SCUDDER FUNDS TRUST, 497, 1996-05-29

SCUDDER FUNDS TRUST
497, 1996-05-29

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This prospectus sets forth concisely the information about Scudder Short Term
Bond Fund, a series of Scudder Funds Trust, an open-end management investment
company, that a prospective investor should know before investing. Please retain
it for future reference.

If you require more detailed information, a Statement of Additional Information
dated May 1, 1996, as amended from time to time, may be obtained without charge
by writing Scudder Investor Services, Inc., Two International Place, Boston, MA
02110-4103 or calling 1-800-225-2470. The Statement, which is incorporated by
reference into this prospectus, has been filed with the Securities and Exchange
Commission.

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

Contents--see page 4.

Scudder
Short Term
Bond Fund

Prospectus
May 1, 1996

A pure no-load(TM) (no sales charges) mutual fund series which seeks to provide
a high level of income consistent with a high degree of principal stability.

<PAGE>

Expense information

How to compare a Scudder pure no-load(TM) fund

This information is designed to help you understand the various costs and
expenses of investing in Scudder Short Term Bond Fund (the "Fund"). By reviewing
this table and those in other mutual funds' prospectuses, you can compare the
Fund's fees and expenses with those of other funds. With Scudder's pure
no-load(TM) funds, you pay no commissions to purchase or redeem shares, or to
exchange from one fund to another. As a result, all of your investment goes to
work for you.

1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.

Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE

2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended December 31,
1995.

Investment management fee 0.49%
12b-1 fees NONE
Other expenses 0.26%
-----
Total Fund operating expenses 0.75%
=====

Example

Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$8 $24 $42 $93

See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.

* You may redeem by writing or calling the Fund or by "Write-A-Check." If you
wish to receive redemption proceeds via wire, there is a $5 wire service
fee. For additional information, please refer to "Transaction
information--Redeeming shares."

2
<PAGE>

Financial highlights

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements. If you would like more detailed information concerning the Fund's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1995 and may be
obtained without charge by writing or calling Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993(c) 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period................................. $10.91 $12.01 $11.93 $12.25 $11.72 $11.71 $11.19 $11.23 $11.92 $11.35
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a).............. .71 .81 .87 .97 1.08 1.09 .83 .73 .74 .81
Net realized and unrealized
gains (losses)....................... .44 (1.15) .08 (.33) .53 .01 .61 (.04) (.58) .78
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
transactions......................... 1.15 (.34) .95 .64 1.61 1.10 1.44 .69 .16 1.59
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income........... (.43) (.64) (.80) (.96) (1.08) (1.09) (.83) (.73) (.74) (.81)
From net realized gains.............. -- -- (.03) -- -- -- (.09) -- (.11) (.21)
In excess of gains................... -- -- (.04) -- -- -- -- -- -- --
From tax return of capital........... (.28) (.12) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions...................... (.71) (.76) (.87) (.96) (1.08) (1.09) (.92) (.73) (.85) (1.02)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period........... $11.35 $10.91 $12.01 $11.93 $12.25 $11.72 $11.71 $11.19 $11.23 $11.92
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)......................... 10.74 (2.87) 8.18 5.43 14.38 9.88 13.20 6.10 1.40 14.70
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)......................... 1,823 2,136 3,190 2,862 2,247 340 72 10 10 8
Ratio of operating expenses net, to
average daily net assets (%)......... .75 .73 .68 .75 .44 .16 .36 1.50 1.45 1.45
Ratio of net investment income net,
to average daily net assets (%)...... 6.37 6.93 7.21 8.01 8.96 9.36 7.97 6.48 6.34 6.89
Portfolio turnover rate (%).............. 101.1 65.3 66.1 83.7(b) 41.0 52.9 40.0 23.5 28.7 15.6

(a) Portion of expenses
reimbursed by
the Adviser........................ $ -- $ -- $ -- $ -- $ -- $ .02 $ .10 $ .04 $ .04 $ --
Management fee not imposed
by the Adviser ...................... $ -- $ -- $ -- $ -- $ .06 $ .07 $ .05 $ -- $ -- $ .01

Ratio of operating expenses, including expenses reimbursed, management fee and other expenses not imposed, to average daily
net assets aggregated .78%, 1% and 1.19% for the years ended December 31, 1992, 1991 and 1990, respectively.

(b) The high turnover rate reflects an increase in principal prepayments on mortgage securities in the Fund.

On July 3, 1989, the Fund adopted its present name and objective. Prior to that date, the Fund was known as the General 1994
Portfolio of Scudder Target Fund and its objectives were current income, capital preservation, and possible capital
appreciation. Financial information prior to July 3, 1989 should not be considered representative of the present Fund.

</TABLE>

3
<PAGE>

A message from Scudder's chairman

Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $100 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.

The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.

Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.

All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.

/s/ Daniel Pierce

Scudder Short Term Bond Fund

Investment objective

* a high level of income consistent with a high degree of principal stability

Investment characteristics

* designed to provide a higher and more stable level of income than typically
provided by money market investments, yet more price stability than
investments in intermediate- and long-term bonds

* investments primarily in high quality, short-term bonds

* average portfolio effective maturity will not exceed three years

* dividends declared daily and paid monthly

* daily liquidity at current net asset value

Contents

Investment objective and policies 5
Why invest in the Fund? 6
Additional information about policies
and investments 7
Distribution and performance information 11
Purchases 12
Exchanges and redemptions 13
Fund organization 14
Transaction information 15
Shareholder benefits 19
Trustees and Officers 22
Investment products and services 23
How to contact Scudder Back cover

4
<PAGE>

Investment objective and policies

Scudder Short Term Bond Fund (the "Fund"), a diversified series of Scudder Funds
Trust, is a pure no-load(TM) mutual fund designed for investors seeking:

* a higher and more stable level of income than normally provided by money
market investments; and

* more price stability than investments in intermediate- and long-term bonds.

The Fund's objective is to provide a high level of income consistent with a high
degree of principal stability by investing primarily in high quality, short-term
bonds. The dollar-weighted average effective maturity of the Fund's portfolio
may not exceed three years. Within this limitation, the Fund may purchase
individual securities with remaining stated maturities greater than three years.

Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. Shareholders
will receive written notice of any changes in the Fund's objective. If there is
a change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.

Investments

The Fund invests at least 65% of its net assets in a managed portfolio of bonds
consisting of:

* U.S. Government securities, including bonds, notes and bills issued by the
U.S. Treasury, and securities issued by agencies and instrumentalities of
the U.S. Government;

* Corporate debt securities, such as bonds, notes and debentures;

* Mortgage-backed securities; and

* Other asset-backed securities.

Other eligible investments for the Fund are as follows:

* Money market instruments which are comprised of commercial paper, bank
obligations (i.e., certificates of deposit and bankers' acceptances) and
repurchase agreements;

* Privately placed obligations (including restricted securities); and

* Foreign securities, including non-U.S. dollar-denominated securities and
U.S. dollar-denominated debt securities issued by foreign issuers and
foreign branches of U.S. banks.

In addition, the Fund may purchase indexed securities, securities on a
when-issued or forward delivery basis and may engage in dollar roll transactions
and strategic transactions. See "Additional information about policies and
investments" for more information.

To meet its objective, the Fund's investment adviser, Scudder, Stevens & Clark,
Inc. (the "Adviser"), actively manages the Fund's portfolio. Investment
decisions are based on general economic and financial trends, such as domestic
and international economic developments, the outlook for the securities markets,
the level of interest rates and inflation, the supply and demand of debt
securities, and other factors. The composition of the Fund's portfolio is also
determined by individual security analysis. The Adviser's team of experienced
credit analysts actively monitors the credit quality of the investments of the
Fund.

5
<PAGE>

Investment objective and policies (cont'd)

rising interest rates and falling bond prices, the Adviser may shorten the
Fund's average maturity to minimize the effect of declining bond values on the
Fund's net asset value. Conversely, during times of falling rates and rising
prices, a longer average maturity of up to three years may be sought. When the
Adviser believes economic or other conditions warrant, for temporary defensive
purposes the Fund may invest more than 35% of its assets in money market
instruments.

The Fund's securities generally offer less current yield than securities of
lower quality (rated below BBB/Baa) or longer maturity, but lower-quality
securities generally have less liquidity, and both tend to have greater credit
and market risk, and consequently more price volatility.

It is against the Fund's policy to make changes in the portfolio for short-term
trading purposes. However, the Fund may take advantage of opportunities provided
by temporary dislocations in the market to maintain principal stability or
enhance income.

High quality securities

The Fund emphasizes high quality investments. At least 65% of the Fund's net
assets will be invested in (1) obligations of the U.S. Government, its agencies
or instrumentalities, and (2) debt securities rated, at the time of purchase, in
one of the two highest ratings categories of Standard & Poor's ("S&P") (AAA or
AA) or Moody's Investors Service, Inc. ("Moody's") (Aaa or Aa) or, if not rated,
judged to be of comparable quality by the Adviser. In addition, the Fund will
not invest in any debt security rated at the time of purchase lower than BBB by
S&P or Baa by Moody's, or of equivalent quality as determined by the Adviser.
Should the rating of a portfolio security be downgraded, the Adviser will
determine whether it is in the best interest of the Fund to retain or dispose of
the security.

The U.S. Government securities in which the Fund may invest include (1)
securities issued and backed by the full faith and credit of the U.S.
Government, such as U.S. Treasury bills, notes and bonds; (2) securities,
including mortgage-backed securities, issued by an agency or instrumentality of
the U.S. Government, including those backed by the full faith and credit of the
U.S. Government, such as securities of the Export-Import Bank of the United
States, the General Services Administration and the Government National Mortgage
Association, and those issued by agencies and instrumentalities, such as Federal
Home Loan Banks and the Federal Home Loan Mortgage Corporation which, while
neither direct obligations of nor guaranteed by the U.S. Government, are backed
by the credit of the issuer itself and may be supported as well by the issuer's
right to borrow from the U.S. Treasury; and (3) securities of the U.S.
Government, its agencies or instrumentalities on a when-issued or forward
delivery basis. In addition, the Fund may invest in repurchase agreements with
respect to U.S. Government securities.

Why invest in the Fund?

Scudder Short Term Bond Fund is designed for individuals, institutions and
corporations seeking a high level of income compared to money market funds,
consistent with a high degree of principal stability for their investments
compared to that of longer-term fixed-income investments. Investors may choose
this Fund as a complement to money market funds. Money market funds are managed
for total price stability but generally tend to offer somewhat lower yields than
this Fund. Further, the Fund may appeal to investors favoring a more stable
investment and willing to accept somewhat lower yields than they might normally
expect from a longer-term bond fund.

Some investors may view the Fund as an alternative to a bank certificate of

6
<PAGE>

deposit ("CD"). While an investment in the Fund is not federally insured and
there is no guarantee of price stability, an investment in the Fund-- unlike a
CD--is not locked away for any period, may be redeemed at any time without
incurring early withdrawal penalties and may provide a higher yield. The Fund
may also be appropriate for IRAs, 401(k)s and other retirement plans where
income is compounded on a tax-deferred basis.

Investors will also benefit from the convenience, cost-savings and professional
management of a no-load mutual fund. Scudder, Stevens & Clark, Inc. has been
researching and managing fixed-income investments since 1929 and currently
oversees more than $50 billion in U.S. and foreign bonds.

In addition, the Fund offers all the benefits of the Scudder Family of Funds.
Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-load(TM)
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.

Additional information about policies and investments

Investment restrictions

The Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk.

The Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase agreements,
and may not make loans except through the lending of portfolio securities, the
purchase of debt securities or through repurchase agreements.

In addition, as a matter of nonfundamental policy, the Fund may not invest more
than 10% of its total assets, in the aggregate, in securities which are not
readily marketable, restricted securities and repurchase agreements maturing in
more than seven days.

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

Portfolio turnover rate

The Fund's active management of mortgage holdings in 1995 resulted in a higher
portfolio turnover rate. A higher rate involves greater transaction costs to the
Fund and may result in the realization of net capital gains, which would be
taxable to shareholders when distributed.

When-issued securities

The Fund may purchase securities on a when-issued or forward delivery basis, for
payment and delivery at a later date. The price and yield are generally fixed on
the date of commitment to purchase. During the period between purchase and
settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.

Repurchase agreements

As a means of earning income for periods as short as overnight, the Fund may
enter into repurchase agreements with selected banks and broker/ dealers. Under
a repurchase agreement, the Fund acquires securities, subject to the seller's
agreement to repurchase them at a specified time and price.

The Fund may enter into repurchase commitments with any party deemed
creditworthy by the Adviser, including foreign banks and broker/dealers, if the
transaction is entered into for investment purposes and the counterparty's
creditworthiness is at least equal to that of issuers of securities which the
Fund may purchase.

Mortgage and other asset-backed securities

The Fund may invest in mortgage-backed securities, which are securities
representing interests in pools of mortgage loans. These securities provide

7
<PAGE>

Additional information about policies and investments (cont'd)

shareholders with payments consisting of both interest and principal as the
mortgages in the underlying mortgage pools are paid off.

The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Fund shares. Also, GNMA and other
mortgage-backed securities may be purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs. In addition, the Fund may invest in mortgage-backed
securities issued by other issuers, such as the Federal National Mortgage
Association (FNMA), which are not guaranteed by the U.S. Government. Moreover,
the Fund may invest in debt securities which are secured with collateral
consisting of mortgage-backed securities and in other types of mortgage-related
securities.

The Fund may also invest in securities representing interests in pools of
certain other consumer loans, such as automobile loans or credit card
receivables. In some cases, principal and interest payments are partially
guaranteed by a letter of credit from a financial institution.

Dollar roll transactions

The Fund may enter into dollar roll transactions with selected banks and
broker/dealers. Dollar roll transactions are treated as reverse repurchase
agreements for purposes of the Fund's borrowing restrictions and consist of the
sale by the Fund of mortgage-backed securities, together with a commitment to
purchase similar, but not identical, securities at a future date at the same
price. In addition, the Fund is paid a fee as consideration for entering into
the commitment to purchase. Dollar rolls may be renewed after cash settlement
and initially involve only a firm commitment agreement by the Fund to buy a
security.

Convertible securities

The Fund may invest in convertible securities which may offer higher income than
the common stocks into which they are convertible. The convertible securities in
which the Fund may invest include bonds, notes, debentures and preferred stocks
which may be converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. Prior to their conversion, convertible
securities may have characteristics similar to nonconvertible securities.

Foreign securities

While the Fund generally emphasizes investments in U.S. Government securities
and companies domiciled in the U.S., it may invest in foreign securities that
meet the same criteria as the Fund's domestic holdings when the anticipated
performance of foreign securities is believed by the Adviser to offer more
potential than domestic alternatives in keeping with the investment objective of
the Fund. Foreign securities may be denominated either in U.S. dollars or
foreign currencies.

Indexed securities

The Fund may invest in indexed securities, the value of which is linked to
currencies, interest rates, commodities, indices or other financial indicators
("reference instruments"). The interest rate or (unlike most fixed-income
securities) the principal amount payable at maturity of an indexed security may
be increased or decreased, depending on changes in the value of the reference
instrument.

Strategic Transactions and derivatives

The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income

8
<PAGE>

market movements), to manage the effective maturity or duration of the Fund's
portfolio or to enhance potential gain. These strategies may be executed through
the use of derivative contracts. Such strategies are generally accepted as a
part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.

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

Risk factors

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

Debt securities. Securities rated BBB by S&P or Baa by Moody's are neither
highly protected nor poorly secured. These securities normally pay higher yields
but involve potentially greater price variability than higher-quality
securities. These securities are regarded as having adequate capacity to repay
principal and pay interest, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to do so. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics.

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

9
<PAGE>

Additional information about policies and investments (cont'd)

Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted, or
the value of the securities may decline before the Fund is able to dispose of
them. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities.

Some repurchase commitment transactions may not provide the Fund with collateral
marked-to-market during the term of the commitment.

Mortgage-backed securities. Unscheduled or early payments on the underlying
mortgages may shorten the securities' effective maturities and lessen their
growth potential. The Fund may agree to purchase or sell these securities with
payment and delivery taking place at a future date. A decline in interest rates
may lead to a faster rate of repayment of the underlying mortgages, and expose
the Fund to a lower rate of return upon reinvestment. To the extent that such
mortgage-backed securities are held by the Fund, the prepayment right of
mortgagors may limit the increase in net asset value of the Fund because the
value of the mortgage-backed securities held by the Fund may not appreciate as
rapidly as the price of non-callable debt securities.

Other asset-backed securities. In addition to prepayment risk, securities
representing pools of certain consumer loans present certain risks that are not
presented by mortgage-backed securities. These securities may not have the
benefit of any security interest in the underlying assets. Also, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities.

Dollar roll transactions. If the broker/dealer to whom the Fund sells the
securities underlying a dollar roll transaction becomes insolvent, the Fund's
right to purchase or repurchase the securities may be restricted; the value of
the securities may change adversely over the term of the dollar roll; the
securities that the Fund is required to repurchase may be worth less than
securities that the Fund originally held, and the return earned by the Fund with
the proceeds of a dollar roll may not exceed transaction costs.

Foreign securities. Investments in foreign securities involve special
considerations due to limited information, higher brokerage costs, different
accounting standards, thinner trading markets as compared to domestic markets
and the likely impact of foreign taxes on the yield from debt securities. They
may also entail other risks, such as the possibility of one or more of the
following: imposition of dividend or interest withholding or confiscatory taxes;
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; less government supervision
and regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Purchases of foreign
securities are usually made in foreign currencies and, as a result, the Fund may
incur currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar.

Further, it may be more difficult for the Fund's agents to keep currently
informed about corporate actions which may affect the prices of portfolio
securities. Communications between the U.S. and foreign countries may be less
reliable than within the U.S., increasing the risk of delayed settlements of
portfolio transactions or loss of certificates for portfolio securities. The

10
<PAGE>

Fund's ability and decisions to purchase and sell portfolio securities may be
affected by laws or regulations relating to the convertibility and repatriation
of assets.

Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, the Fund will bear the
market risk of the reference instrument.

Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets.

As a result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position.

Finally, the daily variation margin requirements for futures contracts would
create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.

Distribution and performance information

Dividends and capital gains distributions

The Fund's dividends from net investment income are declared daily and
distributed monthly. The Fund intends to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of a federal excise tax. An additional distribution may
be made within three months of the Fund's fiscal year end, if necessary. Any
dividends or capital gains distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. According to preference,
shareholders may receive

(Continued on page 14)

11
<PAGE>
Purchases

<S> <C>

Opening
an account Minimum initial investment: $1,000; IRAs $500
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.

Make checks o By Mail Send your completed and signed application and check
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:

The Scudder Funds Scudder Shareholder Service
P.O. Box 2291 Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612

o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number. Then call
1-800-225-5163 for instructions.

Purchasing
additional shares Minimum additional investment: $100; IRAs $50
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.

Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.

o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.

o In Person Visit one of our Funds Centers to make an additional investment in your
Scudder fund account. Funds Center locations are listed under Shareholder
benefits.

o By Telephone Please see Transaction information--Purchasing shares--
By AutoBuy for more details.

o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.

12
<PAGE>

Exchanges and redemptions

Exchanging shares

Minimum investments: $1,000 to establish a new account;
$100 to exchange among existing accounts

o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).

o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.

Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:

The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612

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

Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may have redemption
proceeds sent to your predesignated bank account, or redemption proceeds of up
to $50,000 sent to your address of record.

o By "Write- You may redeem shares by writing checks against your account balance as often as
A-Check" you like for at least $100, but not more than $5,000,000.

o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:

- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.

A signature guarantee is required for redemptions over $50,000.
See Transaction information--Redeeming shares.

o By Automatic You may arrange to receive automatic cash payments periodically. Call
Withdrawal Plan 1-800-225-5163 for more information and an enrollment form.

</TABLE>

13
<PAGE>

Distribution and performance information (cont'd)

(Continued from page 11)

distributions in cash or have them reinvested in additional shares of the Fund.
If an investment is in the form of a retirement plan, all dividends and capital
gains distributions will be reinvested into the shareholder's account.

Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable as
long-term capital gains regardless of the length of time shareholders have owned
shares. Short-term capital gains and any other taxable income distributions are
taxable as ordinary income. It is not expected that dividends will qualify for
the dividends-received deduction for corporations.

The Fund sends detailed tax information to its shareholders about the amount and
type of its distributions by January 31 of the following year.

Performance information

The "SEC yield" of the Fund is an annualized expression of the net income
generated by the Fund over a specified 30-day (one month) period, as a
percentage of the Fund's share price on the last day of that period. This yield
is calculated according to methods required by the Securities and Exchange
Commission (the "SEC"), and therefore may not equate to the level of income paid
to shareholders. "Total return" is the change in value of an investment in the
Fund for a specified period. The "average annual total return" of the Fund is
the average annual compound rate of return of an investment in the Fund assuming
the investment has been held for one year, five years and ten years as of a
stated ending date. "Cumulative total return" represents the cumulative change
in value of an investment in the Fund for various periods. All types of total
return calculations assume that all dividends and capital gains distributions
during the period were reinvested in shares of the Fund. Performance will vary
based upon, among other things, changes in market conditions and the level of
the Fund's expenses.

Fund organization

Scudder Short Term Bond Fund is a diversified series of Scudder Funds Trust (the
"Trust"), an open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as a
Massachusetts business trust in July 1981 and changed its name from Scudder
Target Fund to its current name effective July 3, 1989.

The Fund's name and investment objective also were changed to the current ones
effective July 3, 1989.

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

Investment adviser

The Fund retains the investment management firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, to manage the Fund's daily investment and business
affairs subject to the policies established by the Board of Trustees. The
Trustees have overall responsibility for the management of the Fund under

14
<PAGE>

Massachusetts law.

The Adviser receives an investment management fee for these services. The fee is
graduated so that increases in the Fund's net assets may result in a lower
annual fee rate and decreases in the Fund's net assets may result in a higher
annual fee rate.

The fee is payable monthly, provided that the Fund will make such interim
payments as may be requested by the Adviser not to exceed 75% of the amount of
the fee then accrued on the books of the Fund and unpaid.

For the year ended December 31, 1995 the Adviser received an investment
management fee of 0.49% of the Fund's average daily net assets on an annual
basis.

All of the Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment or administrative services.

Scudder, Stevens & Clark, Inc. is located at
345 Park Avenue, New York, New York.

Transfer agent

Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Fund.

Underwriter

Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Fund's
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of the Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.

Custodian

State Street Bank and Trust Company is the Fund's custodian.

Fund accounting agent

Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.

Transaction information

Purchasing shares

Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")

By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone or by "Write-A-Check" prior to the expiration of the
seven-day period will not be accepted.

By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:

The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552

Your wire instructions must also include:

- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).

The account will be established once the application and money order are
received in good order.

15
<PAGE>

Transaction information (cont'd)

You may also make additional investments of $100 or more to your existing
account by wire.

By "AutoBuy." If you elected "AutoBuy" for your account, you can call toll-free
to purchase shares. The money will be automatically transferred from your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoBuy," call
1-800-225-5163 for more information.

To purchase additional shares, call 1-800-225-5163. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
will be transferred from your bank checking account in two or three business
days following your call. For requests received by the close of regular trading
on the New York Stock Exchange (the "Exchange"), shares will be purchased at the
net asset value per share calculated at the close of trading on the day of your
call. Shares will begin to earn dividends on the day the purchase payment from
your bank is received by the Fund. "AutoBuy" requests received after the close
of regular trading on the Exchange will begin their processing and be purchased
at the net asset value calculated the following business day.

If you purchase shares by "AutoBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "AutoBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.

By exchange. Your new account will have the same registration and address as
your existing account.

The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.

You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.

By telephone order. Certain financial institutions may call Scudder before the
close of regular trading on the Exchange, normally 4 p.m. eastern time, and
purchase shares at that day's price. Such purchased shares will begin to earn
dividends on the day on which the payment is received by the Fund. If payment by
check or wire is not received from the financial institution within three
business days, the order is subject to cancellation and the financial
institution will be responsible for any loss to the Fund resulting from this
cancellation. Please call 1-800-854-8525 for more information.

Redeeming shares

The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.

By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.

Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.

You can also make redemptions from your Scudder fund account on SAIL by calling
1-800-343-2890.

16
<PAGE>

If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.

In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.

By "Write-A-Check." You may redeem shares by writing checks against your account
balance for at least $100. Your Fund investments will continue to earn dividends
until your check is presented to the Fund for payment.

Checks will be returned by the Fund's transfer agent if there are insufficient
shares to meet the withdrawal amount. You should not attempt to close an account
by check, because the exact balance at the time the check clears will not be
known when the check is written.

By "AutoSell." If you elected "AutoSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoSell,"
call 1-800-225-5163 for more information.

To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "AutoSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.

"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.

Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $50,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations, or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.

Telephone transactions

Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine.

17
<PAGE>

Transaction information (cont'd)

Share price

Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share as of
the close of regular trading on the Exchange, normally 4 p.m. eastern time, on
each day the Exchange is open for trading. Net asset value per share is
calculated by dividing the value of total Fund assets, less all liabilities, by
the total number of shares outstanding.

Processing time

All purchase and redemption requests must be received in good order by the
Fund's transfer agent. Those requests received by the close of regular trading
on the Exchange are executed at the net asset value per share calculated at the
close of trading that day. Purchase and redemption requests received after the
close of regular trading on the Exchange will be executed the following business
day. Purchases made by federal funds wire before noon eastern time will begin
earning income that day; all other purchases received before the close of
regular trading on the Exchange will begin earning income the next business day.
Redeemed shares will earn income on the day on which the redemption request is
executed.

If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.

The Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).

Tax information

A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.

Tax identification number

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

Minimum balances

Shareholders should maintain a share balance worth at least $1,000, which amount
may be changed by the Board of Trustees. Scudder retirement plans have similar
or lower minimum share balance requirements. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
sub-minimum accounts, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account.
Reductions in value that result solely from market activity will not trigger an
involuntary redemption. The Fund will mail the proceeds of the redeemed account
to the shareholder. The shareholder may restore the share balance to $1,000 or
more during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.

Third party transactions

If purchases and redemptions of Fund shares are arranged and settlement is made

18
<PAGE>

at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.

Shareholder benefits

Experienced professional management

Scudder, Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.

A team approach to investing

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

Since the Fund was introduced in 1989, Lead Portfolio Manager Thomas M. Poor has
had responsibility for its day-to-day operation. Mr. Poor, who joined Scudder in
1970, sets the Fund's general investment strategies. Christopher L. Gootkind,
Portfolio Manager, also has been a member of the Fund's team since its
inception. Mr. Gootkind, who has worked as a portfolio manager at Scudder since
1986, has responsibility for the Fund's investments in financial institutions
and asset-backed securities. Scott E. Dolan, Portfolio Manager, joined the team
in 1994 and is responsible for implementing the Fund's strategy. Mr. Dolan, who
joined Scudder in 1989, has four years of experience in compliance analysis and
account administration and has worked as a portfolio manager since 1993.

SAIL(TM)--Scudder Automated Information Line

For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact Scudder" for the
address.

Investment flexibility

Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.

Dividend reinvestment plan

You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.

Shareholder statements

You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.

19
<PAGE>

Shareholder benefits (cont'd)

Shareholder reports

In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.

To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.

Newsletters

Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.

Scudder Funds Centers

As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.

T.D.D. service for the hearing impaired

Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.

20
<PAGE>

Scudder tax-advantaged retirement plans

Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.

* Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of $2,000 per person for anyone with earned income. Many
people can deduct all or part of their contributions from their taxable
income, and all investment earnings accrue on a tax deferred basis. The
Scudder No-Fee IRA charges no annual custodial fee.

* 401(k) Plans. 401(k) plans allow employers and employees to make
tax-deductible retirement contributions. Scudder offers a full service
program that includes recordkeeping, prototype plan, employee
communications and trustee services, as well as investment options.

* Profit Sharing and Money Purchase Pension Plans. These plans allow
corporations, partnerships and people who are self-employed to make annual,
tax-deductible contributions of up to $30,000 for each person covered by
the plans. Plans may be adopted individually or paired to maximize
contributions. These are sometimes known as Keogh plans.

* 403(b) Plans. Retirement plans for tax-exempt organizations and school
systems to which employers and employees may both contribute.

* SEP-IRAs. Easily administered retirement plans for small businesses and
self-employed individuals. The maximum annual contribution to SEP-IRA
accounts is adjusted each year for inflation.

* Scudder Horizon Plan. A no-load variable annuity that lets you build assets
by deferring taxes on your investment earnings. You can start with $2,500
or more.

Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call 1-800-225-5163.

The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.

21
<PAGE>

Trustees and Officers

Daniel Pierce*
President and Trustee

Lynn S. Birdsong*
Trustee

Sheryle J. Bolton
Trustee; Consultant

Thomas J. Devine
Trustee; Consultant

Peter B. Freeman
Trustee; Corporate Director and Trustee

Dr. Wilson Nolen
Trustee; Consultant

Juris Padegs*
Trustee

Jerard K. Hartman*
Vice President

Thomas W. Joseph*
Vice President

David S. Lee*
Vice President

Thomas M. Poor*
Vice President

Thomas F. McDonough*
Vice President, Secretary and
Assistant Treasurer

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Kathryn L. Quirk*
Vice President and Assistant Secretary

Coleen Downs Dinneen*
Assistant Secretary

* Scudder, Stevens & Clark, Inc.

22
<PAGE>
Investment products and services

The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder Global Bond Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax free money market+ Scudder Income Fund
Scudder Tax Free Money Fund Scudder International Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Bond Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Discovery Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Small Company Value Fund
Scudder Balanced Fund Scudder Value Fund
Scudder Growth and Income Fund The Japan Fund
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including management fees and expenses, call or write for
a free prospectus. Read it carefully before you invest or send money. +A portion of the income from the tax-free funds
may be subject to federal, state and local taxes. *Not available in all states. +++ A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc., are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust(TM), an institutional cash management service that utilizes certain portfolios of
Scudder Fund, Inc. ($100,000 minimum), call: 1-800-541-7703.
</TABLE>

23
<PAGE>
<TABLE>
<S> <C>
How to contact Scudder

Account Service and Information: Please address all correspondence to:

For existing account service Scudder Investor Relations The Scudder Funds
and transactions 1-800-225-5163 P.O. Box 2291
Boston, Massachusetts
02107-2291

For personalized information Scudder Automated
about your Scudder accounts; Information Line
(SAIL) exchanges and or 1-800-343-2890
redemptions; information on
any Scudder fund

Investment Information: Or Stop by a Scudder Funds Center:

To receive information about Scudder Investor Relations Many shareholders enjoy the personal, one-on-one
the Scudder funds, for 1-800-225-2470 service of the Scudder Funds Centers. Check for a
additional applications and Funds Center near you--they can be found in the
prospectuses, or for following cities:
investment questions

For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale

For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*,
institutional cash management service for funds designed to meet the broad investment management and
corporations, non-profit organizations and trusts service needs of banks and other institutions, call:
which utilizes certain portfolios of Scudder 1-800-854-8525.
Fund, Inc.* ($100,000 minimum), call: 1-800-541-7703.
</TABLE>

Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.

* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.

<PAGE>
Scudder
Zero Coupon
2000 Fund

Prospectus
May 1, 1996

A pure no-load(TM) (no sales charges) mutual fund designed for investors who
seek as high an investment return over a selected period as is consistent with
investment in U.S. Government securities and the minimization of reinvestment
risk.

This prospectus sets forth concisely the information about Scudder Zero Coupon
2000 Fund, a series of Scudder Funds Trust, an open-end management investment
company, that a prospective investor should know before investing. Please retain
it for future reference.

Contents--see page 4.

<PAGE>

Expense information

How to compare a Scudder pure no-load(TM) fund

This information is designed to help you understand the various costs and
expenses of investing in Scudder Zero Coupon 2000 Fund (the "Fund"). By
reviewing this table and those in other mutual funds' prospectuses, you can
compare the Fund's fees and expenses with those of other funds. With Scudder's
pure no-load(TM) funds, you pay no commissions to purchase or redeem shares, or
to exchange from one fund to another. As a result, all of your investment goes
to work for you.

1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.

Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE

Investment management fee (after waiver) 0.12%**
12b-1 fees NONE
Other expenses 0.88%
Total Fund operating expenses 1.00%**

Example

Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its
net investment income to shareholders. (As noted above, the Fund has no
redemption fees of any kind.)

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$10 $32 $55 $122

See "Fund organization -- Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.

* You may redeem by writing or calling the Fund. If you wish to receive
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."

** Until December 31, 1996, the Adviser has agreed to waive a portion of its
fee to the extent necessary so that the total annualized expenses of the
Fund do not exceed 1.00% of average daily net assets. If the Adviser had
not agreed to waive a portion of its fee, Fund expenses would have been:
investment management fee 0.60%, other expenses 0.88%, and total Fund
operating expenses 1.48% for the fiscal year ended December 31, 1995. To
the extent that expenses fall below 1.00% during the fiscal year, the
Adviser reserves the right to recoup, during the fiscal year incurred,
amounts waived during the period, but only to the extent that the Fund's
expenses do not exceed 1.00%.

2
<PAGE>

Financial highlights

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.

If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated December 31, 1995 and may be obtained without charge
by writing or calling Scudder Investor Services, Inc.

Years Ended December 31,
-------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987(b) 1986(c)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............... $10.95 $12.85 $12.55 $13.76 $12.27 $12.61 $10.92 $10.34 $12.62 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a) ......... .65 .59 .79 .94 .99 .86 .51 .63 .91 .56
Net realized and
unrealized gain
(loss) on investments ............ 1.40 (1.59) 1.23 .17 1.44 (.29) 1.73 .58 (1.86) 2.06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........................ 2.05 (1.00) 2.02 1.11 2.43 .57 2.24 1.21 (.95) 2.62
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income ............................ (.62) (.31) (.83) (.93) (.94) (.83) (.52) (.63) (1.22) --
From net realized gains
on investments .................... -- (.59) (.89) (1.39) -- (.08) (.03) -- (.11) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ................. (.62) (.90) (1.72) (2.32) (.94) (.91) (.55) (.63) (1.33) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period ............................. $12.38 $10.95 $12.85 $12.55 $13.76 $12.27 $12.61 $10.92 $10.34 $12.62
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (d) ................ 19.08 (7.92) 16.00 8.13 20.03 4.59 20.39 11.71 (8.01) 26.20**
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of period
($ millions) ....................... 29 25 31 29 33 33 32 5 2 1
Ratio of operating expenses
net, to average daily
net assets (%) (a) ................. 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00*
Ratio of net investment
income to average
daily net assets (%) ............... 5.59 5.23 5.29 6.38 7.12 7.62 7.10 8.10 8.13 7.27*
Portfolio turnover rate (%) ......... 86.6 89.3 101.6 118.8 90.7 98.5 87.1 149.2 37.3 79.4*
<FN>
(a) Portion of expenses
reimbursed by the
Adviser (Note C) ............... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ .14 $ .29 $ .26
Management fee not
imposed by the
Adviser (Note C) ............... $ .06 $ .05 $ .04 $ .04 $ .03 $ .04 $ .04 $ .04 $ .06 $ .04
Ratio of operating
expenses including
management and other
expenses not imposed
and reimbursement
absorbed (%) ................... 1.48 1.47 1.28 1.28 1.23 1.39 1.62 3.37 4.13 5.64*
(b) Per share amounts for the year ended December 31, 1987 have been calculated using the monthly weighted average shares
outstanding during the year method.
(c) For the period February 4, 1986 (commencement of operations) to December 31, 1986.
(d) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>

3
<PAGE>

A message from Scudder's chairman

/s/ Daniel Pierce

Scudder Zero Coupon 2000 Fund

Investment objective

* as high an investment return over a selected period as is consistent with
investment in U.S. Government securities and the minimization of
reinvestment risk

Investment characteristics

* a portfolio maturing in the year 2000

* professionally managed portfolio of high quality U.S. Government zero
coupon securities

* relatively predictable return--if held to the Fund's maturity date and
dividends and distributions are reinvested

* daily liquidity at current net asset value

Contents

Investment objective 5
Investing in zero coupon securities 5
Why invest in the Fund? 6
Additional information about policies
and investments 6
Specialized investment techniques 8
Distribution and performance information 9
Fund organization 9
Purchases 10
Exchanges and redemptions 11
Transaction information 12
Shareholder benefits 16
Trustees and Officers 17
Investment products and services 19
How to contact Scudder Back cover

4
<PAGE>

Investment objective

Scudder Zero Coupon 2000 Fund (the "Fund"), a diversified series of Scudder
Funds Trust, seeks to provide as high an investment return over a selected
period as is consistent with investment in U.S. Government securities and the
minimization of reinvestment risk. The Fund invests primarily in zero coupon
securities and the Fund matures on a specified target date.

By pursuing its objective, the Fund seeks to return to investors a reasonably
assured targeted dollar amount, predictable at the time of investment, on a
specific target date in the future. As with any investment, however, there can
be no assurance that the Fund's objective or the targeted amount will be met.

In order to obtain the predicted return, investors should plan to hold shares of
the Fund until maturity and elect automatic reinvestment of dividends and
distributions. Since the Fund will be primarily invested in zero coupon
securities, investors who hold shares to maturity and reinvest dividends and
distributions will receive a return consisting primarily of the accretion of
discount on the underlying securities in the Fund. Of course, investors may
redeem their shares on any business day at the daily net asset value. However,
the net asset value of the Fund's shares increases or decreases with changes in
the market value of the Fund's investments which tends to vary inversely with
changes in prevailing interest rates. A shareholder who redeems prior to
maturity may receive a significantly different investment return than was
anticipated at the time of purchase.

Investing in zero coupon securities

Fund target date

The Fund matures on the third Friday of December 2000. At that time, the Fund
will be converted to cash and distributed to shareholders or reinvested in
another fund of their choice. The maturity date may coincide with known
financial needs in the future, such as a car purchase, children's college
education, the purchase of a home, or retirement. Additional funds may be added
in the future.

What are zero coupon securities?

Zero coupon securities, including U.S. Government securities and privately
stripped coupons on and receipts for U.S. Government securities, pay no cash
income but are issued at substantial discounts from their value at maturity.
When held to maturity, their entire return, which consists of the accretion of
discount, comes from the difference between their issue price and their maturity
value. This difference is known at the time of purchase, so investors holding
zero coupon securities until maturity know the amount of their investment return
at the time of their investment.

A portion of the total realized return from conventional interest-paying bonds
comes from the reinvestment of periodic interest. Since the rate to be earned on
these reinvestments may be higher or lower than the rate quoted on the
interest-paying bonds at the time of the original purchase, the investment's
total return is uncertain even for investors holding the security to its
maturity. This uncertainty is commonly referred to as reinvestment risk and can
have a significant impact on total realized investment return. With zero coupon
securities, however, there are no cash distributions to reinvest, so investors
bear no reinvestment risk if they hold the zero coupon security to maturity.

5
<PAGE>

Why invest in the Fund?

The Fund is designed for investors seeking returns available on U.S. Government
securities and reasonable assurance that a specific targeted dollar amount,
predictable at the time of their investment, will be paid to them on a specific
target date in the future.

Dividends and distributions will be automatically reinvested in additional
shares (unless investors make a specific written election to take them in cash)
because without such reinvestment investors are not likely to receive their
targeted dollar amount on maturity. Investors should also plan to hold shares in
this Fund until maturity because these shares are likely to have substantially
more price volatility than shares of funds investing in traditional fixed-income
investments.

The Fund is an appropriate investment for IRAs, Keoghs, 403(b) plans, 401(k)
plans and other retirement plans where investors can match their retirement
planning needs with the Fund's target date.

The Fund is also appropriate for investors planning for future anticipated
expenses, such as the college educations of children or grandchildren, or the
purchase of a home. The Fund may also be an appropriate investment in a Uniform
Transfer/Gift to Minors Act account or any other investment account where
predictability of return over a selected time period is important.

Additional information about policies and investments

At least 80% of the net assets of the Fund will be invested in zero coupon
securities. These include U.S. Treasury notes and bonds which have no coupons
and are not entitled to income, U.S. Treasury bills, individual interest coupons
which trade separately, and evidences of receipt of such securities. At least
50% of the net assets of the Fund will be invested in zero coupon securities
maturing within two years of the Fund's target date. Up to 20% may be invested
in interest-paying U.S. Treasury notes and bonds, and in repurchase agreements
with respect to such securities. These interest-paying securities provide income
for expenses, redemption payments, and cash dividends of the Fund.

The average duration of the Fund will be maintained within 12 months of the
Fund's target date. Duration is a measure of the length of an investment which
takes into account, through present value analysis, the timing and amount of any
interest payments as well as the amount of the principal repayment. Duration is
commonly used by professional investment managers to help identify and control
reinvestment risk. Since the Fund will not be invested entirely in securities
maturing on the target date, there will be some reinvestment risk. By balancing
investments with slightly longer and shorter durations, the Fund's investment
adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"), believes it can
maintain the Fund's average duration within 12 months of the Fund's target date
and thereby reduce its reinvestment risk.

Investment restrictions

The Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk.

The Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes, and may not make loans except through the lending of

6
<PAGE>

portfolio securities, the purchase of debt securities or through repurchase
agreements.

In addition, as a matter of nonfundamental policy, the Fund may not invest more
than 10% of its total assets, in the aggregate, in securities which are not
readily marketable, in restricted securities or in repurchase agreements
maturing in more than seven days.

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

Predictability of return

Due to the nature of zero coupon securities, which comprise 80% or more of the
investments of the Fund, and specialized investment policies designed to reduce
reinvestment risk, an approximate dollar amount to be received at the target
date can be estimated daily for the Fund. The difference between this amount and
an initial investment is projected total return and is called anticipated
growth. Anticipated growth will consist primarily of the estimated accretion of
discount on the zero coupon securities in a Fund, and to a much lesser degree,
of projected cash flow from income-producing securities in excess of estimated
expenses.

The Fund will calculate on each business day its anticipated growth rate, which
is the annualized rate of growth investors may expect from the time they
purchase the Fund's shares until the Fund's target date. The anticipated growth
rate cannot be guaranteed, as it involves certain assumptions about variable
factors, such as reinvestment of dividends and distributions, the expense ratio,
and Fund composition. The rate will vary from day to day due to changes in
interest rates and other market factors affecting the value of the Fund's
investments.

Furthermore, differences in the price changes of securities with different
maturities can affect investment return, as can management of the Fund. Under
certain circumstances, shareholder redemptions could also affect anticipated
growth rate.

Ownership in a portfolio holding zero coupon and other securities differs from a
direct investment in zero coupon securities in various ways, including the
factors affecting predictability of return described above and the varying
maturity dates of the underlying securities held by the Fund.

However, the Adviser believes that investors purchasing and holding the Fund's
shares to maturity and reinvesting all dividends and distributions should be
able to realize an investment return substantially equal to the anticipated
growth rate calculated on the day the Fund's shares were purchased.

Quality

The Fund will invest in zero coupon securities, including both U.S. Government
securities and privately stripped coupons and receipts for U.S. Government
securities, which are rated AAA or AA by Standard & Poor's, or Aaa or Aa by
Moody's Investors Service, Inc., or judged by the Adviser to be of equivalent
quality. The Fund's Treasury obligations, including those underlying zero coupon
receipts, are backed by the full faith and credit of the U.S. Government. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interest of the Fund to retain or dispose of the
security. In addition, the Fund may enter into repurchase agreements with
respect to such securities with selected banks and broker/dealers.

Price variability

Investors can expect more appreciation from the Fund than from a fund investing
in interest- paying securities of similar maturity during periods of declining
interest rates.

7
<PAGE>

Additional information about policies and investments (cont'd)

Conversely, when interest rates rise, the Fund may decline more in price than a
fund investing in interest-paying securities of similar maturity. Price
fluctuations are expected to be greatest in a longer-maturity fund and are
expected to diminish as the Fund approaches its maturity date.

Interest rates can change suddenly and unpredictably. The Fund may not be
appropriate for investors who do not plan to hold their shares for a long term
or until maturity. Redemptions prior to maturity generally will result in
capital gains or losses.

Income taxes

Under federal income tax laws, a portion of the difference between the issue
price of zero coupon securities and their face value is considered to be income
to the Fund each year, even though the Fund will not in each year receive cash
interest payments from these securities.

The Fund must distribute substantially all of its net investment income each
year, including the imputed income from its zero coupon investments. As with all
funds distributing taxable income, tax-paying investors in the Fund will be
subject to income taxes whether they elect to take cash distributions or have
them reinvested.

Tax-deferred investments such as IRAs, Keogh plans, 403(b) plans or 401(k) plans
currently do not pay federal income taxes.

Specialized investment techniques

When-issued securities

Repurchase agreements

As a means of earning income for periods as short as overnight, the Fund may
enter into repurchase agreements with selected banks and broker/dealers. Under a
repurchase agreement, the Fund acquires securities, subject to the seller's
agreement to repurchase them at a specified time and price.

Risk factors

Price variability. Because they do not pay interest until maturity, zero coupon
securities tend to be subject to greater interim fluctuation of market value in
response to changes in interest rates than interest-paying securities of similar
maturities.

8
<PAGE>

Distribution and performance information

Dividends and capital gains distributions

The Fund intends to distribute dividends from its net investment income and net
realized capital gains, if any, resulting from Fund investment activity in
November or December to prevent application of a federal excise tax. An
additional distribution may be made within three months of the Fund's fiscal
year end, if necessary. Any dividends or capital gains distributions declared in
October, November or December with a record date in such a month and paid during
the following January will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared. According
to preference, shareholders may receive distributions in cash or have them
reinvested in additional shares of the Fund. If an investment is in the form of
a retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account.

The Fund sends detailed tax information about the amount and type of its
distributions to its shareholders by January 31 of the following year.

Performance information

From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. The "SEC yield" of the Fund is an
annualized expression of the net income generated by the Fund over a specified
30-day (one month) period, as a percentage of the Fund's share price on the last
day of that period. This yield is calculated according to methods required by
the Securities and Exchange Commission (the "SEC"), and therefore may not equate
to the level of income paid to shareholders. The "effective yield" of the Fund
is expressed similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested and will reflect the effects of
compounding. "Total return" is the change in value of an investment in the Fund
for a specified period. The "average annual total return" of the Fund is the
average annual compound rate of return of an investment in the Fund assuming the
investment has been held for one year, five years and the life of Fund as of a
stated ending date. "Cumulative total return" represents the cumulative change
in value of an investment in the Fund for various periods. All types of total
return calculations assume that all dividends and capital gains distributions
during the period were reinvested in shares of the Fund. Performance will vary
based upon, among other things, changes in market conditions and the level of
the Fund's expenses.

Fund organization

Scudder Zero Coupon 2000 Fund is a diversified series of Scudder Funds Trust
(the "Trust"), an open-end management investment company, registered under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as a
Massachusetts business trust in July 1981 and changed its name from Scudder
Target Fund to its current name effective July 3, 1989.

(Continued on page 12)

9
<PAGE>

Purchases
<TABLE>
<S> <C>
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.

Make checks o By Mail Send your completed and signed application and check
payable to "The
Scudder Funds." by regular mail to: or by express, registered,
or certified mail to:

The Scudder Funds Scudder Shareholder Service
P.O. Box 2291 Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612

o By Wire Please see Transaction information--Purchasing shares--By wire
for details, including the ABA wire transfer number. Then call
1-800-225-5163 for instructions.

o In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.

Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the
Scudder Funds." complete Fund name, tothe appropriate address listed above.

o By Wire Please see Transaction information--Purchasing shares--By wire
for details, including the ABA wire transfer number.

o In Person Visit one of our Funds Centers to make an additional
investment in your Scudder fund account. Funds Center locations are
listed under Shareholder benefits.

o By Telephone Please see Transaction information--Purchasing shares--By
AutoBuy or By telephone order for more details.

o By Automatic You may arrange to make investments on a regular basis
Investment Plan through automatic deductions from your bank checking
($50 minimum) account. Please call 1-800-225-5163 for more information
and an enrollment form.
</TABLE>
10
<PAGE>

Exchanges and redemptions

<TABLE>
<S> <C> <C>
Exchanging Minimum investments: $1,000 to establish a new account;
shares $100 to exchange among existing accounts

Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:

The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612

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

Redeeming o By Telephone To speak with a service representative, call
shares 1-800-225-5163 from 8 a.m. to 8 p.m. eastern time or to access
SAIL(TM), Scudder's Automated Information Line, call 1-800-343-2890
(24 hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to $50,000
sent to your address of record.

o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:

A signature guarantee is required for redemptions over $50,000. See
Transaction information--Redeeming shares.

o By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Plan Call 1-800-225-5163 for more information and an enrollment form.

</TABLE>

11
<PAGE>

Fund organization (cont'd)

(Continued from page 9)

as electing or removing Trustees, changing fundamental investment policies or
approving an investment advisory contract. Shareholders will be assisted in
communicating with other shareholders in connection with removing a Trustee as
if Section 16(c) of the 1940 Act were applicable.

Investment adviser

The Adviser receives an investment management fee for these services equal to
0.60% of the average daily net assets of the Fund, payable monthly, provided the
Fund will make such interim payments as may be requested by the Adviser not to
exceed 75% of the amount of the fee then accrued on the books of the Fund and
unpaid. The Adviser has agreed to waive all or a portion of its management fee
until December 31, 1996, and to take other action, to the extent necessary, to
maintain the annualized expenses of the Fund at not more than 1% of average
daily net assets.

For the fiscal year ended December 31, 1995, the Adviser received an investment
management fee of 0.12% of the Fund's average daily net assets on an annual
basis.

All of the Fund's expenses are paid out of gross investment income, if any, or
from the Fund's assets. Shareholders pay no direct charges or fees for
investment or administrative services.

Scudder, Stevens & Clark, Inc. is located at
345 Park Avenue, New York, New York.

Transfer agent

Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Fund.

Underwriter

Custodian

State Street Bank and Trust Company is the Fund's custodian.

Fund accounting agent

Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.

Transaction information

Purchasing shares

By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
or exchange requests by telephone prior to the expiration of the seven-day
period will not be accepted.

12
<PAGE>

The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552

Your wire instructions must also include:

- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).

The account will be established once the application and money order are
received in good order.

You may also make additional investments of $100 or more to your existing
account by wire.

By telephone order. Existing shareholders may purchase shares at a certain day's
price by calling 1-800-225-5163 before the close of regular trading on the New
York Stock Exchange (the "Exchange"), normally 4 p.m. eastern time, on that day.
Orders must be for $10,000 or more and cannot be for an amount greater than four
times the value of your account at the time the order is placed. You must
include with your payment the order number given at the time the order is
placed. A confirmation with complete purchase information is sent shortly after
your order is received. If payment by check or wire is not received within three
business days, the order is subject to cancelation and the shareholder will be
responsible for any loss to the Fund resulting from this cancelation. Telephone
orders are not available for shares held in Scudder IRA accounts and most other
Scudder retirement plan accounts.

To purchase additional shares, call 1-800-225-5163. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
will be transferred from your bank checking account in two or three business
days following your call. For requests received by the close of regular trading
on the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "AutoBuy" requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day.

By exchange. Your new account will have the same registration and address as
your existing account.

13
<PAGE>

Transaction information (cont'd)

information, including information about the transfer of special account
features.

You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.

Redeeming shares

The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.

You can also make redemptions from your Scudder fund account on SAIL by calling
1-800-343-2890.

In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.

"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.

Telephone transactions

Shareholders automatically receive the ability to exchange by telephone and the

14
<PAGE>

right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine.

Share price

Processing time

Purchase and redemption requests received after the close of regular trading on
the Exchange will be executed the following business day.

If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.

The Fund will normally send your redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).

Short-term trading

Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to restrict
purchases of Fund shares (including exchanges) when a pattern of frequent
purchases and sales made in response to short-term fluctuations in the Fund's
share price appears evident.

Tax information

A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.

Tax identification number

Minimum balances

15
<PAGE>

Transaction information (cont'd)

sub-minimum accounts, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account.
Reductions in value that result solely from market activity will not trigger an
involuntary redemption. The Fund will mail the proceeds of the redeemed account
to the shareholder. The shareholder may restore the share balance to $1,000 or
more during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.

Third party transactions

If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.

Shareholder benefits

Experienced professional management

A team approach to investing

Scudder Zero Coupon 2000 Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in Scudder's offices across the United States and abroad. We believe our
team approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.

Lead Portfolio Manager Ruth Heisler has responsibility for overseeing the Fund's
day-to-day operations and for implementing the Fund's investment strategies.
Ms. Heisler has been in charge of the Fund's security selection since 1988 and
has been involved with bond research and investing at Scudder since 1953. Renee
L. Ross, Portfolio Manager, assists Ms. Heisler with trading bonds for the
Fund's portfolio. Ms. Ross, who has 10 years' experience as a portfolio manager,
joined the team in 1986, and has worked at Scudder since 1981. Stephen A.
Wohler, Portfolio Manager, joined the team in 1994 and is also responsible for
implementing the Fund's strategy. Mr. Wohler has over 16 years' experience
managing fixed-income investments and has been with Scudder since 1979.

SAIL(TM)--Scudder Automated Information Line

Investment flexibility

16
<PAGE>

the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.

Dividend reinvestment plan

You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.

Shareholder statements

Shareholder reports

In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.

Newsletters

Scudder Funds Centers

T.D.D. service for the hearing impaired

Trustees and Officers

Daniel Pierce*
President and Trustee

Lynn S. Birdsong*
Trustee

Sheryle J. Bolton
Trustee; Consultant

Thomas J. Devine
Trustee; Consultant

Peter B. Freeman
Trustee; Corporate Director and Trustee

Dr. Wilson Nolen
Trustee; Consultant

Juris Padegs*
Trustee

Jerard K. Hartman*
Vice President

Thomas W. Joseph*
Vice President

David S. Lee*
Vice President

Thomas M. Poor*
Vice President

Thomas F. McDonough*
Vice President, Secretary and
Assistant Treasurer

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Kathryn L. Quirk*
Vice President and Assistant Secretary

Coleen Downs Dinneen*
Assistant Secretary

* Scudder, Stevens & Clark, Inc.

17
<PAGE>

Scudder tax-advantaged retirement plans

* 403(b) Plans. Retirement plans for tax-exempt organizations and school
systems to which employers and employees may both contribute.

* SEP-IRAs. Easily administered retirement plans for small businesses and
self-employed individuals. The maximum annual contribution to SEP-IRA
accounts is adjusted each year for inflation.

* Scudder Horizon Plan. A no-load variable annuity that lets you build assets
by deferring taxes on your investment earnings. You can start with $2,500
or more.

18
<PAGE>

Investment products and services
<TABLE>
<S> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder Global Bond Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax free money market+ Scudder Income Fund
Scudder Tax Free Money Fund Scudder International Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Bond Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Discovery Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Small Company Value Fund
Scudder Balanced Fund Scudder Value Fund
Scudder Growth and Income Fund The Japan Fund
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
</TABLE>

For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state and local taxes. *Not available
in all states. +++A no-load variable annuity contract provided by Charter
National Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens &
Clark, Inc., are traded on various stock exchanges. ++For information on
Scudder Treasurers Trust(TM), an institutional cash management service that
utilizes certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call:
1-800-541-7703.

19
<PAGE>
<TABLE>
<S> <C>
How to contact Scudder

Account Service and Information: Please address all correspondence to:

For existing account service Scudder Investor Relations The Scudder Funds
and transactions 1-800-225-5163 P.O. Box 2291
Boston, Massachusetts
02107-2291

For personalized information Scudder Automated
about your Scudder accounts; Information Line
(SAIL) exchanges and or 1-800-343-2890
redemptions; information on
any Scudder fund

Investment Information: Or Stop by a Scudder Funds Center:

For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale

Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.

SCUDDER SHORT TERM BOND FUND

A Pure No-Load(TM) (No Sales Charge) Diversified Mutual Fund
Series Which Seeks to Provide a High Level of Income
Consistent With a High Degree of Principal
Stability By Investing Primarily in High
Quality, Short-Term Bonds

and

SCUDDER ZERO COUPON 2000 FUND

A Pure No-Load(TM) (No Sales Charge) High-Quality Diversified Mutual Fund
Series Designed For Investors Who Seek as High an Investment Return
Over a Selected Period as is Consistent With Investment in
U.S. Government Securities and the Minimization of Reinvestment Risk

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

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1996

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

This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the prospectuses of Scudder Short Term
Bond Fund and Scudder Zero Coupon 2000 Fund each dated May 1, 1996, as amended
from time to time, copies of which may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.

TABLE OF CONTENTS
Page

<S> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
Investment Objective and Policies of Short Term Bond Fund....................................................1

High Quality Securities......................................................................................2

Investment Objective and Policies of Zero Coupon 2000 Fund...................................................2
Management of Reinvestment Risk and Anticipated Growth of Zero Coupon 2000 Fund..............................3
Liquidation and Distribution of Assets in Target Year of Zero Coupon 2000 Fund...............................4
Management Strategies and Portfolio Turnover of Zero Coupon 2000 Fund........................................5
Specialized Investment Techniques............................................................................5
Investment Restrictions.....................................................................................18

PURCHASES............................................................................................................21
Additional Information About Opening An Account.............................................................21

Additional Information About Making Subsequent Investments..................................................21
Additional Information About Making Subsequent Investments by AutoBuy.......................................21

Checks......................................................................................................22
Wire Transfer of Federal Funds..............................................................................22
Share Price.................................................................................................23
Share Certificates..........................................................................................23
Other Information...........................................................................................23

EXCHANGES AND REDEMPTIONS............................................................................................23
Exchanges...................................................................................................23
Redemption by Telephone.....................................................................................24

Redemption by AutoSell......................................................................................25

Redemption by Mail or Fax...................................................................................25
Redemption by "Write-A-Check"...............................................................................25
Other Information...........................................................................................26

FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................26
The Pure No-Load(TM) Concept................................................................................26
Dividend and Capital Gain Distribution Options..............................................................27
Diversification.............................................................................................28
Scudder Funds Centers.......................................................................................28
Reports to Shareholders.....................................................................................28
Transaction Summaries.......................................................................................28

THE SCUDDER FAMILY OF FUNDS..........................................................................................28

SPECIAL PLAN ACCOUNTS................................................................................................31
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for
Corporations and Self-Employed Individuals.............................................................32
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and
Self-Employed Individuals..............................................................................32
Scudder IRA: Individual Retirement Account.................................................................32
Scudder 403(b) Plan.........................................................................................33
Automatic Withdrawal Plan...................................................................................33
Group or Salary Deduction Plan..............................................................................33
Automatic Investment Plan...................................................................................34
Uniform Transfers/Gifts to Minors Act.......................................................................34

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................34

i
<PAGE>

TABLE OF CONTENTS (continued)
Page

PERFORMANCE INFORMATION..............................................................................................35
Average Annual Total Return.................................................................................35
Cumulative Total Return.....................................................................................35
Total Return................................................................................................36

SEC Yields..................................................................................................36
Comparison of Portfolio Performance.........................................................................37

ORGANIZATION OF THE FUNDS............................................................................................40

INVESTMENT ADVISER...................................................................................................41
Personal Investments by Employees of the Adviser............................................................44

TRUSTEES AND OFFICERS................................................................................................44

REMUNERATION.........................................................................................................46

DISTRIBUTOR..........................................................................................................47

TAXES................................................................................................................48

PORTFOLIO TRANSACTIONS...............................................................................................51
Brokerage Commissions.......................................................................................51
Portfolio Turnover..........................................................................................52

NET ASSET VALUE......................................................................................................53

ADDITIONAL INFORMATION...............................................................................................54
Experts.....................................................................................................54
Shareholder Indemnification.................................................................................54
Other Information...........................................................................................54

FINANCIAL STATEMENTS.................................................................................................55

RATINGS OF CORPORATE BONDS...........................................................................................56

GLOSSARY.............................................................................................................57

</TABLE>

ii
<PAGE>

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES

(See "Investment objective and policies" and "Additional
information about policies and investments" in a Fund's
prospectus.)

Scudder Funds Trust, a Massachusetts business trust of which Scudder
Short Term Bond Fund ("Short Term Bond Fund") and Scudder Zero Coupon 2000 Fund
("Zero Coupon 2000 Fund") are series, is referred to herein as the "Trust." Each
Fund is a pure no-load(TM), open-end management investment company which
continuously offers and redeems its shares at net asset value. Each Fund is a
company of the type commonly known as a mutual fund. Short Term Bond Fund and
Zero Coupon 2000 Fund are both diversified series of the Trust. These series are
sometimes referred to individually as a "Fund" and jointly as the "Funds."

Because of each Fund's investment considerations discussed herein and
their investment policies, investment in shares of a Fund is not intended to
provide a complete investment program for an investor. The value of each Fund's
shares when sold may be higher or lower than when purchased.

The following objectives and policies, except as otherwise stated, are
not fundamental and may be changed without a shareholder vote. There can be no
assurance that either Fund will achieve its investment objective.

Investment Objective and Policies of Short Term Bond Fund

Short Term Bond Fund seeks to provide a high level of income consistent
with a high degree of principal stability by investing primarily in high
quality, short-term bonds. The dollar-weighted average effective maturity of the
Fund's portfolio may not exceed three years. Within this limitation, the Fund
may purchase individual securities with remaining stated maturities greater than
three years.

The Fund invests at least 65% of its net assets in a managed portfolio
of bonds consisting of:

* U.S. Government securities, including bonds, notes and bills
issued by the U.S. Treasury, and securities issued by agencies
and instrumentalities of the U.S. Government;

* Corporate debt securities, such as bonds, notes and
debentures;

* Mortgage-backed securities; and

* Other asset-backed securities.

Other eligible investments for the Fund are as follows:

* Money market instruments which are comprised of commercial
paper, bank obligations (i.e., certificates of deposit and
bankers' acceptances) and repurchase agreements;

* Privately placed obligations (including restricted
securities); and

* Foreign securities, including non-U.S. dollar-denominated
securities and U.S. dollar-denominated debt securities issued
by foreign issuers and foreign branches of U.S. banks.

In addition, the Fund may purchase indexed securities, securities on a
when-issued or forward delivery basis and may engage in dollar roll transactions
and strategic transactions. See "Specialized Investment Techniques" and
"Investment Restrictions" for more information.

To meet its objective, the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (the "Adviser"), actively manages the Fund's portfolio. Investment
decisions are based on general economic and financial trends, such as domestic
and international economic developments, the outlook for the securities markets,
the level of interest rates and inflation, the supply and demand of debt
securities, and other factors. The composition of the Fund's portfolio is also

<PAGE>

determined by individual security analysis. The Adviser's team of experienced
credit analysts actively monitors the credit quality of the investments of the
Fund.

The net asset value of the Fund is expected to fluctuate with changes
in interest rates and bond market conditions, although this fluctuation should
be more moderate than that of a fund with a longer average maturity. The
Adviser, however, will attempt to reduce principal fluctuation through, among
other things, diversification, credit analysis and security selection, and
adjustment of the Fund's average portfolio maturity. The Fund's share price
tends to rise as interest rates decline and decline as interest rates rise. In
periods of rising interest rates and falling bond prices, the Adviser may
shorten the Fund's average maturity to minimize the effect of declining bond
values on the Fund's net asset value. Conversely, during times of falling rates
and rising prices, a longer average maturity of up to three years may be sought.
When the Adviser believes economic or other conditions warrant, for temporary
defensive purposes the Fund may invest more than 35% of its assets in money
market instruments.

The Fund's securities generally offer less current yield than
securities of lower quality (rated below BBB/Baa) or longer maturity, but
lower-quality securities generally have less liquidity, and both tend to have
greater credit and market risk, and consequently more price volatility.

It is against the Fund's policy to make changes in the portfolio for
short-term trading purposes. However, the Fund may take advantage of
opportunities provided by temporary dislocations in the market to maintain
principal stability or enhance income.

High Quality Securities

The Fund emphasizes high quality investments. At least 65% of the
Fund's net assets will be invested in (1) obligations of the U.S. Government,
its agencies or instrumentalities, and (2) debt securities rated, at the time of
purchase, in one of the two highest ratings categories of Standard & Poor's
("S&P") (AAA or AA) or Moody's Investors Service, Inc. ("Moody's") (Aaa or Aa)
or, if not rated, judged to be of comparable quality by the Adviser. In
addition, the Fund will not invest in any debt security rated at the time of
purchase lower than BBB by S&P or Baa by Moody's, or of equivalent quality as
determined by the Adviser. Should the rating of a portfolio security be
downgraded, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security.

Investment Objective and Policies of Zero Coupon 2000 Fund

Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk. The Fund
invests primarily in zero coupon securities and the Fund matures on a specified
target date.

By pursuing its objective, the Fund seeks to return to investors a
reasonably assured targeted dollar amount, predictable at the time of
investment, on a specific target date in the future. As with any investment,
however, there can be no assurance that the Fund's objective or the targeted
amount will be met.

2
<PAGE>

redeem their shares on any business day at the daily net asset value. However,
the net asset value of the Fund's shares increases or decreases with changes in
the market value of the Fund's investments which tends to vary inversely with
changes in prevailing interest rates. A shareholder who redeems prior to
maturity may receive a significantly different investment return than was
anticipated at the time of purchase.

The Fund matures on the third Friday of December 2000. At that time,
the Fund will be converted to cash and distributed to shareholders or reinvested
in another fund of their choice. The maturity date may coincide with known
financial needs in the future, such as a car purchase, children's college
education, the purchase of a home, or retirement.

Zero coupon securities, including U.S. Government securities and
privately stripped coupons on and receipts for U.S. Government securities, pay
no cash income but are issued at substantial discounts from their value at
maturity. When held to maturity, their entire return, which consists of the
accretion of discount, comes from the difference between their issue price and
their maturity value. This difference is known at the time of purchase, so
investors holding zero coupon securities until maturity know the amount of their
investment return at the time of their investment.

A portion of the total realized return from conventional
interest-paying bonds comes from the reinvestment of periodic interest. Since
the rate to be earned on these reinvestments may be higher or lower than the
rate quoted on the interest-paying bonds at the time of the original purchase,
the investment's total return is uncertain even for investors holding the
security to its maturity. This uncertainty is commonly referred to as
reinvestment risk and can have a significant impact on total realized investment
return. With zero coupon securities, however, there are no cash distributions to
reinvest, so investors bear no reinvestment risk if they hold the zero coupon
security to maturity.

The Fund is designed for investors seeking returns available on U.S.
Government securities and reasonable assurance that a specific targeted dollar
amount, predictable at the time of their investment, will be paid to them on a
specific target date in the future.

Dividends and distributions will be automatically reinvested in
additional shares (unless investors make a specific written election to take
them in cash) because without such reinvestment investors are not likely to
receive their targeted dollar amount on maturity. Investors should also plan to
hold shares in this Fund until maturity because these shares are likely to have
substantially more price volatility than shares of funds investing in
traditional fixed-income investments.

At least 80% of the net assets of the Fund will be invested in zero
coupon securities. These include U.S. Treasury notes and bonds which have no
coupons and are not entitled to income, U.S. Treasury bills, individual interest
coupons which trade separately, and evidences of receipt of such securities. At
least 50% of the net assets of the Fund will be invested in zero coupon
securities maturing within two years of the Fund's target date. Up to 20% may be
invested in interest-paying U.S. Treasury notes and bonds, and in repurchase
agreements with respect to such securities. These interest-paying securities
provide income for expenses, redemption payments, and cash dividends of the
Fund.

The average duration of the Fund will be maintained within 12 months of
the Fund's target date. Duration is a measure of the length of an investment
which takes into account, through present value analysis, the timing and amount
of any interest payments as well as the amount of the principal repayment.
Duration is commonly used by professional investment managers to help identify
and control reinvestment risk. Since the Fund will not be invested entirely in
securities maturing on the target date, there will be some reinvestment risk. By
balancing investments with slightly longer and shorter durations, the Adviser
believes it can maintain the Fund's average duration within 12 months of the
Fund's target date and thereby reduce its reinvestment risk.

Management of Reinvestment Risk and Anticipated Growth of Zero Coupon 2000 Fund

Reinvestment risk arises from the uncertainty as to the total return
which will be realized from conventional interest-paying bonds due to the fact
that periodic interest (cash) will be reinvested in the future at interest rates
unknown at the time of the original purchase. With zero coupon securities,
however, there are no cash distributions to reinvest, so investors bear no
reinvestment risk if they hold a zero coupon security to maturity.

3
<PAGE>

For an investor who makes a direct investment in a zero coupon security
(not in a zero coupon fund) and holds it to its maturity, the return or yield to
maturity is certain--regardless of whether interim reinvestment rates rise or
fall. (See table below.)

<TABLE>
<CAPTION>
Total Ending Value1 on a $1,000
Investment (Realized Yield)
Initial If reinvestment rates are2 :
Coupon Yield to
(Interest) Maturity Maturity 6% 8% 10% 12% 14%
- ---------- -------- -------- ----- ----- ------ ------ -----
<C> <C> <C> <C> <C> <C> <C> <C>
10% 10 years 10% $2345 $2490 $2655 $2841 $3052
(8.7%) (9.3%) (10%) (10.7%) (11.5%)

0% 10 years 10% $2655 $2655 $2655 $2655 $2655
(10%) (10%) (10%) (10%) (10%)
</TABLE>

Due to the nature of zero coupon securities, which comprise 80% or more
of the investments of the Fund, the reinvestment risk accompanying this Fund is
less than would be the case if this Fund were entirely invested in interest
(cash)-paying securities. Furthermore, the Fund's Adviser believes it can reduce
reinvestment risk by maintaining the Fund's average duration within twelve
months of the Fund's Target Date.

When held to maturity, an investor's investment return in the Fund will
consist primarily of the accretion of discount on the underlying securities in
the Fund (the difference between their issue price and their maturity value) and
will be realized on the specified Target Date. The anticipated growth rate for
the Fund is the annualized rate of growth investors may expect from the time
they purchase the Fund's shares until the Fund's Target Date. The Fund will
calculate its anticipated growth rate on each business day. Such a rate will
vary from day to day because of changes in interest rates and other factors
affecting the value of the Fund's investments, and is based on certain
assumptions such as reinvestment of dividends and distributions, a constant
expense ratio and portfolio composition. Furthermore, changes in the price among
securities with different maturities and shareholder redemptions can affect
investment return, as can the skill of the Adviser in managing the Fund.

Liquidation and Distribution of Assets in Target Year of Zero Coupon 2000 Fund

As securities in the Fund mature or are sold throughout the Target
Year, the proceeds will be invested in eligible money market instruments. By
December of that year, substantially all of the assets of the Fund will consist
of such eligible money-market instruments and other then-maturing securities.
These instruments will be sold or allowed to mature, the liabilities of the Fund
will be discharged or provision made therefor, and the net assets will be
distributed pro rata to shareholders or reinvested at their direction. The
estimated expenses of terminating and liquidating the Fund will be accrued
ratably over its Target Year. These expenses, which are charged to income as are
all expenses, are not expected to exceed significantly the ordinary annual
expenses incurred by the Fund, and, therefore, should have no effect on the
maturity value of the Fund.

If a shareholder does not complete an election form directing what
should be done with the liquidation proceeds, a check for the proceeds will be
mailed to the shareholder's address of record in complete discharge of the
Fund's obligation to the shareholder. In no event, however, will liquidation
proceeds be distributed unless all share certificates, if any, have been
returned to, or other arrangements have been made which are satisfactory to, the
Trust or its transfer agent, Scudder Service Corporation (the "Transfer Agent").
Retirement plan participants who do not choose an option will receive their
distribution as a reinvestment into Scudder U.S. Treasury Money Fund. All
distributions in liquidation will be made subject to compliance with any
applicable regulatory positions.

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

1 See "Glossary."

2 These results assume semiannual compounding. For illustration purposes
only, the table above assumed these reinvestment rates would remain
constant over the life of the bond. The actual reinvestment rates, and
total returns of coupon-paying bonds, will vary with changing market
conditions.

4
<PAGE>

The practice of declaring and paying dividends annually (see "DIVIDENDS
AND CAPITAL GAINS DISTRIBUTIONS") may be changed, and dividend declarations and
payments may be withheld during the Maturity Year immediately preceding the
final distribution of the assets of the Fund, and the amounts so withheld
distributed in liquidation if the Trustees determine that it would be in the
best interest of the Fund's shareholders to do so.

Management Strategies and Portfolio Turnover of Zero Coupon 2000 Fund

In pursuit of its investment objectives, the Fund purchases obligations
that it believes are attractive and competitive values in terms of quality,
yield and relationship of current price to maturity value. However, recognizing
the dynamics of bond prices in response to changes in general economic
conditions, fiscal and monetary policies, interest levels and market forces such
as supply and demand for various bond issues, the Adviser, subject to the
Trustees' review, manages the Fund, attempting to achieve as high an investment
return over selected periods as is consistent with investment in U.S. Government
securities and with the minimization of reinvestment risk. The primary
strategies employed in the management of the Fund are:

Emphasis on Quality. The Fund is a high quality portfolio of zero
coupon securities, which include U.S. Treasury notes and bonds which have no
coupons and are not entitled to income, U.S. Treasury bills, individual interest
coupons which trade separately and evidences of receipt of such securities. The
ratings assigned by Moody's and S&P represent their opinions as to the quality
of the securities which they undertake to rate, many of which may be purchased
by the Fund. The Fund will invest in zero coupon securities, including both U.S.
Government and privately stripped coupons and receipts for U.S. Government
securities, which are rated AAA or AA by S&P, or Aaa or Aa by Moody's. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. Furthermore, even within the high-quality segment of the bond
market, relative credit standing and market perceptions thereof may shift.
Therefore, the Adviser believes that it should review continuously the quality
of debt obligations. The Fund's Adviser has over many years developed an
experienced staff to assign its own quality ratings which are considered in
making value judgments and in arriving at purchase or sale decisions. Through
the discipline of this procedure the Adviser attempts to discern variations in
credit rankings of the published services, and to anticipate changes in credit
ranking. Should the rating of a portfolio security be downgraded, the Adviser
will determine whether it is in the best interest of the Fund to retain or
dispose of the security. (See "RATINGS OF CORPORATE BONDS.")

Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of bonds of the same or generally
similar maturity tend to change constantly in reaction to broad swings in
interest rates and factors affecting relative supply and demand. These temporary
disparities in normal yield relationships may afford opportunities to implement
a flexible policy of trading the Fund's holdings in order to invest in more
attractive market sectors or specific issues.

Market Trading Opportunities. In addition to the above, the Fund,
consistent with its investment policies, may engage in short-term trading
(selling securities held for brief periods of time, usually less than three
months) if the Adviser believes that such transactions, net of costs, would
further the attainment of the Fund's objective. The needs of different classes
of lenders and borrowers and their changing preferences and circumstances have
in the past caused market dislocations unrelated to fundamental creditworthiness
and trends in interest rates which have presented market trading opportunities.
There can be no assurance that such dislocations will occur in the future or
that the Fund will be able to take advantage of them. The Fund will limit its
voluntary short-term trading to the extent necessary to qualify as a "regulated
investment company" under the Internal Revenue Code. (See "TAXES.")

Specialized Investment Techniques

Mortgage-Backed Securities and Mortgage Pass-Through Securities. Short Term Bond
Fund may also invest in mortgage-backed securities, which are interests in pools
of mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below. The
Fund may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.

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A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities.

Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.

The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages. These guarantees, however, do not apply to the market
value or yield of mortgage-backed securities or to the value of Fund shares.
Also, GNMA securities often are purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.

Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.

FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.

Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Adviser determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.

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Collateralized Mortgage Obligations ("CMO"s). Short Term Bond Fund may invest in
CMOs which 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 FNMA, 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 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.

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.

FHLMC Collateralized Mortgage Obligations. Short Term Bond Fund may invest in
FHLMC CMOs which are debt obligations of FHLMC issued in multiple classes having
different maturity dates and are secured by the pledge of a pool of conventional
mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of principal and
interest on the CMOs are made semiannually, as opposed to monthly. The amount of
principal payable on each semiannual payment date is determined in accordance
with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to
approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.

If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.

Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.

Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. Short Term Bond Fund will limit its purchases of mortgage-backed
securities or any other assets which, in the opinion of the Adviser, are
illiquid, in accordance with the nonfundamental investment restriction on
securities which are not readily marketable discussed below. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with the Fund's investment objective, policies and quality
standards, consider making investments in such new types of mortgage-related
securities.

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Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with Short Term Bond Fund's investment objectives and
policies, the Fund may invest in these and other types of asset-backed
securities that may be developed in the future. In general, the collateral
supporting these securities is of shorter maturity than mortgage loans and is
less likely to experience substantial prepayments with interest rate
fluctuations.

Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile ReceivablesSM ("CARSSM"). CARSSM
represent undivided fractional interests in a trust ("Trust") whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.

Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.

Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Fund will not pay any additional or separate fees for
credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an investment in such a security.

The Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the Securities Act of 1933 (the "1933 Act") may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.

The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Fund to dispose of any then existing holdings of such
securities.

Convertible Securities. Short Term Bond Fund may invest in convertible
securities, that is, bonds, notes, debentures, preferred stocks and other
securities which are convertible into common stock. Investments in convertible

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securities can provide an opportunity for capital appreciation and/or income
through interest and dividend payments by virtue of their conversion or exchange
features.

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

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

Indexed Securities. Short Term Bond Fund may invest in indexed securities, the
value of which is linked to currencies, interest rates, commodities, indices or
other financial indicators ("reference instruments"). Most indexed securities
have maturities of three years or less.

Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).

Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.

Dollar Roll Transactions. Short Term Bond Fund may enter into "dollar roll"
transactions, which consist of the sale by the Fund to a bank or broker/dealer
(the "counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Fund receives a fee from the counterparty
as consideration for entering into the commitment to purchase. Dollar rolls may
be renewed over a period of several months with a different purchase and
repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a

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firm commitment agreement pursuant to which the Fund agrees to buy a security on
a future date.

The Fund will not use such transactions for leveraging purposes and,
accordingly, will segregate cash, U.S. Government securities or other high grade
debt obligations in an amount sufficient to meet its purchase obligations under
the transactions. The Fund will also maintain asset coverage of at least 300%
for all outstanding firm commitments, dollar rolls and other borrowings.

Dollar rolls are treated for purposes of the Investment Company Act of
1940 (the "1940 Act") as borrowings of the Fund because they involve the sale of
a security coupled with an agreement to repurchase. Like all borrowings, a
dollar roll involves costs to the Fund. For example, while the Fund receives a
fee as consideration for agreeing to repurchase the security, the Fund forgoes
the right to receive all principal and interest payments while the counterparty
holds the security. These payments to the counterparty may exceed the fee
received by the Fund, thereby effectively charging the Fund interest on its
borrowing. Further, although the Fund can estimate the amount of expected
principal prepayment over the term of the dollar roll, a variation in the actual
amount of prepayment could increase or decrease the cost of the Fund's
borrowing.

The entry into dollar rolls involves potential risks of loss which are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security which the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.

The Trustees of the Fund have adopted guidelines to ensure that those
securities received are substantially identical to those sold. To reduce the
risk of default, the Fund will engage in such transactions only with banks and
broker/dealers selected pursuant to such guidelines.

Repurchase Agreements. Each Fund may enter into repurchase agreements with
member banks of the Federal Reserve System or any domestic broker/dealer which
is recognized as a reporting government securities dealer if the
creditworthiness of the bank or broker/dealer has been determined by the Adviser
to be at least as high as that of other obligations a Fund may purchase or at
least equal to that of issuers of commercial paper rated within the two highest
grades assigned by Moody's or S&P.

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

For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to a Fund's investment restriction applicable
to loans. It is not clear whether a court would consider the Obligation
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a 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, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in the price of the
Obligation. If the court characterizes the transaction as a loan and a Fund has
not perfected a security interest in the Obligation, a 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, a 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 a Fund, the Adviser seeks to

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minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the Obligation, in which case a Fund
may incur a loss if the proceeds to that Fund of its sale of the securities
underlying the repurchase agreement 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), a Fund will direct the seller of the Obligation to
deliver additional securities so that the market value (including interest) of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
impose on the seller a contractual obligation to deliver additional securities.

Short Term Bond Fund may enter into repurchase commitments with any
party deemed creditworthy by the Adviser, including foreign banks and
broker/dealers, if the transaction is entered into for investment purposes and
the counterparty's creditworthiness is at least equal to that of issuers of
securities which the Fund may purchase. Such transactions may not provide the
Fund with collateral marked-to-market during the term of the commitment.

When-Issued Securities. Each Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. The price of such securities, which
is generally expressed in yield terms, is generally fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities take place at a later date. During the period
between purchase and settlement, no payment is made by a Fund to the issuer and
no interest on the when-issued or forward delivery security accrues to a Fund.
To the extent that assets of a Fund are not invested prior to the settlement of
a purchase of securities, a Fund will earn no income; however, it is intended
that a Fund will be fully invested to the extent practicable and subject to the
policies stated above. While when-issued or forward delivery securities may be
sold prior to the settlement date, it is intended that a Fund will purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes the commitment to
purchase a security on a when-issued or forward delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of when-issued or forward delivery securities may
be more or less than the purchase price. Each Fund does not believe that its net
asset value or income will be adversely affected by their purchase of securities
on a when-issued or forward delivery basis. Each Fund will establish a
segregated account for commitments for when-issued or forward delivery
securities as described above. For Zero Coupon 2000 Fund, such segregated
securities either will mature or, if necessary, be sold on or before the
settlement date.

Foreign Securities. Short Term Bond Fund may invest in securities of foreign
issuers. Investing in foreign issuers involves certain special considerations,
including those set forth below, which are not typically associated with
investing in United States issuers. As foreign companies are not generally
subject to uniform accounting and 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. Volume and liquidity in most foreign bond markets is
less than in the United States and, at times, volatility of price can be greater
than in the United States. There is generally less government supervision and
regulation of brokers and listed companies than in the United States. Mail
service between the United States and foreign countries may be slower or less
reliable than within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Securities issued or guaranteed by foreign national governments,
their agencies, instrumentalities, or political subdivisions, may or may not be
supported by the full faith and credit and taxing power of the foreign
government. The Fund's ability and decisions to purchase and sell portfolio
securities may be affected by laws or regulations relating to the convertibility
and repatriation of assets. Further, it may be more difficult for the Fund's
agents to keep currently informed about corporate actions which may affect the
prices of portfolio securities. 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
United States investments in those countries. In addition, it may be more
difficult to obtain and enforce a judgment against a foreign issuer. Foreign
securities may be subject to foreign government taxes which will reduce the
yield on such securities. A shareholder of the Fund will not be entitled to
claim a credit or deduction for U.S. federal income tax purposes for his or her
proportionate share of such foreign taxes paid by the Fund.

Lending of Portfolio Securities. Short Term Bond Fund may seek to increase its
income by lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and high grade debt obligations maintained on a
current basis at an amount at least equal to the market value and accrued
interest of the securities loaned. The Fund has the right to call a loan and

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obtain the securities loaned on no more than five days' notice. During the
existence of a loan, the Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by the Adviser to be of good standing.
The value of the securities loaned will not exceed 30% of the value of the
Fund's total assets at the time any loan is made. The Fund has no current
intention of making loans of portfolio securities that would amount to greater
than 5% of the Fund's total assets.

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

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

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

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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 Short Term Bond Fund assets in special accounts,
as described below under "Use of Segregated and Other Special Accounts."

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

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

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

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

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

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Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Adviser.
The staff of the SEC currently takes the position that OTC options purchased by
the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 10% of its assets in illiquid securities.

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

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

The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, 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. The Fund will not sell put options if, as a result, more than 50% of
the Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.

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

The Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited

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thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.

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

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

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

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

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

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To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.

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

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

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

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

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

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

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

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

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

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above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.

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

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

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

The Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") for qualification as a regulated investment company. (See
"TAXES.")

Investment Restrictions

The following restrictions are fundamental policies and may not be
changed with respect to each of the Funds 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 combined Statement of Additional
Information, means the lesser of (1) 67% or more of the voting securities of
such Fund present at such meeting, if the holders of more than 50% of the
outstanding voting securities of such Fund are present or represented by proxy,
or (2) more than 50% of the outstanding voting securities of such Fund.

As a matter of fundamental policy, each Fund may not:

1. with respect to 75% of its total assets taken at market value,
purchase more than 10% of the voting securities of any one issuer
or invest more than 5% of the value of its total assets in the
securities of any one issuer, except obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities and except securities of other investment
companies;

2. borrow money, except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse
repurchase agreements; provided that the Fund maintains asset
coverage of 300% for all borrowings;

3. purchase or sell real estate (except that the Fund may invest in
(i) securities of companies which deal in real estate or
mortgages, and (ii) securities secured by real estate or
interests therein, and that the Fund reserves freedom of

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<PAGE>

action to hold and sell real estate acquired as a result of the
Fund's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities;

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

5. make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent that the entry into repurchase
agreements and the purchase of debt securities in accordance with
the Fund's investment objective and investment policies may be
deemed to be loans;

6. issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for
shares of the separate classes or series of the Trust, provided
that collateral arrangements with respect to currency-related
contracts, futures contracts, options or other permitted
investments, including deposits of initial and variation margin,
are not considered to be the issuance of senior securities for
purposes of this restriction; or

7. purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to
be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that
there is no limitation with respect to investments in obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. (For the purposes of this restriction,
telephone companies are considered to be in a separate industry
from gas and electric public utilities, and wholly-owned finance
companies are considered to be in the industry of their parents
if their activities are primarily related to financing the
activities of the parents.)

As a matter of nonfundamental policy each Fund may not:

(a) purchase or retain securities of any open-end investment company,
or securities of any closed-end investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchases, or except when
such purchase, though not made in the open market, is part of a
plan of merger, consolidation, reorganization or acquisition of
assets; in any event the Fund may not purchase more than 3% of
the outstanding voting securities of another investment company,
may not invest more than 5% of its assets in another investment
company, and may not invest more than 10% of its assets in other
investment companies;

(b) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;

(c) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee
of the Trust or a member, officer, director or trustee of the
investment adviser of the Fund if one or more of such individuals
owns beneficially more than one-half of one percent (1/2%) of the
outstanding shares or securities or both (taken at market value)
of such issuer and such individuals owning more than one-half of
one percent (1/2%) of such shares or securities together own
beneficially more than 5% of such shares or securities or both;

(d) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right to
obtain securities equivalent in kind and amount to the securities
sold and, if the right is conditional, the sale is made upon the
same conditions, except in connection with arbitrage
transactions, and except that the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of securities;

(e) invest more than 10% of its total assets in securities which are
not readily marketable, the disposition of which is restricted
under Federal securities laws, or in repurchase agreements not
terminable within 7 days, and the Fund will not invest more than
10% of its total assets in restricted securities;

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<PAGE>

(f) purchase securities of any issuers with a record of less than
three years continuous operations, including predecessors, except
U.S. Government securities, securities of such issuers which are
rated by at least one nationally recognized statistical rating
organization, municipal obligations and obligations issued or
guaranteed by any foreign government or its agencies or
instrumentalities, if such purchase would cause the investments
of the Fund in all such issuers to exceed 5% of the total assets
of the Fund taken at market value;

(g) (Short Term Bond Fund only) buy options on securities or
financial instruments, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its net assets; or sell put options on securities if, as a
result, the aggregate value of the obligations underlying such
put options would exceed 50% of the Fund's net assets;

(h) (Short Term Bond Fund only) enter into futures contracts or
purchase options thereon unless immediately after the purchase,
the value of the aggregate initial margin with respect to all
futures contracts entered into on behalf of the Fund and the
premiums paid for options on futures contracts does not exceed 5%
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;

(i) (Zero Coupon 2000 Fund only) purchase or sell any put or call
options or any combination thereof;

(j) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which own
or invest in such interests);

(k) (Short Term Bond Fund only) borrow money in excess of 5% of its
total assets (taken at market value) except for temporary or
emergency purposes or borrow other than from banks; however, in
the case of reverse repurchase agreements, the Fund may invest in
such agreements with other than banks subject to total asset
coverage of 300% for such agreements and all borrowing;

(l) (Zero Coupon 2000 Fund only) borrow money, including reverse
repurchase agreements, in excess of 5% of its total assets (taken
at market value) except for temporary or emergency purposes or
borrow other than from banks;

(m) purchase warrants if as a result warrants taken at the lower of
cost or market value would represent more than 5% of the value of
the Fund's total net assets or more than 2% of its net assets in
warrants that are not listed on the New York or American Stock
Exchanges or on an exchange with comparable listing requirements
(for this purpose, warrants attached to securities will be deemed
to have no value);

(n) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the time
any loan is made; all loans of portfolio securities will be fully
collateralized and marked to market daily. The Fund has no
current intention of making loans of portfolio securities that
would amount to greater than 5% of the Fund's total assets; or

(o) purchase or sell real estate limited partnership interests.

For Short Term Bond Fund, restrictions with respect to repurchase
agreements shall be construed to be for repurchase agreements entered into for
the investment of available cash consistent with the Fund's repurchase agreement
procedures, not repurchase commitments entered into for general investment
purposes. In addition, for Short Term Bond Fund's policy regarding its
investments in the securities of issuers having their principal business
activities in the same industry, collateralized mortgage obligations and
asset-backed securities are considered to be separate industries.

20
<PAGE>

PURCHASES

(See "Purchases" and "Transaction information" in a
Fund's prospectus.)

Additional Information About Opening An Account

Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $1,000 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX or telephone.

Shareholders of other Scudder funds who have submitted an account
application and have a certified taxpayer identification number, clients having
a regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call the investor will be asked to indicate
the Fund name, amount to be wired ($1,000 minimum), name of bank or trust
company from which the wire will be sent, the exact registration of the new
account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, Boston, MA 02101, ABA Number 011000028, DDA
Account Number 9903-5552. The investor must give the Scudder fund name, account
name and new account number. Finally, the investor must send the completed and
signed application to a Fund promptly.

The minimum initial purchase amount is less than $1,000 under certain
special plan accounts.

Additional Information About Making Subsequent Investments

For Zero Coupon 2000 Fund, subsequent purchase orders for shares in the
amount of $10,000 or more and for an amount not greater than four times the
value of the shareholder's account may be placed by telephone, fax, etc., by
members of the NASD, by banks, and by established shareholders (except by
Scudder Individual Retirement Account (IRA), Scudder Horizon Plan, Scudder
Profit Sharing and Money Purchase Pension Plans, Scudder 401(k) and Scudder
403(b) Plan holders). Orders placed in this manner may be directed to any office
of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Fund or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Trust shall have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse the Fund or
the principal underwriter for the loss incurred. Net losses on such transactions
which are not recovered from the purchaser will be absorbed by the principal
underwriter. Any net profit on the liquidation of unpaid shares will accrue to
that Fund.

For Short Term Bond Fund, certain financial institutions may call
Scudder before the close of regular trading on the Exchange, normally 4 p.m.
eastern time, and purchase shares at that day's price. Such purchased shares
will begin to earn dividends on the day on which the payment is received by the
Fund. If payment by check or wire is not received from the financial institution
within three business days, the order is subject to cancellation and the
financial institution will be responsible for any loss to the Fund resulting
from this cancellation. Please call 1-800-854-8525 for more information.

Additional Information About Making Subsequent Investments by AutoBuy

Shareholders, whose predesignated bank account of record is a
Member of the Automated Clearing House Network (ACH) and have elected to
participate in the AutoBuy program, may purchase shares of the Fund by
telephone. Through this service shareholders may purchase up to $250,000 but not
less than $250. To purchase shares at the net asset value per share calculated
on the day of your call by AutoBuy, shareholders should call before the close of
trading on the New York Stock Exchange (the "Exchange") (normally 4 p.m. eastern
time). Proceeds in the amount of your purchase will be transferred from your
bank checking account in two or three business days following your call. For

21
<PAGE>

requests received by the close of regular trading on the Exchange, shares will
be purchased at the net asset value per share calculated at the close of trading
on the day of your call. For Short Term Bond Fund, shares will begin to earn
dividends on the day the purchase payment from your bank is received by the
Fund. AutoBuy requests received after the close of regular trading on the
Exchange will begin their processing the following business day and will be
purchased at the net asset value per share calculated at the close of trading on
the business day following your call. If you purchase shares by AutoBuy and
redeem them within seven days of the purchase, the Fund may hold the redemption
proceeds for a period of up to seven business days. If you purchase shares and
there are insufficient funds in your bank account the purchase will be canceled
and you will be subject to any losses or fees incurred in the transaction.
AutoBuy transactions are not available for Scudder IRA accounts and most other
retirement plan accounts.

In order to request purchases by AutoBuy, shareholders must have
completed and returned to the Funds' transfer agent, Scudder Service Corporation
(the "Transfer Agent"), the application, including the designation of a bank
account from which the purchase payment will be debited. New investors wishing
to establish AutoBuy may so indicate on the application. Existing shareholders
who wish to add AutoBuy to their account may do so by completing an AutoBuy
Enrollment Form. After sending in an enrollment form shareholders should allow
for 15 days for this service to be available.

Checks

A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.

If shares are purchased by a check which proves to be uncollectible,
the Trust reserves the right to cancel the purchase immediately and the
purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust shall have the authority, as agent of the shareholder, to
redeem shares in the shareholder's account to reimburse a Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted, in placing future orders in any of the
Scudder funds.

Wire Transfer of Federal Funds

To purchase shares of Short Term Bond Fund and obtain the same day
dividend you must have your bank forward federal funds by wire transfer and
provide the required account information so as to be available to the Fund prior
to twelve o'clock noon eastern time on that day. If you wish to make a purchase
of $500,000 or more you should notify the Transfer Agent of such a purchase by
calling 1-800-225-5163. If either the federal funds or the account information
is received after twelve o'clock noon eastern time, but both the funds and the
information are made available before the close of regular trading on the
Exchange (normally 4 p.m. eastern time) on any business day, shares will be
purchased at net asset value determined on that day but will not receive the
dividend; in such cases, dividends commence on the next business day.

To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day for a Fund, your bank must forward
federal funds by wire transfer and provide the required account information so
as to be available to a Fund prior to the close of regular trading on the
Exchange (normally 4 p.m. eastern time).

The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.

Boston banks are closed on certain holidays although the Exchange may
be open. These holidays are Martin Luther King, Jr. Day (the 3rd Monday in
January), Columbus Day (the 2nd Monday in October) and Veterans Day (November
11). Investors are not able to purchase shares by wiring federal funds on such
holidays because the Custodian is not open to receive such federal funds on
behalf of a Fund.

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<PAGE>

Share Price

Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
per share normally will be computed as of the close of regular trading on each
day during which the Exchange is open for trading. Orders received after the
close of regular trading on the Exchange will receive the next business day's
net asset value. If the order has been placed by a member of the NASD, other
than the Distributor, it is the responsibility of that member broker, rather
than a Fund, to forward the purchase order to the Fund's Transfer Agent by the
close of trading on the Exchange.

Share Certificates

Due to the desire of the Trust to afford ease of redemption,
certificates will not be issued to indicate ownership in a Fund.

Other Information

If purchases or redemptions of a Fund's shares are arranged and
settlement is made, at an investor's election through a member of the NASD other
than the Distributor, that member may, at its discretion, charge a fee for that
service.

The Board of Trustees and the Distributor each has the right to limit
the amount of purchases by, and to refuse to sell to any person and each may
suspend or terminate the offering of shares of a Fund at any time.

The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations, certification of exempt status) will be
returned to the investor.

The Trust may issue shares of each Fund at net asset value in
connection with any merger or consolidation with, or acquisition of the assets
of, any investment company (or series thereof) or personal holding company,
subject to the requirements of the 1940 Act.

EXCHANGES AND REDEMPTIONS

(See "Exchanges and redemptions" and "Transaction information"
in a Fund's prospectus.)

Exchanges

Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be
either an additional investment into an existing account or may involve opening
a new account in the other fund. When an exchange involves a new account, the
new account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $1,000. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee as described under "Transaction information--Redeeming
shares--Signature guarantees" in a Fund's prospectus.

Exchange orders received before the close of regular trading on the
Exchange on any business day will ordinarily be executed at respective net asset
values determined on that day. Exchange orders received after the close of
trading will be executed on the following business day.

Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund through Scudder's Automatic Exchange

23
<PAGE>

Program. Exchanges must be for a minimum of $50. Shareholders may add this free
feature over the telephone or in writing. Automatic Exchanges will continue
until the shareholder requests by telephone or in writing to have the feature
removed, or until the originating account is depleted. The Trust and the
Transfer Agent each reserves the right to suspend or terminate the privilege of
the Automatic Exchange Program at any time.

No commission is charged to the shareholder for any exchange described
above. An exchange into another Scudder fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder, and
the proceeds of such exchange may be subject to backup withholding. (See
"TAXES.")

Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Trust employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trust will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust, the Funds and the Transfer Agent each reserves the right to
suspend or terminate the privilege of exchanging by telephone or fax at any
time.

The Scudder Funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder Fund
into which the exchange is being contemplated.

Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.

Redemption by Telephone

Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $50,000 and have the proceeds mailed
to their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.

(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section on
the application.

(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA, Scudder
Pension and Profit-Sharing, Scudder 401(k) and Scudder 403(b)
planholders) who wish to establish telephone redemption to a
designated bank account or who want to change the bank account
previously designated to receive redemption payments should
either return a Telephone Redemption Option Form (available upon
request) or send a letter identifying the account and specifying
the exact information to be changed. The letter must be signed
exactly as the shareholder's name(s) appears on the account. An
original signature and an original signature guarantee are
required for each person in whose name the account is registered.

Telephone redemption is not available with respect to shares
represented by share certificates or shares held in IRA accounts.

If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.

Note: Investors designating that a savings bank receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds
must be wired through a commercial bank which is a correspondent
of the savings bank. As this may delay receipt by the
shareholder's account, it is suggested that investors wishing to
use a savings bank discuss wire

24
<PAGE>

procedures with their banks and submit any special wire transfer
information with the telephone redemption authorization. If
appropriate wire information is not supplied, redemption proceeds
will be mailed to the designated bank.

Redemption requests by telephone (technically a repurchase by agreement
between a Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared.

Redemption by AutoSell

Shareholders, whose predesignated bank account of record is a
member of the Automated Clearing House Network (ACH) and who have elected to
participate in the AutoSell program, may redeem shares of the Fund by AutoSell.
To redeem shares by AutoSell, shareholders should call before the close of
regular trading on the Exchange. Redemptions must be for at least $250.
Redemption proceeds will be transferred to your bank checking account in two or
three business days following your call. Shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. AutoSell requests after the close of regular trading on the Exchange will
begin their processing and be redeemed at the net asset value calculated as of
the close of regular trading on the Exchange the following business day.
AutoSell transactions are not available for Scudder IRA accounts and most other
retirement plan accounts.

In order to request redemptions by AutoSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish AutoSell may so indicate on the application.
Existing shareholders who wish to add AutoSell to their account may do so by
completing an AutoSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.

Redemption by Mail or Fax

In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).

It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to redemptions to ensure
that all necessary documents accompany the request. When shares are held in the
name of a corporation, trust, fiduciary agent, attorney or partnership, the
Transfer Agent requires, in addition to the stock power, certified evidence of
authority to sign. These procedures are for the protection of shareholders and
should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within five business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays in
payment of more than seven days of payment for shares tendered for redemption
may result but only until the purchase check has cleared.

The requirements for IRA redemptions are different from those for
regular accounts. For more information please call 1-800-225-5163.

Redemption by "Write-A-Check"

All new investors and existing shareholders of Short Term Bond Fund who
apply to the Custodian for checks may use them to pay any person, provided that
each check is for at least $100 and not more than $5 million. By using the
checks, the shareholder will receive daily dividend credit on his or her shares
until the check has cleared the banking system. Investors who purchased shares
by check may write checks against those shares only after they have been on
Short Term Bond Fund's books for seven business days. Shareholders who use this
service may also use other redemption procedures. No shareholder may write
checks against certificated shares. Short Term Bond Fund pays the bank charges
for this service. However, the Fund will review the cost of operation
periodically and reserves the right to determine if direct charges to the
persons who avail themselves of this service would be appropriate. The Trust, on
behalf of Short Term Bond Fund, the Transfer Agent and the Custodian each
reserves the right at any time to suspend or terminate the "Write-A-Check"
procedure. Checks will be returned by the Custodian if there are insufficient
shares to meet the withdrawal amount. Potential fluctuations in the per share

25
<PAGE>

value of Short Term Bond Fund should be considered in determining the amount of
the check. An investor should not attempt to close an account by check, because
the exact balance at the time the check clears will not be known when the check
is written.

Other Information

If the shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive, in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed may be more or less than a shareholder's cost depending upon the net
asset value at the time the redemption is made. The Trust does not impose a
redemption charge, although a wire charge may be applicable for redemption
proceeds wired to an investor's bank account. Redemption of shares, including an
exchange into another Scudder fund, may result in tax consequences (gain or
loss) to the shareholder, and the proceeds of such redemptions may be subject to
backup withholding. (See "TAXES.")

Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.

The determination of net asset value, and a shareholder's right to
redeem shares and to receive payment therefore may be suspended at times during
which (a) the Exchange is closed, other than customary weekend and holiday
closings, (b) trading on said Exchange is restricted, (c) an emergency exists as
a result of which disposal by a Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for a Fund fairly to determine
the value of its net assets, or (d) a governmental body having jurisdiction over
the Trust may by order permit such a suspension for the protection of the
Trust's shareholders; provided that applicable rules and regulations of the
Securities and Exchange Commission ("SEC") (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.

If transactions at any time reduce a shareholder's account balance to
below $1,000 in value, the Trust may notify the shareholder that, unless the
account balance is brought up to at least $1,000, the Trust may redeem all
shares in a Fund, close the account, and send redemption proceeds to the
shareholder. The shareholder has sixty days to bring the account balance up to
$1,000 before any action will be taken. No transfer from an existing to a new
Scudder fund account should be for less than $1,000; otherwise the new account
will be redeemed as described above. (This policy applies to accounts of new
shareholders, but does not apply to certain Special Plan Accounts.) The Trustees
have the authority to change the minimum account size.

FEATURES AND SERVICES OFFERED BY THE FUNDS

(See "Shareholder benefits" in a Fund's
prospectus.)

The Pure No-Load(TM) Concept

Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its funds from the
vast majority of mutual funds available today. The primary distinction is
between load and no-load funds.

Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.

A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.

26
<PAGE>

A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the NASD
Rules of Fair Practice, a mutual fund can call itself a "no-load" fund only if
the 12b-1 fee and/or service fee does not exceed 0.25% of a fund's average
annual net assets.

Because Scudder funds do not pay any asset-based sales charges or
service fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual funds. Scudder pioneered the
no-load concept when it created the nation's first no-load fund in 1928, and
later developed the nation's first family of no-load mutual funds.

The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart show the value
of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.

<TABLE>
<CAPTION>
=====================================================================================================================
Scudder Load Fund with 0.75% No-Load Fund with
YEARS Pure No-Load(TM)Fund 8.50% Load Fund 12b-1 Fee 0.25% 12b-1 Fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $25,937 $23,733 $24,222 $25,354
- ---------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- ---------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
=====================================================================================================================
</TABLE>

Investors are encouraged to review the fee tables on page 2 of a Fund's
prospectus for more specific information about the rates at which management
fees and other expenses are assessed.

Dividend and Capital Gain Distribution Options

Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders may change their dividend option either by
calling 1-800-225-5163 or by sending written instructions to the Transfer Agent.
Please include your account number with your written request. See "How to
contact Scudder" in a Fund's prospectus for the address.

Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the relevant Fund.

Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after a Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.

Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.

27
<PAGE>

Diversification

Your investment represents an interest in a large, diversified
portfolio of carefully selected securities. Diversification may protect you
against the possible risks associated with concentrating in fewer securities.

Scudder Funds Centers

Investors may visit any of the Funds Centers maintained by the
Distributor listed in a Fund's prospectus. The Centers are designed to provide
individuals with services during any business day. Investors may pick up
literature or find assistance with opening an account, adding monies or special
options to existing accounts, making exchanges within the Scudder Family of
Funds, redeeming shares or opening retirement plans. Checks should not be mailed
to the Centers but should be mailed to "The Scudder Funds" at the address listed
under "How to Contact Scudder" in a Fund's prospectus.

Reports to Shareholders

The Trust issues to the Funds' shareholders semiannual financial
statements, audited annually by independent accountants, including a list of
investments held and statements of assets and liabilities, operations, changes
in net assets and financial highlights for each Fund.

Transaction Summaries

Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.

THE SCUDDER FAMILY OF FUNDS

(See "Investment products and services" in a Fund's
prospectus.)

The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.

MONEY MARKET

Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital, and consistent therewith, to maintain the liquidity of
capital and to provide current income through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.

Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.

INCOME

Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued in
emerging markets.

28
<PAGE>

Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.

Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.

Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.

Scudder International Bond Fund seeks to provide income from a
portfolio of high-grade bonds denominated in foreign currencies. As a
secondary objective, the Fund seeks protection and possible enhancement
of principal value by actively managing currency, bond market and
maturity exposure and by security selection.

Scudder Short Term Bond Fund seeks to provide a higher and more stable
level of income than is normally provided by money market investments,
and more price stability than investments in intermediate- and
long-term bonds.

Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with the minimization of
reinvestment risks through investments primarily in zero coupon
securities.

TAX FREE MONEY MARKET

Scudder Tax Free Money Fund ("STFMF") is designed to provide investors
with income exempt from regular federal income tax while seeking
stability of principal. STFMF seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may
not be possible.

Scudder California Tax Free Money Fund* is designed to provide
California taxpayers income exempt from California state and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.

Scudder New York Tax Free Money Fund* is designed to provide New York
taxpayers income exempt from New York state, New York City and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.

TAX FREE

Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in investment-grade
municipal securities.

Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.

Scudder Managed Municipal Bonds seeks to provide income which is exempt
from regular federal income tax primarily through investments in
long-term municipal securities with an emphasis on high quality.

Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.

- -------------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.

29
<PAGE>

Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.

Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.

Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.

Scudder New York Tax Free Fund* seeks to provide income exempt from New
York state, New York City and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
investments in New York state, municipal and local government
obligations.

Scudder Ohio Tax Free Fund* seeks to provide income exempt from both
Ohio and regular federal income taxes through the professional and
efficient management of a portfolio consisting of Ohio state, municipal
and local government obligations.

Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
both Pennsylvania and regular federal income taxes through a portfolio
consisting of Pennsylvania state, municipal and local government
obligations.

GROWTH AND INCOME

Scudder Balanced Fund seeks to provide a balance of growth and income,
as well as long-term preservation of capital, from a diversified
portfolio of equity and fixed income securities.

Scudder Growth and Income Fund seeks to provide long-term growth of
capital, current income, and growth of income through a portfolio
invested primarily in common stocks and convertible securities by
companies which offer the prospect of growth of earnings while paying
current dividends.

GROWTH

Scudder Capital Growth Fund seeks to maximize long-term growth of
capital through a broad and flexible investment program emphasizing
common stocks.

Scudder Development Fund seeks to achieve long-term growth of capital
primarily through investments in marketable securities, principally
common stocks, of relatively small or little-known companies which in
the opinion of management have promise of expanding their size and
profitability or of gaining increased market recognition for their
securities, or both.

Scudder Global Discovery Fund seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.

Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S.
and foreign issuers. Income is an incidental consideration.

Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.

- -------------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.

30
<PAGE>

Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.

Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.

Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.

Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.

Scudder Quality Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.

Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.

Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.

The Japan Fund, Inc. seeks capital appreciation through investment
in Japanese securities, primarily in common stocks of Japanese
companies.

The net asset values of most Scudder Funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder Funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.

The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; easy telephone exchanges
into other Scudder funds; shares redeemable at net asset value at any time.

SPECIAL PLAN ACCOUNTS

(See "Scudder tax-advantaged retirement plans," "Purchases--By
Automatic Investment Plan" and "Exchanges and redemptions--By
Automatic Withdrawal Plan" in a Fund's prospectus.)

Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. It is
advisable for an investor considering the funding of the investment plans
described below to consult with an attorney or other investment or tax adviser
with respect to the suitability requirements and tax aspects thereof.

Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.

None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.

31
<PAGE>

Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals

Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code.

Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals

Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.

Scudder IRA: Individual Retirement Account

Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.

A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.

An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,250 for married couples if one spouse has earned income of no
more than $250). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.

The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)

<TABLE>
<CAPTION>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution

- ------------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of --------------------------------------------------------------------------
Contributions 5% 10% 15%
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>

32
<PAGE>

This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)

<TABLE>
<CAPTION>
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket

- ------------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of --------------------------------------------------------------------------
Contributions 5% 10% 15%
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>

Scudder 403(b) Plan

Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.

Automatic Withdrawal Plan

Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Payments are mailed at the end
of each month. The check amounts may be based on the redemption of a fixed
dollar amount, fixed share amount, percent of account value or declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be reinvested in additional shares. Shares are then liquidated as
necessary to provide for withdrawal payments. Since the withdrawals are in
amounts selected by the investor and have no relationship to yield or income,
payments received cannot be considered as yield or income on the investment and
the resulting liquidations may deplete or possibly extinguish the initial
investment. Requests for increases in withdrawal amounts or to change payee must
be submitted in writing, signed exactly as the account is registered and contain
signature guarantee(s) as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Fund's prospectus. Any such requests must
be received by the Fund's transfer agent by the 15th of the month in which such
change is to take effect. An Automatic Withdrawal Plan may be terminated at any
time by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the Trust of notice of death of the shareholder.

An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.

Group or Salary Deduction Plan

An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.

The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time

33
<PAGE>

after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.

Automatic Investment Plan

Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.

The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.

Uniform Transfers/Gifts to Minors Act

Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.

The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

(See "Distribution and performance
information--Dividends and capital gains
distributions" in a Fund's prospectus.)

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

With respect to Short Term Bond Fund, dividends will be declared daily
and distributions of net investment income will be made monthly. Distributions
of net realized capital gains, if any, will be made in November or December to
prevent application of a federal excise tax. An additional distribution may be
made within three months of the Fund's fiscal year end, if necessary. Any
dividends or capital gains distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if

34
<PAGE>

received on December 31 of the calendar year declared. Both types of
distributions will be made in shares of the Fund and confirmations will be
mailed to each shareholder unless a shareholder has elected to receive cash, in
which case a check will be sent.

With respect to Zero Coupon 2000 Fund, the net investment income of the
Fund normally will be declared and distributed as a dividend in December.
Distributions of net realized capital gains, if any, will be made in November or
December to prevent application of a federal excise tax. An additional
distribution may be made within three months of the Fund's fiscal year end, if
necessary. Any dividends declared in October, November or December with a record
date in such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. Checks will be mailed to shareholders electing to
take dividends in cash. Confirmations will be mailed to shareholders electing to
invest dividends in additional shares for the dividends declared during the
preceding period shortly after the end of the fiscal year.

PERFORMANCE INFORMATION

(See "Distribution and performance
information-- Performance information" in a
Fund's prospectus.)

From time to time, quotations of the Funds' performances may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures may be calculated in the
following manner:

Average Annual Total Return

Average annual total return is the average annual compounded rate of
return for the periods of one year, five years, and ten years, all ended on the
last day of a recent calendar quarter. Because Zero Coupon 2000 Fund had been in
existence for less than ten years as of December 31, 1995, the average annual
total return for the life of that Fund is given below. Average annual total
return quotations reflect changes in the price of a Fund's shares and assume
that all dividends and capital gains distributions during the respective periods
were reinvested in Fund shares. Average annual total return is calculated by
finding the average annual compounded rates of return of a hypothetical
investment over such periods according to the following formula (average annual
total return is then expressed as a percentage):

T = (ERV/P)^(1/n) - 1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.

Average Annual Total Return for periods ended December 31, 1995

One Year Five Years Ten Years Life of Fund

Short Term Bond Fund 10.74% 7.01% 8.00%(1)
Zero Coupon 2000 Fund* 19.08% 10.55% N/A 10.53%(2)

(1) The foregoing average annual total return includes the period
prior to July 3, 1989, during which the Fund operated under
the investment objective and policies of Scudder Target Fund
General 1994 Portfolio. Average annual total return figures
for the periods prior to July 3, 1989 should not be considered
representative of the present Fund.

(2) For the period February 4, 1986 (commencement of operations)
to December 31, 1995.

* If the Adviser had not temporarily maintained expenses, the
average annual total return for the one year, five years and
life of Fund would have been lower.

Cumulative Total Return

Cumulative total return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):

35
<PAGE>

C = (ERV/P)-1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is
the value, at the end of the
applicable period, of a
hypothetical $1,000 investment made
at the beginning of the applicable
period.

Cumulative Total Return for periods ended December 31, 1995

One Year Five Years Ten Years Life of Fund

Short Term Bond Fund 10.74% 40.33% 115.92%(1)
Zero Coupon 2000 Fund* 19.08% 65.08% N/A 169.57%(2)

(1) The foregoing cumulative total return includes the period
prior to July 3, 1989, during which the Fund operated under
the investment objective and policies of Scudder Target Fund
General 1994 Portfolio. Cumulative total return figures for
the periods prior to July 3, 1989 should not be considered
representative of the present Fund.

(2) For the period February 4, 1986 (commencement of operations)
to December 31, 1995.

* If the Adviser had not temporarily maintained expenses, the
cumulative total return for the one year, five years and life
of Fund would have been lower.

Total Return

Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.

SEC Yields

Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:

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

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.

The SEC net annualized yield for the 30-day period ended December 31,
1995 for Short Term Bond Fund was 5.84%.

The SEC net annualized yield for the 30-day period ended December 31,
1995 for Zero Coupon 2000 Fund was 4.68%.

Quotations of a Fund's performance are based on historical earnings and
are not intended to indicate future performance of a Fund. An investor's shares
when redeemed may be worth more or less than their original cost. Performance of
a Fund will vary based on changes in market conditions and the level of a Fund's
expenses. In periods of declining interest rates a Fund's quoted yield will tend
to be somewhat higher than prevailing market rates, and in periods of rising
interest rates a Fund's quoted yield will tend to be somewhat lower.

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<PAGE>

Comparison of Portfolio Performance

A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.

In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.

From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.

From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.

The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.

Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.

Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.

Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the

37
<PAGE>

types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.

A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.

Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.

Scudder's Theme: Build Create Provide. Marketing and fund literature may refer
to Scudder's theme: "Build Create Provide." This theme intends to encapsulate
the composition of a sound investment philosophy, one through which Scudder can
help provide investors appropriate avenues for pursuing dreams. Individuals
recognize the need to build investment plans that are suitable and directed at
achieving one's financial goals. The desired result from planning and a
long-term commitment to it is the ability to build wealth over time. While there
are no guarantees in the pursuit of wealth through investing, Scudder believes
that a sound investment plan can enhance one's ability to achieve financial
goals that are clearly defined and appropriately approached. Wealth, while a
relative term, may be defined as the freedom to provide for those interests
which you hold most important -- your family, future, and/or your community.

Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:

American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.

Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.

Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.

Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.

Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.

CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.

Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.

Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.

Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.

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<PAGE>

Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.

Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.

The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.

Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.

IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."

Ibbotson Associates, Inc., a company specializing in investment research and
data.

Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.

Investor's Daily, a daily newspaper that features financial, economic, and
business news.

Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.

Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.

Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.

Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.

Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.

The New York Times, a nationally distributed newspaper which regularly covers
financial news.

The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.

No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.

Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.

Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.

Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.

Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.

39
<PAGE>

United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.

USA Today, a leading national daily newspaper.

U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.

Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.

The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.

Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.

Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.

Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.

ORGANIZATION OF THE FUNDS

(See "Fund organization" in a Fund's
prospectus.)

Each Fund is a separate series of Scudder Funds Trust, a Massachusetts
business trust established under a Declaration of Trust dated July 24, 1981, as
amended. The name of the Trust was changed, effective July 3, 1989, from Scudder
Target Fund to Scudder Funds Trust. Prior to action taken by the Trustees of the
Trust on March 7, 1990, Scudder Zero Coupon 2000 Fund was named 2000 U.S.
Government Zero Coupon Target Portfolio. On December 23, 1987 the par value of
the shares of beneficial interest of the Trust was changed from no par value to
$.01 par value per share. The Trust's authorized capital consists of an
unlimited number of shares of beneficial interest of $.01 par value, issued in
separate series. Each share of each series represents an equal proportionate
interest in that series with each other share of that series. Shareholders have
one vote for each share held on matters on which they are entitled to vote.

Effective as of July 3, 1989, two series of the Trust, the General 1990
Portfolio and U.S. Government 1990 Portfolio, sold their assets to another
series of the Trust, the General 1994 Portfolio, in exchange for shares of the
1994 Portfolio, as approved by shareholders on June 26, 1989. Effective as of
the same date, the General 1994 Portfolio changed its name to Scudder Short Term
Bond Fund and changed its investment objectives from current income, capital
preservation and possible capital appreciation to its current investment
objective.

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

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<PAGE>

Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment management agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.

The Trustees have the authority to designate additional series and to
designate the relative rights and preferences as between the different series.
All shares issued and outstanding will be fully paid and non-assessable by the
Trust, and redeemable as described in this Statement of Additional Information
and in each Fund's prospectus.

The Trustees, in their discretion, may authorize the division of shares
of a Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution. The Trustees have no present
intention of taking the action necessary to effect the division of shares into
separate classes (which under present regulations would require a Fund first to
obtain an exemptive order of the SEC), nor of changing the method of
distribution of shares of a Fund.

The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.

INVESTMENT ADVISER

(See "Fund organization--Investment adviser" in a
Fund's prospectus.)

Scudder, Stevens & Clark, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Funds. This organization is one of the
most experienced investment management firms in the United States. It was
established as a partnership in 1919 and pioneered the practice of providing
investment counsel to individual clients on a fee basis. In 1928, it introduced
the first no-load mutual fund to the public. In 1953, the Adviser introduced
Scudder International Fund, Inc., the first mutual fund available in the U.S.
investing internationally in several foreign countries. The firm reorganized
from a partnership to a corporation on June 28, 1985.

The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder Institutional Fund,
Inc., Scudder International Fund, Inc., Scudder Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Securities Trust, Scudder State Tax Free
Trust, Scudder Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S.
Treasury Money Fund, Scudder Variable Life Investment Fund, Scudder World Income
Opportunities Fund, Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The
First Iberian Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The
Latin America Dollar Income Fund, Inc. Some of the foregoing companies or trusts
have two or more series.

The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $12 billion and includes the

41
<PAGE>

AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.

In selecting among the securities in which a Fund may invest, the
conclusions and investment decisions of the Adviser with respect to a Fund are
based primarily on the analyses of its own research department. The Adviser
receives published reports and statistical compilations of the issuers
themselves, as well as analyses from brokers and dealers who may execute
portfolio transactions for the Adviser's clients. However, the Adviser regards
this information and material as an adjunct to its own research activities.

Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for the Funds 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 series or 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 Adviser to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by a Fund. Purchase and sale orders for a Fund may be combined
with those of other series or other clients of the Adviser in the interest of
the most favorable net results to that Fund.

The Investment Management Agreements (the "Agreements") for Short Term
Bond Fund and Zero Coupon 2000 Fund are dated September 7, 1993 and June 6,
1991, respectively. The continuance of the Agreements was approved by Trustees
on September 7, 1995. Each Agreement will continue in effect until September 30,
1996 and from year to year thereafter only if its continuance is approved
annually by the vote of a majority of those Trustees who are not parties to such
Agreement or interested persons of the Adviser or the Trust, cast in person at a
meeting called for the purpose of voting on such approval, and either by vote of
a majority of the Trustees or a majority of the outstanding voting securities of
the respective Fund. Each Agreement may be terminated at any time without
payment of penalty by either party on sixty days written notice, and
automatically terminates in the event of its assignment.

Under each Agreement, the Adviser regularly provides a Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold, and what portion of the Fund's
assets shall be held uninvested, subject always to the provisions of the Trust's
Declaration of Trust and By-Laws, the 1940 Act, the Internal Revenue Code of
1986 and the Fund's investment objectives, policies and restrictions, as each
may be amended, and subject further to such policies and instructions as the
Trustees of the Trust may from time to time establish. The Adviser also advises
and assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committee of the Trustees regarding the conduct of the business of the Trust.

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

The Adviser pays the compensation and expenses of the Trust except
those for attending Board and committee meetings outside New York, New York or
Boston, Massachusetts of all Trustees, officers and executive employees of the
Trust affiliated with the Adviser and makes available, without expense to a
Fund, the services of the Adviser's directors, officers and employees as may

42
<PAGE>

duly be elected officers, subject to their individual consent to serve and to
any limitations imposed by law, and provides the Trust's office space and
facilities and provides investment advisory, research and statistical facilities
and all clerical services relating to research, statistical and investment work.

For these services, Short Term Bond Fund pays the Adviser a fee at an
annual rate of 0.60% of the first $500 million of average daily net assets,
0.50% of the next $500 million of such assets, 0.45% of the next $500 million of
such assets, 0.40% of the next $500 million of such assets, 0.375% of the next
$1 billion of such assets and 0.35% of such assets in excess of $3 billion. From
March 18, 1992 to September 6, 1993, Short Term Bond Fund paid the Adviser a fee
at the annual rate of 0.60% of the first $500 million of average daily net
assets, 0.50% of such assets in excess of $500 million, 0.45% of such assets in
excess of $1 billion, 0.40% of such assets in excess of $1.5 billion and 0.375%
of such assets in excess of $2 billion. For the fiscal year ended December 31,
1993, the Adviser imposed its management fee which amounted to $13,596,092, of
which $1,190,026 was unpaid at December 31, 1993. For the fiscal years ended
December 31, 1994 and 1995, the investment management fees for Short Term Bond
Fund amounted to $12,415,709 and $9,529,973, respectively.

For these services, Zero Coupon 2000 Fund pays the Adviser a fee at an
annual rate of 0.60% of the Fund's average daily net assets. For the fiscal year
ended December 31, 1993, the Adviser did not impose a portion of its management
fees, which amounted to $90,982, and the portion imposed amounted to $108,121.
For the fiscal year ended December 31, 1994, the Adviser did not impose a
portion of its management fees which amounted to $117,316 and the portion
imposed amounted to $33,453. For the fiscal year ended December 31, 1995, the
Adviser did not impose a portion of its management fee which amounted to
$129,399 and the portion imposed amounted to $31,783.

The fees are payable monthly, provided the Funds will make such interim
payments as may be requested by the Adviser not to exceed 75% of the amount of
the fee then accrued on the books of a Fund and unpaid. The Adviser has
voluntarily agreed, with respect to Zero Coupon 2000 Fund, not to impose all or
a portion of its management fee and to maintain the annualized expenses at not
more than 1.00% of the average daily net assets until December 31, 1996. The
Adviser retains the ability to be repaid by the Fund if expenses fall below the
specified limit prior to the end of the fiscal year. These expense limitation
arrangements can decrease the Fund's expenses and improve its performance.

The yield on shares of a Fund will be increased to the extent that the
Adviser maintains a Fund's expenses, and thereafter will be reduced to the
extent that full payment by a Fund of the fee and expenses is instituted.

Under each Agreement, a Fund is responsible for all of its other
expenses including: fees and expenses incurred in connection with membership in
investment company organizations; brokerage commissions; legal, auditing or
accounting expenses; taxes or governmental fees; the fees and expenses of the
Transfer Agent; and any other expenses, including clerical expense, of issue,
redemption or repurchase of shares; the expenses of and fees for registering or
qualifying securities for sale; the fees and expenses of the Trustees, officers
and employees of the Trust who are not affiliated with the Adviser; the cost of
printing and distributing reports and notices to shareholders; and the fee or
disbursements of custodians. A Fund may arrange to have third parties assume all
or part of the expenses of sale, underwriting and distribution of shares of a
Fund. A Fund is also responsible for its expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify officers and Trustees of the Trust with respect thereto.

The Agreements require the Adviser to maintain the Funds' expenses up
to, but not exceeding, the advisory fee for annual expenses of a Fund (including
the advisory fee stated above) which exceed the limitations prescribed by any
state in which a Fund's shares are offered for sale. Management has been advised
that, while most states have eliminated expense limitations, the lowest of such
limitations is currently 2 1/2% of average net assets up to $30,000,000, 2% of
the next $70,000,000 of such net assets and 1 1/2% of such net assets in excess
of that amount. Certain expenses such as brokerage commissions, taxes,
extraordinary expenses and interest are excluded from the calculation of such
limitations, and other expenses may be excluded from time to time. Any such
maintenance will be made as promptly as practicable after the end of the Funds'
fiscal year. However, no fee payment will be made to the Adviser during any
fiscal year which will cause year-to-date expenses to exceed the cumulative pro
rata expense limitation at the time of such payment.

The expense ratio, the ratio of operating expenses to average net
assets, for Short Term Bond Fund was 0.68%, 0.73% and 0.75% for the fiscal years
ended December 31, 1993, 1994 and 1995, respectively.

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<PAGE>

The expense ratio, the ratio of operating expenses to average net
assets, for Zero Coupon 2000 Fund was 1.00% for each fiscal year ended December
31, 1993, 1994 and 1995.

Each Agreement provides that a Fund may use any name derived from the
name "Scudder, Stevens & Clark" only as long as the Agreements remains in
effect.

In reviewing the terms of the Agreements and in discussions with the
Adviser concerning the Agreements, Trustees who are not "interested persons" of
the Trust or the Adviser are represented by independent counsel at the Funds'
expense.

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

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

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

Personal Investments by Employees of the Adviser

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

TRUSTEES AND OFFICERS

(See "Trustees and Officers" in a Fund's
prospectus.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>

Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- -------------------------------------------------------------------------------------------------------------

Daniel Pierce (62)*#+ President and Chairman of the Board and Vice President,
Trustee Managing Director of Scudder, Director and Assistant
Stevens & Clark, Inc. Treasurer

Lynn S. Birdsong (49)*++ Trustee Managing Director of Scudder, --
Stevens & Clark, Inc.

Sheryle J. Bolton (49) Trustee Consultant --
20 Hilltop Road
Waccabuc, NY 10597
</TABLE>

44
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>

Thomas J. Devine (69) Trustee Consultant --
641 Lexington Avenue
28th Floor
New York, NY 10022

Peter B. Freeman (63) Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906

Dr. Wilson Nolen (69) Trustee Consultant --
1120 Fifth Avenue, #10-B
New York, NY 10128

Juris Padegs (64)*#++ Trustee Managing Director of Scudder, Vice President and
Stevens & Clark, Inc. Director

Jerard K. Hartman (63)++ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.

Thomas W. Joseph (57)+ Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer &
Assistant Clerk

David S. Lee (62)+ Vice President Managing Director of Scudder, President, Assistant
Stevens & Clark, Inc. Treasurer and Director

Thomas F. McDonough (49)+ Vice President, Principal of Scudder, Stevens & Clerk
Secretary and Clark, Inc.
Assistant Treasurer

Pamela A. McGrath (42)+ Vice President and Managing Director of Scudder, --
Treasurer Stevens & Clark, Inc.

Edward J. O'Connell (50)++ Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.

Thomas M. Poor (52)+ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.

Kathryn L. Quirk (43)++ Vice President and Managing Director of Scudder, Vice President
Assistant Secretary Stevens & Clark, Inc.

Coleen Downs Dinneen (35)+ Assistant Secretary Vice President of Scudder, Assistant Clerk
Stevens & Clark, Inc.

* Messrs. Birdsong, Padegs and Pierce are considered by the Trust and its
counsel to be Trustees who are "interested persons" of the Adviser or
of the Trust, within the meaning of the 1940 Act.
** Unless otherwise stated, all Officers and Trustees have been associated
with their respective company for more than five years but not
necessarily in the same capacity.
# Messrs. Padegs and Pierce are members of the Executive Committee, which may exercise all of the powers of
the Trustees when the Trustees are not in session.
</TABLE>

45
<PAGE>

+ Address: Two International Place, Boston, Massachusetts 02110
++ Address: 345 Park Avenue, New York, New York 10154

As of March 31, 1996, all Trustees and officers of Short Term Bond Fund
as a group owned beneficially (as that term is defined under Section 13(d) of
the Securities Exchange Act of 1934) less than 1% of the outstanding shares of
the Fund.

As of March 31, 1996, all Trustees and officers of Zero Coupon 2000
Fund as a group owned beneficially (as that term is defined under Section 13(d)
of the Securities Exchange Act of 1934) 85,165 shares or, 3.62% of the
outstanding shares of the Fund.

Certain accounts for which the Adviser acts as investment adviser owned
10,135,820 shares of Short Term Bond Fund in the aggregate or 6.62% of the
outstanding shares on March 31, 1996. The Adviser may be deemed to be the
beneficial owner of such shares, but disclaims any beneficial interest in such
shares.

As of March 31, 1996, 189,766 shares in the aggregate or 8.07% of the
outstanding shares of Zero Coupon 2000 Fund, were held in the name of Charles
Schwab & Co., 101 Montgomery Street, San Francisco, CA 94104, who may be deemed
to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership in them.

To the best of each Fund's knowledge, as of March 31, 1996, no person
owned beneficially more than 5% of Short Term Bond Fund's outstanding shares or
more than 5% of Zero Coupon 2000 Fund's outstanding shares except as stated
above.

The Trustees and officers of the Trust also serve in similar capacities
with other Scudder funds.

REMUNERATION

Several of the officers and Trustees of the Trust may be officers or
employees of the Adviser, or of the Distributor, the Transfer Agent, Scudder
Trust Company or Scudder Fund Accounting Corporation from whom they receive
compensation, as a result of which they may be deemed to participate in the fees
paid by the Trust. The Trust pays no direct remuneration to any officer of the
Trust. However, each of the Trustees who is not affiliated with the Adviser will
be compensated for all expenses relating to trust business (specifically
including travel expenses relating to Trust business). Each of these
unaffiliated Trustees receives an annual Trustee's fee of $2,000 per Fund plus
$200 per Fund for attending each Trustees' meeting, audit committee meeting or
meeting held for the purpose of considering arrangements between the Trust on
behalf of a Fund and the Adviser or any of its affiliates. Each unaffiliated
Trustee also receives $75 per Fund per committee meeting attended other than
those set forth above. For the year ended December 31, 1995, Trustees' fees
amounted to $12,751 for Short Term Bond Fund and $12,806 for Zero Coupon 2000
Fund.

The following Compensation Table provides in tabular form the following data:

Column (1): All Trustees who receive compensation from the Trust.
Column (2): Aggregate compensation received by a Trustee from all the series of
the Trust -- Scudder Funds Trust, which is comprised of Scudder Short Term Bond
Fund and Scudder Zero Coupon 2000 Fund. Columns (3) and (4): Pension or
retirement benefits accrued or proposed be paid by the Fund Complex. Scudder
Funds Trust does not pay its Trustees such benefits. Column (5): Total
compensation received by a Trustee from Scudder Short Term Bond Fund and Scudder
Zero Coupon 2000 Fund, plus compensation received from all funds managed by
Scudder for which a Trustee serves. The total number of funds from which a
Trustee receives such compensation is also provided in column (5). Generally,
compensation received by a Trustee for serving on the board of a closed-end fund
is greater than the compensation received by a Trustee for serving on the board
of an open-end fund.

46
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
for the fiscal year ended December 31, 1995
===================== ============================== ==================== ===================== =========================
(1) (2) (3) (4) (5)
Aggregate Compensation from
Scudder Funds Trust Pension or
(consisting of two Funds: Retirement Total Compensation From
Scudder Short Term Bond Fund Benefits Accrued Estimated Annual Scudder Funds Trust and
Name of Person, and Scudder Zero Coupon As Part of Fund Benefits Upon Fund Complex Paid to
Position 2000 Fund.) Complex Expenses Retirement Trustee
===================== ============================== ==================== ===================== =========================

Thomas J. Devine, $8600 N/A N/A $146,267
Trustee (17 funds)

Peter B. Freeman, $8200 N/A N/A $126,750
Trustee (31 funds)

Dr. Wilson Nolen, $8200 N/A N/A $148,342
Trustee (16 funds)

</TABLE>

DISTRIBUTOR

The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a Massachusetts corporation, which is a subsidiary of
the Adviser, a Delaware corporation. The Trust's underwriting agreement dated
July 15, 1985 remains in effect from year to year thereafter only if its
continuance is approved annually by a majority of the Trustees who are not
parties to such agreement or interested persons of any such party and either by
vote of a majority of the Trustees or a majority of the outstanding voting
securities of the Trust. The continuance of the underwriting agreement was most
recently approved by the Trustees on September 7, 1995 and will continue in
effect until September 30, 1996.

Under the underwriting agreement, the Trust is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of the Trust's registration statement and prospectus and any
amendments and supplements thereto; the registration and qualification of shares
for sale in the various states, including registering the Trust as a
broker/dealer in the various states as required; the fees and expenses of
preparing, printing and mailing prospectuses (see below for expenses relating to
prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications (including newsletters) to shareholders of each Fund; the
cost of printing and mailing confirmations of purchases of shares and the
prospectuses accompanying such confirmations; any issue taxes or any initial
transfer taxes; a portion of shareholder toll-free telephone charges and
expenses of shareholder service representatives; the cost of wiring funds for
share purchases and redemptions (unless paid by the shareholder who initiates
the transaction); the cost of printing and postage of business reply envelopes;
and a portion of the cost of computer terminals used by both the Trust and the
Distributor.

The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of Fund shares to
the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of each Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
the Trust.

Note: Although no Fund has a 12b-1 Plan and shareholder approval
would be required in order to adopt one, the underwriting
agreement provides that each Fund will also pay those fees and
expenses permitted to be paid or assumed by a Fund pursuant to
a 12b-1 Plan, if any, adopted by the Fund, notwithstanding any
other provision to the contrary in the underwriting agreement,
and the Fund or a third party will pay those fees and expenses
not specifically allocated to the Distributor in the
underwriting agreement.

47
<PAGE>

As agent, the Distributor currently offers each Fund's shares on a
continuous basis to investors in all states. The underwriting agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of a Fund.

TAXES

(See "Distribution and performance information--Dividends and
capital gains distributions" and "Transaction information--Tax
information, Tax identification number" in a Fund's prospectus.)

Each Fund intends to qualify as a separate regulated investment company
under Subchapter M of the Code. Such qualification does not involve governmental
supervision or management of investment practices or policy. Each series of a
series fund is treated as a separate taxpayer. Accordingly, each Fund is treated
as a separate taxpayer.

A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.

Each Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires a Fund to distribute to shareholders during a calendar year an amount
equal to at least 98% of a Fund's ordinary income for the calendar year, at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) realized during the one-year period ending October 31
during such year, and all ordinary income and capital gains for prior years that
were not previously distributed. Investment companies with taxable years ending
on November 30 or December 31 may make an irrevocable election to measure the
required capital gain distribution for excise tax purposes, using their actual
taxable year, rather than the one-year period ending October 31.

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

As of December 31, 1995, Short Term Bond Fund had a net tax basis
capital loss carryforward of approximately $79,822,000 which may be applied
against any realized net taxable capital gains of each succeeding year until
fully utilized or until December 31, 2002 ($27,264,000) and December 31, 2003
($52,558,000), the respective expiration dates. In addition, from November 1,
1995 through December 31, 1995, the Fund incurred approximately $1,093,000 of
net realized capital losses. As permitted by tax regulations, the Fund intends
to elect to defer these losses and treat them as having arisen in the year ended
December 31, 1996.

As of December 31, 1995, Zero Coupon 2000 Fund had a net tax basis
capital loss carryforward of approximately $1,062,000 which may be applied
against any realized net taxable capital gains of each succeeding year until
fully utilized or until December 31, 2002 ($884,000) and December 21, 2003
($178,000), the respective expiration dates. In addition, from November 1, 1995
through December 31, 1995, the Fund incurred approximately $18,000 of net
realized capital losses. As permitted by tax regulations, the Fund intends to
elect to defer these losses and treat them as arising in the fiscal year ended
December 31, 1996.

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

Distributions of investment company taxable income are taxable to
shareholders as ordinary income.

48
<PAGE>

Since no portion of a Fund's income is expected to be comprised of
dividends from domestic corporations, none of the income distributions of a Fund
are expected to be eligible for the deduction for dividends received by
corporations, except when a Fund invests in certain high yield, original issue
discount obligations, discussed below.

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

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

If a Fund holds zero coupon securities or other securities which are
issued at discount, a portion of the difference between the issue price and the
face amount of such securities ("original issue discount") will be treated as
income to the Fund each year, although no current payments will be received by
the Fund with respect to such income. This original issue discount will comprise
a part of the investment company taxable income of a Fund which must be
distributed to shareholders in order to maintain its qualification as a
regulated investment company and to avoid federal income tax at the Fund level.
Shareholders will be subject to income tax on such original issue discount,
whether or not they elect to receive their distributions in cash. In the event
that a Fund acquires a debt instrument at a market discount, it is possible that
a portion of any gain recognized on the disposition of such instrument may be
treated as ordinary income.

If Short Term Bond Fund invests in certain high yield original issue
discount obligations issued by corporations, a portion of the original issue
discount accruing on the obligations may be eligible for the deduction for
dividends received by corporations. In such event, dividends of investment
company taxable income received from the Fund by its corporate shareholders, to
the extent attributable to such portion of accrued original issue discount, may
be eligible for this deduction for dividends received by corporations if so
designated by the Fund in a written notice to shareholders.

Since Zero Coupon 2000 Fund invests primarily in zero coupon
securities, upon which it will receive no cash payments of interest, to the
extent shareholders of the Fund elect to take their distributions in cash, the
Fund may have to generate the required cash from interest earned on non-zero
coupon securities, from the disposition of such securities, or possibly from the
disposition of some of the zero coupon securities.

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

An individual may make a deductible IRA contribution of up to $2,000
or, if less, the amount of the individual's earned income, for any taxable year
only if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a

49
<PAGE>

spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.

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

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

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

Subchapter M of the Code requires that each Fund realize less than 30%
of its annual gross income from the sale or other disposition of stock,
securities and certain options, futures and forward contracts held for less than
three months. Certain options, futures and forward transactions of Short Term
Bond Fund may increase the amount of gains realized by the Fund that are subject
to the 30% limitation. Accordingly, the amount of such transactions that the
Fund may undertake may be limited.

Positions of Short Term Bond Fund which consist of at least one
position not governed by Section 1256 and at least one future, forward, or
option on a futures contract governed by Section 1256 which substantially
diminishes the Fund's risk of loss with respect to such other position will be
treated as a "mixed straddle." Mixed straddles are subject to the straddle rules
of Section 1092 of the Code, and may result in the deferral of losses if the
non-Section 1256 position is in an unrealized gain at the end of a reporting
period.

Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time Short Term Bond Fund accrues
receivables or accrues liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts and options, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
are also treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of the Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.

50
<PAGE>

Each Fund will be required to report to the IRS all distributions of
taxable income and capital gains as well as gross proceeds from the redemption
or exchange of its shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code,
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if a
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld. In addition, the IRS imposes a penalty of $50.00 per failure on
shareholders who fail to furnish their tax identification numbers to a Fund.

Shareholders of a Fund may be subject to state and local taxes on
distributions received from a Fund and on redemptions of their shares. Under the
laws of certain states, distributions of investment company taxable income are
taxable to shareholders as dividends, even though a portion of such
distributions may be derived from interest on U.S. Government obligations which,
if received directly by such shareholders, would be exempt from state income
tax.

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

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

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

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

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

PORTFOLIO TRANSACTIONS

(See "Fund organization--Investment adviser" in a
Fund's prospectus.)

Brokerage Commissions

To the maximum extent feasible, the Adviser places orders for portfolio
transactions through the Distributor which in turn places orders on behalf of a
Fund with other brokers and dealers. The Distributor receives no commissions,
fees or other remuneration from the Funds for this service. Allocation of
brokerage is supervised by the Adviser.

A Fund's purchases and sales of portfolio securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by a Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary

51
<PAGE>

market makers reflect the spread between the bid and ask prices. Purchases of
underwritten issues may be made which will include an underwriting fee paid to
the underwriter. Portfolio transactions in debt securities may also be placed on
an agency basis, with a commission being charged.

The primary objective of the Adviser 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 (negotiable in the case of
national securities exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker/dealer. The Adviser seeks
to evaluate the overall reasonableness of brokerage commissions paid (to the
extent applicable) through the familiarity of the Distributor with commissions
charged on comparable transactions, as well as by comparing commissions paid by
the Fund to reported commissions paid by others, if available. The Adviser
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons. Zero Coupon 2000 Fund paid
no commissions for the three fiscal years ending December 31, 1995. Short Term
Bond Fund paid brokerage commissions of $12,000 for the fiscal year ended
December 31, 1993. Short Term Bond Fund paid no brokerage commissions for the
fiscal years ended December 31, 1994 and 1995.

When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes; who pay, directly or indirectly, a portion
of the Trust's expenses, such as custodian or transfer agent fees; or who supply
research, market and statistical information to the Trust or the Adviser. The
term "research, market and statistical information" includes advice as to the
value of securities, the advisability of investing in, purchasing or selling
securities; and the availability of securities or purchasers or sellers of
securities; and furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. The Adviser is not authorized when placing portfolio transactions
for a Fund to pay a brokerage commission (to the extent applicable) in excess of
that which another broker might have charged for effecting the same transaction
solely on account of the receipt of research, market or statistical information.
The Adviser will not place orders with brokers or dealers on the basis that a
broker or dealer has or has not sold shares of the Trust. Except for
implementing the policy stated above, there is no intention to place portfolio
transactions with particular brokers or dealers or groups thereof. 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 otherwise.

Subject also to obtaining the most favorable net results, the Adviser
may place brokerage transactions through the Funds' Custodian and a credit
against the custodian fee due to the custodian equal to one-half of the
commission on any such transaction will be given.

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

The Trustees intend to review 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.

Portfolio Turnover

The 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 with maturities at time of
acquisition of one year or less. The portfolio turnover rate for Short Term Bond
Fund was 65.3% and 101.1% for the fiscal years ended December 31, 1994 and 1995,
respectively. Short Term Bond Fund's active management of mortgage holdings in
1995 resulted in a higher portfolio turnover rate. The portfolio turnover rate
for Zero Coupon 2000 Fund was 89.3% and 86.6% for the fiscal years ended
December 31, 1994 and 1995, respectively.

52
<PAGE>

Purchases and sales are made for a Fund whenever necessary, in
management's opinion, to meet each Fund's objective.

NET ASSET VALUE

The net asset value of shares of each Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. 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. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at its most recent sale price. Lacking any sales, the security is valued
at the high or "inside" bid quotation. 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. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.

Debt securities, other than short-term securities, are valued at prices
supplied by the Funds' pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.

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

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

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

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.

53
<PAGE>

ADDITIONAL INFORMATION

Experts

The Financial Highlights of each Fund included in each Fund's
Prospectus and the Financial Statements incorporated by reference in this
Statement of Additional Information have been so included or incorporated by
reference in reliance on the report of Coopers & Lybrand L.L.P., One Post Office
Square, Boston, Massachusetts, 02109, independent accountants, and given on the
authority of that firm as experts in accounting and auditing.

Shareholder Indemnification

The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Trust property or the
acts, obligations or affairs of the Trust and a disclaimer stating that each
series shall not be liable for the obligations of any other series. The
Declaration of Trust also provides for indemnification out of the Trust's
property of any shareholder held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust itself would be unable to meet its obligations.

Other Information

Short Term Bond Fund's CUSIP number is 810902-20-5.

Zero Coupon 2000 Fund's CUSIP number is 810902-23-9.

Each Fund has a fiscal year ending on December 31.

Portfolio securities of each Fund are held separately, pursuant to a
custodian agreement, by the Funds' custodian, State Street Bank and Trust
Company, 255 Franklin Street, Boston, Massachusetts 02101.

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

Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109,
serves as independent accountants to the Trust.

Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net asset value
for the Funds.

Short Term Bond Fund and Zero Coupon 2000 Fund each pays Scudder Fund
Accounting Corporation an annual fee equal to .025% of the first $150 million of
average daily net assets, .0075% of such assets in excess of $150 million up to
$1 billion and .0045% of such assets in excess of $1 billion. Scudder Fund
Accounting Corporation charged Short Term Bond Fund and Zero Coupon 2000 Fund an
aggregate fee of $100,885 and $36,756, respectively, for the fiscal year ended
December 31, 1995.

Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts
02107-2291, a subsidiary of the Adviser, is the transfer, dividend-paying and
shareholder service agent for each Fund. Each Fund pays Scudder Service
Corporation an annual fee for each account maintained as a participant. Short
Term Bond Fund and Zero Coupon 2000 Fund each pays Scudder Service Corporation
an annual fee of $25.00 and $17.55, respectively, for each account maintained
for a shareholder. The fees incurred by Short Term Bond Fund and Zero Coupon
2000 Fund for the fiscal year ended December 31, 1995 amounted to $204,887 and
$53,485, respectively.

Scudder Trust Company, an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Annual service fees are paid by a Fund to
Scudder Trust Company for such accounts. Short Term Bond Fund and Zero Coupon
2000 Fund each pays Scudder Trust Company a fee of $25.00 and $17.55,

54
<PAGE>

respectively, for each account maintained. The fees incurred by Short Term Bond
and Zero Coupon 2000 Fund for the fiscal year ended December 31, 1995 were
$132,198 and $17,221, respectively.

The name "Scudder Funds Trust" is the designation of the Trustees for
the time being under a Declaration of Trust dated June 24, 1981, as amended from
time to time, and all persons dealing with the Trust must look solely to the
property of the Trust for the enforcement of any claims against the Trust as
neither the Trustees, officers, agents nor shareholders assume any personal
liability for obligations entered into on behalf of the Trust. Upon the initial
purchase of shares, the shareholder agrees to be bound by the Trust's
Declaration of Trust, as amended from time to time. The Declaration of Trust is
on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts. All persons dealing with a Fund must look only to the assets of a
Fund for the enforcement of any claims against a Fund as no other series of the
Trust assumes any liabilities for obligations entered into on behalf of a Fund.

SCUDDER FUNDS TRUST, 345 Park Avenue, New York, New York 10154, has
filed with the U.S. Securities and Exchange Commission, Washington, D.C. 20549,
a Registration Statement under the 1933 Act, as amended, with respect to the
shares of Short Term Bond Fund and Zero Coupon 2000 Fund offered by each Fund's
prospectus. Each Fund's prospectus and this Statement of Additional Information
do not contain all of the information set forth in the Registration Statement
and its amendments, certain parts of which are omitted in accordance with Rules
and Regulations of the SEC. The Registration Statement and its amendments, may
be inspected at the principal office of the SEC at 450 Fifth Street, N.W.,
Washington and copies thereof may be obtained from the SEC at prescribed rates.

FINANCIAL STATEMENTS

Scudder Short Term Bond Fund

The financial statements, including the Investment Portfolio, of
Scudder Short Term Bond Fund, together with the Report of Independent
Accountants and Financial Highlights are incorporated by reference and attached
hereto on pages 9 through 26, inclusive, in the Annual Report to the
Shareholders of the Fund dated December 31, 1995, and are hereby deemed to be a
part of this Statement of Additional Information.

Scudder Zero Coupon 2000 Fund

The financial statements, including the Investment Portfolio, of
Scudder Zero Coupon 2000 Fund, together with the Report of Independent
Accountants and Financial Highlights are incorporated by reference and attached
hereto on pages 8 through 16, inclusive, in the Annual Report to the
Shareholders of the Fund dated December 31, 1995, and are hereby deemed to be a
part of this Statement of Additional Information.

55
<PAGE>

RATINGS OF CORPORATE BONDS

The two highest ratings of Moody's for corporate bonds are Aaa and Aa.
Bonds rated Aaa are judged by Moody's 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. Bonds rated Aa are judged to be of
high quality by all standards. Together with the Aaa group, they comprise what
are generally known as high-grade bonds. Aa bonds 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. 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 some time in the future. Moody's Baa rated bonds are considered
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 may have speculative characteristics
as well.

The two highest ratings of S&P for corporate bonds are AAA and AA.
Bonds rated AAA have the highest rating assigned by S&P to a debt obligation.
Capacity to pay interest and repay principal is extremely strong. Bonds rated AA
have a very strong capacity to pay interest and repay principal and differ from
the highest rated issues only in a small degree. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated securities. S&P's BBB rated bonds, or
medium-grade category bonds, are between sound obligations and those where the
speculative elements begin to predominate. Although these bonds have adequate
asset coverage and normally are protected by satisfactory earnings, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and principal.

56
<PAGE>

GLOSSARY

1. Bond

A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity
date) and to pay a stated rate of interest until maturity. Interest is
generally paid semi-annually in amounts equal to one-half the annual
interest rate.

2. Debt Obligation

A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.

3. Discount and Premium

(a) Market Discount and Premium - A discount (premium) bond is a bond
selling in the market at a price lower (higher) than its face value.
The amount of the market discount (premium) is the difference between
market value and face value.

(b) Original Issue Discount - An original issue discount is the
discount from face value at which the bond is first offered to the
public.

4. Face Value

The value of a bond that appears on the face of the bond, unless the
value is otherwise specified by the issuing company. Face value is
ordinarily the amount the issuing company promises to pay at maturity.
Face value is not an indication of market value.

5. Fixed Income Obligation

An instrument under which the lender agrees to pay interest, either at
a stated rate or according to a specified formula, over the life of the
instrument, as well as to repay principal at maturity.

6. Investment Company Taxable Income

The investment company taxable income of a Fund includes dividends,
interest (including original issue discount) and net short-term capital
gains in excess of long-term capital losses, less expenses.

7. Liquidation

The process of converting securities or other property into cash.

8. Maturity

The date on which the principal amount of a debt obligation comes due
by the terms of the instrument.

9. Maturity Date

Zero Coupon Fund will mature on the third Friday in December 2000 and
proceeds of the liquidation of the Fund will be distributed shortly
thereafter.

10. Maturity Value

The actual maturity value per share of Zero Coupon Fund will be the
actual net asset value per share on the Maturity Date.

57
<PAGE>

When used with respect to periods prior to the Maturity Date, maturity
value means an estimate of the approximate anticipated net asset value
per share of Zero Coupon 2000 Fund on its Maturity Date, calculated by
dividing the aggregate face value of all securities in the Fund
increased by any unamortized premiums and decreased by any unamortized
original issue discounts plus all other assets, minus all liabilities,
by the number of outstanding shares at the time of calculation of
Maturity Value.

11. Maturity Year

The calendar year in which Zero Coupon 2000 Fund will mature. All
investments in a Fund will mature within two years of the Fund's
Maturity Year.

12. Net Asset Value Per Share

The value of the share of a Fund for purposes of sales and redemptions.
(See "NET ASSET VALUE.")

13. Net Investment Income

The net investment income of a Fund is comprised of its interest
income, including amortizations of original issue and certain market
discounts, less amortizations of premiums and expenses paid or accrued.

14. Par Value

Par value of a bond is a dollar amount representing the denomination
and assigned value of the bond. It signifies the dollar value on which
interest on the bonds is computed and is usually the same as face value
and maturity value for an individual bond. For example, most bonds are
issued in $1,000 denominations and they have a face value, maturity
value and par value of $1,000. Their market price can of course vary
significantly from $1,000 during their life between issuance and
maturity.

15. Target or Target Year

See Maturity Year.

16. Target Date

See Maturity Date.

17. Zero Coupon Security

A non-interest (non-cash) paying debt obligation which is issued at a
substantial discount from its face value. Income is accrued over the
life of the obligation, and cash equal to the face value is due at
maturity.

58
<PAGE>

Compound Interest Table^1

The table below shows the return on $100 over 5, 10 and 15 year periods
assuming interest rates of 5%, 7%, 9%, 11% and 13%.

Years
-----

Interest Rate 5 10 15

5% $128.0 $163.8 $209.7
7% 141.0 198.9 280.6
9% 155.2 241.1 374.5
11% 170.8 291.7 498.3
13% 187.7 352.3 661.4

1 Compounded semiannually at one-half the annual rate similar to normal
bond calculation of yield-to-maturity. The calculation is different
from a calculation of anticipated growth which involves additional
assumptions. (See "THE FUNDS' INVESTMENT OBJECTIVES AND
POLICIES--Management of Reinvestment Risk and Anticipated Growth of
Zero Coupon 2000 Fund" and "DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS.")

59
<PAGE>

This information must be preceded or accompanied by a current prospectus.

Portfolio changes should not be considered recommendations for action by
individual investors.

Scudder
Short Term
Bond Fund

Annual Report
December 31, 1995

o Seeks to provide a high level of income consistent with a high degree of
principal stability.

o A pure no-load(TM) fund with no commissions to buy, sell, or exchange
shares.
<PAGE>

SCUDDER SHORT TERM BOND FUND

CONTENTS

2 In Brief
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
9 Investment Portfolio
17 Financial Statements
20 Financial Highlights
21 Notes to Financial Statements
26 Report of Independent Accountants
27 Tax Information
29 Officers and Trustees
30 Investment Products and Services
31 How to Contact Scudder

IN BRIEF

o Scudder Short Term Bond Fund provided a pleasing 10.74% total return for
the 12 months ended December 31, 1995, in an environment of low inflation,
declining interest rates, and moderate economic growth.

o The Fund's 30-day net annualized SEC yield finished the period at 5.84%, a
decline from a year earlier but higher than the average 30-day yield
offered by taxable money market funds and considerably higher than the rate
of inflation, which at year end was 2.54%.

(BAR CHART TITLE)
30-Day Yields
(as of December 31, 1995)

(BAR CHART DATA)
----------------------------------------
Scudder Short Average Taxable Money
Term Bond Fund Market Fund*
----------------------------------------
5.84% 5.23%
----------------------------------------

*Source: IBC Donoghue Corporation.

o The Fund benefited from a longer-than-average duration (2.5 years) and
active bond selection during the period. At year end, the portfolio was
well diversified among high credit quality investments such as
mortgage-backed, asset-backed, U.S. corporate, and U.S. Treasury
securities.

2
<PAGE>

LETTER FROM THE FUND'S PRESIDENT

Dear Shareholders,
We are pleased to report a strong 10.74% total return for the Scudder
Short Term Bond Fund in 1995. The Fund began the year amid a challenging
investment environment that quickly turned positive and remained so for the
remainder of the period. As interest rates fell and inflation remained low, the
Fund's opportunistic stance helped provide above-average returns in the latter
part of the year.
In the coming months, we believe the outlook for the domestic
fixed-income market will remain favorable, characterized by a slowing economy
and sluggish consumer demand. With inflation subdued, interest rates may fall
further, providing additional fuel for the bond market. As of this writing, the
Federal Reserve has already lowered short-term interest rates by one quarter of
one percent in 1996. Lower short-term rates should benefit the Fund in
particular, since its bond holdings are chiefly those in the one to three year
maturity range.
Scudder Short Term Bond Fund remains an investment well-suited for
those seeking to improve upon lower-yielding money market funds and similar
investments, but unwilling to take on the investment risk of longer-term bonds.
Since its inception in 1989, the Fund has provided an attractive yield advantage
over the average taxable money fund, according to IBC Donoghue, while also
providing a relatively high degree of principal stability relative to
longer-term bonds.
If you have questions about Scudder Short Term Bond Fund, please
contact a Scudder Investor Relations representative at 1-800-225-2470. Page 31
provides more information on how to contact Scudder. Thank you for choosing
Scudder Short Term Bond Fund to help meet your investment needs.

Sincerely,
/S/Daniel Pierce
Daniel Pierce
President,
Scudder Short Term Bond Fund

3
<PAGE>
SCUDDER SHORT TERM BOND FUND
PERFORMANCE UPDATE as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER SHORT TERM BOND FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,074 10.74% 10.74%
5 Year $14,033 40.33% 7.01%
10 Year* $21,592 115.92% 8.00%

SALOMON BROTHERS INC. BROAD INVESTMENT
GRADE BOND INDEX (1 - 3 YEARS)
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,089 10.89% 10.89%
5 Year $14,028 40.28% 7.00%
10 Year $21,209 112.09% 7.80%

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

YEARLY PERIODS ENDED DECEMBER 31

Scudder Short Term Bond Fund
Year Amount
- ----------------------
85 $10,000
86 $11,466
87 $11,628
88 $12,362
89 $14,003
90 $15,387
91 $17,600
92 $18,556
93 $20,074
94 $19,498
95 $21,592

Salomon Brothers Inc. Broad Investment
Grade Bond Index (1 - 3 years)
Year Amount
- ----------------------
85 $10,000
86 $11,046
87 $11,678
88 $12,425
89 $13,783
90 $15,119
91 $16,910
92 $18,000
93 $19,013
94 $19,127
95 $21,209

Salomon Brothers Inc. Broad Investment Grade Bond Index
(1 - 3 years) is composed of Treasury, Government Sponsored
Agency, and Corporate securities with maturities of one to
three years. Index returns assume reinvestment of dividends
and, unlike Fund returns, do not reflect any fees or expenses.

- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------

A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.

YEARLY PERIODS ENDED DECEMBER 31

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
--------------------------------------------------------------------------------
NET ASSET VALUE... $11.92 $11.23 $11.19 $11.71 $11.72 $12.25 $11.93 $12.01 $10.91 $11.35
INCOME DIVIDENDS.. $ .81 $ .74 $ .73 $ .83 $ 1.09 $ 1.08 $ .96 $ .80 $ .76 $ .71
CAPITAL GAINS
DISTRIBUTIONS..... $ .21 $ .11 $ -- $ .09 $ -- $ -- $ -- $ .07 $ -- $ --
FUND TOTAL
RETURN (%)........ 14.70 1.40 6.10 13.20 9.88 14.38 5.43 8.18 -2.87 10.74
INDEX TOTAL
RETURN (%)........ 10.46 5.72 6.40 10.93 9.70 11.85 6.44 5.63 .60 10.89
</TABLE>

All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
Returns may be higher due to the Adviser's maintenance of the Fund's
expenses. See Financial Highlights on page 20.
*The Fund, with its current name and investment objective, commenced
operations on July 3, 1989. Performance figures include the performance
of its predecessor, the General 1994 Portfolio of Scudder Target Fund.
Since adopting its current objectives, the cumulative and average annual
returns are 59.09% and 7.76%, respectively.

4
<PAGE>

PORTFOLIO SUMMARY as of December 31, 1995
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
U.S. Gov't Guaranteed
Mortgages 25% The Fund's holdings of
Asset-Backed Securities 17% mortgage-backed securities were
Collateralized Mortgage increased during the period
Obligations 17% with an emphasis on "seasoned"
Corporate Bonds 16% GNMA securities.
U.S. Government &
Agencies 11%
Commercial Paper 8%
Indexed Securities 6%
----
100%
====

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
U.S. Gov't & Agencies 51%
AAA* 22% Historically, the Fund has
AA 2% maintained a high-quality
A 9% portfolio.
BBB 16%
----
100%
====
Weighted average quality: AAA-
* Category includes cash equivalents

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

- --------------------------------------------------------------------------
EFFECTIVE MATURITY
- --------------------------------------------------------------------------
Under 1 year 11% The Fund's weighted average
1 - 5 years 75% effective maturity was extended
5 - 8 years 8% to roughly three years, its limit
8 years or greater 6% by prospectus, to take advantage
---- of this year's rally in bond
100% prices.
====

Weighted average effective maturity: 2.98 years

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- -----------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 9.
A monthly Investment Portfolio Summary and quarterly Portfolio Holdings
are available upon request.

5
<PAGE>
SCUDDER SHORT TERM BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION

Dear Shareholders,

Scudder Short Term Bond Fund returned a gratifying 10.74% in 1995, based on
a combination of price change and income distributions. The Fund's net asset
value increased $0.44 during the period, from $10.91 to $11.35 on December 31,
1995, and the Fund paid a total of $0.71 per share in distributions, of which
39% consisted of non-taxable distributions from capital. By comparison, the
unmanaged Salomon Brothers Broad Investment Grade Bond Index (1-3 years), the
Fund's benchmark index, returned 10.89%. The Fund's 30-day net annualized SEC
yield finished the year at 5.84%, a decline from a year earlier but still well
above the average money market fund yield. This lower yield reflects both a
widespread drop in interest rates and a change in the investment composition of
the portfolio.

The Makings of A Bond Market Rally

The economic backdrop during 1995 was quite favorable for bond investors.
Domestic economic growth remained slow as businesses worked off excess
inventories, the economies of many U.S. trading partners continued to falter,
and consumers began to rein in spending. Despite fears to the contrary,
inflation was subdued throughout the year as wage growth remained modest. The
Federal Reserve hailed this disinflationary news by lowering the targeted
federal funds rate by 1/4 of one percentage point on two occasions during the
year. Lending strength to the market, the U.S. dollar fell dramatically versus
the Japanese yen during the first half of 1995, which led to significant
currency intervention by central bankers and subsequent demand for
short-maturity U.S. Treasury securities. The dollar staged an impressive rebound
in the second half of the year versus the yen, lending further support to lower
U.S. interest rates. Adding to this positive environment was the potential for a
credible deficit reduction plan. The Republican congressional majority shifted
deficit reduction and a balanced budget to the forefront of the political
agenda.

Bond investors clearly were impressed by the developments of 1995, which
led interest rates in the two to three year maturity range to fall over two and
one half percentage points, and pushed long-term rates down nearly two
percentage points. The Fund benefited greatly from this decline in rates, and
its average effective maturity was kept between 2 1/2 and 3 years (its maximum

6
<PAGE>

PORTFOLIO MANAGEMENT DISCUSSION

by prospectus) for much of the year. The Fund's duration -- a mathematical
measure of sensitivity to interest rates -- began the year at a defensive 0.5
year but was extended to 2.0 years in February and to approximately 2.5 years
for much of the third and fourth quarters.

Stressing Diversification, High Quality

During the year, we actively managed the Fund's exposure to the various
sectors of the bond market with an emphasis on high-quality securities. As of
December 31, 1995, the portfolio represented seven segments of the
short-maturity bond market and had an overall credit quality rating of AAA-. In
the corporate sector (16% of portfolio holdings as of December 31), the Fund
benefited from holdings in issuers such as Lyondell Petrochemical, which
received a rating agency upgrade during the year. The Fund also benefited from
the performance of such corporate bonds as Time Warner and improving credits
such as The Money Store and real estate investment trust Taubman Realty.

In the mortgage sector (approximately 42% of portfolio holdings as of
December 31), the Fund's exposure to bonds of various coupons was actively
managed as opportunities arose. In particular, we increased the Fund's holdings
of "seasoned" premium mortgages such as GNMA 10% and GNMA 9% bonds. Seasoned
securities are so called because homeowners with the underlying mortgages have
had several opportunities to refinance at lower rates and for one reason or
another have not. We believe the premium paid is worth the reduced risk of
prepayment should interest rates move lower, and we expect these bonds to
outperform less-seasoned bonds in such an environment.

In the asset-backed arena (17% of portfolio holdings as of December 31), we
continue to place emphasis on issues with short average maturities backed by
manufactured housing loans, home equity loans, and credit card receivables.
These issues currently offer attractive yields relative to such short-maturity
alternatives as U.S. Treasury bills and notes.

7
<PAGE>

SCUDDER SHORT TERM BOND FUND

Scudder Short Term
Bond Fund:
A Team Approach to Investing

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

Since Scudder Short Term Bond Fund was introduced in 1989, Lead Portfolio
Manager Thomas M. Poor has had responsibility for the Fund's day-to-day
operation. Tom, who joined Scudder in 1970, sets the Fund's general investment
strategies. Christopher L. Gootkind, Portfolio Manager, also has been a member
of the Fund's team since its inception. Chris, who has worked in the investment
industry since 1981 and at Scudder since 1986, has responsibility for the Fund's
bank, finance, and asset-backed securities. Scott E. Dolan, Portfolio Manager,
joined Scudder in 1989 and the Fund's portfolio management team in 1993. Scott
has six years of experience in the investment industry and is responsible for
implementing investment strategy.

Looking Ahead

Looking forward to 1996, we believe the outlook for the domestic
fixed-income market is favorable. The U.S. economy is at the end of an aging
expansion, and the outlook for domestic demand is questionable given the average
consumer's growing debt burden. We have already begun to see a rise in consumer
loan delinquency rates, signaling more trouble may lie ahead. We do not expect
our major trading partners in Europe and the Americas to bail out the U.S.
economy given that many of their economies are now experiencing slow to
declining growth. Our economic forecast calls for slower growth in the first
half and the potential for negative growth in the second half of 1996. In this
environment, further declines in inflation are looked for as demand recedes and
secular trends such as increased productivity, aging demographics, and
deregulation continue to contain price pressures.

Given this economic outlook, we expect that interest rates will fall
further in 1996. Additional Fed easing in particular should result in a steeper
yield curve, with shorter-term interest rates declining more than longer-term
rates, which would be positive for Scudder Short Term Bond Fund as most of its
investments are located in the short end of the yield curve. In this
environment, we believe the Fund will continue to provide shareholders with a
competitive current yield and the potential for attractive total returns.

Sincerely,

Your Portfolio Management Team

/s/Thomas M. Poor /s/Scott E. Dolan

Thomas M. Poor Scott E. Dolan

/s/Christopher L. Gootkind

Christopher L. Gootkind

8
<PAGE>
INVESTMENT PORTFOLIO as of December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
7.9% COMMERCIAL PAPER
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
57,000,000 American Express Credit Corp.,
5.66%, 1/30/9.............................................. 57,000,000
27,500,000 Associates Corp. of North America,
5.954%, 1/2/96............................................. 27,500,000
28,000,000 Household Finance Corp., 5.754%, 1/2/96..................... 28,000,000
40,000,000 Prudential Funding Corp., 5.78%, 1/5/96..................... 40,000,000
-----------
TOTAL COMMERCIAL PAPER (Cost $152,500,000).................. 152,500,000
-----------

----------------------------------------------------------------------------------------------------
10.4% U.S. GOVERNMENT & AGENCIES
----------------------------------------------------------------------------------------------------

18,000,000 U.S. Treasury Note, 5.375%, 11/30/97........................ 18,059,040
20,000,000 U.S. Treasury Note, 6.875%, 3/31/00......................... 21,128,200
18,000,000 U.S. Treasury Note, 5.625%, 11/30/00........................ 18,163,080
82,000,000 U.S. Treasury STRIP, 2/15/04................................ 52,284,020
107,500,000 U.S. Treasury STRIP, 2/15/99................................ 91,355,650
-----------
TOTAL U.S. GOVERNMENT & AGENCIES
(Cost $197,353,683)........................................ 200,989,990
-----------
----------------------------------------------------------------------------------------------------
25.3% U.S. GOV'T GUARANTEED MORTGAGES
----------------------------------------------------------------------------------------------------
17,577,441 Federal Home Loan Mortgage Corp.,
5 year Balloon, 5%, with various
maturities to 7/1/99....................................... 17,275,286
15,634,936 Federal Home Loan Mortgage Corp.,
5 year Balloon, 7%, 9/1/98................................. 15,893,851
201,524 Federal National Mortgage Association,
5.5%, with various maturities to 1/1/01.................... 198,059
1,784,673 Federal National Mortgage Association,
7.338%, 1/1/19............................................. 1,823,150
3,870,206 Federal National Mortgage Association,
7.706%, 11/1/22............................................ 3,936,116
7,368,102 Federal National Mortgage Association,
7.733%, 10/1/23............................................ 7,568,441
2,435,526 Federal National Mortgage Association,
7 year Balloon, 5.5%, with various
maturities to 9/1/02....................................... 2,393,659
376,916 Federal National Mortgage Association,
7 year Balloon, 6%, 6/1/01................................. 376,208
21,965,641 Federal National Mortgage Association,
7 year Balloon, 8.5%, with various
maturities to 5/1/02....................................... 22,576,506

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

----------------------------------------------------------------------------------------------------
17.0% COLLATERALIZED MORTGAGE OBLIGATIONS
----------------------------------------------------------------------------------------------------
904,580 Chase Mortgage Finance Corp.,
Series 1992-L1 1A3, 5.5%, 11/25/09......................... 901,470
4,868,993 Chase Mortgage Finance Corp.,
Series 1993-I2 A2, 7.25%, 7/25/24.......................... 4,853,777
20,589,000 Chase Mortgage Finance Corp.,
Series 1993-I2 A3, 7.25%, 7/25/24.......................... 20,679,077
4,175,000 Chemical Mortgage Securities Inc.,
Series 1993-1 A4, 7.45%, 2/25/23........................... 4,263,719
2,840,680 Daiwa Mortgage Acceptance Corp.,
Series 1991A, 8.625%, 3/15/10.............................. 2,851,333
5,580,463 Federal Home Loan Mortgage Corp.,
Series 1381-Z, 6%, 7/15/05................................. 5,568,242
42,542,479 Federal Home Loan Mortgage Corp.,
Series 1719-C PO, 4/15/99.................................. 37,517,149
55,231,388 Federal Home Loan Mortgage Corp.,
Series 167-A, STRIP, PO, 5/1/99............................ 48,672,661
57,435,656 Federal Home Loan Mortgage Corp.,
REMIC, Series 1724-PO, 5/15/01............................. 48,721,590
9,850,000 Federal Home Loan Mortgage Corp.,
Series 1267 O, 7.25%, 12/15/05............................. 10,050,054
9,622,636 Federal Home Loan Mortgage Corp.,
Series 1276-C, 7.5%, 12/15/05.............................. 9,709,817
</TABLE>

The accompanying notes are an integral part of the financial statements.

10
<PAGE>

INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,400,000 Federal Home Loan Mortgage Corp.,
Series 1406-E, 6%, 12/15/18................................ 4,334,000
5,250,000 Federal Home Loan Mortgage Corp.,
Series 1250-F, 7%, 4/15/19................................. 5,307,383
937,660 Federal National Mortgage Association,
1989-68 G, 8.75%, 8/25/18.................................. 945,865
20,469,000 First Bank System Inc., Series 1993-F,
7.1844%, 11/25/24.......................................... 20,590,535
11,018,882 Fund America Investors Corp., Series 1991-1H,
7.95%, 2/20/20............................................. 11,170,392
500,000 General Electric Capital Mortgage
Services, Inc., Series 1992-2F, 7%, 6/25/07................ 488,125
30,075,000 General Electric Capital Mortgage
Services, Inc., Series 1993-14, 6.5%, 1/25/18.............. 30,037,406
13,059,694 General Electric Capital Mortgage
Services, Inc., Series 1994-27, 6.5%, 7/25/24.............. 13,100,506
151,669 Kidder, Peabody & Co. Mortgage Assets Trust,
2-B, 8.2%, 1/20/18......................................... 151,383
1,824,000 Paine Webber Mortgage Acceptance Corp.,
Series 1993-6, 6.9%, 8/25/08............................... 1,848,510
2,663,804 Prudential Home Mortgage Securities Co.,
Series 1992-47 A7, 7.5%, 1/25/23........................... 2,660,475
3,220,000 Residential Funding Mortgage Securities,
Series 1993-A2, 6.85%, 9/25/23............................. 3,215,472
19,500,000 Residential Funding Mortgage Securities,
Series 1993-A5, 7.0924%, 10/25/23.......................... 19,487,813
905,000 Resolution Trust Corp., Series A, Zero
Coupon, 7/15/97............................................ 836,537
2,808,285 Resolution Trust Corp., Series 1992 A2A,
7.5%, 8/25/23.............................................. 2,833,735
4,352,840 Resolution Trust Corp., Series 1992 A2C,
7.5%, 8/25/23.............................................. 4,359,641
13,294,537 Ryland Acceptance Corp., Series 97-H, 8.95%,
8/20/19.................................................... 13,705,737
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $332,878,542)........................................ 328,862,404
-----------

----------------------------------------------------------------------------------------------------
17.1% ASSET-BACKED SECURITIES
----------------------------------------------------------------------------------------------------
CREDIT CARD
RECEIVABLES 0.7% 13,735,849 First USA Bank, Series 1994-1, 7.45%,
4/15/99.................................................... 13,818,264
-----------
HOME EQUITY LOANS 7.6% 2,498,456 AFC Home Equity Loan Trust,
Series 1990-3A, 9.6%, 9/15/05.............................. 2,543,740
1,087,990 AFC Home Equity Loan Trust,
Series 1992-3A, 7.05%, 8/15/07............................. 1,081,870
1,548,715 AFC Home Equity Loan Trust,
Series 1993-3A, 5.45%, 6/20/13............................. 1,472,247

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SCUDDER SHORT TERM BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,613,313 CTS Home Equity Loan Trust,
Series 1991-1A, 8.8%, 1/15/06.............................. 1,649,613
1,175,547 Contimortgage Home Equity Loan Trust,
Series 1991-1, 9.52%, 4/15/06.............................. 1,248,651
7,522,188 Contimortgage Home Equity Loan Trust,
Series 1994-5 A1, 9.07%, 5/15/06........................... 7,549,221
28,500,000 Contimortgage Home Equity Loan Trust,
Series 1995-1 A2, 8.6%, 2/15/10............................ 29,221,406
3,887,400 Equity Credit Corp. Home Equity Loan
Trust, 5.3%, 9/15/08....................................... 3,761,667
3,023,088 Equity Credit Corp. Home Equity Loan
Trust, Series 1993-4B, 5.65%, 12/15/08..................... 2,956,013
4,250,137 Fleet Financial Home Equity Loan Trust,
Series 1991-2A, 6.7%, 10/15/06............................. 4,289,982
6,678,324 Home Equity Loan Trust, Series 1992 A,
6.65%, 11/20/12............................................ 6,690,812
1,458,486 Home Equity Loan Trust, Series 1992 B,
6.85%, 11/20/12............................................ 1,459,390
2,561,520 Household Finance Home Equity Trust,
Series 1992-2 A3, 5.25%, 10/20/07.......................... 2,542,309
1,735,485 Mid-State Homes IV, Series 1, 8.33%, 4/1/30................. 1,886,255
2,175,004 Old Stone Credit Corp., Series 1991-2,
8.42%, 9/15/06............................................. 2,250,450
7,163,875 Old Stone Credit Corp. Home Equity Loan,
Series 1992-2 A2, 6.95%, 5/15/07........................... 7,222,045
6,295,313 Old Stone Credit Corp. Home Equity Loan,
Series 1992-3 A2, 6.3%, 9/25/07............................ 6,267,740
1,758,874 Old Stone Credit Corp. Home Equity Loan,
Series 1993-1 A1, 5.85%, 3/15/08........................... 1,736,613
2,126,646 Security Pacific Home Equity Loan Trust,
Series 1991-2A, 8.1%, 6/15/20.............................. 2,149,890
3,980,722 Security Pacific Home Equity Loan Trust,
Series 1991-2B, 8.15%, 6/15/20............................. 4,064,038
15,600,000 Security Pacific Home Equity Trust,
Series 1991-A B, 10.5%, 3/10/06............................ 16,265,438
27,317,425 TMS Home Equity Loan Trust,
Series 1993-D2 A2, 5.075%, 2/15/18......................... 26,754,003
9,700,000 U.S. Home Equity Loan, Series 1991-2B,
9.125%, 4/15/21............................................ 9,954,625
1,222,340 U.S. Home Equity Loan, Series 1991-2A,
8.5%, 4/15/21.............................................. 1,240,675
-----------
146,258,693
-----------

MANUFACTURED
HOUSING RECEIVABLES 8.8% 5,061,984 Chemical Financial Acceptance Corp.,
Housing Trust, Series 1989 A, Participating
Certificate, 9.25%, 5/15/98................................ 5,247,050
22,846,378 Green Tree Financial Corp., Securitized
NIM, Series 1994A, 6.9%, 2/15/04........................... 23,021,296

</TABLE>

The accompanying notes are an integral part of the financial statements.

12
<PAGE>

INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
20,497,050 Green Tree Financial Corp., Securitized
NIM, Series 1994B, 7.85%, 7/15/04.......................... 20,910,194
1,950,000 Green Tree Home Improvement Financial
Corp., Series 1995-C B1, 7.2%, 7/15/20..................... 1,987,781
2,825,000 Green Tree Financial Corp., Series 1995-F A4,
6.15%, 1/15/21............................................. 2,836,918
2,000,000 Green Tree Financial Corp., Series 1995-F B2,
7.1%, 1/15/21.............................................. 2,005,000
5,715,000 Green Tree Financial Corp., Series 1995-1 B2,
9.2%, 6/15/25.............................................. 6,415,088
20,636,400 Green Tree Financial Corp., Series 1995-3 B2,
8.1%, 8/15/25.............................................. 21,858,462
11,769,720 Green Tree Financial Corp., Series 1995-6,
8%, 9/15/25................................................ 12,529,235
445,000 Green Tree Financial Corp., Series 1995-D A3,
6.45%, 9/15/25............................................. 455,082
750,000 Green Tree Financial Corp., Series 1995-D B1,
7.05%, 9/15/25............................................. 761,484
9,000,000 Green Tree Financial Corp., Series 1995-5,
7.65%, 9/15/26............................................. 9,174,330
219,236 Merrill Lynch Mortgage Investors Inc.,
Series 1988-H, 9.7%, 6/15/08............................... 223,483
485,162 Merrill Lynch Mortgage Investors Inc.,
Series 1988-Q, 9.8%, 10/15/08.............................. 493,346
323,044 Merrill Lynch Mortgage Investors Inc.,
Series 1989-F, 9.75%, 10/15/09............................. 329,605
2,306,120 Merrill Lynch Mortgage Investors Inc.,
Series 1990-C, 9.7%, 6/15/10............................... 2,412,040
4,502,145 Merrill Lynch Mortgage Investors Inc.,
Series 1990-H, 9.25%, 1/15/11.............................. 4,651,256
4,220,886 Merrill Lynch Mortgage Investors Inc.,
Series 1990-I, 10%, 1/15/11................................ 4,463,587
936,427 Merrill Lynch Mortgage Investors Inc.,
Series 1991-B, 9.2%, 3/15/11............................... 961,008
3,302,442 Merrill Lynch Mortgage Investors Inc.,
Series 1991-A, 9.25%, 4/15/11.............................. 3,416,971
3,557,363 Merrill Lynch Mortgage Investors Inc.,
Series 1991-C, 8.9%, 7/15/11............................... 3,734,093
5,891,992 Merrill Lynch Mortgage Investors Inc.,
Series 1991-G, 9.15%, 10/15/11............................. 6,227,069
12,274,127 Merrill Lynch Mortgage Investors Inc.,
Series 1992-B, 8.5%, 4/15/12............................... 12,761,164
5,288,521 Merrill Lynch Mortgage Investors Inc.,
Series 1992-B A4, 7.85%, 4/15/12........................... 5,410,791
3,552,642 Merrill Lynch Mortgage Investors Inc.,
Series 1992-D, 7.95%, 7/15/17.............................. 3,651,441
7,737,365 Security Pacific Acceptance Corp.,
Series 1991-2B, 8.55%, 9/15/11............................. 8,034,712

</TABLE>

The accompanying notes are an integral part of the financial statements.

13
<PAGE>

----------------------------------------------------------------------------------------------------
15.8% CORPORATE BONDS
----------------------------------------------------------------------------------------------------
FINANCIAL 8.8% 5,000,000 American General Finance Corp., 8.875%,
3/15/96.................................................... 5,030,000
6,000,000 Associates Corp. of North America, 8.75%,
2/1/96..................................................... 6,012,360
4,000,000 Associates Corp. of North America, 5.875%,
8/15/97.................................................... 4,025,840
14,000,000 British Aerospace Finance Inc., 7.15%, 6/24/97.............. 14,266,000
5,000,000 Discover Credit Corp., Medium Term Note,
Series 2, 8.73%, 8/15/96................................... 5,090,200
5,000,000 First Union Corp., 8.125%, 12/15/96......................... 5,116,300
5,225,000 Health Care Properties Investors Inc.,
6%, 11/8/00................................................ 5,166,219
1,500,000 Household Finance Corp. Medium Term Note,
10.08%, 4/1/96............................................. 1,514,685
18,000,000 Manufacturers Hanover Corp., 5.75%, 4/30/97................. 17,955,000
4,000,000 Marine Midland Bank, 6%, 12/20/00........................... 3,950,000
11,000,000 Spieker Properties, 6.65%, 12/15/00......................... 11,008,800
5,500,000 Spieker Properties, 6.8%, 12/15/01.......................... 5,508,800
3,500,000 Spieker Properties, 6.95%, 12/15/02......................... 3,507,700
3,300,000 Taubman Realty Group LP Medium Term Note,
7.4%, 6/10/02.............................................. 3,298,185
19,150,000 Taubman Realty Group LP Medium Term Note,
7.5%, 6/15/02.............................................. 19,236,175
15,700,000 The Money Store Inc., 9.16%, 9/9/97......................... 16,320,150
21,520,000 The Money Store Inc., Series B, 9.16%, 9/9/97............... 22,370,040
8,000,000 The Money Store Inc., 7.63%, 4/15/98........................ 8,160,400
10,000,000 United Savings Association of Texas,
9.05%, 5/15/98............................................. 9,825,000
2,500,000 World Savings & Loan Association of
Oakland, CA, 10.25%, 10/1/97............................... 2,682,300
-----------
170,044,154
-----------

MEDIA 1.6% 29,100,000 Time Warner Inc., 7.95%, 2/1/00............................. 30,676,638
-----------
SERVICE INDUSTRIES 0.8% 19,060,000 Hanson America, 2.39%, 3/1/01............................... 15,772,150
-----------
DURABLES 1.6% 5,398,488 Ford Motor Co., 8.42%, 12/30/96............................. 5,490,262
24,970,000 McDonnell Douglas Corp., Medium-Term Note,
6.54%, 7/29/96............................................. 25,066,884
-----------
30,557,146
-----------

</TABLE>

The accompanying notes are an integral part of the financial statements.

14
<PAGE>

----------------------------------------------------------------------------------------------------
0.1% MEDIUM-TERM MUNICIPAL INVESTMENTS
----------------------------------------------------------------------------------------------------
1,000,000 Massachusetts Industrial Finance Agency,
6%, 7/1/96 (Cost $ 1,000,000).............................. 1,001,620
-----------
----------------------------------------------------------------------------------------------------
6.3% COUPON INDEXED SECURITIES
----------------------------------------------------------------------------------------------------
39,500,000 Bayerische Landesbank Medium Term Note,
inversely indexed to 30 day Commercial
Paper Bond Equivalent Yield, 5.65%, 12/29/97............... 40,191,250

24,850,000 Credit Suisse Medium Term Note, inversely
indexed to 2 year Spanish Peseta Swap Rate,
2.335%, 7/8/96............................................. 24,623,865

52,400,000 Federal National Mortgage Association
Medium Term Note, inversely indexed to
30 day Commercial Paper Bond Equivalent
Yield, 9.452%, 12/29/97.................................... 56,330,000
-----------
TOTAL COUPON INDEXED SECURITIES
(Cost $118,470,556)........................................ 121,145,115
-----------

----------------------------------------------------------------------------------------------------
0.1% PURCHASED OPTIONS
----------------------------------------------------------------------------------------------------
526 Call on U.S. Treasury Bond, strike price 120,
expires 2/16/96............................................ 1,339,656
787 Call on U.S. Treasury Bond, strike price 122,
expires 2/16/96............................................ 1,143,609
-----------
TOTAL PURCHASED OPTIONS
(Cost $1,967,522).......................................... 2,483,265
-----------

===================================================================================================================================
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $1,915,518,375)(a)................................... 1,933,426,656
=============

</TABLE>

The accompanying notes are an integral part of the financial statements.

15
<PAGE>

SCUDDER SHORT TERM BOND FUND
- --------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $1,915,518,375. At
December 31, 1995, net unrealized appreciation for all securities based on
tax cost was $17,908,281. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $28,288,886 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $10,380,605.

Included in the portfolio are investments in mortgage or asset-backed
securities which are interests in separate pools of mortgages or assets.
Effective maturities of these investments will be shorter than stated
maturities due to prepayments. All separate investments in each of the
Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association and the Government National Mortgage Association issues which
have similar coupon rates have been aggregated for presentation purposes
in the investment portfolio.

CURRENCY ABBREVIATIONS AND OTHER ACRONYMS USED IN THIS PORTFOLIO:

NIM Net Interest Margin
REMIC Real Estate Mortgage Investment Conduit
STRIP Separate Trading Registered Interest and Principal
PO Principal Only

The accompanying notes are an integral part of the financial statements.

16
<PAGE>

LIABILITIES
Payables:
Investments purchased.............. $122,654,886
Fund shares redeemed............... 4,557,874
Dividends.......................... 2,147,933
Accrued management fee (Note C).... 758,516
Other accrued expenses (Note C).... 715,567
------------
Total liabilities............... 130,834,776
--------------
Net assets, at market value........... $1,822,821,050
==============
NET ASSETS
Net assets consist of:
Unrealized appreciation on investments $ 17,908,281
Accumulated net realized loss....... (94,805,084)
Shares of beneficial interest....... 1,605,344
Additional paid-in capital.......... 1,898,112,509
--------------
Net assets, at market value............ $1,822,821,050
==============
NET ASSET VALUE, offering and redemption price per
share ($1,822,821,050/160,534,389 outstanding
shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) $11.35
======

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SCUDDER SHORT TERM BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $138,487,820

Expenses:
Management fee (Note C).................... $ 9,529,973
Services to shareholders (Note C).......... 3,993,269
Custodian and accounting fees (Note C)..... 385,724
Trustees' fees (Note C).................... 12,751
Reports to shareholders.................... 395,774
Auditing................................... 95,974
Federal and state registration............. 35,531
Legal...................................... 9,820
Other ..................................... 85,839 14,544,655
----------------------------
Net investment income...................... 123,943,165
------------

NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS

Net realized gain (loss) from:
Investments............................. (73,353,234)
Futures................................. (5,591,835)
Foreign currency related transactions... (895,801) (79,840,870)
------------
Net unrealized appreciation (depreciation)
during the period on:
Investments............................. 170,042,186
Futures................................. (13,690,415) 156,351,771
----------------------------
Net gain on investment transactions........ 76,510,901
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.............................. $200,454,066
============

</TABLE>

The accompanying notes are an integral part of the financial statements.

18
<PAGE>

FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income......................... $ 123,943,165 $ 187,777,310
Net realized loss from investment
transactions.............................. (79,840,870) (79,769,043)
Net unrealized appreciation (depreciation) on
investment transactions during the
period.................................... 156,351,771 (188,626,897)
-------------- ---------------
Net increase (decrease) in net assets resulting
from operations........................... 200,454,066 (80,618,630)
-------------- ---------------
Distributions to shareholders from:
Net investment income ($.43 and $.64 per
share, respectively).................... (75,809,129) (149,862,207)
-------------- ---------------
Tax return of capital ($.28 and $.12 per
share, respectively).................... (48,134,036) (27,524,389)
-------------- ---------------
Fund share transactions:
Proceeds from shares sold..................... 434,415,510 1,037,772,973
Net asset value of shares issued to
shareholders in reinvestment
of distributions.......................... 93,453,411 134,347,811
Cost of shares redeemed....................... (917,495,507) (1,968,606,250)
-------------- ---------------
Net decrease in net assets from
Fund share transactions................... (389,626,586) (796,485,466)
-------------- ---------------
DECREASE IN NET ASSETS........................ (313,115,685) (1,054,490,692)
Net assets at beginning of period............. 2,135,936,735 3,190,427,427
-------------- ---------------
NET ASSETS AT END OF PERIOD................... $1,822,821,050 $ 2,135,936,735
============== ===============
OTHER INFORMATION
Increase (decrease) in Fund shares
Shares outstanding at beginning of period..... 195,776,523 265,610,358
-------------- ---------------
Shares sold................................... 39,170,009 89,258,004
Shares issued to shareholders in
reinvestment of distributions............. 8,406,276 11,736,021
Shares redeemed............................... (82,818,419) (170,827,860)
-------------- ---------------
Net decrease in Fund shares................... (35,242,134) (69,833,835)
-------------- ---------------
Shares outstanding at end of period........... 160,534,389 195,776,523
============== ===============
</TABLE>

The accompanying notes are an integral part of the financial statements.

19
<PAGE>

SCUDDER SHORT TERM BOND FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.

<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993(c) 1992 1991 1990 1989 1988 1987 1986
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period................................. $10.91 $12.01 $11.93 $12.25 $11.72 $11.71 $11.19 $11.23 $11.92 $11.35
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a).............. .71 .81 .87 .97 1.08 1.09 .83 .73 .74 .81
Net realized and unrealized
gains (losses)....................... .44 (1.15) .08 (.33) .53 .01 .61 (.04) (.58) .78
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
transactions......................... 1.15 (.34) .95 .64 1.61 1.10 1.44 .69 .16 1.59
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income........... (.43) (.64) (.80) (.96) (1.08) (1.09) (.83) (.73) (.74) (.81)
From net realized gains.............. -- -- (.03) -- -- -- (.09) -- (.11) (.21)
In excess of gains................... -- -- (.04) -- -- -- -- -- -- --
From tax return of capital........... (.28) (.12) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions...................... (.71) (.76) (.87) (.96) (1.08) (1.09) (.92) (.73) (.85) (1.02)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period........... $11.35 $10.91 $12.01 $11.93 $12.25 $11.72 $11.71 $11.19 $11.23 $11.92
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)......................... 10.74 (2.87) 8.18 5.43 14.38 9.88 13.20 6.10 1.40 14.70
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)......................... 1,823 2,136 3,190 2,862 2,247 340 72 10 10 8
Ratio of operating expenses net, to
average daily net assets (%)......... .75 .73 .68 .75 .44 .16 .36 1.50 1.45 1.45
Ratio of net investment income net,
to average daily net assets (%)...... 6.37 6.93 7.21 8.01 8.96 9.36 7.97 6.48 6.34 6.89
Portfolio turnover rate (%).............. 101.1 65.3 66.1 83.7(b) 41.0 52.9 40.0 23.5 28.7 15.6
<FN>
(a) Portion of expenses
reimbursed by
the Adviser........................ $ -- $ -- $ -- $ -- $ -- $ .02 $ .10 $ .04 $ .04 $ --
Management fee not imposed
by the Adviser (Note C).............. $ -- $ -- $ -- $ -- $ .06 $ .07 $ .05 $ -- $ -- $ .01

(b) The high turnover rate reflects an increase in principal prepayments on mortgage securities in the Fund.

</FN>
</TABLE>

20
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Scudder Short Term Bond Fund (the "Fund") is a diversified series of Scudder
Funds Trust (the "Trust"). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as an open-end, management investment company. The policies described below are
followed consistently by the Fund in the preparation of its financial
statements in conformity with generally accepted accounting principles.

SECURITY VALUATION. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the officers of the
Fund, which quotations reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost. All other securities are valued at their fair
value as determined in good faith by the Valuation Committee of the Board of
Trustees.

FUTURES CONTRACTS. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the period the
Fund sold interest rate futures to hedge against declines in the value of
portfolio securities.

Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security,
and are recorded for financial reporting purposes as unrealized gains or losses
by the Fund. When entering into a closing transaction, the Fund will realize a
gain or loss equal to the difference between the value of the futures contract
to sell and the futures contract to buy. Futures contracts are valued at the
most recent settlement price.

Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly

21
<PAGE>

SCUDDER SHORT TERM BOND FUND
- --------------------------------------------------------------------------------
with changes in the value of the securities or currencies hedged. When
utilizing futures contracts to hedge, the Fund gives up the opportunity to
profit from favorable price movements in the hedged positions during the term
of the contract.

INDEXED SECURITIES. Indexed securities held by the Fund are investments whose
value is indexed to another financial instrument, index, currency, or commodity
(the "reference instrument"). For principal indexed securities, the principal
amount payable at maturity may be more or less than the amounts shown depending
on fluctuations in the value of the reference instrument. For coupon indexed
securities, the principal amount payable at maturity is fixed. However, the
coupon is indexed to the reference instrument. The price sensitivity of these
securities may be greater than that of non-indexed securities with similar
maturities.

FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:

(i) market value of investment securities, other assets and
liabilities at the daily rates of exchange, and

(ii) purchases and sales of investment securities, interest income
and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions.

The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes
in market prices of the investments. Such fluctuations are included with the
net realized and unrealized gains and losses from investments.

Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on interest and
foreign withholding taxes.

FEDERAL INCOME TAXES. It is the Fund's policy to comply with the requirements
of the Internal Revenue Code which are applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes and no provision for federal
income taxes was required.

22
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1995, the Fund had a net tax basis capital loss carryforward of
approximately $79,822,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December
31, 2002 ($27,264,000) and December 31, 2003 ($52,558,000), the respective
expiration dates. In addition, from November 1, 1995 through December 31, 1995,
the Fund incurred approximately $1,093,000 of net realized capital losses. As
permitted by tax regulations, the Fund intends to elect to defer these losses
and treat them as having arisen in the year ended December 31, 1996.

DISTRIBUTION OF INCOME AND GAINS. Substantially all of the net investment
income of the Fund is declared as a dividend to shareholders of record as of
the close of business each day and is paid to shareholders monthly. During any
particular year, net realized gains from investment transactions, in excess of
available capital loss carryforwards, would be taxable to the Fund if not
distributed and, therefore, will be distributed to shareholders. An additional
distribution may be made to the extent necessary to avoid the payment of a four
percent federal excise tax. Distributions of net realized capital gains to
shareholders are recorded on the ex-dividend date.

The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
primarily relate to investments in futures, options, mortgage-backed securities
and certain securities sold at a loss. As a result, net investment income and
net realized gain (loss) on investment transactions for a reporting period may
differ significantly from distributions during such period. Accordingly, the
Fund may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of the Fund.

The Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting purposes.

OTHER. Investment security transactions are accounted for on a trade date
basis. Interest income is recorded on the accrual basis. All original issue
discounts are accreted for both tax and financial reporting purposes.

23
<PAGE>

SCUDDER SHORT TERM BOND FUND
- --------------------------------------------------------------------------------
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
For the year ended December 31, 1995, purchases and sales of investment
securities (excluding short-term investments and U.S. Government obligations)
aggregated $1,227,108,064 and $1,747,697,124 respectively. Purchases and sales
of U.S. Government obligations aggregated $657,559,369 and $371,441,027,
respectively.

The face value of futures contracts closed during the year ended December 31,
1995 amounted to $2,259,185,415.
<TABLE>
Transactions in written options for the year ended December 31, 1995 are
summarized as follows:
<CAPTION>

OPTIONS CONTRACTS OPTIONS ON CURRENCIES
---------------------------- ----------------------------
NUMBER OF PREMIUMS CANADIAN PREMIUMS
CONTRACTS RECEIVED ($) DOLLARS RECEIVED ($)
--------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Beginning of Period............... -- -- -- --
Written........................... 2,400 3,114,750 160,150,977 1,137,072
Closed............................ (2,400) (3,114,750) (160,150,977) (1,137,072)
------ ---------- ------------ ----------
End of Period..................... -- -- -- --
====== ========== ============ ==========

</TABLE>

C. RELATED PARTIES
- --------------------------------------------------------------------------------

Under the Investment Management Agreement (the "Management Agreement") with
Scudder, Stevens & Clark, Inc. ("the Adviser"), the Adviser directs the
investments of the Fund in accordance with its investment objectives, policies,
and restrictions. The Adviser determines the securities, instruments, and
other contracts relating to investments to be purchased, sold or entered into
by the Fund. In addition to portfolio management services, the Adviser provides
certain administrative services in accordance with the Management Agreement.
The management fee payable under the Management Agreement is equal to an annual
rate of 0.60% on the first $500,000,000 of average daily net assets, 0.50% on
the next $500,000,000 of such net assets, 0.45% on the next $500,000,000 of
such net assets, 0.40% on the next $500,000,000 of such net assets, 0.375% on
the next $1,000,000,000 of such net assets and 0.35% on such net assets in
excess of $3,000,000,000, computed and accrued daily and payable monthly. The
Management Agreement also provides that if the Fund's expenses, exclusive of
taxes, interest, and extraordinary expenses, exceed specified limits, such
excess, up to the amount of the management fee, will be paid by the Adviser.
For the

24
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
year ended December 31, 1995, the fee pursuant to the Management Agreement
amounted to $9,529,973, which was equivalent to an annualized effective rate of
0.49% of the Fund's average daily net assets.

Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. Included
in services to shareholders is $3,187,870 charged to the Fund by SSC for the
year ended December 31, 1995, of which $337,085 is unpaid at December 31, 1995.

Effective July 19, 1995, Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of the Adviser, assumed responsibility for determining the daily net
asset value per share and maintaining the portfolio and general accounting
records of the Fund. For the year ended December 31, 1995, the amount charged
to the Fund by SFAC aggregated $100,885 of which $17,155 is unpaid at December
31, 1995.

The Trust pays each of its Trustees not affiliated with the Adviser $4,000
annually, divided equally among the series of the Trust, plus specified amounts
for attended board and committee meetings. For the year ended December 31,
1995, Trustees' fees aggregated $12,751.

25
<PAGE>

SCUDDER SHORT TERM BOND FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER FUNDS TRUST AND TO THE SHAREHOLDERS OF SCUDDER SHORT
TERM BOND FUND:

We have audited the accompanying statement of assets and liabilities of Scudder
Short Term Bond Fund as of December 31, 1995, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights
for each of the ten years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

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

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Short Term Bond Fund as of December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the ten years in the period then ended in conformity with generally accepted
accounting principles.

Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 9, 1996

26
<PAGE>

TAX INFORMATION
- --------------------------------------------------------------------------------

By now shareholders to whom year-end tax reporting is required by the IRS
should have received their Form 1099-DIV and tax information letter from the
Fund. For corporate shareholders no amount of the income dividends paid by the
Fund qualified for the dividends received deduction.

In many states the amount of income you receive from obligations of the U.S.
Government is exempt from your state income taxes. Of the Fund's dividends from
net investment income, 4.44% was derived from direct obligations of the U.S.
Government, 0.77% from the Student Loan Marketing Association and 2.68% from
the Federal Home Loan Bank.

Please consult a tax adviser if you have questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at (800) 225-5163.

27
<PAGE>

(This page intentionally left blank.)

28
<PAGE>

OFFICERS AND TRUSTEES

Daniel Pierce*
President and Trustee

Lynn S. Birdsong*
Trustee

Sheryle J. Bolton
Trustee; Consultant

Thomas J. Devine
Trustee; Consultant

Peter B. Freeman
Trustee; Corporate Director and Trustee

Dr. Wilson Nolen
Trustee; Consultant

Juris Padegs*
Trustee

Jerard K. Hartman*
Vice President

Thomas W. Joseph*
Vice President

David S. Lee*
Vice President

Thomas F. McDonough*
Vice President, Secretary and
Assistant Treasurer

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Thomas M. Poor*
Vice President

Kathryn L. Quirk*
Vice President and Assistant Secretary

Coleen Downs Dinneen*
Assistant Secretary

*Scudder, Stevens & Clark, Inc.

29
<PAGE>

INVESTMENT PRODUCTS AND SERVICES

The Scudder Family of Funds
-----------------------------------------------------------------------------------------------------------------
<C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Small Company Value Fund
Scudder Growth and Income Fund Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
-----------------------------------------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
-----------------------------------------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
-----------------------------------------------------------------------------------------------------------------
Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
-----------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,(TM) an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.

</TABLE>

30
<PAGE>

HOW TO CONTACT SCUDDER

<TABLE>

Account Service and Information
-------------------------------------------------------------------------------------------------------------
<C> <C>
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For personalized information about your
Scudder accounts; exchanges and
redemptions; or information on any
Scudder fund
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890

Investment Information
-------------------------------------------------------------------------------------------------------------

To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470

For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105

Please address all correspondence to
-------------------------------------------------------------------------------------------------------------

THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291

Or stop by a Scudder Funds Center
-------------------------------------------------------------------------------------------------------------

Many shareholders enjoy the personal,
one-on-one service of the Scudder Funds
Centers. Check for a Funds Center near
you--they can be found in the following
cities:

Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
-------------------------------------------------------------------------------------------------------------

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

Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.

</TABLE>

<PAGE>

Celebrating Over 75 Years of Serving Investors

Established in 1919 by Theodore
Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the
first independent investment counsel firm
in the United States. Since its birth,
Scudder's pioneering spirit and commitment
to professional long-term investment
management have helped shape the
investment industry. In 1928, we
introduced the nation's first no-load
mutual fund. Today we offer 37 pure no
load(TM) funds, including the first
international mutual fund offered to U.S.
investors.

Over the years, Scudder's global
investment perspective and dedication to
research and fundamental investment
disciplines have helped us become one of
the largest and most respected investment
managers in the world. Though times have
changed since our beginnings, we remain
committed to our long-standing principles:
managing money with integrity and
distinction; keeping the interests of our
clients first; providing access to
investments and markets that may not be
easily available to individuals; and
making investing as simple and convenient
as possible through friendly,
comprehensive service.

<PAGE>

Scudder
Zero
Coupon
2000 Fund

Annual Report
December 31, 1995

o For investors who seek as high an investment return over a select period
as is consistent with investment in U.S. government securities and the
minimization of reinvestment risk.
o A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.

This information must be preceded or accompanied by a current prospectus.

Portfolio changes should not be considered recommendations for action by
individual investors.

<PAGE>

SCUDDER ZERO COUPON 2000 FUND

CONTENTS

2 In Brief
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Management Discussion
8 Investment Portfolio
9 Financial Statements
12 Financial Highlights
13 Notes to Financial Statements
16 Report of Independent Accountants
17 Tax Information
17 Officers and Trustees
18 Investment Products
and Services
19 How to Contact
Scudder

IN BRIEF

o Reflecting an environment of slow but steady economic growth and continuing
declines in interest rates, Scudder Zero Coupon 2000 Fund posted a strong
total return of 19.08% for the 12-month period ended December 31, 1995.

BAR CHART TITLE:
Average Annual Total Returns For Periods Ended December 31, 1995

CHART PERIOD:
December 31, 1994 to December 31, 1995

CHART DATA:
1 Year 19.08* 19.24**
3 Years 8.35* 8.51**
5 Years 10.55* 9.80**

* Scudder Zero Coupon 2000 Fund
**Lehman Brothers Government/Corporate Bond Index

CALLOUT TO PRECEDING CHART:
o The Fund's strategy during the period included a focus on four- and
seven-year Treasuries, maturities that strongly benefited from 1995's
interest rate declines.

2
<PAGE>

LETTER FROM THE FUND'S PRESIDENT

Dear Shareholders,

Global fixed-income markets were generally strong in 1995, as
slow growth, moderate inflation, and falling interest rates provided a
positive economic environment. The U.S. bond market was no exception
to this trend and in fact was one of the more remarkable stories of
the year, as long-term interest rates declined sharply.

While a repeat in the coming year of 1995's exceptional
performance is unlikely, the outlook for U.S. fixed-income securities
is positive. The prospect of slow growth and low inflation provides a
favorable backdrop with respect to the direction of interest rates. In
fact, a mild and brief recession is a possibility that would be a plus
for the bond market.

We see a number of trends underway that support the long-term
outlook for low inflation in the U.S. and around the world. Technology
is bringing efficiencies to every stage of the product cycle, from
design to distribution. Globalization has widened the competitive
universe, making inflationary price increases less likely.
Deregulation is subjecting major industries to market discipline,
increasing capacity and reducing supply bottlenecks. While investing
will always involve uncertainties and market fluctuation, the net
result of these forces may well be an era of disinflationary growth
that benefits investors and raises living standards worldwide.

As you know, the interests of the Fund's shareholders are
represented by the Fund's Board of Trustees. We would like to take
this opportunity to welcome the Board's newest independent member,
Sheryle J. Bolton.

If you have questions about Scudder Zero Coupon 2000 Fund or
other Scudder investments, please contact an Investor Relations
representative at 1-800-225-2470. Page 19 provides more information on
how to contact Scudder. Thank you for your continued investment in
Scudder Zero Coupon 2000 Fund.

Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Zero Coupon 2000 Fund

3
<PAGE>
SCUDDER ZERO COUPON 2000 FUND
PERFORMANCE UPDATE as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER ZERO COUPON 2000 FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,908 19.08% 19.08%
5 Year $16,508 65.08% 10.55%
Life of
Fund* $26,957 169.57% 10.53%

LB GOVERNMENT/CORPORATE BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,924 19.24% 19.24%
5 Year $15,960 59.60% 9.80%
Life of
Fund* $23,965 139.65% 9.29%

*The Fund commenced operations on
February 4, 1986. Index comparisons
begin February 28, 1986.

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

YEARLY PERIODS ENDED DECEMBER 31

Scudder Zero Coupon Fund
Year Amount
- ----------------------
2/28/86 $10,000
86 $11,022
87 $10,139
88 $11,326
89 $13,635
90 $14,262
91 $17,118
92 $18,510
93 $21,472
94 $19,770
95 $23,543

LB Government/Corporate Bond Index
Year Amount
- ----------------------
2/28/86 $10,000
86 $11,031
87 $11,284
88 $12,139
89 $13,867
90 $15,016
91 $17,437
92 $18,759
93 $20,829
94 $20,098
95 $23,965

The unmanaged Lehman Brothers (LB) Government/Corporate Bond
Index is composed of U.S. government treasury and agency
securities, corporate and Yankee bonds. Index returns assume
reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.

- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------

A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.

YEARLY PERIODS ENDED DECEMBER 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986* 1987 1988 1989 1990 1991 1992 1993 1994 1995
--------------------------------------------------------------------------------
NET ASSET VALUE... $12.62 $10.34 $10.92 $12.61 $12.27 $13.76 $12.55 $12.85 $10.95 $12.38
INCOME DIVIDENDS.. $ -- $ 1.22 $ .63 $ .52 $ .83 $ .94 $ .93 $ .83 $ .31 $ .62
CAPITAL GAINS
DISTRIBUTIONS..... $ -- $ .11 $ -- $ .03 $ .08 $ -- $ 1.39 $ .89 $ .59 $ --
FUND TOTAL
RETURN (%)........ 26.20 -8.01 11.71 20.39 4.59 20.03 8.13 16.00 -7.92 19.08
INDEX TOTAL
RETURN (%)........ 10.31 2.29 7.58 14.23 8.28 16.12 7.58 11.03 -3.51 19.24
</TABLE>

4
<PAGE>

SCUDDER ZERO COUPON 2000 FUND
PORTFOLIO MANAGEMENT DISCUSSION

Dear Shareholders,

During the 12 months ended December 31, 1995, Scudder Zero
Coupon 2000 Fund benefited from a strong rally in the U.S. Treasury
market. The Fund posted a total return of 19.08% for the year ended
December 31 in keeping with the 19.24% return of the unmanaged Lehman
Brothers Government/Corporate Bond Index. The Fund's net asset value
rose to $12.38 per share on December 31, 1995, from $10.95 on December
31, 1994. Also contributing to the Fund's total return were income
distributions to shareholders totalling $0.62 per share.

Scudder Zero Coupon 2000 Fund seeks to provide investors with
as high an investment return over a selected period as is consistent
with direct investments in government securities. With a specified
maturity date in December 2000, a reasonably predictable return to the
investor can be identified at the time of investment. The Fund invests
in high-quality zero-coupon bonds that pay no cash income but, similar
to savings bonds, are issued at substantial discounts to their value
at maturity. When held to maturity, a zero-coupon bond's entire return
comes from the difference between its issue price and its maturity
value.

Slow Growth an Ideal Environment

Throughout 1995, the U.S. economy grew but did so at a
controlled pace. The buildup of consumer spending that had worried
economists and the bond market in 1994 gave way to more cautious
spending and an easing of inflation fears. The U.S. Treasury market
reacted extremely favorably to the new environment and experienced one
of its best years ever. For example, the yield of the 30-year Treasury
bond declined from 7.88% at the close of 1994 to 5.95% at 1995 year
end, a drop of almost two percentage points with a resulting increase
in price of 26.77%.

In addition to slow growth and only modest inflation, several
additional factors propelled the Treasury rally: The Federal Reserve
moved from a tightening to an easing stance, lowering the federal
funds rate in July and again in late December; foreign investors
purchased Treasury securities in large quantities; and in Washington
both political parties expressed their desire to design a plan that
will ultimately balance the federal budget.

5
<PAGE>

SCUDDER ZERO COUPON 2000 FUND

LINE CHART TITLE: Yields of Treasury Securities

CHART DATA:
12/31/94 12/31/95
-------- --------
3 mos 5.682 5.072
6 mos 6.495 5.147
1 yr 7.162 5.132
2 yrs 7.690 5.150
3 yrs 7.778 5.208
5 yrs 7.827 5.374
10 yrs 7.827 5.570
30 yrs 7.876 5.949

Portfolio Review

As managers of Scudder Zero Coupon 2000 Fund, our goal is to maximize the
value of your investment on the December 2000 maturity date. Since the Fund's
zero coupon bonds lack the cushion of regular interest payments, the Fund can be
more volatile than other fixed-income investments of comparable maturity.
Because some shareholders may need to redeem Fund shares before the maturity
date, we try to limit share price volatility where possible while at the same
time seeking a higher return than other fixed-income investments.

Over the first half of 1995, we pursued a cautious strategy, given the
volatility of the Treasury market during the previous year. We shortened the
Fund's duration to 4.86 years at the end of March from 5.01 years at the close
of 1994. (Duration gives relative weight to both interest and principal payments
and has replaced maturity as the standard measure of interest rate sensitivity
among professional investors. Generally, the shorter the duration, the less
sensitive a portfolio will be to changes in interest rates.) As our confidence
grew that interest rates would decline, we gradually extended the Fund's
duration over the remainder of the year, to 5.25 years as of December 31, 1995.

In terms of the Fund's portfolio structure, as we observed varying changes
in interest rates at differing maturities we adjusted the portfolio to benefit
as much as possible from the prevailing environment while staying within the
bounds of the Fund's maturity requirements. By the end of 1995 the Fund was
focused primarily on Treasury securities with four- and seven-year maturities,
two areas we feel are likely to strongly benefit from continuing interest rate
declines.

6
<PAGE>

PORTFOLIO MANAGEMENT DISCUSSION

Our Outlook

In light of continuing evidence of further economic slowing in 1996 - with
a second half downturn a possibility - we are optimistic about the bond market's
prospects over the next several months. Interest rates should continue to
decline overall but to a lesser degree than in 1995. There may also be pockets
of volatility ahead, as bond market participants react to budgetary and
political news. As always, we will keep a close eye on events influencing the
market and adjust the Fund's maturity structure accordingly. We will continue to
work to maximize Scudder Zero Coupon 2000 Fund's value on its maturity date.

Sincerely,

Your Portfolio Management Team

/s/Ruth Heisler /s/Renee L. Ross
Ruth Heisler Renee L. Ross

/s/Stephen A. Wohler
Stephen A. Wohler

Scudder Zero Coupon
2000 Fund:
A Team Approach to Investing

Scudder Zero Coupon 2000 Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund. They are supported by Scudder's large staff of
economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Scudder Zero Coupon 2000 Fund investors by bringing together
many disciplines and leveraging Scudder's extensive resources.

Lead Portfolio Manager Ruth Heisler has responsibility for overseeing the
Fund's day-to-day operations and setting the Fund's investment strategy. Ruth
has been in charge of security selection since 1988 and has been involved in
bond research and investing at Scudder since 1953. Renee L. Ross, Portfolio
Manager, assists Ruth with trading bonds for the Fund's portfolio. Renee has
worked on the team since 1986 and at Scudder since 1981. Stephen Wohler,
Portfolio Manager, joined the team in 1994 and is also responsible for
implementing the Fund's strategy. Steve has over 15 years' experience managing
fixed income investments and has been with Scudder since 1979.

7
<PAGE>
<TABLE>
SCUDDER ZERO COUPON 2000 FUND
INVESTMENT PORTFOLIO as of December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>

% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
---------------------------------------------------------------------------------
100.0% U.S. GOVERNMENT & AGENCIES
---------------------------------------------------------------------------------

290,000 U.S. Treasury Note, 5.125%, 11/30/98 .................... 289,049
275,000 U.S. Treasury Note, 5%, 1/31/99 ......................... 272,938
2,859,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 11/15/98 (5.25%*) .............. 2,463,772
97,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 2/15/99 (5.28%*) ............... 82,433
1,773,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 2/15/00 (5.33%*) ............... 1,427,566
2,113,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 8/15/00 (5.35%*) ............... 1,655,683
690,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 11/15/00 (5.36%*) .............. 533,356
12,972,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 2/15/01 (5.37%*) ............... 9,887,258
13,662,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 2/15/02 (5.45%*) ............... 9,828,306
290,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 11/15/02 (5.50%*) .............. 199,717
2,779,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 2/15/03 (5.53%*) ............... 1,884,607
1,398,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 5/15/03 (5.55%*) ............... 933,626
----------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $27,771,791) (a) ................................. 29,458,311
==========
- -------------------------------------------------------------------------------------------------------------------------
<FN>

(a) The cost for federal income tax purposes was $27,922,756. At December 31, 1995,
net unrealized appreciation for all securities was $1,535,555. This consisted
of aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $1,535,555.

* Bond equivalent yield to maturity; not a coupon rate.
</FN>
</TABLE>

The accompanying notes are an integral part of the financial statements.

8
<PAGE>

<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------------

DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------

<S> <C> <C>
ASSETS
Investments, at market (identified cost $27,771,791)
(Note A) ...................................................... $29,458,311
Cash ........................................................... 392,614
Receivables:
Interest ...................................................... 7,053
Fund shares sold .............................................. 34,885
-----------
Total assets ................................................. 29,892,863
LIABILITIES
Payables:
Fund shares redeemed .......................................... $607,441
Accrued management fee (Note C) ............................... 10,245
Other accrued expenses (Note C) ............................... 51,840
--------
Total liabilities ............................................
669,526
-----------
Net assets, at market value .................................... $29,223,337
===========
NET ASSETS
Net assets consist of:
Undistributed net investment income ........................... $ 734,456
Unrealized appreciation on investments ........................ 1,686,520
Accumulated net realized loss ................................. (1,230,465)
Shares of beneficial interest ................................. 23,598
Additional paid-in capital .................................... 28,009,228
-----------
Net assets, at market value .................................... $29,223,337
===========
NET ASSET VALUE, offering and redemption price per share
($29,223,337 -:- 2,359,785 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized) ......................................... $12.38
======
</TABLE>

The accompanying notes are an integral part of the financial statements.

9
<PAGE>

<TABLE>
SCUDDER ZERO COUPON 2000 FUND
- ---------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------

<S> <C> <C>
INVESTMENT INCOME
Interest ................................................. $1,770,805
Expenses:
Management fee (Note C) .................................. $161,182
Services to shareholders (Note C) ........................ 88,378
Custodian and accounting fees (Note C) ................... 45,069
Trustees' fees and expenses (Note C) ..................... 12,806
Auditing ................................................. 32,328
Reports to shareholders .................................. 23,623
State registration ....................................... 17,939
Legal .................................................... 10,354
Other .................................................... 6,411
--------
Total expenses before reductions ......................... 398,090
Expense reductions (Note C) .............................. (129,399)
--------
Expenses, net ............................................ 268,691
----------
Net investment income .................................... $1,502,114
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investments ....................... 233,090
Net unrealized appreciation on investments
during the period ....................................... 2,939,161
----------
Net gain on investments .................................. 3,172,251
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..... $4,674,365
==========
</TABLE>

The accompanying notes are an integral part of the financial statements.

10
<PAGE>

<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
<CAPTION>

- ---------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------

YEARS ENDED DECEMBER 31,
------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- ---------------------------------------------------------------------------------------------------

<S> <C> <C>
Operations:
Net investment income .............................................. $ 1,502,114 $ 1,313,676
Net realized gain (loss) from investments .......................... 233,090 (1,399,239)
Net unrealized appreciation (depreciation)
on investments during the period .................................. 2,939,161 (2,122,299)
----------- -----------
Net increase (decrease) in net assets
resulting from operations ......................................... 4,674,365 (2,207,862)
----------- -----------
Distributions to shareholders:
From net investment income ($.62 and $.31 per
share, respectively) .............................................. (1,407,675) (674,895)
----------- -----------
From net realized gains from investments
($.59 per share) .................................................. -- (1,284,256)
----------- -----------
Fund share transactions:
Proceeds from shares sold .......................................... 13,696,852 10,304,177
Net asset value of shares issued to
shareholders in reinvestment of
distributions ..................................................... 1,372,320 1,933,362
Cost of shares redeemed ............................................ (13,980,558) (13,967,971)
----------- -----------
Net increase (decrease) in net assets from
Fund share transactions ........................................... 1,088,614 (1,730,432)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS .................................. 4,355,304 (5,897,445)
Net assets at beginning of period .................................. 24,868,033 30,765,478
----------- -----------
NET ASSETS AT END OF PERIOD (including
undistributed net investment income of
$734,456 and $640,017, respectively) .............................. $29,223,337 $24,868,033
=========== ===========
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period .......................... 2,271,921 2,394,451
----------- -----------
Shares sold ........................................................ 1,155,838 891,083
Shares issued to shareholders in
reinvestment of distributions ..................................... 116,327 169,739
Shares redeemed .................................................... (1,184,301) (1,183,352)
----------- -----------
Net increase (decrease) in Fund shares ............................. 87,864 (122,530)
----------- -----------
Shares outstanding at end of period ................................ 2,359,785 2,271,921
=========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

11
<PAGE>

<TABLE>
SCUDDER ZERO COUPON 2000 FUND
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>

12
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Scudder Zero Coupon 2000 Fund (the "Fund") is organized as a diversified series
of Scudder Funds Trust (the "Trust"), a Massachusetts business trust registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund primarily invests in U.S. Government zero coupon
securities. At least 50% of the Fund's net assets will be invested in zero
coupon securities maturing within two years of the Fund's target maturity date.
It is expected that the Fund will be liquidated in December of the year 2000.

The policies described below are followed consistently by the Fund in the
preparation of its financial statements in conformity with generally
accepted accounting principles.

SECURITY VALUATION. Portfolio debt securities with remaining maturities
greater than sixty days are valued by pricing agents approved by the
Officers of the Fund, which prices reflect broker/dealer-supplied valuations
and electronic data processing techniques. If the pricing agents are unable
to provide such quotations, the most recent bid quotation supplied by a bona
fide market maker shall be used. Short-term investments having a maturity of
sixty days or less are valued at amortized cost. All other securities are
valued at their fair value as determined in good faith by the Valuation
Committee of the Trustees.

FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code which are applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, the Fund paid no federal income taxes and no provision for federal
income taxes was required.

At December 31, 1995, the Fund had a net tax basis capital loss carryforward
of approximately $1,062,000 which may be applied against any realized net
taxable capital gains of each succeeding year until fully utilized or until
December 31, 2002 ($884,000) and December 31, 2003 ($178,000), the respective
expiration dates. In addition, from November 1, 1995 through December 31, 1995,
the Fund incurred approximately $18,000 of net realized capital losses. As
permitted by tax regulations, the Fund intends to elect to defer these losses
and treat them as arising in the fiscal year ended December 31, 1996.

13
<PAGE>

SCUDDER ZERO COUPON 2000 FUND
- --------------------------------------------------------------------------------

DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income are
made annually. During any particular year, net realized gains from investment
transactions, in excess of available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders. An additional distribution may be made to the extent necessary
to avoid the payment of a four percent federal excise tax.

The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles.
These differences primarily relate to investments in certain securities sold at
a loss. As a result, net investment income (loss) and net realized gain (loss)
on investment transactions for a reporting period may differ significantly from
distributions during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.

The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.

OTHER. Investment security transactions are accounted for on a trade date
basis. Interest income is generally recorded on the accrual basis under the
amortized cost method whereby the Fund adjusts the cost of each investment
assuming a constant accretion to maturity of any discount. All original issue
discounts are accreted for both tax and financial reporting purposes.
Distributions to shareholders are recorded on the ex-dividend date.

B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
During the year ended December 31, 1995, purchases and sales of investment
securities were $23,424,178 and $23,754,932, respectively.

C. RELATED PARTIES
- --------------------------------------------------------------------------------
Under the Investment Management Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Adviser directs the investments of
the Fund in accordance with its investment objectives, policies and
restrictions. The Adviser determines the securities, instruments and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides
certain administrative

14
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

services in accordance with the Agreement. The management fee payable under
the Agreement is equal to an annual rate of approximately 0.60% of the average
daily net assets of the Fund computed and accrued daily and payable monthly.
The Agreement also provides that if the Fund's expenses, exclusive of taxes,
interest and extraordinary expenses exceed specified limits, such excess, up
to the amount of the management fee, will be paid by the Adviser. In addition,
the Adviser has agreed to maintain the annualized expenses of the Fund at not
more than 1% of average daily net assets until April 30, 1996. For the year
ended December 31, 1995, the management fee aggregated $161,182, of which
$129,399 was not imposed.

Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend disbursing and shareholder service agent for the Fund. For
the year ended December 31, 1995, $70,706 was charged to the Fund by SSC, of
which $8,650 was unpaid at December 31, 1995.

Effective January 10, 1995, Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of the Adviser, assumed responsibility for determining the daily
net asset value per share and maintaining the portfolio and general accounting
records of the Fund. For the year ended December 31, 1995, the amount charged
to the Fund by SFAC aggregated $36,756, of which $3,125 is unpaid at December
31, 1995.

The Trust pays each Trustee not affiliated with the Adviser $4,000 annually,
plus specified amounts for attended board and committee meetings. For the year
ended December 31, 1995, Trustees' fees and expenses amounted to $12,806.

15
<PAGE>

SCUDDER ZERO COUPON 2000 FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

TO THE TRUSTEES OF SCUDDER FUNDS TRUST AND THE SHAREHOLDERS OF SCUDDER ZERO
COUPON 2000 FUND:

We have audited the accompanying statement of assets and liabilities of Scudder
Zero Coupon 2000 Fund including the investment portfolio, as of December 31,
1995, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the nine years in the
period then ended and for the period February 4, 1986 (commencement of
operations) to December 31, 1986. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Scudder Zero Coupon 2000 Fund as of December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the nine years in the period then ended and for the period February 4, 1986
(commencement of operations) to December 31, 1986, in conformity with generally
accepted accounting principles.

Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 9, 1996

16
<PAGE>

TAX INFORMATION

By now shareholders for whom year-end tax reporting is required by the IRS
should have received their Form 1099-DIV and tax information letter from
the Fund. For corporate shareholders no amount of the income dividends paid
by the Fund qualified for the dividends received deduction.

In many states the amount of income you received from direct obligations of
the U.S. Government is exempt from your state income taxes. Of the Zero
Coupon 2000 Fund's dividend from ordinary income, which includes net
short-term capital gains, 100% was derived from direct obligations of the
U.S. Government.

Please consult a tax adviser if you have questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have
specific questions about your Scudder Fund account, please call a Scudder
Investor Relations Representative at 1-800-225-5163.

OFFICERS AND TRUSTEES

Daniel Pierce*
President and Trustee

Sheryle J. Bolton
Trustee; Consultant

Thomas J. Devine
Trustee; Consultant

Peter B. Freeman
Trustee; Corporate Director and Trustee

Dr. Wilson Nolen
Trustee; Consultant

Juris Padegs*
Trustee

Lynn S. Birdsong*
Trustee

Jerard K. Hartman*
Vice President

Thomas W. Joseph*
Vice President

David S. Lee*
Vice President

Thomas F. McDonough*
Vice President, Secretary and Assistant Treasurer

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Thomas M. Poor*
Vice President

Kathryn L. Quirk*
Vice President and Assistant Secretary

Coleen Downs Dinneen*
Assistant Secretary

*Scudder, Stevens & Clark, Inc.

17
<PAGE>

INVESTMENT PRODUCTS AND SERVICES

The Scudder Family of Funds
-----------------------------------------------------------------------------------------------------------------

Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Small Company Value Fund
Scudder Growth and Income Fund Scudder Value Fund
The Japan Fund

Retirement Plans and Tax-Advantaged Investments
-----------------------------------------------------------------------------------------------------------------

IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans

Closed-End Funds#
-----------------------------------------------------------------------------------------------------------------

The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.

Institutional Cash Management
- -----------------------------------------------------------------------------------------------------------------

Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
-----------------------------------------------------------------------------------------------------------------

For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +A portion of the income from the tax-free funds may
be subject to federal, state, and local taxes. *Not available in all states.
+++A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc. are
traded on various stock exchanges. ++For information on Scudder Treasurers
Trust,(TM) an institutional cash management service that utilizes certain
portfolios of Scudder Fund, Inc. ($100,000 minimum), call 1-800-541-7703.

</TABLE>

18
<PAGE>

HOW TO CONTACT SCUDDER
<TABLE>
<CAPTION>
<S> <C>

Account Service and Information
- -------------------------------------------------------------------------------------------------------------

For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163

For personalized information about your Scudder accounts;
exchanges and redemptions; or information on any Scudder fund
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890

Investment Information
- -------------------------------------------------------------------------------------------------------------

To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470

For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105

Please address all correspondence to
- -------------------------------------------------------------------------------------------------------------

THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291

Or stop by a Scudder Funds Center
- -------------------------------------------------------------------------------------------------------------

Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:

Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
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For information on Scudder For information on Scudder
Treasurers Trust,(TM) an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
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Scudder Investor Relations and Scudder Funds Centers are services provided through Scudder
Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a prospectus with more complete information,
including management fees and expenses. Please read it carefully before you invest or send money.

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19
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Celebrating Over 75 Years of Serving Investors

Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long- term investment management have helped shape
the investment industry. In 1928, we introduced the nation's first no-load
mutual fund. Today we offer 37 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.

Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.