SCUDDER FUNDS TRUST, 485BPOS, 1998-04-29

SCUDDER FUNDS TRUST
485BPOS, 1998-04-29

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Filed With the Securities and Exchange Commission on April 29, 1998

File No. 2-73371
File No. 811-3229

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.
-----
Post-Effective Amendment No. 26
-----

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 25
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Scudder Funds Trust
-----------------------------
(Exact Name of Registrant as Specified in Charter)

Two International Place, Boston, MA 02110-4103
-------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (617) 295-2567
---------------

Thomas F. McDonough
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
-------------------------------------------------
(Name and Address of Agent for Service)

It is proposed that this filing will become effective

Immediately upon filing pursuant to paragraph (b)
-----

X on May 1, 1998 pursuant to paragraph (b)
-----

60 days after filing pursuant to paragraph (a)(1)
-----

on May 1, 1998 pursuant to paragraph (a)(1)
-----

75 days after filing pursuant to paragraph (a)(2)
-----

on pursuant to paragraph (a)(2) of Rule 485
---------------------
-----

If appropriate, check the following:

----- this post-effective amendment designates a new effective date for a
previously filed post-effective amendment

<PAGE>

SCUDDER FUNDS TRUST
SCUDDER SHORT TERM BOND FUND
CROSS-REFERENCE SHEET

Items Required By Form N-1A
---------------------------
PART A
<TABLE>

Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
<S> <C> <C>
1. Cover Page COVER PAGE

2. Synopsis EXPENSE INFORMATION

3. Condensed Financial Information FINANCIAL HIGHLIGHTS
DISTRIBUTION AND PERFORMANCE INFORMATION

4. General Description of INVESTMENT OBJECTIVE AND POLICIES
Registrant WHY INVEST IN THE FUND?
ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION

5. Management of the Fund FINANCIAL HIGHLIGHTS
A MESSAGE FROM SCUDDER'S CHAIRMAN
FUND ORGANIZATION--Investment adviser; Transfer agent
SHAREHOLDER BENEFITS--A team approach to investing
TRUSTEES AND OFFICERS

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

6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and
Securities capital gains distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL(TM)--Scudder Automated Information Line,
Dividend reinvestment plan,
T.D.D. service for the hearing impaired
HOW TO CONTACT SCUDDER

7. Purchase of Securities Being PURCHASES
Offered FUND ORGANIZATION--Underwriter
TRANSACTION INFORMATION--Purchasing
shares, Share price, Processing time, Minimum balances,
Third party transactions
SHAREHOLDER BENEFITS--Dividend reinvestment plan
SCUDDER TAX-ADVANTAGED RETIREMENT PLANS
INVESTMENT PRODUCTS AND SERVICES

8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares, Tax identification
number, Minimum balances

9. Pending Legal Proceedings NOT APPLICABLE

Cross Reference- Page 1
<PAGE>

SCUDDER SHORT TERM BOND FUND
(continued)

Items Required by Form N-1A
PART B
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------
<S> <C> <C>

10. Cover Page COVER PAGE

11. Table of Contents TABLE OF CONTENTS

12. General Information and History ORGANIZATION OF THE FUNDS

13. Investment Objectives and THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Policies INVESTMENT RESTRICTIONS

14. Management of the Fund INVESTMENT ADVISER
TRUSTEES AND OFFICERS
REMUNERATION

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

16. Investment Advisory and Other INVESTMENT ADVISER
Services DISTRIBUTOR
ADDITIONAL INFORMATION--Experts, Other Information

17. Brokerage Allocation and Other PORTFOLIO TRANSACTIONS--Brokerage Commissions, Portfolio
Practices Turnover

18. Capital Stock and Other ORGANIZATION OF THE FUNDS
Securities DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

19. Purchase, Redemption and PURCHASES
Pricing of Securities Being EXCHANGES AND REDEMPTIONS
Offered FEATURES AND SERVICES OFFERED BY THE FUNDS-- Dividend and
capital gain distribution options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE

20. Tax Status DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS
TAXES

21. Underwriters DISTRIBUTOR

22. Calculation of Performance Data PERFORMANCE INFORMATION

23. Financial Statements FINANCIAL STATEMENTS

Cross Reference- Page 2
<PAGE>

SCUDDER FUNDS TRUST
SCUDDER ZERO COUPON 2000 FUND
CROSS-REFERENCE SHEET

Items Required By Form N-1A
---------------------------
PART A
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
<S> <C> <C>

1. Cover Page COVER PAGE

2. Synopsis EXPENSE INFORMATION

3. Condensed Financial Information FINANCIAL HIGHLIGHTS
DISTRIBUTION AND PERFORMANCE INFORMATION

4. General Description of INVESTMENT OBJECTIVE
Registrant INVESTING IN ZERO COUPON SECURITIES
WHY INVEST IN THE FUND?
ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
SPECIALIZED INVESTMENT TECHNIQUES
FUND ORGANIZATION

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

6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and
Securities capital gains distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL(TM)--Scudder Automated Information Line,
Dividend reinvestment plan, T.D.D. service for the hearing impaired
HOW TO CONTACT SCUDDER

7. Purchase of Securities Being PURCHASES
Offered FUND ORGANIZATION--Underwriter
TRANSACTION INFORMATION--Purchasing shares, Share price,
Processing time, Minimum balances, Third party transactions
SHAREHOLDER BENEFITS--Dividend reinvestment plan
SCUDDER TAX-ADVANTAGED RETIREMENT PLANS
INVESTMENT PRODUCTS AND SERVICES

8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares, Tax identification
number, Minimum balances

9. Pending Legal Proceedings NOT APPLICABLE

Cross Reference- Page 3
<PAGE>

SCUDDER ZERO COUPON 2000 FUND
(continued)

Items Required by Form N-1A
---------------------------
PART B
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------
<S> <C> <C>

10. Cover Page COVER PAGE

11. Table of Contents TABLE OF CONTENTS

12. General Information and History ORGANIZATION OF THE FUNDS

13. Investment Objectives and THE FUNDS' INVESTMENT OBJECTIVES
Policies AND POLICIES
INVESTMENT RESTRICTIONS

14. Management of the Fund INVESTMENT ADVISER
TRUSTEES AND OFFICERS
REMUNERATION

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

16. Investment Advisory and Other INVESTMENT ADVISER
Services DISTRIBUTOR
ADDITIONAL INFORMATION--Experts, Other Information

17. Brokerage Allocation and Other PORTFOLIO TRANSACTIONS-- Brokerage Commissions, Portfolio
Practices Turnover

18. Capital Stock and Other ORGANIZATION OF THE FUNDS
Securities DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS

20. Tax Status DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS
TAXES

21. Underwriters DISTRIBUTOR

22. Calculation of Performance Data PERFORMANCE INFORMATION

23. Financial Statements FINANCIAL STATEMENTS
</TABLE>

Cross Reference- Page 4
<PAGE>
This prospectus sets forth concisely the information about Scudder Short Term
Bond Fund, a diversified 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, 1998, 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 and is available along with other related materials on the SEC's
Internet Web site (http://www.sec.gov).

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.

- -------------------------------
NOT FDIC- / MAY LOSE VALUE
INSURED / NO BANK GUARANTEE
- -------------------------------

SCUDDER (logo)

Scudder
Short Term
Bond Fund

Prospectus
May 1, 1998

A pure no-load(TM) (no sales charges) mutual fund 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 Family of Funds 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,
1997.

Investment management fee 0.53%
12b-1 fees NONE
Other expenses 0.33%
----
Total Fund operating expenses 0.86%

====
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
------ ------- ------- --------
$9 $27 $48 $106

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."

<PAGE>

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, 1997,
which may be obtained without charge by writing or calling Scudder Investor
Services, Inc.

<TABLE>
<CAPTION>
Years
Ended
December
31,
1997(a) 1996(a) 1995 1994 1993(a) 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, -------------------------------------------------------------------------------------------------
beginning of period ......... $11.05 $11.35 $10.91 $12.01 $11.93 $12.25 $11.72 $11.71 $11.19 $11.23
-------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income ....... .73 .74 .71 .81 .87 .97 1.08 1.09 .83 .73
Net realized and unrealized
gain (loss) on
investments ............... (.07) (.32) .44 (1.15) .08 (.33) .53 .01 .61 (.04)
Total from investment -------------------------------------------------------------------------------------------------
transactions ................ .66 .42 1.15 (.34) .95 .64 1.61 1.10 1.44 .69
-------------------------------------------------------------------------------------------------
Less distributions:
From net investment income .. (.67) (.72) (.43) (.64) (.80) (.96) (1.08) (1.09) (.83) (.73)
From net realized gains ..... -- -- -- -- (.03) -- -- -- (.09) --
In excess of gains .......... -- -- -- -- (.04) -- -- -- -- --
From tax return of capital .. -- -- (.28) (.12) -- -- -- -- -- --
-------------------------------------------------------------------------------------------------
Total distributions ............ (.67) (.72) (.71) (.76) (.87) (.96) (1.08) (1.09) (.92) (.73)
-------------------------------------------------------------------------------------------------
Net asset value, -------------------------------------------------------------------------------------------------
end of period ............... $11.04 $11.05 $11.35 $10.91 $12.01 $11.93 $12.25 $11.72 $11.71 $11.19
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) ............... 6.17 3.86 10.74 (2.87) 8.18 5.43 14.38 9.88 13.20 6.10
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................ 1,166 1,468 1,823 2,136 3,190 2,862 2,247 340 72 10
Ratio of operating expenses net,
to average daily net assets
(%) ......................... .86 .80 .75 .73 .68 .75 .44 .16 .36 1.50
Ratio of operating expenses
before expense reductions, to
average daily net
assets (%) .................. .86 .80 .75 .73 .68 .78 1.00 1.19 2.06 1.86
Ratio of net investment income
to average daily net assets
(%) ......................... 6.64 6.66 6.37 6.93 7.21 8.01 8.96 9.36 7.97 6.48
Portfolio turnover rate (%) .... 39.4 61.8 101.1 65.3 66.1 83.7 41.0 52.9 40.0 23.5
</TABLE>

(a) Per share amounts have been calculated using weighted average shares
outstanding. 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.

3
<PAGE>

A message from the President

Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $200 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts. It is one of the ten
largest mutual fund companies in the U.S.

We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also 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 numerous other open- and closed-end funds that invest in this
country and other 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 shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.

Funds or fund classes in the Scudder Family of Funds are offered without
commissions to purchase or redeem 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/ Edmond D. Villani

Scudder Short Term Bond Fund

Investment objective

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

Investment characteristics

o 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

o invests primarily in high quality, short-term bonds

o dollar-weighted average portfolio effective maturity will not exceed three
years

o dividends declared daily and paid monthly

o 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
Fund organization 12
Transaction information 13
Shareholder benefits 17
Purchases 20
Exchanges and redemptions 21
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 (the "Trust"), is a pure no-load(TM) mutual fund designed for investors
seeking:

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

o 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. 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:

o 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;

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

o Mortgage-backed securities; and o Other asset-backed securities.

Other eligible investments for the Fund are as follows:

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

o Privately placed obligations (including restricted securities); and

o 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, zero coupon securities,
trust preferred securities, illiquid securities, securities on a when-issued or
forward delivery basis and may engage in currency transactions, reverse
repurchase agreements and 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 Kemper
Investments, 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>

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. It is impossible to accurately predict for how long such
alternative strategies may be utilized.

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 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 Corporation
("S&P") (AAA or AA) or Moody's Investor Services, 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 after being purchased by the Fund, 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.

6
<PAGE>

Some investors may view the Fund as an alternative to a bank certificate of
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 may also benefit from the convenience, cost-savings and professional
management of a no-load mutual fund. As of December 31, 1997, the Adviser was
responsible for managing more than $200 billion in assets globally.

Additional information about policies and investments

Investment restrictions

The Fund has certain investment restrictions which are designed to reduce the
Fund's investment risk. Fundamental investment restrictions may not be changed
without a vote of shareholders; non-fundamental investment restrictions may be
changed by a vote of the Trust's Board of Trustees.

As a matter of fundamental policy, the Fund may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Fund may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes and by engaging in reverse repurchase
agreements and dollar rolls.

As a matter of fundamental policy, the Fund may not make loans except through
the lending of portfolio securities, the purchase of debt securities or
interests in indebtedness or through repurchase agreements. The Fund has adopted
a non-fundamental policy restricting the lending of portfolio securities to no
more than 5% of total assets.

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

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.

Illiquid securities

The Fund may invest in securities for which there is not an active trading
market, or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities, but carry the
risk that the Fund may not be able to dispose of them at an advantageous time or
price.

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 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
shareholders with payments consisting of both interest and principal as the

7
<PAGE>

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
market movements), to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio or to enhance potential gain. These
strategies may be executed through the use of

8
<PAGE>

derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.

In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").

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

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

9
<PAGE>

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. Because principle may be
prepaid at any time, mortgage-backed securities may involve significantly
greater price and yield volatility than traditional 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.

Convertible securities. While convertible securities generally offer lower
yields than nonconvertible debt securities of similar quality, their prices may
reflect changes in the value of the underlying common stock. Convertible
securities generally entail less credit risk than the issuer's common stock.

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

10
<PAGE>

of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. 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.

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 combined 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, if necessary. Any dividends or capital gains distributions declared in
October, November or December with a record date in such 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

11
<PAGE>

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 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 to
individual shareholders at a maximum 20% or 28% capital gains rate (depending on
the Fund's holding period for the assets giving rise to the gain), regardless of
the length of time 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, 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 Kemper Investments,
Inc., a Delaware corporation formerly known as Scudder, Stevens & Clark, Inc.,
to manage its daily investment and business affairs subject to the policies
established by the Board of Trustees.

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<PAGE>

The Trustees have overall responsibility for the management of the Fund under
Massachusetts law.

Scudder, Stevens & Clark, Inc. ("Scudder"), and Zurich Insurance Company
("Zurich"), an international insurance and financial services organization, have
formed a new global investment organization by combining Scudder's business with
that of Zurich's subsidiary, Zurich Kemper Investments, Inc. and Scudder has
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owns approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.

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, 1997 the Adviser received an investment
management fee of 0.53% 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 Kemper Investments, Inc. is located at Two International Place, Boston,
Massachusetts.

Like other mutual funds and financial and business organizations worldwide, the
Fund could be adversely affected if computer systems on which the Fund relies,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to correctly process date-related information on
and after January 1, 2000. This risk is commonly called the Year 2000 Issue.
Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the Fund's business and
operations. The Adviser has commenced a review of the Year 2000 Issue as it may
affect the Fund and is taking steps it believes are reasonably designed to
address the Year 2000 Issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 Issue will not have an adverse effect on the companies whose securities are
held by the Fund or on global markets or economies generally.

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.

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.

Custodian

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

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.")

13
<PAGE>

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.

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

By "QuickBuy." If you elected "QuickBuy" 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
"QuickBuy," call 1-800-225-5163 for more information.

To purchase additional shares, call 1-800-225-5163. Purchases may not be for
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. "QuickBuy" 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 "QuickBuy" 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. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA accounts.

By exchange. The Fund may be exchanged for shares of other funds in the Scudder
Family of Funds unless otherwise determined by the Board of Trustees. 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.

14
<PAGE>

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
provided your banking information on your application, you can call to request
that federal funds be sent to your authorized bank account. If you did not
include your banking information 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.

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 "QuickSell." If you elected "QuickSell" 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 "QuickSell,"
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. "QuickSell" 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.

"QuickSell" 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

15
<PAGE>

redemption requests in excess of $100,000 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 $100,000 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

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).

Purchase restrictions

The Fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of Fund shares (including exchanges) for any reason including 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.

16
<PAGE>

Tax identification number

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

Minimum balances

Shareholders should maintain a share balance worth at least $2,500, which amount
may be changed by the Board of Trustees. Scudder retirement plans and certain
other accounts have similar or lower minimum share balance requirements. A
shareholder may open an account with at least $1,000, if an automatic investment
plan of $100/month is established.

Shareholders who maintain a non-fiduciary account balance of less than $2,500 in
the Fund, without establishing an automatic investment plan, will be assessed an
annual $10.00 per fund charge with the fee to be paid to the Fund. The $10.00
charge will not apply to shareholders with a combined household account balance
in any of the Scudder Funds of $25,000 or more. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account. The Fund
will mail the proceeds of the redeemed account to the shareholder. Reductions in
value that result solely from market activity will not trigger an involuntary
redemption. Retirement accounts and certain other accounts will not be assessed
the $10.00 charge or be subject to automatic liquidation. Please refer to
"Exchanges and Redemptions--Other Information" in the Fund's combined Statement
of Additional Information for more information.

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

Scudder Kemper Investments, Inc., one of the nation's most experienced
investment management firms, actively manages your 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 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 the Adviser's large staff of economists,
research analysts, traders and other investment specialists who work in the
Adviser's offices across the United States and abroad. The Adviser believes its
team approach benefits Fund investors by bringing together many disciplines and
leveraging its extensive resources.

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<PAGE>

Stephen A. Wohler, Lead Portfolio Manager, is responsible for the Fund's
day-to-day operations and overall investment strategy. Mr. Wohler joined the
Adviser in 1979 and has over 17 years of experience managing fixed income
investments. Robert Cessine, Portfolio Manager, joined the team in 1998 and
helps set the Fund's investment strategy. Mr. Cessine joined the Adviser in 1993
and has over 15 years of investment and financial services industry experience.

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. (The exchange
privilege may not be available for certain Scudder funds or classes thereof. For
more information, please call 1-800-225-5163.) 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.

Personal Counsel(SM) -- A Managed Fund Portfolio Program

If you would like to receive direct guidance and management of your overall
mutual fund portfolio to help you pursue your investment goals, you may be
interested in Personal Counsel from Scudder. Personal Counsel, a program of
Scudder Investor Services, Inc., a registered investment adviser and a
subsidiary of Scudder Kemper Investments, Inc., combines the benefits of a
customized portfolio of no-load mutual funds with ongoing portfolio monitoring
and individualized service, for an annual fee of generally 1.25% or less of
assets. In addition, it draws upon the Adviser's more than 75-year heritage of
providing investment counsel to large corporate and private clients. If you have
$100,000 or more to invest initially and would like more information about
Personal Counsel, please call 1-800-700-0183.

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 will receive a detailed statement summarizing account activity, including
dividend and capital gain reinvestment, purchases and redemptions. All of your
statements should be retained to help you keep track of account activity and the
cost of shares for tax purposes.

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

18
<PAGE>

(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 Investor Centers

As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor Centers in Boca Raton, Boston,
Chicago, New York and San Francisco.

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.

19
<PAGE>

Purchases

<TABLE>
<CAPTION>
Purchases

Opening Minimum initial investment: $2,500; IRAs $1,000
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.

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

The Scudder Funds The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291

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 Investor Centers to complete your application
with the help of a Scudder representative. Investor Center
locations are listed under Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
shares 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
Scudder Funds." Fund name, to 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 Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed under Shareholder benefits.

o By Telephone Please see Transaction information--Purchasing shares--
By QuickBuy 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>

20
<PAGE>

Exchanges and redemptions

Exchanging Minimum investments: $2,500 to establish a new account;
shares $100 to exchange among existing accounts

<S> <C> <C>
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 The Scudder Funds 1-800-821-6234
P.O. Box 2291 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184
-----------------------------------------------------------------------------------------------------------------------
Redeeming o By Telephone
shares
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 $100,000 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:
- 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 forredemptions over $100,000.
See Transaction information--Redeeming shares.

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

21
<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.

o Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of up to $2,000 per person for anyone with earned income (up
to $2,000 per individual for married couples filing jointly, even if only
one spouse has 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 you no annual
custodial fee.

o Scudder Roth No-Fee IRAs. Similar to the traditional IRA in many respects,
these retirement plans provide a unique opportunity for qualifying
individuals to accumulate investment earnings tax free. Unlike a
traditional IRA, with a Roth IRA, if you meet the distribution
requirements, you can withdraw your money without paying any taxes on the
earnings. No tax deduction is allowed for contributions to a Roth IRA. The
Scudder Roth IRA charges you no annual custodial fee.

o 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.

o 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.

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

o 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. The Scudder SEP-IRA charges
you no annual custodial fee.

o 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 and most 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.

Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.

22
<PAGE>

Investment products and services

The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series--
Premium Shares*
Managed Shares*
Scudder Government Money Market
Series--Managed Shares*

Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
Scudder California Tax Free Money
Fund**
Scudder New York Tax Free Money
Fund**

Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited
Term Tax Free Fund**
Scudder Massachusetts Tax Free
Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**

U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund

Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund

Asset Allocation
- ----------------
Scudder Pathway Conservative
Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International
Portfolio

U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund

U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund

Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth
Fund
Scudder Development Fund
Scudder 21st Century Growth Fund

Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and
Income Fund
Scudder International Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth
Fund
Scudder Gold Fund

Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.

Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund

Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)

Education Accounts
- ------------------
Education IRA
UGMA/UTMA

Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *A class of
shares of the Fund. **Not available in all states. ***Only the Scudder Shares of
the Fund are part of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New York
Stock Exchange and, in some cases, on various foreign stock exchanges.

23
<PAGE>

How to contact Scudder

Account Service and Information:
<S> <C>

For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163

For 24 hour account information, fund information, exchanges, and an
overview of all the services available to you

Scudder Electronic Account Services -- http://funds.scudder.com

For personalized information about your Scudder accounts, exchanges and redemptions

Scudder Automated Information Line (SAIL) -- 1-800-343-2890

Investment Information:

For information about the Scudder funds, including additional
applications and prospectuses, or for answers to investment questions

Scudder Investor Relations -- 1-800-225-2470
[email protected]

Scudder's World Wide Web Site -- http://funds.scudder.com

For establishing 401(k) and 403(b) plans

Scudder Defined Contribution Services -- 1-800-323-6105

Scudder Brokerage Services:

To receive information about this discount brokerage service and to obtain an application

Scudder Brokerage Services* -- 1-800-700-0820

Personal Counsel(SM) -- A Managed Fund Portfolio Program:

To receive information about this mutual fund portfolio guidance and management program

Personal Counsel from Scudder -- 1-800-700-0183

Please address all correspondence to:

The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291

Or Stop by a Scudder Investor Center:

Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:

Boca Raton Chicago San Francisco
Boston New York

Scudder Investor Relations and Scudder Investor Centers are services provided
through Scudder Investor Services, Inc., Distributor.
</TABLE>
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA
02061--Member NASD/SIPC.

<PAGE>
This prospectus sets forth concisely the information about Scudder Zero Coupon
2000 Fund, a diversified 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.

- ---------------------------------
NOT FDIC- / MAY LOSE VALUE
INSURED / NO BANK GUARANTEE
- ---------------------------------

SCUDDER (logo)

Scudder
Zero Coupon
2000 Fund

Prospectus
May 1, 1998

A pure no-load(TM) (no sales charges) mutual fund which 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.

<PAGE>

Expense information

How to compare a Scudder Family of Funds 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) 0.00%**
12b-1 fees NONE
Other expenses (after reimbursement) 1.00%
----
Total Fund operating expenses (after waiver and reimbursement) 1.00%**
====

Example

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 April 30, 1999, the Adviser has agreed to waive and/or reimburse all
or a portion of its management fee and expenses to the extent necessary so
that 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 and
other expenses, Fund expenses would have been: investment management fee
0.60%, other expenses 1.16%, and total Fund operating expenses 1.76% for
the year ended December 31, 1997.

<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, 1997, which may be obtained without
charge by writing or calling Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
Years Ended December 31,
1997(a) 1996(a) 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning ---------------------------------------------------------------------------------------------
of period ...................... $11.77 $12.38 $10.95 $12.85 $12.55 $13.76 $12.27 $12.61 $10.92 $10.34
---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............ .63 .64 .65 .59 .79 .94 .99 .86 .51 .63
Net realized and unrealized gain
(loss) on investments .......... .11 (.57) 1.40 (1.59) 1.23 .17 1.44 (.29) 1.73 .58
Total from investment ---------------------------------------------------------------------------------------------
operations ..................... .74 .07 2.05 (1.00) 2.02 1.11 2.43 .57 2.24 1.21
---------------------------------------------------------------------------------------------
Less distributions:
From net investment income ....... (.63) (.68) (.62) (.31) (.83) (.93) (.94) (.83) (.52) (.63)
From net realized gains on
investments .................... -- -- -- (.59) (.89) (1.39) -- (.08) (.03) --
---------------------------------------------------------------------------------------------
Total distributions .............. (.63) (.68) (.62) (.90) (1.72) (2.32) (.94) (.91) (.55) (.63)
---------------------------------------------------------------------------------------------
Net asset value, end of ---------------------------------------------------------------------------------------------
period ......................... $11.88 $11.77 $12.38 $10.95 $12.85 $12.55 $13.76 $12.27 $12.61 $10.92
------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) ............. 6.53 .65 19.08 (7.92) 16.00 8.13 20.03 4.59 20.39 11.71
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 20 25 29 25 31 29 33 33 32 5
Ratio of operating expenses,
net to average daily net
assets (%) ..................... 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... 1.76 1.45 1.48 1.47 1.28 1.28 1.23 1.39 1.62 3.37
Ratio of net investment income to
average daily net assets (%) ... 5.44 5.42 5.59 5.23 5.29 6.38 7.12 7.62 7.10 8.10
Portfolio turnover rate (%) ...... 5.74 85.2 86.6 89.3 101.6 118.8 90.7 98.5 87.1 149.2
</TABLE>

(a) Based on monthly average shares outstanding during the period.
(b) Total returns would have been lower had certain expenses not been reduced.

3
<PAGE>

A message from the President

/s/ Edmond D. Villani

Scudder Zero Coupon 2000 Fund

Investment objective

o 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

o a portfolio maturing in the year 2000

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

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

o 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
Transaction information 11
Shareholder benefits 14
Purchases 17
Exchanges and redemptions 18
Trustees and Officers 20
Investment products and services 21
How to contact Scudder 22

4
<PAGE>

Investment objective

Scudder Zero Coupon 2000 Fund (the "Fund"), a diversified series of Scudder
Funds Trust (the "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 will be met or the targeted amount
will be obtained.

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 Kemper Investments, 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

As a matter of fundamental policy, the Fund may not make loans except through

6
<PAGE>

the lending of portfolio securities, the purchase of debt securities or
interests in indebtedness or through repurchase agreements. The Fund has adopted
a non-fundamental policy restricting the lending of portfolio securities to no
more than 5% of total assets.

A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund's combined 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 Corporation, or Aaa
or Aa by Moody's Investor Services, 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 after being
purchased by the Fund, 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.

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.

7
<PAGE>

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

Illiquid securities

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.

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.

8
<PAGE>

and it may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.

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, five 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 Zero Coupon 2000 Fund is a diversified series of Scudder Funds 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 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

9
<PAGE>

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 Kemper Investments,
Inc., a Delaware corporation formerly known as Scudder, Stevens & Clark, Inc.,
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 Massachusetts law.

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 April 30, 1999, and to take other action, to the extent necessary, to
maintain the annualized expenses of the Fund at not more than 1.00% of average
daily net assets.

For the fiscal year ended December 31, 1997, the Adviser maintained expenses at
not more than 1.00% of average daily net assets of the Fund and as a result did
not receive an investment management fee.

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 Kemper Investments, Inc. is located at Two International Place, Boston,
Massachusetts.

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,

10
<PAGE>

all purchases of shares of the Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.

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.

Custodian

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

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
requests by telephone prior to the expiration of the seven-day period will not
be accepted.

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.

11
<PAGE>

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.

12
<PAGE>

be redeemed at the net asset value calculated the following business day.

"QuickSell" 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 $100,000 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

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).

Purchase restrictions

Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of Fund shares (including exchanges) for any reason including 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

13
<PAGE>

may result in a gain or loss for income tax purposes.

Tax identification number

Minimum balances

A shareholder may open an account with at least $1,000, if an automatic
investment plan of $100/month is established. Shareholders who maintain a
non-fiduciary account balance of less than $2,500 in the Fund, without
establishing an automatic investment plan, will be assessed an annual $10.00 per
fund charge with the fee to be paid to the Fund. The $10.00 charge will not
apply to shareholders with a combined household account balance in any of the
Scudder Funds of $25,000 or more. The Fund reserves the right, following 60
days' written notice to shareholders, to redeem all shares in accounts below
$250, including accounts of new investors, where a reduction in value has
occurred due to a redemption or exchange out of the account. The Fund will mail
the proceeds of the redeemed account to the shareholder. Reductions in value
that result solely from market activity will not trigger an involuntary
redemption. Retirement accounts and certain other accounts will not be assessed
the $10.00 charge or be subject to automatic liquidation. Please refer to
"Exchanges and Redemptions--Other Information" in the Fund's combined Statement
of Additional Information for more information.

Third party transactions

Shareholder benefits

Experienced professional management

A team approach to investing

Scudder Zero Coupon 2000 Fund is managed by a team of 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 the Adviser's large staff of economists,
research analysts, traders, and other investment specialists who work in offices
across the United States and abroad. The Adviser believes its team approach
benefits Fund investors by bringing together many disciplines and leveraging its

14
<PAGE>

extensive resources. Stephen A. Wohler, Lead Portfolio Manager, joined the team
in 1994 and is also responsible for implementing the Fund's strategy. Mr. Wohler
has over 18 years' experience managing fixed-income investments and has been
with the Adviser since 1979. Timothy G. Raney, Portfolio Manager, joined the
team in 1998. Mr. Raney has eight years of investment industry experience. Mr.
Raney joined the Adviser in 1989 as a taxable securities trader and also played
a key role in the development of automated trade and compliance software.

SAIL(TM)--Scudder Automated Information Line

Investment flexibility

Personal Counsel(SM) -- A Managed Fund Portfolio Program

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.

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

15
<PAGE>

1-800-225-5163 if you wish to receive additional shareholder reports.

Newsletters

Scudder Investor Centers

As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor Centers in Boca Raton, Boston,
Chicago, New York and San Francisco.

T.D.D. service for the hearing impaired

16
<PAGE>

<TABLE>
<CAPTION>
Purchases

Opening Minimum initial investment: $2,500; IRAs $1,000
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.

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

The Scudder Funds The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291

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 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 Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed under Shareholder benefits.

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

</TABLE>

17
<PAGE>

Exchanges and redemptions

Exchanging Minimum investments: $2,500 to establish a new account;
shares $100 to exchange among existing accounts

A signature guarantee is required forredemptions over $100,000.
See Transaction information--Redeeming shares.

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

18
<PAGE>

Scudder tax-advantaged retirement plans

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

o 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 Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.

19
<PAGE>

Trustees and Officers

Daniel Pierce*
President and Trustee
Kathryn L. Quirk*
Trustee, Vice President and Assistant
Secretary
Henry P. Becton, Jr.
Trustee; President and General Manager,
WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; President, Driscoll Associates
Peter B. Freeman
Trustee; Corporate Director and Trustee
George M. Lovejoy, Jr.
Trustee; President and Director, Fifty
Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration,
Northeastern University, College of Business
Administration
Jean C. Tempel
Trustee; Director, Managing Partner,
Technology Equity Partners
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Stephen A. Wohler*
Vice President
Thomas F. McDonough*
Vice President, Secretary and
Assistant Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary

*Scudder Kemper Investments, Inc.

20
<PAGE>

Investment products and services

Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market
Series--Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**

U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund

Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income
Fund

Asset Allocation
- ----------------
Scudder Pathway Conservative
Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International
Portfolio

U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund

U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund

Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth
Fund
Scudder Development Fund
Scudder 21st Century Growth Fund

Regional
Scudder Greater Europe Growth
Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.

Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund

Education Accounts
- ------------------
Education IRA
UGMA/UTMA

21
<PAGE>

How to contact Scudder

Account Service and Information:
<S> <C>

For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163

For 24 hour account information, fund information, exchanges, and an
overview of all the services available to you

Scudder Electronic Account Services -- http://funds.scudder.com

For personalized information about your Scudder accounts, exchanges and redemptions

Scudder Automated Information Line (SAIL) -- 1-800-343-2890

Investment Information:

For information about the Scudder funds, including additional
applications and prospectuses, or for answers to investment questions

Scudder Investor Relations -- 1-800-225-2470
[email protected]

Scudder's World Wide Web Site -- http://funds.scudder.com

For establishing 401(k) and 403(b) plans

Scudder Defined Contribution Services -- 1-800-323-6105

Scudder Brokerage Services:

To receive information about this discount brokerage service and to obtain an application

Scudder Brokerage Services* -- 1-800-700-0820

Personal Counsel(SM) -- A Managed Fund Portfolio Program:

To receive information about this mutual fund portfolio guidance and management program

Personal Counsel from Scudder -- 1-800-700-0183

Please address all correspondence to:

The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291

Or Stop by a Scudder Investor Center:

Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:

Boca Raton Chicago San Francisco
Boston New York

<PAGE>

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 Which 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

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

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1998

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

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, 1998, 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.

<PAGE>

TABLE OF CONTENTS
Page

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...........................................................4
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
Master/feeder structure..................................................6
Specialized Investment Techniques........................................6
Investment Restrictions.................................................20

PURCHASES.....................................................................21
Additional Information About Opening An Account.........................21
Additional Information About Making Subsequent Investments..............22
Additional Information About Making Subsequent Investments by QuickBuy..22
Checks..................................................................22
Wire Transfer of Federal Funds..........................................23
Share Price.............................................................23
Share Certificates......................................................23
Other Information.......................................................23

EXCHANGES AND REDEMPTIONS.....................................................24
Exchanges...............................................................24
Redemption by Telephone.................................................25
Redemption By QuickSell.................................................25
Redemption by Mail or Fax...............................................26
Redemption by "Write-A-Check"...........................................26
Other Information.......................................................26

FEATURES AND SERVICES OFFERED BY THE FUNDS....................................27
The Pure No-Load(TM) Concept............................................27
Internet access.........................................................28
Dividend and Capital Gain Distribution Options..........................29
Diversification.........................................................29
Scudder Investor Centers................................................29
Reports to Shareholders.................................................29
Transaction Summaries...................................................29

THE SCUDDER FAMILY OF FUNDS...................................................30

SPECIAL PLAN ACCOUNTS.........................................................34
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension
Plans for Corporations and Self-Employed Individuals...............35
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for
Corporations and Self-Employed Individuals.........................35
Scudder IRA: Individual Retirement Account.............................35
Scudder Roth IRA: Individual Retirement Account........................36
Scudder 403(b) Plan.....................................................37
Automatic Withdrawal Plan...............................................37
Group or Salary Deduction Plan..........................................37
Automatic Investment Plan...............................................37
Uniform Transfers/Gifts to Minors Act...................................38

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................38

i
<PAGE>

TABLE OF CONTENTS (continued)
Page

PERFORMANCE INFORMATION.......................................................38
Average Annual Total Return.............................................39
Cumulative Total Return.................................................39
Total Return............................................................40
SEC Yields..............................................................40
Comparison of Fund Performance..........................................40

ORGANIZATION OF THE FUNDS.....................................................44

INVESTMENT ADVISER............................................................45
Personal Investments by Employees of the Adviser........................48

TRUSTEES AND OFFICERS.........................................................48

REMUNERATION..................................................................50
Responsibilities of the Board--Board and Committee Meetings.............50
Compensation of Officers and Trustees...................................51

DISTRIBUTOR...................................................................52

TAXES ........................................................................52

PORTFOLIO TRANSACTIONS........................................................56
Brokerage Commissions...................................................56
Portfolio Turnover......................................................57

NET ASSET VALUE...............................................................57

ADDITIONAL INFORMATION........................................................58
Experts.................................................................58
Shareholder Indemnification.............................................58
Other Information.......................................................58

FINANCIAL STATEMENTS..........................................................59

RATINGS OF CORPORATE BONDS....................................................60

GLOSSARY......................................................................61

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 diversified, pure no-load(TM) series, is referred to
herein as the "Trust." The Trust is an 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 each 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:

o 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;

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

o Mortgage-backed securities; and

o Other asset-backed securities.

Other eligible investments for the Fund are as follows:

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

o Privately placed obligations (including restricted securities); and

o 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, zero coupon
securities, illiquid securities, securities on a when-issued or forward delivery
basis and may engage in reverse repurchase agreements and dollar roll
transactions and strategic transactions. See "Specialized Investment Techniques"
and "Investment Restrictions" for more information.

<PAGE>

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.

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. It is impossible to accurately predict for how long such
alternative strategies will be utilized.

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 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
Corporation ("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 after being purchased by the Fund, 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 will be met or the
targeted amount will be obtained.

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<PAGE>

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.

The Fund matures on the third Friday of December 2000 (the "Target Date").
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.

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.

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.

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<PAGE>

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.

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.)

Total Ending Value(1) on a $1,000
Investment (Realized Yield)
Initial If reinvestment rates are(2):
Coupon Yield to
(Interest) Maturity Maturity 6% 8% 10% 12% 14%
- ---------- -------- -------- ----- ----- ------ ------ -----

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%)

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 therefore, 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.

- ----------
(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.

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<PAGE>

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.

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 after being
purchased by the Fund, 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.")

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<PAGE>

Master/feeder structure

The Board of Trustees has the discretion to retain the current
distribution arrangement for each Fund while investing in a master fund in a
master/feeder fund structure as described below.

A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.

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.

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. When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
price volatility, affecting the price volatility of Fund's shares.

When interest rates rise, mortgage prepayment rates tend to decline, thus
lengthening the life of mortgage-related securities and increasing their price
volatility, affecting the price volatility of a Fund's shares.

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. Because principal may be prepared at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. Because principal may be prepaid at
any time, mortgage-backed securities involve significantly greater price and
yield volatility than traditional debt securities. 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.

6
<PAGE>

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.

Collateralized Mortgage Obligations ("CMOs"). 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. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.

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

7
<PAGE>

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.

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 Receivables(SM) ("CARS(SM)").
CARS(SM) 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 CARS(SM) 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 CARS(SM) 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

8
<PAGE>

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
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.

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<PAGE>

Trust Preferred Securities. Short Term Bond Fund may invest in Trust Preferred
Securities, which are hybrid instruments issued by a special purpose trust (the
"Special Trust"), the entire equity interest of which is owned by a single
issuer. The proceeds of the issuance to the Fund of Trust Preferred Securities
are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.

If payments on the underlying junior subordinated debentures held by the
Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Fund, would be required to accrue daily for Federal income tax purposes, their
share of the stated interest and the de minimis OID on the debentures
(regardless of whether the Fund receives any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Fund, to sell their holdings.

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

Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" (TIGRS(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the Division of Investment
Management of the SEC no longer considers such privately stripped obligations to
be U.S. Government securities, as defined in the 1940 Act.

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

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<PAGE>

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

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
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 or other liquid assets 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

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<PAGE>

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 Trust, on behalf of Short Term Bond 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
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

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<PAGE>

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
or liquid assets maintained on a current basis at an amount at least equal to
the market value and accrued interest of the securities loaned. The Fund has the
right to call a loan and obtain the securities loaned on 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 5% of the
value of the Fund's total assets at the time any loan is made.

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

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<PAGE>

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 to create leveraged exposure in the Fund.

Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the 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.

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

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<PAGE>

of the parties to such options. The discussion below uses the OCC as an example,
but is also applicable to other financial intermediaries.

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

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

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

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

Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the 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 15% of its net 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.

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<PAGE>

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
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

16
<PAGE>

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.

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

17
<PAGE>

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.

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.

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<PAGE>

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

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

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

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

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

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

Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by

19
<PAGE>

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 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.

Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, a Fund.

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

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

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

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

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

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

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

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

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

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

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

20
<PAGE>

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

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

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

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

(6) lend portfolio securities in an amount greater than 5% of its total
assets.

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.

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 $2,500 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 ($2,500 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 $2,500 under certain
special plan accounts.

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<PAGE>

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 QuickBuy

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 QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
Exchange, normally 4 p.m. eastern time. Proceeds in the amount of your purchase
will be transferred from your bank checking account 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. QuickBuy 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 QuickBuy 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.
QuickBuy transactions are not available for most retirement plan accounts.
However, QuickBuy transactions are available for Scudder IRA accounts.

In order to request purchases by QuickBuy, 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 QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow for 15 days for this service to be available.

Each Fund 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 a Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.

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.

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<PAGE>

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 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.

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

The Funds have authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Funds' shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on each Fund's behalf. Orders for purchase or redemption will be deemed
to have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at that Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of a Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Funds' principal

23
<PAGE>

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

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 $2,500. 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
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.

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<PAGE>

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. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.

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 $100,000 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 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 QuickSell

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 QuickSell program may sell shares of a Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the

25
<PAGE>

Exchange, normally 4:00 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell 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. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.

In order to request redemptions by QuickSell, 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 QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell 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
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.

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<PAGE>

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 $2,500 in value, the Trust may notify the shareholder that, unless the
account balance is brought up to at least $2,500, 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
$2,500 before any action will be taken. No transfer from an existing to a new
Scudder fund account should be for less than $2,500; 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 Scudder Family of
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.

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 funds in the Scudder Family of Funds do not pay any asset-based
sales charges or service fees, Scudder developed and trademarked the phrase pure
no-load(TM) to distinguish funds in the Scudder Family of 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 Family of Funds 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.

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<PAGE>

===============================================================================
Scudder No-Load Fund
Pure No-Load(TM) 8.50% Load Load Fund with with 0.25%
YEARS Fund Fund 0.75% 12b-1 Fee 12b-1 Fee
- --------------------------------------------------------------------------------
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
===============================================================================

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.

Internet access

World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.

The site is designed for interactivity, simplicity and maneuverability. A
section entitled "Planning Resources" provides information on asset allocation,
tuition, and retirement planning to users who fill out interactive "worksheets."
Investors can easily establish a "Personal Page," that presents price
information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.

Scudder has communicated with shareholders and other interested parties on
Prodigy since 1988 and has participated since 1994 in GALT's Networth "financial
marketplace" site on the Internet. The firm made Scudder Funds information
available on America Online in early 1996.

Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.

Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.

An Account Activity option reveals a financial history of transactions for
an account, with trade dates, type and amount of transaction, share price and
number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.

A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.

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<PAGE>

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.

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 Investor Centers

Investors may visit any of the 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.

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<PAGE>

THE SCUDDER FAMILY OF FUNDS

(See "Investment products and services" in the Funds' prospectuses.)

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.

MONEY MARKET

Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current income.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible, and declares
dividends daily.

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. SCIT seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not
be possible, and declares dividends daily.

Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.

Scudder Government Money Market Series seeks to provide investors with as
high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of shares
of this Fund is not within the Scudder Family of Funds.

TAX FREE MONEY MARKET

Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt from
regular federal income tax and stability of principal through investments
primarily in municipal securities. STFMF seeks to maintain a constant net
asset value of $1.00 per share, although in extreme circumstances this may
not be possible.

Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal income
tax by reason of federal law as is consistent with its investment policies
and with preservation of capital and liquidity. The Fund seeks to maintain
a constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.

Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.

Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There can
be no assurance that the stable net asset value will be maintained.

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

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<PAGE>

TAX FREE

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 Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.

Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.

Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.

Scudder California Tax Free Fundseeks to provide California taxpayers with
income exempt from both California State personal income and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of California municipal securities.

Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.

Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.

Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.

Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income tax.
The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.

Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.

U.S. INCOME

Scudder 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.

Scudder GNMA Fund seeks to provide high current income primarily from U.S.
Government guaranteed mortgage-backed (Ginnie Mae) securities.

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

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<PAGE>

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

Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.

GLOBAL INCOME

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 International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. 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 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 by governments and
corporations in emerging markets.

ASSET ALLOCATION

Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will have
some exposure to Scudder equity mutual funds.

Scudder Pathway Series: Balanced Portfolio seeks to provide investors with
a balance of growth and income by investing in a select mix of Scudder
money market, bond and equity mutual funds.

Scudder Pathway Series: Growth Portfolio seeks to provide investors with
long-term growth of capital. In pursuing this objective, the Portfolio
will, under normal market conditions, invest predominantly in a select mix
of Scudder equity mutual funds designed to provide long-term growth.

Scudder Pathway Series: International Portfolio seeks maximum total return
for investors. Total return consists of any capital appreciation plus
dividend income and interest. To achieve this objective, the Portfolio
invests in a select mix of established international and global Scudder
funds.

U.S. GROWTH AND INCOME

Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund also
seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.

Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.

Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index.

Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies in
the real estate industry.

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<PAGE>

U.S. GROWTH

Value

Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.

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

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

Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.

Growth

Scudder Classic Growth Fund** seeks to provide long-term growth of capital
with reduced share price volatility compared to other growth mutual funds.

Scudder Large Company 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 Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.

Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies poised
to be leaders in the 21st century.

SCUDDER CHOICE SERIES

Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.

Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related to
the treatment or prevention of diseases and other medical problems.

Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the development,
production or distribution of technology-related products or services.

GLOBAL GROWTH

Worldwide

Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.

Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.

- ----------
** Only the Scudder Shares are part of the Scudder Family of Funds.

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Scudder International Fund seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities.

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 Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the globe.

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

Regional

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

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

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

The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts) 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; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.

SPECIAL PLAN ACCOUNTS

(See "Scudder tax-advantaged retirement plans," "Purchases--By Automatic
Investment Plan" and "Exchanges and redemptions--By Automatic
Withdrawal Plan" in the 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. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. 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.

- ----------
** Only the Scudder Shares are part of the Scudder Family of Funds.

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Shares of the Fund may also be a permitted investment under profit sharing
and pension plans and IRAs 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.

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 as to Form.

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 Funds 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 $2,000 per individual for married couples if only one spouse has
earned income). 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.)

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Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution

- -------------------------------------------------------------------------
Starting
Age of Annual Rate of Return
------------------------------------------------------
Contributions 5% 10% 15%
- -------------------------------------------------------------------------
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

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.)

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
Age of Annual Rate of Return
------------------------------------------------------
Contributions 5% 10% 15%
- -------------------------------------------------------------------------
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

Scudder Roth IRA: Individual Retirement Account

Shares of the Funds may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.

A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.

An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.

All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, excess medical expenses, the
purchase of health insurance for an unemployed individual and education
expenses.

An individual with an income of less than $100,000 (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.

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<PAGE>

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. 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 ten
days prior to the date of the first automatic withdrawal. 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,
Corporation] 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
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.

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<PAGE>

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, 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. 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:

38
<PAGE>

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. 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, 1997

One Year Five Years Ten Years

Short Term Bond Fund 6.17% 5.11% 7.43%(1)
Zero Coupon 2000 Fund* 6.53% 6.40% 9.55%

(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.

* If the Adviser had not temporarily maintained expenses, the average
annual total return for the one year, five year and life periods 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):

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.

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<PAGE>

Cumulative Total Return for periods ended December 31, 1997

One Year Five Years Ten Years

Short Term Bond Fund 6.17% 28.30% 104.74%(1)
Zero Coupon 2000 Fund* 6.53% 36.38% 148.99%

(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.

* If the Adviser had not temporarily maintained expenses, the
cumulative total return for the one year, five year and life of Fund
periods 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, sometimes
referred to as the Fund's "SEC 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, 1997
for Short Term Bond Fund was 6.06%.

The SEC net annualized yield for the 30-day period ended December 31, 1997
for Zero Coupon 2000 Fund was 4.86%.

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.

Comparison of Fund 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.

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<PAGE>

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
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

41
<PAGE>

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.

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.

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

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

42
<PAGE>

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

Investor's Business 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.

SmartMoney, 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.

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.

43
<PAGE>

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

Worth, a national publication issued 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 diversified 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.

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.

44
<PAGE>

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 Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Funds. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") entered into
an agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder
and Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc.

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

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 Global High Income
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 Pathway Series, 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,
The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc., The Japan
Fund, Inc. and Scudder Spain and Portugal 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 $13 billion and includes the AARP Growth
Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed Investment
Portfolios Trust and AARP Cash Investment Funds.

Pursuant to an Agreement between Scudder Kemper Investments, Inc. and AMA
Solutions, Inc., a subsidiary of the American Medical Association (the "AMA"),
dated May 9, 1997, the Adviser has agreed, subject to applicable state
regulations, to pay AMA Solutions, Inc. royalties in an amount equal to 5% of
the management fee received by the Adviser with respect to assets invested by
AMA members in Scudder funds in connection with the AMA InvestmentLink(SM)
Program. The Adviser will also pay AMA Solutions, Inc. a general monthly fee,
currently in the amount of $833. The AMA and AMA Solutions, Inc. are not engaged
in the business of providing investment advice

45
<PAGE>

and neither is registered as an investment adviser or broker/dealer under
federal securities laws. Any person who participates in the AMA
InvestmentLink(SM) Program will be a customer of the Adviser (or of a subsidiary
thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLink(SM) is a
service mark of AMA Solutions, Inc.

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

Certain investments may be appropriate for 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 between each of Scudder Short Term
Bond Fund and Scudder Zero Coupon 2000 Fund and Scudder were last approved by
the Trust's Trustees on August 6, 1998. Because the transaction between Scudder
and Zurich resulted in the assignment of each Fund's investment management
agreement with Scudder, the agreements automatically terminated at the
consummation of the transaction. In anticipation of the transaction, however,
new investment management agreements (the "Agreements") between each of the
Funds and the Adviser were approved by the Trust's Trustees on August 14, 1997.
At the special meeting of the Funds' shareholders held on October 24, 1997, the
shareholders also approved the Agreements. The new Agreements became effective
as of December 31, 1997 and will be in effect for an initial term ending on
September 30, 1998. The Agreements are in all material respects on the same
terms as the previous investment management agreements which they supersede. The
Agreements incorporate conforming changes which promote consistency among all of
the funds advised by the Adviser and which permit ease of administration. The
Agreements will continue in effect from year to year thereafter only if their
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to the Agreements 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 a vote of the Trust's Trustees on behalf of the Funds or
of a majority of the outstanding voting securities of the Fund. The Agreements
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 their
assignment.

Under each Agreement, the Adviser regularly provides a Fund with
continuing investment management for the Fund's portfolio consistent with a
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold, and what portion of a 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 a 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 Funds (such as the Funds' 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 each Fund's federal, state and local tax returns; preparing and filing each
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

46
<PAGE>

securities laws; maintaining each Fund's books and records to the extent not
otherwise maintained by a third party; assisting in establishing accounting
policies for each 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 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. For
the fiscal years ended December 31, 1995, 1996 and 1997, the investment
management fees for Short Term Bond Fund amounted to $9,529,973, $8,232,708 and
$6,769,577, 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, 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. For
the fiscal year ended December 31, 1996, the management fee aggregated $158,725,
of which $120,119 was not imposed. For the fiscal year ended December 31, 1997,
the management fee aggregated $129,600, all of which was not imposed.

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 April 1, 1998. 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 expense ratio, the ratio of operating expenses to average net assets,
for Short Term Bond Fund was 0.75%, 0.80% and 0.53% for the fiscal years ended
December 31, 1995, 1996 and 1997, respectively.

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,
1995, 1996 and 1997.

The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the

47
<PAGE>

Scudder name and marks as part of its name, and to use the Scudder Marks in the
Trust's investment products and services.

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.

The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance.

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.)

TO BE UPDATED

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

<S> <C> <C> <C>
Daniel Pierce (64)*#+ President and Managing Director of Scudder Director, Vice
Trustee Kemper Investments, Inc. President and Assistant
Treasurer

Henry P. Becton, Jr. (54) Trustee President and General Manager, --
125 Western Ave. WGBH Educational Foundation
Allston, MA 02134
</TABLE>

48
<PAGE>

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

<S> <C> <C> <C>
Dawn-Marie Driscoll (51) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33904 College; President, Driscoll
Associates

Peter B. Freeman (65) Trustee Director, The A.H. Belo Company; --
100 Alumni Avenue Trustee, Eastern Utilities
Providence, RI 02906 Associates (public utility
holding company); Director,
AMICA Life Insurance Co.;
Director, AMICA Insurance Co.

George M. Lovejoy, Jr. (68) Trustee President and Director, Fifty --
50 Congress Street Associates (real estate
Suite 543 investment trust)
Boston, MA 02109

Wesley W. Marple, Jr. (66) Trustee Professor of Business --
Northeastern University Administration
413 Hayden Hall Northeastern University, College
360 Huntington Ave. of Business Administration
Boston, MA 02115

Kathryn L. Quirk (45)*#++ Trustee, Vice Managing Director of Scudder Director, Assistant
President and Kemper Investments, Inc. Treasurer and Senior
Assistant Secretary Vice President

Jean C. Tempel (55) Trustee Managing Partner, Technology --
Technology Equity Partners Equity Partners
Ten Post Office Square
Suite 1325
Boston, MA 02109

John R. Hebble (39)+ Assistant Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.

Jerard K. Hartman (65)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.

Thomas W. Joseph (59)+ Vice President Senior Vice President of Scudder Vice President,
Kemper Investments, Inc. Director, Treasurer and
Assistant Clerk

Thomas F. McDonough (51)+ Vice President, Senior Vice President of Scudder Assistant Clerk
Secretary and Kemper Investments, Inc.
Treasurer
</TABLE>

49
<PAGE>

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

<S> <C> <C> <C>
Caroline Pearson (36)+ Assistant Secretary Vice President of Scudder Kemper --
Investments, Inc.

Steven A. Wohler (49) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
</TABLE>

* Mr. Pierce and Ms. Quirk 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.
# Mr. Pierce and Ms. Quirk are members of the Executive Committee, which may
exercise all of the powers of the Trustees when the Trustees are not in
session.
+ Address: Two International Place, Boston, Massachusetts 02110
++ Address: 345 Park Avenue, New York, New York 10154

As of March 31, 1998, 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, 1998, 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) 32,020 shares or, 1.90% of the outstanding
shares of the Fund.

Certain accounts for which the Adviser acts as investment adviser owned
6,736,079 shares of Short Term Bond Fund in the aggregate or 6.58% of the
outstanding shares on March 31, 1998. 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, 1998, 173,906 shares in the aggregate or 10.33% 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 knowledge of the Funds, as of March 31, 1998, 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 respect to other Scudder funds.

REMUNERATION

Responsibilities of the Board--Board and Committee Meetings

The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. (the "Adviser"). These "Independent Trustees"
have primary responsibility for assuring that each Fund is managed in the best
interests of its shareholders.

The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Funds' investment performance, the quality and efficiency of the various other
services provided,

50
<PAGE>

costs incurred by the Adviser and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by each Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.

All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.

The Independent Trustees met two times during 1997, including Board and
Committee meetings and meetings to review each Fund's contractual arrangements
as described above.

Compensation of Officers and Trustees

The Independent Trustees receive the following compensation from the Funds
of Scudder Funds Trust: an annual trustee's fee of $2,400 for a Fund in which
assets do not exceed $100 million, $4,800 for assets which exceed $100 million,
but not exceeding $1 billion, and $7,200 if assets exceed $1 billion; a fee of
$150 for attendance at each board meeting, audit committee meeting, or other
meeting held for the purposes of considering arrangements between the Trust for
the Funds and the Adviser or any affiliate of the Adviser; $75 for any other
committee meeting (although in some cases the Independent Trustees have waived
committee meeting fees); and reimbursement of expenses incurred for travel to
and from Board Meetings. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences, service on special trustee
task forces or subcommittees or service as lead or liaison trustee. Independent
Trustees do not receive any employee benefits such as pension, retirement or
health insurance.

The Independent Trustees also serve in the same capacity for other funds
managed by Scudder. These funds differ broadly in type an complexity and in some
cases have substantially different Trustee fee schedules. The following table
shows the aggregate compensation received by each Independent Trustee during
1997 from the Trust and from all of Scudder funds as a group.

Name Scudder Funds Trust* All Scudder Funds
---- -------------------- -----------------

Henry P. Becton, Jr.** $2,022 $113,974 (23 funds)

Dawn-Marie Driscoll** $2,022 $107,142 (23 funds)

Peter B. Freeman,** $9,215 $137,011 (42 funds)

George M. Lovejoy, Jr.** $2,022 $138,533 (21 funds)

Wesley Marple, Jr.** $2,022 $120,549 (22 funds)

Jean C. Tempel** $2,022 $121,924 (22 funds)

* Scudder Funds Trust consists of two Funds: Scudder Short Term Bond Fund
and Scudder Zero Coupon 2000 Fund.

** Elected Trustee on October 24, 1997

Members of the Board of Trustees who are employees of the Adviser or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.

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DISTRIBUTOR

The Trust, on behalf of each Fund, 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 August 12, 1997 and will
continue in effect until September 30, 1998.

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 redemption's (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.

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 has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute and has qualified as
such since its inception. Each Fund intends to continue to qualify for such
treatment. Such qualification does not involve governmental supervision or
management of investment practices or policy.

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.

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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
payment to shareholders during a calendar year of distributions representing 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 company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of the Fund.

If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains taxable to individual shareholders at a maximum 20% or 28% capital gains
rate (depending on the Fund's holding period for the assets giving rise to the
gain), will be able to claim a proportionate share of federal income taxes paid
by the Fund on such gains as a credit against the shareholder's federal income
tax liability, and will be entitled to increase the adjusted tax basis of the
shareholder's Fund shares by the difference between the shareholder's pro rata
share of such gains and the shareholder's tax credit. If a Fund makes such an
election, it may not be treated as having met the excise tax distribution
requirement.

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

Dividends from domestic corporations are not expected to comprise a
substantial part of either of the Fund's gross income. If any such dividends
constitute a portion of a Fund's gross income, a portion of the income
distributions of a Fund may be eligible for the 70% deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law and is eliminated if
either those shares or the shares of a Fund are deemed to have been held by the
Fund or the shareholder, as the case may be, for less than 46 days during the
90-day period beginning 45 days before the shares become ex-dividend.

Properly designated distributions of the excess of net long-term capital
gain over net short-term capital loss are taxable to individual shareholders at
a maximum 20% or 28% capital gains rate (depending on a Fund's holding period
for the assets giving rise to the 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 on the reinvestment
date.

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

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

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<PAGE>

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 ($2,000 per individual for married couples
if only one spouse has earned income) for that year. There are special rules for
determining how withdrawals are to be taxed if an IRA contains both deductible
and nondeductible amounts. In general, a proportionate amount of each withdrawal
will be deemed to be made from nondeductible contributions; amounts treated as a
return of nondeductible contributions will not be taxable. Also, annual
contributions may be made to a spousal IRA even if the spouse has earnings in a
given year if the spouse elects to be treated as having no earnings (for IRA
contribution purposes) for the year.

Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as 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.

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

Over-the-counter options on debt securities written or purchased by the
Fund will be subject to tax under Section 1234 of the Code. In general, no loss
will be 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 the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in the Fund's portfolio similar to the property underlying the put option. If
the Fund writes an option, no gain is recognized upon its receipt of a premium.
If a call option lapses or is closed out, any gain or loss is treated as
short-term capital gain or loss. If the option is exercised, the character of
the gain or loss depends on the holding period of the underlying stock.

Many futures and forward contracts entered into by a Fund and listed
nonequity options written or purchased by a Fund (including options on debt
securities, options on futures contracts, options on securities indices and
options on currencies), 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 capital gain or loss, and on the last trading day of the
Fund's fiscal year, 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 capital gain or loss. Under Section 988 of the Code,
discussed below, foreign currency gain or loss from foreign currency-related
forward contracts, certain futures and options and similar financial instruments
entered into or acquired by a Fund will be treated as ordinary income or loss.

Positions of a Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or nonequity option or
other position governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position will be treated as a
"mixed straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. Each Fund will
monitor its transactions in options, foreign currency futures and forward
contracts and may make certain tax elections in connection with these
investments.

Notwithstanding any of the foregoing, recent tax law changes may require a
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or

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substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options, futures and
forward contracts and short sales) in stock, partnership interests, certain
actively traded trust instruments and certain debt instruments. Constructive
sale treatment of appreciated financial positions does not apply to certain
transactions closed in the 90-day period ending with the 30th day after the
close of the Fund's taxable year, if certain conditions are met.

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

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

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

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

A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to a Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount imputed income will
comprise a part of the investment company taxable income of the Fund which must
be distributed to shareholders in order to maintain the qualification of the
Fund as a regulated investment company and to avoid federal income tax at the
Fund's level.

Gain derived by a Fund from the disposition of any market discount bonds
(i.e., bonds purchased other than at original issue, where the face value of the
bonds exceeds their purchase price), including tax-exempt market discount bonds,
held by the Fund will be taxed as ordinary income to the extent of the accrued
market discount on the bonds, unless the Fund elects to include the market
discount in income as it accrues.

Each Fund will be required to report to the Internal Revenue Service (the
"IRS") all distributions of investment company taxable income and capital gains
as well as gross proceeds from the redemption or exchange of Fund shares, except
in the case of certain exempt shareholders. Under the backup withholding
provisions of Section 3406 of the Code, distributions of investment company
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

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<PAGE>

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.

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

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

Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.

PORTFOLIO TRANSACTIONS

Brokerage Commissions

Allocation of brokerage is supervised by the Adviser.

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 where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through 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. The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.

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

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

To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.

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<PAGE>

Although certain research, market and statistical information from
broker/dealers may be useful to a Fund and to the Adviser, it is the opinion of
the Adviser that such information only 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 a Fund, and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to a Fund.

The Trustees 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 the 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 61.8% and 39.4% for the fiscal years ended December 31, 1996 and 1997,
respectively. The portfolio turnover rate for Zero Coupon 2000 Fund was 85.2%
and 5.74% for the fiscal years ended December 31, 1996 and 1997, respectively.

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, Martin Luther King, Jr. 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 Nasdaq
Stock Market ("Nasdaq") system is valued at its most recent sale price. Lacking
any sales, the security is valued at the most recent bid quotation. The value of
an equity security not quoted on 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.

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

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.

ADDITIONAL INFORMATION

Experts

The Financial Highlights of each Fund included in the Fund's prospectus,
and the Financial Statements incorporated by reference in the Statement of
Additional Information will be 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 upon their
authority as experts in accounting and auditing. Coopers & Lybrand, L.L.P. is
responsible for performing annual audits of the financial statements and
financial highlights of each Fund in accordance with Generally Accepted Auditing
Standards, and the preparation of federal tax returns.

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 each Fund.

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, is responsible for
determining the daily net asset value per share and maintaining the portfolio
and general accounting records of the Funds.

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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, plus transaction
holding charges. Scudder Fund Accounting Corporation charged Short Term Bond
Fund an aggregate fee of $173,925, of which $13,765 was unpaid at December 31,
1997. Scudder Fund Accounting Corporation charged Zero Coupon 2000 Fund $26,394,
of which $11,106 was not imposed, and $10,769 was unpaid at December 31, 1997.

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 $26.00 for each account maintained for a shareholder. The fees
incurred by Short Term Bond Fund for the fiscal year ended December 31, 1997
amounted to $1,966,378, of which $144,271 was unpaid at December 31, 1997. The
fees incurred by Zero Coupon 2000 Fund for the fiscal year ended December 31,
1997 amounted to $46,588, of which $19,604 was not imposed, and $7,723 was
unpaid at December 31, 1997.

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 $29.00 for each account maintained. The fees
incurred by Short Term Bond for the fiscal year ended December 31, 1997 were
$611,127, of which $48,871 was unpaid at December 31, 1997. The fees incurred by
Zero Coupon 2000 Fund for the fiscal year ended December 31, 1997 amounted to
$8,564, of which $3,604 was not imposed, and $111 was unpaid at December 31,
1997

This Statement of Additional Information combines the information of both
Scudder Short Term Bond Fund and Scudder Zero Coupon 2000 Fund. Each Fund,
through its individual prospectus, offers only its own shares, yet it is
possible that one Fund might become liable for a misstatement regarding the
other Fund. The Trustees of each Fund have considered this, and have approved
the use of a combined Statement of Additional Information.

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, Two International Place, Boston, Massachusetts 02110,
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,
Financial Highlights and notes to financial statements, attached hereto in the
Annual Report to the Shareholders of the Fund dated December 31, 1997, are
incorporated by reference herein and are hereby deemed to be a part of this
Statement of Additional Information.

59
<PAGE>

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,
Financial Highlights and notes to financial statements, attached hereto in the
Annual Report to the Shareholders of the Fund dated December 31, 1997, are
incorporated by reference herein and are hereby deemed to be a part of this
Statement of Additional Information.

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.

60
<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.

61
<PAGE>

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.

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.

62
<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.")

63
<PAGE>

Scudder
Short Term
Bond Fund

Annual Report
December 31, 1997

Pure No-Load(TM) Funds

Seeks to provide a high level of income consistent with a high degree of
principal stability.

A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.

SCUDDER (logo)

<PAGE>

Scudder Short Term Bond Fund
- --------------------------------------------------------------------------------
Date of Inception: 4/24/84 Total Net Assets as of Ticker Symbol: SCSTX
12/31/97: $1,165.5 million
- --------------------------------------------------------------------------------

o The Fund ended the year with a total return of 6.17%, which nearly matched the
6.19% return of the average short term bond fund, as tracked by Lipper
Analytical Services. The Fund's 30-day net annualized SEC yield at the end of
December was 6.06%, compared with 5.12% on average for the taxable money market
funds tracked by IBC/Donoghue.

o Throughout the year, the Fund continued to hold a diversified mix of
short-maturity alternatives to U.S. Treasuries to meet the goals of high current
income with minimum share-price fluctuation.

o A relatively neutral position was maintained with respect to interest rate
risk over the period, keeping overall portfolio duration within a range of 1.6
to 1.8 years.

o The Fund maintained its high quality orientation, with over 66% of portfolio
holdings rated AA or better by Standard & Poor's and/or Moody's at the end of
December.

Table of Contents

3 Letter from the Fund's President 19 Financial Highlights
4 Performance Update 20 Notes to Financial Statements
5 Portfolio Summary 24 Report of Independent Accountants
6 Portfolio Management Discussion 25 Shareholder Meeting Results
9 Glossary of Investment Terms 28 Officers and Trustees
10 Investment Portfolio 29 Investment Products and Services
16 Financial Statements 30 Scudder Solutions

2 - Scudder Short Term Bond Fund

<PAGE>
Letter from the Fund's President

Dear Shareholders,

The U.S. economy -- buoyed by moderate growth, declining unemployment, low
inflation, and healthy corporate profits -- continued to enjoy a strong
performance during Scudder Short Term Bond Fund's 1997 fiscal year. In fact, the
U.S. economy can now lay claim to one of the longest expansions on record -- 6
1/2 years -- a growth trend which shows few signs of ending soon.

Throughout the period, stocks were on an upward climb thanks to strong
positive fundamentals in the U.S. economy. On the fixed-income front, markets
benefited from several positive forces, including declining inflation, lower
federal deficits and a strong dollar.

Although inflation remains under control, there is still a chance that the
Federal Reserve Board could raise interest rates in the coming months, which
would quickly affect market returns. This conclusion is based on the belief that
the Federal Reserve Board could view the tight labor market as a potential
inflation danger (unemployment levels are at a 25-year low) and that the
economy's underlying strength may lead to even stronger growth.

Rest assured, however, that your Fund is managed for a high degree of
principal stability -- as well as high current income -- no matter what the
market conditions. In fact, the Fund's focus on short-maturity alternatives to
U.S. Treasuries helped lead to a competitive 6.17% total return while helping to
shield it from significant share-price volatility.

Finally, as you may know, the Fund's investment adviser has changed its
name to Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc.,
pursuant to the acquisition of a majority interest in Scudder, Stevens & Clark
by Zurich Insurance Company, and the combining of Scudder's business with that
of Zurich Kemper Investments, Inc. In addition, the Fund has a new management
team as of January 1, 1998, Stephen A. Wohler and Robert S. Cessine. We are
pleased that they are bringing their extensive knowledge and expertise to the
Fund.

Thank you for choosing Scudder Short Term Bond Fund to help meet your
investment needs. If you should have any questions regarding your investment, or
any of the Scudder Funds, please do not hesitate to call Investor Relations at
1-800-225-2470, or visit our Web site at http://funds.scudder.com.

Sincerely,

/s/Daniel Pierce

Daniel Pierce
President,
Scudder Short Term Bond Fund

3 - Scudder Short Term Bond Fund

<PAGE>

PERFORMANCE UPDATE as of December 31, 1997
- -----------------------------------------------------------------
FUND INDEX COMPARISONS
- -----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/97 $10,000 Cumulative Annual
- ---------------------------------------
SCUDDER SHORT TERM BOND FUND
- ---------------------------------------
1 Year $ 10,617 6.17% 6.67%
5 Year $ 12,830 28.30% 5.11%
10 Year* $ 20,474 104.74% 7.43%

- ---------------------------------------
SALOMON BROTHERS INC. BROAD INVESTMENT
GRADE BOND INDEX (1-3 YEARS)
- ---------------------------------------
1 Year $ 10,667 6.67% 6.67%
5 Year $ 13,219 32.19% 5.74%
10 Year* $ 20,376 103.76% 7.37%
- ---------------------------------------

- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------

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
- ----------------------
'87 $10,000
'88 $10,631
'89 $12,042
'90 $13,233
'91 $15,135
'92 $15,957
'93 $17,263
'94 $16,767
'95 $18,569
'96 $19,285
'97 $20,474

SALOMON BROTHERS INC. TREASURY/GOVERNMENT
SPONSORED CORPORATE INDEX (1-3 YEARS)
Year Amount
- ----------------------
'87 $10,000
'88 $10,639
'89 $11,801
'90 $12,948
'91 $14,481
'92 $15,415
'93 $16,281
'94 $16,380
'95 $18,164
'96 $19,103
'97 $20,376

Salomon Brothers Inc. Treasury/Government Sponsored Corporate 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>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 11.19 $ 11.71 $ 11.72 $ 12.25 $ 11.93 $ 12.01 $ 10.91 $ 11.35 $ 11.05 $ 11.04
INCOME DIVIDENDS.. $ .73 $ .83 $ 1.09 $ 1.08 $ .96 $ .80 $ .76 $ .71 $ .72 $ .67
CAPITAL GAINS
DISTRIBUTIONS..... $ -- $ .09 $ -- $ -- $ -- $ .07 $ -- $ -- $ -- $ --
FUND TOTAL
RETURN (%)........ 6.10 13.20 9.88 14.38 5.43 8.18 -2.87 10.74 3.86 6.17
INDEX TOTAL
RETURN (%)........ 6.40 10.93 9.70 11.85 6.44 5.63 .60 10.89 5.16 6.67
</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
19.
*The Fund, with its current name and 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
objective, the cumulative and average annual returns are 78.64% and 7.06%,
respectively.

4 - Scudder Short Term Bond Fund

<PAGE>

PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Asset-Backed Securities 24%
Collateralized Mortgage Obligations 20%
Corporate Bonds 19%
Gov't National Mortgage Association 17%
U.S. Gov't Agency Pass-throughs 11%
U.S. Gov't Obligations 6%
Cash Equivalents 3%
- -------------------------------------------
100%
- -------------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

Mortgage-backed securities and
corporate issues were significant
contributors to Fund performance.
- ---------------------------------------------------------------------------
QUALITY
- ---------------------------------------------------------------------------
U.S. Gov't & Agencies 36%
AAA* 28%
AA 2%
A 3%
BBB 30%
Not Rated 1%
- -------------------------------------------
100%
- -------------------------------------------
Weighted average quality: AA
*Category includes cash equivalents

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

Issues that were believed to have the
potential for future credit rating
upgrades were emphasized.

- ---------------------------------------------------------------------------
EFFECTIVE MATURITY
- ---------------------------------------------------------------------------
Under 1 year 10%
1 - 5 years 70%
5 - 8 years 14%
8 years or greater 6%
- -------------------------------------------
100%
- -------------------------------------------
Weighted average effective maturity: 2.65 years

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

The Fund maintained a relatively
neutral position on maturities,
with a portfolio duration range
of 1.6 to 1.8 years during the
period.

For more complete details about the Fund's investment portfolio,
see page 10. A monthly Investment Portfolio Summary and quarterly Portfolio
Holdings are available upon request.

5 - Scudder Short Term Bond Fund

<PAGE>
Portfolio Management Discussion

We asked Scudder Short Term Bond Fund's portfolio management team, Thomas Poor,
Scott Dolan, and Susan Martland, to discuss fund strategy and market conditions
over the fiscal year.

Q: How did Scudder Short Term Bond Fund perform in 1997?

A: Throughout the period, Scudder Short Term Bond Fund continued to provide
investors with a competitive, high-yielding alternative for their short-term
cash reserves.

The Fund's 30-day net annualized SEC yield at the end of December was 6.06%,
compared with 5.10% on average for the taxable money market funds tracked by
IBC/Donoghue, an independent research firm. Scudder Short Term Bond Fund
historically has maintained a comfortable yield advantage over taxable money
market funds. Of course, money market funds seek to maintain a stable principal
value, whereas your Fund's net asset value will fluctuate with changing market
conditions.

The Fund ended the year with a total return of 6.17%, which nearly matched the
6.19% return of the average short term bond fund, as tracked by Lipper
Analytical Services, an independent ranking service. The Fund's benchmark, the
unmanaged Salomon Brothers Inc. Treasury/Government Sponsored Corporate Index (1
to 3 years), returned 6.67% for the same period.

Q: How would you describe the investment climate over the past 12 months?

A: Interest rates in general dropped during the period -- yields on 2-year and
30-year Treasuries fell almost a quarter of a percentage point and
three-quarters of a percentage point, respectively -- with the yield curve
flattening. At year-end, rates for short-term and long-term Treasuries differed
by only 28 basis points.

Several factors were at the heart of the interest rate drop. Inflation remained
in check throughout the year, and shows no sign of staging a comeback. In fact,
consensus economic forecasts for 1998 estimate consumer price inflation at
around 1.8%. The financial crisis in Southeast Asia during the latter part of
the year -- with its prospects for lowering inflation and restraining economic
growth in 1998 -- also helped to push rates lower. Finally, the declining
government budget deficit -- which is currently at a 20-year low -- as well as
prospects for future deficit reductions and, indeed, talks of a possible
government surplus, also contributed to lower rates.

Encouraged by declining interest rates and a low inflation environment, the bond
market pushed interest rates lower over the past 12 months, although it
contended with some volatility earlier in the year. This was in response to
strong economic activity and a rise in the federal funds rate -- a key
short-term interest rate -- in March.

Q: How was the portfolio structured during the year?

A: Throughout the Fund's fiscal year, we continued to hold a diversified
mix of short-maturity alternatives to U.S. Treasuries to meet the goals of high
current income with minimum share-price fluctuation.

Over the past 12 months, relatively few changes were made to the portfolio's
structure. We maintained a heavy weighting (28% of portfolio assets at year end)

6 - Scudder Short Term Bond Fund

<PAGE>

in mortgage-backed securities, which performed particularly well and contributed
a high level of income to the portfolio. In addition, 20% of portfolio assets
was invested in collateralized mortgage obligations as of December 31, 1997.

The Fund's corporate issues, which currently represent nearly 20% of portfolio
assets, also contributed positively to performance. Corporate bonds generally
perform well versus other fixed income instruments during times of solid
economic growth, because the credit quality of issuing corporations benefits
from increased earnings and cash flow. As always, we emphasized credit issuers
we believe had the potential for future credit rating upgrades.

Within the corporate sector, the Fund maintained a high concentration -- more
than 10% of portfolio assets -- in corporate bonds issued by real estate
investment trusts. Thanks to booming real estate and mortgage markets -- the
result of an improving U.S. economy -- property values were on the rise while
mortgage default rates were declining. While performance trailed off in the
fourth quarter, these issues benefited from upgrades in credit quality during
the period.

At year end, the remainder of portfolio assets were spread across asset-backed
securities (24%) and U.S. Treasury securities (6%). As always, the Fund
maintained its high quality orientation, with over 66% of portfolio holdings
rated AA or better by Standard & Poor's and/or Moody's independent bond rating
services.

Q: What about the Fund's duration?

A: Duration, which measures a portfolio's sensitivity to interest rate changes,
is adjusted by altering the mix of securities. The shorter a portfolio's
duration, the less its net asset value will be adversely affected by an increase
in interest rates. Remember, as interest rates rise, bond prices fall.
Conversely, a short duration means that a portfolio will reap fewer rewards from
a decline in interest rates.

Because we believed that interest rates would remain relatively unchanged
throughout the period, we maintained a relatively neutral position, keeping
overall portfolio duration within a range of 1.6 to 1.8 years. (As a short-term
bond fund, the Fund's duration will not exceed that of a 3-year Treasury note --
about 2.5 years.)

Q: What is your outlook for the coming months?

A: Consensus predictions for the U.S. economy overall are a modest 2.5% growth
in gross domestic product. The meltdown in many smaller Asian economies and
growing problems in Japan are what many economists predict will hold back growth
in the U.S. to a degree. Weaker markets for exports and competition from cheaper
foreign goods sold in devalued currencies will be hard to fight in the near
term. In fact, Southeast Asia's problems may reverberate throughout the world
for some time, bringing volatility to both the stock and bond markets.

Were it not for the difficulties in Asia, it seems likely that the Federal
Reserve (the "FED") would be inclined to raise interest rates to curb
inflationary pressures. It is not surprising in light of the lowest unemployment

7 - Scudder Short Term Bond Fund

<PAGE>

rate in 24 years that wage costs have begun to rise in the past few months. The
Fed is understandably reluctant to act when the world markets are fragile, but
remains poised to raise rates if necessary.

In light of all this, we are cautiously optimistic about the near-term future of
the bond market. The U.S. economy continues to travel along a smooth road of
moderate growth, relatively stable rates and modest inflation. But, no one can
predict how long this near-perfect economic environment will last.

In an uncertain investment environment such as this, your Fund offers a
relatively "safe haven" for your financial assets. In fact, we continue to view
Scudder Short Term Bond Fund as an important enhancement to a traditional
short-term portfolio.

In the months ahead, the Fund's portfolio management team will continue to
collect economic data and carefully monitor the investment climate. As we enter
into 1998, we believe that bond sector allocations and individual bond selection
may well resume their primary importance, as the markets as a whole become less
sensitive to the continuing economic euphoria. Scudder Short Term Bond Fund will
continue to look for opportunities to offer you the highest yield consistent
with your goals of price stability and liquidity.

Scudder Short Term
Bond Fund:
A Team Approach to Investing

Scudder Short Term Bond Fund is managed by a team of Scudder Kemper
Investments, Inc. (SKI) 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 a 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 SKI's extensive resources.

Since Scudder Short Term Bond was introduced in 1989, Lead Portfolio Manager
Thomas M. Poor has had responsibility for the Fund's day-to-day operation.
Tom, who joined SKI in 1970, sets the Fund's general investment strategies.
Scott E. Dolan, Portfolio Manager, joined SKI 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. Susan R.
Martland, Portfolio Manager, joined the team in 1997. Susan, who helps set the
Fund's investment strategy, joined Scudder in 1982 and has over nine years of
experience as a portfolio manager.

8 - Scudder Short Term Bond Fund

<PAGE>
Glossary of Investment Terms

COUPON The interest rate on a bond the issuer (a
corporation or government entity) promises to
pay to the holder of the bond until maturity,
expressed as an annual percentage of face
value. As an example, a bond with a 10%
coupon will pay $100 of $1,000 of the face
amount each year.

DEFAULT Occurs when the issuer of a bond fails to
make timely payment of principal and/or
interest. In the event of default,
bondholders may make claims against the
assets of the issuing corporation.

DURATION Gauges the price sensitivity of a bond or
bond portfolio to changes in market interest
rate levels. A fixed income portfolio with an
overall duration of five years can be
expected to increase 5% for every 1% decrease
in interest rates (and decline 5% for every
1% increase in rates).

INVESTMENT GRADE BOND A bond that has a quality rating of BBB or
higher.

SECTOR A similar group of bonds or stocks. Some
examples of sectors that could be found in a
fund that invests in corporate bonds include
airlines, financial services companies, and
pharmaceutical firms.

30-DAY SEC YIELD The standard yield reference for bond funds
since the SEC required all bond funds to
quote yields based on a prescribed formula.
This yield calculation reflects the 30-day
average of the annualized income earnings
capability of every holding in a given fund's
portfolio, assuming each is held to maturity,
net of expenses.

TOTAL RETURN The most common yardstick to measure the
performance of a mutual fund. Total return is
based on a combination of changes in share
price plus income and capital gain
distributions, if any, expressed as a
percentage gain or loss in value.

YIELD SPREAD The difference in yield between various types
of bonds. A corporate bond's yield is
generally measured against the yield of a
Treasury bond of similar maturity as a market
yardstick. If yield spreads are "narrow," for
example, it often means that corporate bond
yields have been declining, and prices
rising, compared with Treasury bonds of
similar maturity.

(Sources: SKI; Barron's Dictionary of Finance and Investment Terms)

9 - Scudder Short Term Bond Fund

<PAGE>

Investment Portfolio as of December 31, 1997

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement 2.7%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 12/31/97 at 6.5%,
to be repurchased at $31,282,292 on 1/2/98, collateralized by a $25,115,000 -------------
U.S. Treasury Bond, 10.75%, 2/15/03 (Cost $31,271,000) ................................ 31,271,000 31,271,000
-------------
U.S. Government Obligations 6.0%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note, 6.125%, 9/30/00 ..................................................... 50,000,000 50,523,500
U.S. Treasury Note, 6.25%, 6/30/02 ...................................................... 20,000,000 20,396,800
- ------------------------------------------------------------------------------------------------------------------------------
Total U. S. Government Obligations (Cost $70,925,000) 70,920,300
- ------------------------------------------------------------------------------------------------------------------------------

Government National Mortgage Association 16.7%
- ------------------------------------------------------------------------------------------------------------------------------
8%, with various maturities to 12/15/10 ................................................. 30,381,321 31,511,559
11.5%, with various maturities to 7/20/20 ............................................... 15,947,799 18,349,829
11%, with various maturities to 10/20/20 ................................................ 1,934,293 2,206,632
9%, with various maturities to 12/15/21 (b) ............................................. 83,696,908 90,864,052
10%, with various maturities to 2/15/25 (b) ............................................. 37,635,810 41,849,176
7.13%, with various maturities to 9/20/25 (b) ........................................... 11,360,138 11,569,591
- ------------------------------------------------------------------------------------------------------------------------------
Total Government National Mortgage Association (Cost $191,739,504) 196,350,839
- ------------------------------------------------------------------------------------------------------------------------------

U.S. Government Agency Pass-throughs 10.9%
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 9.5%, with various maturities to 8/1/16 ............... 6,444,112 6,976,203
Federal Home Loan Mortgage Corp., 7.8%, with various maturities to 9/1/24 ............... 7,674,012 8,022,585
Federal National Mortgage Association, 10%, 9/1/17 ...................................... 3,352,083 3,677,135
Federal National Mortgage Association, 8.5%, with various maturities to 8/1/22 .......... 17,179,693 18,103,625
Federal National Mortgage Association, 8.5%, with various maturities to 5/1/02 .......... 10,428,641 10,701,036
Federal National Mortgage Association, ARM, 7.6%, with various maturities to
10/1/23 ............................................................................... 5,764,019 5,953,889
Federal National Mortgage Association, ARM, 7.4%, with various maturities to
12/1/22 ............................................................................... 8,016,275 8,324,785
Federal National Mortgage Association, ARM, 6.2%, with various maturities to
11/1/35 (b) ........................................................................... 66,445,603 66,425,007
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Pass-thrus (Cost $127,542,633) 128,184,265
- ------------------------------------------------------------------------------------------------------------------------------

Collateralized Mortgage Obligations 20.4%
- ------------------------------------------------------------------------------------------------------------------------------
Chase Mortgage Finance Corp., Series 1993-I2 A3, 7.25%, 7/25/24 (b) ..................... 8,498,592 8,511,871
Chemical Mortgage Securities Inc., Series 1993-1 A4, 7.45%, 2/25/23 ..................... 4,175,000 4,208,922
Citicorp Mortgage Securities Inc., Series 1997-3, 7%, 8/25/27 ........................... 40,030,215 40,142,800
Countrywide Funding Corp., Series 1994-2 A8, 6.5%, 2/25/09 .............................. 1,900,000 1,894,359
Daiwa Mortgage Acceptance Corp., Series 1991A, 8.625%, 4/15/10 .......................... 467,610 487,045
Federal Home Loan Mortgage Corp., Series 1719-C Principal only, 4/15/99 (b) ............. 27,398,894 26,183,068
Federal Home Loan Mortgage Corp., Series 1250-F, 7%, 4/15/19 ............................ 1,838,934 1,842,943
</TABLE>

The accompanying notes are an integral part of the financial statements.

10 - Scudder Short Term Bond Fund
<PAGE>

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First Bank System Inc. Series 1993-F, 7.178%, 11/25/24 (b) .............................. 20,469,000 20,596,931
General Electric Capital Mortgage Services, Inc. Series 1993-2F, 7%, 6/25/07 ............ 325,339 327,372
General Electric Capital Mortgage Services, Inc., Series 1994-19 A1, 7.5%,
6/25/24 ............................................................................... 6,388,381 6,392,342
General Electric Capital Mortgage Services, Inc., Series 1994-27 A1, 6.5%,
7/25/24 ............................................................................... 7,190,306 7,167,836
Norwest Asset Security Corp., Series 1996-5 AB, 7.5%, 11/25/26 .......................... 9,366,453 9,509,877
Paine Webber Mortgage Acceptance Corp., Series 1993-6, 6.9%, 8/25/08 .................... 1,702,927 1,715,699
Prudential Home Mortgage Securities Co., Series 1992-47 A7, 7.5%, 1/25/23 ............... 413,674 412,379
Prudential Home Mortgage Securities Co., Series 1993-43-A1, 5.4%, 10/25/23 .............. 702,021 693,681
Residential Asset Securitization Trust, Series 1997-A6, 7.25%, 9/25/12 .................. 2,791,000 2,815,421
Residential Funding Mortgage Securities, Series 1996-A17, 7.75%, 1/25/07 ................ 8,388,398 8,598,108
Residential Funding Mortgage Securities, Series 1993-A2, 6.84%, 9/25/23 ................. 3,220,000 3,229,056
Residential Funding Mortgage Securities, Series 1993-S35, 7.087%, 10/25/23 (b) .......... 19,500,000 19,524,375
Residential Funding Mortgage Securities I Inc., Series 1997-S19 A6, 6.5%,
12/25/12 .............................................................................. 33,026,000 32,943,435
Residential Funding Mortgage Securities I Inc., Series 1997-S13 A8, 7.1%,
9/25/27 ............................................................................... 33,315,669 33,482,247
Resolution Trust Corp., Series 1992-12 A2A, 7.5%, 8/25/23 ............................... 1,193,846 1,201,681
Ryland Acceptance Corp. Four, Series 97-H, 8.95%, 8/20/19 ............................... 3,151,420 3,190,813
Ryland Mortgage Securities Corp., 8%, 8/25/25 ........................................... 3,396,875 3,494,536
- ------------------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations (Cost $240,021,654) 238,566,797
- ------------------------------------------------------------------------------------------------------------------------------

Asset Backed Securities 24.4%
- ------------------------------------------------------------------------------------------------------------------------------
Service Industries 0.6%
GE Capital Mtg Services, Inc., 7%, 1/25/08 .............................................. 6,500,000 6,546,670
-------------
Miscellaneous 2.3%
Bally's Health & Tennis Master Trust, 8.43%, 8/15/02 .................................... 13,000,000 13,054,844
Mortgage Index Amortizing Trust, 6.682%, 8/25/04 ........................................ 14,000,000 14,068,906
-------------
27,123,750
-------------
Credit Card Receivables 2.0%
Advanta Corp., Series 1997-2 A3, 7.3%, 10/25/22 ......................................... 10,500,000 10,759,216
Advanta Corp., Series 1997-1 A4, 7.65%, 5/25/27 ......................................... 4,435,000 4,601,313
First USA Bank, Series 1994-1, 7.45%, 4/15/99 ........................................... 7,547,170 7,544,906
-------------
22,905,435
-------------
Home Equity Loans 6.3%
AFC Home Equity Loan Trust, Series 1990-3A, 9.6%, 7/26/05 ............................... 1,218,097 1,225,330
AFC Home Equity Loan Trust, Series 1992-3A, 7.05%, 8/15/07 .............................. 546,374 543,301
CTS Home Equity Loan Trust, Series 1991-1A, 8.8%, 1/15/06 ............................... 853,645 852,842
Contimortgage Home Equity Loan Trust, Series 1991-1, 9.52%, 4/15/06 ..................... 553,607 559,143
</TABLE>

The accompanying notes are an integral part of the financial statements.

11 - Scudder Short Term Bond Fund
<PAGE>

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Contimortgage Home Equity Loan Trust, Series 1996-4 A6, 6.71%, 6/15/14 .................. 6,200,000 6,240,672
Contimortgage Home Equity Loan Trust, Series 1996-4 A7, 6.99%, 3/15/21 .................. 3,000,000 3,041,250
Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/28 ................ 18,500,000 18,870,000
Contimortgage Net Interest Margin Notes, Series 1997-3, 7.23% 7/16/28 ................... 10,143,043 10,138,289
Fleet Financial Home Equity Trust, Series 1991-2A, 6.7%, 10/15/06 ....................... 695,334 696,855
Green Tree Financial Corp. Home Equity Loan, Series 1997-B A5, 7.15%, 4/15/27 ........... 9,600,000 9,810,000
Green Tree Home Improvement Loan Trust, Series 1995-C B1, 7.2%, 7/15/20 ................. 1,950,000 1,960,664
Green Tree Home Improvement Loan Trust, Series 1995-F B2, 7.1%, 1/15/21 ................. 2,000,000 1,990,391
Green Tree Home Improvement Loan Trust, Series 1995-D A3, 6.45%, 9/15/25 ................ 695,000 696,515
Green Tree Home Improvement Loan Trust, Series 1995-D B1, 7.05%, 9/15/25 ................ 750,000 748,358
Green Tree Home Improvement Loan Trust, 6.95%, 3/15/27 .................................. 4,000,000 4,048,594
Household Finance Corp., Home Equity Loan, Series 1992-2 A3, 5.25%, 10/20/07 ............ 65,551 65,284
Mid-State Homes IV, Series 1, 8.33%, 4/1/30 ............................................. 1,678,112 1,843,760
Old Stone Credit Corp., Series 1991-2, 8.42%, 8/15/03 ................................... 1,047,024 1,054,876
Old Stone Credit Corp., Home Equity Loan, Series 1992-2, 6.95%, 5/15/07 ................. 3,348,391 3,361,985
Old Stone Credit Corp., Home Equity Loan Series 1993-1, 5.85%, 3/15/08 .................. 793,750 781,224
Security Pacific Home Equity Trust, Series 1991-A B, 10.5%, 3/10/06 ..................... 4,892,471 4,936,809
TMS Home Equity Loan Trust, Series 1994-A A3, 5.525%, 9/15/18 ........................... 675,116 663,407
-------------
74,129,549
-------------
Manufactured Housing Receivables 13.2%
Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/28 .................. 8,000,000 8,373,750
Chemical Financial Acceptance Corp. Housing Trust, Series 1989 A, Participating
Certificate, 9.25%, 5/15/98 ........................................................... 2,684,446 2,699,533
Green Tree Financial Corp., 7.3%, 12/15/26 .............................................. 9,500,000 9,717,090
Green Tree Financial Corp., Securitized NIM, Series 1994-A, 6.9%, 2/15/04 ............... 14,990,601 14,941,998
Green Tree Financial Corp., Securitized NIM, Series 1994-B, 7.85%, 7/15/04 .............. 12,512,505 12,722,840
Green Tree Financial Corp., Series 1993-2 B, 8%, 7/15/18 ................................ 8,637,000 9,138,351
Green Tree Financial Corp., Series 1995-1 B2, 9.2%, 6/15/25 ............................. 5,715,000 6,232,475
Green Tree Financial Corp., Series 1995-3 B2, 8.1%, 8/15/25 ............................. 20,636,400 21,431,224
Green Tree Financial Corp., Series 1995-6 B2, 8%, 9/15/26 ............................... 12,059,720 12,481,339
Green Tree Financial Corp., Series 1995-5 B2, 7.65%, 9/15/26 ............................ 9,000,000 9,188,438
Green Tree Financial Corp., Series 1995-6 B1, 7.7%, 9/15/26 ............................. 3,925,000 4,009,623
Green Tree Financial Corp., Series 1995-10 B1, 7.05%, 2/15/27 ........................... 4,000,000 3,986,563
Green Tree Financial Corp., Series 1996-5 B2, 8.45%, 7/15/27 ............................ 10,000,000 10,620,703
Green Tree Financial Corp., Series 1997-A, 7.58%, 8/15/23 ............................... 1,250,000 1,261,713
Green Tree Financial Corp., Series 1997-2 B1, 7.56%, 6/15/28 ............................ 4,000,000 4,165,000
</TABLE>

The accompanying notes are an integral part of the financial statements.

12 - Scudder Short Term Bond Fund
<PAGE>

Corporate Bonds 18.9%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.5%
Federated Department Stores, Inc., 6.79%, 7/15/27 ....................................... 6,115,000 6,278,699
Consumer Staples 0.5%
J. Seagram & Sons Inc., 8.375%, 2/15/07 ................................................. 4,775,000 5,367,434
Financial 13.4%
American Health Properties, Inc. (REIT), 7.05%, 1/15/02 ................................. 2,200,000 2,239,490
Colonial Realty LP (REIT), 7.5%, 7/15/01 ................................................ 4,000,000 4,142,800
ERP Operating L.P. (REIT), 8.5%, 5/15/99 ................................................ 4,100,000 4,214,923
Health Care Properties Investors Inc. (REIT), 6%, 11/8/00 ............................... 5,225,000 5,120,500
MBNA American Bank, 7.25%, 9/15/02 ...................................................... 6,100,000 6,266,469
Oasis Residential Inc. (REIT), 6.75%, 11/15/01 (b) ...................................... 13,400,000 13,544,050
Oasis Residential Inc. (REIT), 7, 11/15/03 (b) .......................................... 14,900,000 15,212,006
Spieker Properties, Inc. (REIT), 6.65%, 12/15/00 ........................................ 15,000,000 15,060,900
Spieker Properties, Inc. (REIT), 6.8%, 12/15/01 ......................................... 5,500,000 5,570,950
Spieker Properties, Inc. (REIT), 6.95%, 12/15/02 ........................................ 3,500,000 3,559,360
Spieker Properties, Inc. (REIT), 8%, 7/19/05 ............................................ 500,000 538,375
Spieker Properties, Inc. (REIT), 7.125%, 12/1/06 ........................................ 3,425,000 3,499,597
Sun Communities, Inc. (REIT), 7.625%, 5/1/03 ............................................ 5,850,000 6,117,638
Susa Partnership LP (REIT), 7.125%, 11/1/03 ............................................. 5,400,000 5,497,524
Taubman Realty Group LP (REIT), Medium Term Note, 7%, 10/1/03 ........................... 3,595,000 3,629,548
Taubman Realty Group LP (REIT), Medium Term Note, 8%, 6/15/99 ........................... 4,755,000 4,861,512
Taubman Realty Group LP (REIT), Medium Term Note, 7.4%, 6/10/02 ......................... 3,300,000 3,386,625
</TABLE>

The accompanying notes are an integral part of the financial statements.

13 - Scudder Short Term Bond Fund
<PAGE>

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Taubman Realty Group LP (REIT), Medium Term Note, 7.5%, 6/15/02 ......................... 19,150,000 19,724,500
The Money Store Inc., 7.63%, 4/15/98 .................................................... 9,500,000 9,488,125
United Dominion Realty Trust Inc. (REIT), Medium Term Note, 7.02%, 11/15/05 ............. 10,000,000 10,248,700
World Omni Automobile Lease Securitization Trust Series 1996-B, 6.85%, 11/15/02 ......... 15,038,970 15,175,260
-------------
157,098,852
-------------
Media 1.4%
Comcast Cable Communications, 8.125%, 5/1/04 ............................................ 15,000,000 16,185,600
-------------
Energy 1.3%
Lyondell Petrochemical Co. Global Note, 9.125%, 3/15/02 ................................. 8,900,000 9,765,525
Lyondell Petrochemical Co., 9.75%, 9/4/03 ............................................... 4,600,000 5,336,000
-------------
15,101,525
-------------
Metals & Minerals 1.3%
Alcan Aluminium Ltd., 9.625%, 7/15/19 ................................................... 14,000,000 15,131,620
-------------
Transportation 0.5%
Continental Airlines Inc. Pass-thru Trust, 7.42%, 4/1/07 ................................ 6,295,000 6,528,922
-------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $217,354,551) 221,692,652
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $1,160,070,253) (a) 1,172,795,908
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) The cost for federal income tax purposes was $1,160,070,253. At December
31, 1997, net unrealized appreciation for all securities based on tax cost
was $12,725,655. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $16,056,848 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$3,331,193. 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.
(b) At December 31, 1997 these securities, in whole or in part, have been
pledged to cover initial margin requirements for open futures contracts.
At December 31, 1997, open future contracts sold short were as follows:

<TABLE>
<CAPTION>
Aggregate
Futures Expiration Contracts Face Value ($) Market Value ($)
------- ---------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
5 Year U.S.
Treasury Note March 20, 1998 1,892 204,857,839 205,518,500
----------- -----------

Total net unrealized depreciation on open futures contracts sold short ...... (660,661)
===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

14 - Scudder Short Term Bond Fund
<PAGE>

Transactions in written options for the year ended December 31, 1997 are
summarized as follows:

Over-the-Counter-Options
------------------------------------
NZD Premiums
----------------- -----------------
Beginning of Period ....... 88,000,000 $ 431,200
Written ................... (86,600,000) (428,670)
Closed .................... (88,000,000) (431,200)
Exercised ................. -- --
Expired ................... 86,600,000 428,670
-------------- -----------
End of Period ............. -- --
============== ===========

Currency abbreviations and other acronyms used in this portfolio:
NIM Net Interest Margin
REIT Real Estate Investment Trust
NZD New Zealand Dollars
ARM Adjustable Rate Mortgage

The accompanying notes are an integral part of the financial statements.

15 - Scudder Short Term Bond Fund
<PAGE>

Financial Statements

Statement of Assets and Liabilities
as of December 31, 1997

<TABLE>
<CAPTION>
Assets
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments, at market (identified cost $1,160,070,253) ............. $1,172,795,908
Cash ................................................................ 981,138
Receivable for investments sold ..................................... 16,625,482
Interest receivable ................................................. 8,491,787
Receivable for Fund shares sold ..................................... 911,652
Other assets ........................................................ 20,866
-----------------
Total assets ........................................................ 1,199,826,833
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------
Dividends payable ................................................... 1,429,237
Payable for Fund shares redeemed .................................... 5,372,038
Payable for investments purchased ................................... 25,649,339
Payable for daily variation margin on open futures contracts ........ 423,394
Accrued management fee .............................................. 524,624
Other payables and accrued expenses ................................. 897,039
-----------------
Total liabilities ................................................... 34,295,671
--------------------------------------------------------------------------------------------
Net assets, at market value $1,165,531,162
--------------------------------------------------------------------------------------------
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................................. 379,071
Net unrealized appreciation (depreciation) on:
Investment securities ............................................ 12,725,655
Futures .......................................................... (660,661)
Accumulated net realized loss ....................................... (138,594,958)
Paid-in capital ..................................................... 1,291,682,055
--------------------------------------------------------------------------------------------
Net assets, at market value $1,165,531,162
--------------------------------------------------------------------------------------------
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($1,165,531,162 / 105,576,081 outstanding shares of
beneficial interest, $.01 par value, unlimited number -----------------
of shares authorized) ............................................ $11.04
-----------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

16 - Scudder Short Term Bond Fund
<PAGE>

Statement of Operations
year ended December 31, 1997

<TABLE>
<CAPTION>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Interest ............................................................ $ 96,118,860
-----------------
Expenses:
Management fee ...................................................... 6,769,577
Services to shareholders ............................................ 3,388,908
Custodian and accounting fees ....................................... 329,241
Trustees' fees and expenses ......................................... 27,001
Reports to shareholders ............................................. 290,987
Auditing ............................................................ 61,737
Legal ............................................................... 33,262
Registration fees ................................................... 41,998
Other ............................................................... 59,990
-----------------
Total expenses ...................................................... 11,002,701
--------------------------------------------------------------------------------------------
Net investment income 85,116,159
--------------------------------------------------------------------------------------------

Realized and unrealized gain (loss) on investment transactions
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investment securities ............................................... (8,363,157)
Futures ............................................................. (10,668,459)
Options ............................................................. (1,194,518)
Foreign currency related transactions ............................... (428,293)
-----------------
(20,654,427)
-----------------
Net unrealized appreciation (depreciation) during the period on:
Investment securities ............................................... 12,201,221
Futures ............................................................. (660,661)
Options ............................................................. (54,384)
-----------------
11,486,176
--------------------------------------------------------------------------------------------
Net loss on investment transactions (9,168,251)
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 75,947,908
--------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

17 - Scudder Short Term Bond Fund
<PAGE>

Statements of Changes in Net Assets

<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ........................................ $ 85,116,159 $ 107,842,813
Net realized loss from investment transactions ............... (20,654,427) (33,115,928)
Net unrealized appreciation (depreciation) on investment
transactions during the period ............................ 11,486,176 (17,329,463)
---------------- -----------------
Net increase in net assets resulting from operations ......... 75,947,908 57,397,422
---------------- -----------------
Distributions to shareholders from:
Net investment income ........................................ (78,060,393) (104,839,251)
---------------- -----------------
Fund share transactions:
Proceeds from shares sold .................................... 225,970,263 349,361,957
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................. 58,987,223 79,869,940

Cost of shares redeemed ...................................... (585,484,724) (736,440,233)
---------------- -----------------
Net decrease in net assets from Fund share transactions ...... (300,527,238) (307,208,336)
---------------- -----------------
Decrease in net assets ....................................... (302,639,723) (354,650,165)
Net assets at beginning of period ............................ 1,468,170,885 1,822,821,050
Net assets at end of period (including undistributed net ---------------- -----------------
investment income of $379,071 for 1997) ................... $1,165,531,162 $1,468,170,885
---------------- -----------------
Other Information
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................... 132,860,852 160,534,389
---------------- -----------------
Shares sold .................................................. 20,508,345 31,416,978
Shares issued to shareholders in reinvestment of
distributions ............................................. 5,352,697 7,197,179
Shares redeemed .............................................. (53,145,813) (66,287,694)
---------------- -----------------
Net decrease in Fund shares .................................. (27,284,771) (27,673,537)
---------------- -----------------
Shares outstanding at end of period .......................... 105,576,081 132,860,852
---------------- -----------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

18 - Scudder Short Term Bond Fund
<PAGE>

Financial Highlights

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

19 - Scudder Short Term Bond Fund
<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 Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.

Security Valuation. Portfolio debt securities purchased with original 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. Money market instruments purchased with an original
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.

Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, the amount of which at the time
of purchase and each subsequent business day is required to be maintained at
such a level that the market value, depending on the maturity of the repurchase
agreement, is equal to at least 100.5% of the repurchase price.

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 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.

Options. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During

20 - Scudder Short Term Bond Fund
<PAGE>

the period, the Fund purchased put options and wrote call options on currencies
and other financial instruments as a hedge against potential adverse price
movements in the value of portfolio assets.

If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchases an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.

The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.

The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.

When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.

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.

21 - Scudder Short Term Bond Fund
<PAGE>

Federal Income Taxes. It is the Fund's policy to comply with the requirements of
the Internal Revenue Code, as amended, 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, 1997, the Fund had a net tax basis capital loss carryforward of
approximately $134,629,000 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), December 31, 2003 ($60,090,000), December 31, 2004
($27,896,000) and December 31, 2005 ($19,379,000), the respective expiration
dates.

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,
foreign currency contracts, and foreign currency denominated investments. 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.

B. Purchases and Sales of Securities

For the year ended December 31, 1997, purchases and sales of investment
securities (excluding short-term investments and U.S. Government obligations)
aggregated $368,541,965 and $763,861,290, respectively. Purchases and sales of
U.S. Government obligations aggregated $125,395,859 and $54,104,587,
respectively.

The aggregate face value of futures contracts opened and closed during the year
ended December 31, 1997 was $1,947,545,924 and $1,742,688,085, respectively.

C. Related Parties

22 - Scudder Short Term Bond Fund
<PAGE>

and Zurich resulted in the termination of the Fund's Investment Management
Agreement with Scudder. However, a new Investment Management Agreement (the
"Management Agreement") between the Fund and Scudder Kemper was approved by the
Fund's Board of Trustees and by the Fund's Shareholders. The Management
Agreement, which is effective December 31, 1997, is the same in all material
respects as the corresponding previous Investment Management Agreement, except
that Scudder Kemper is the new investment adviser to the Fund.

Under the Management Agreement with Scudder Kemper, 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. For the year
ended December 31, 1997, the fee pursuant to these agreements amounted to
$6,769,577, which was equivalent to an annualized effective rate of 0.53% 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 $1,966,378 charged to the Fund by SSC for the
year ended December 31, 1997, of which $144,271 is unpaid at December 31, 1997.

Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the year ended December 31,
1997, the amount charged to the Fund by STC aggregated $611,127, of which
$48,871 is unpaid at December 31, 1997.

Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible 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, 1997, the amount charged to the Fund by SFAC aggregated $173,925,
of which $13,765 is unpaid at December 31, 1997.

The Trust pays each of its Trustees not affiliated with the Adviser an annual
retainer, divided equally among the series of the Trust, plus specified amounts
for attended board and committee meetings. For the year ended December 31, 1997,
Trustees' fees and expenses aggregated $27,001.

23 - Scudder Short Term Bond Fund
<PAGE>

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, 1997, 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, 1997 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, 1997, 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 18, 1998

24 - Scudder Short Term Bond Fund

<PAGE>
Shareholder Meeting Results

A Special Meeting of Shareholders (the "Meeting") of Scudder Short Term Bond
Fund (the "Fund") was held on October 27, 1997, at the offices of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), 25th Floor, 345
Park Avenue (at 51st Street), New York, New York 10154. At the Meeting, as
adjourned and reconvened, the following matters were voted upon by the
shareholders (the resulting votes for each matter are presented below). With
regard to certain proposals, it was recommended that the Meeting be reconvened
in order to provide shareholders with an additional opportunity to return their
proxies. The date of the reconvened meeting at which the matters were decided is
noted after the proposed matter.

1. To elect Trustees.

Number of Votes:
----------------

Trustee For Withheld
------- --- --------

Henry P. Becton, Jr. 60,858,733 2,700,647

Dawn-Marie Driscoll 60,878,989 2,680,391

Peter B. Freeman 60,886,012 2,673,368

George M. Lovejoy, Jr. 60,898,294 2,661,086

Dr. Wesley W. Marple, Jr. 60,827,783 2,731,597

Daniel Pierce 60,910,864 2,648,516

Kathryn L. Quirk 60,871,016 2,688,364

Jean C. Tempel 60,861,283 2,698,097

2. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

59,255,623 2,408,043 1,895,714 3,353,880

3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise. (Approved on December 2, 1997.)

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

59,751,392 4,539,155 3,344,571 3,059,903

25 - Scudder Short Term Bond Fund

<PAGE>

4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

60,332,109 3,880,266 3,422,743 3,059,903

5. To approve the revision of certain fundamental investment policies.

<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------

5.1 Diversification 53,783,780 3,287,948 3,133,772 3,353,880

5.2 Borrowing 53,448,694 3,626,595 3,130,211 3,353,880

5.3 Senior securities 53,757,956 3,310,976 3,136,568 3,353,880

5.4 Concentration 53,642,583 3,425,144 3,137,773 3,353,880

5.5 Underwriting of securities 53,706,538 2,973,638 3,525,324 3,353,880

5.6 Investment in real estate 53,638,227 3,034,462 3,532,811 3,353,880

5.7 Purchase of physical commodities 53,567,959 3,095,970 3,541,571 3,353,880

5.8 Lending 53,465,580 3,221,414 3,518,505 3,353,880
</TABLE>

6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.

Number of Votes:
----------------

For Against Abstain
--- ------- -------

60,158,592 1,134,158 2,266,630

* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.

26 - Short Term Bond Fund

<PAGE>

This Page
intentionally
left blank.

27 - Scudder Short Term Bond Fund

<PAGE>

Officers and Trustees

Daniel Pierce*
President and Trustee

Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation

Dawn-Marie Driscoll
Trustee; President, Driscoll
Associates

Peter B. Freeman
Trustee; Corporate Director and
Trustee

George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates

Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern
University

Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary

Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners

Jerard K. Hartman*
Vice President

Thomas W. Joseph*
Vice President

Thomas F. McDonough*
Vice President, Treasurer and
Secretary

John R. Hebble*
Assistant Treasurer

Caroline Pearson*
Assistant Secretary

*Scudder Kemper Investments, Inc.

28 - Scudder Short Term Bond Fund

<PAGE>
Investment Products and Services

The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*

Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**

U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund

Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund

Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio

U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund

U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund

Growth
Scudder Classic Growth Fund
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund

Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund

Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.

Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)

Education Accounts
- ------------------
Education IRA
UGMA/UTMA

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. +++Funds within categories are listed
in order from expected least risk to most risk. Certain Scudder funds may not be
available for purchase or exchange. +A portion of the income from the tax-free
funds may be subject to federal, state, and local taxes. *A class of shares of
the Fund. **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 Kemper Investments, Inc., are traded on the New York Stock Exchange
and, in some cases, on various other stock exchanges.

29 - Scudder Short Term Bond Fund

<PAGE>

Scudder Solutions
<TABLE>
<CAPTION>

Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy

A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.

Automatic Dividend Transfer Payroll Deduction and Direct Deposit

The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).

Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.

Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.

Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell

You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.

DistributionsDirect

Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.

30 - Scudder Short Term Bond Fund
<PAGE>

Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder

Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 6,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.

Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.

Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.

For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center

For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York

</TABLE>

31 - Scudder Short Term Bond Fund
<PAGE>
About the Fund's Adviser

Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.

Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.

Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.

This information must be preceded or accompanied by a
current prospectus.

Portfolio changes should not be considered recommendations
for action by individual investors.

SCUDDER

[LOGO]
<PAGE>

Scudder
Zero Coupon
2000 Fund

Annual Report
December 31, 1997

Pure No-Load(TM) Funds

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.

A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.

SCUDDER (logo)

<PAGE>

Scudder Zero Coupon 2000 Fund

- --------------------------------------------------------------------------------
Date of Inception: 2/4/86 Total Net Assets as of Ticker Symbol: SGZTX
12/31/97: $20.4 million
- --------------------------------------------------------------------------------

o In a year that proved to be rewarding for fixed-income investors, Scudder Zero
Coupon 2000 Fund posted a positive total return of 6.53% for its most recent
fiscal year ended December 31, 1997.

o The Fund provided a 30-day net annualized SEC yield of 4.86% as of December
31, 1997.

Table of Contents

3 Letter from the Fund's President 14 Notes to Financial Statements
4 Performance Update 17 Report of Independent Accountants
5 Portfolio Management Discussion 18 Shareholder Meeting Results
8 Glossary of Investment Terms 20 Officers and Trustees
9 Investment Portfolio 21 Investment Products and Services
10 Financial Statements 22 Scudder Solutions
13 Financial Highlights

2 - Scudder Zero Coupon 2000 Fund

<PAGE>

Letter from the Fund's President

Dear Shareholders,

We are pleased to report to you on Scudder Zero Coupon 2000 Fund's
performance over its most recent fiscal year ended December 31, 1997. The Fund's
managers continue to invest in high quality U.S. Treasuries, with almost all
maturities set within one year of the Fund's 2000 target date. Given the Fund's
relatively short time to maturity, the Fund's philosophy is to seek as high an
investment return over a selected period as is consistent with the minimization
of investment risk. For more information on the Fund's investment strategy,
results, and outlook, please read the portfolio management discussion beginning
on page 5.

For those of you who are interested in new Scudder products, we recently
introduced a new industry sector fund, Scudder Financial Services Fund. One of
Scudder's Choice Series sector funds, the Fund seeks long-term growth by
investing in financial services companies in the U.S. and abroad. In addition,
two other Choice Series funds will be launched on March 2: Scudder Health Care
Fund, seeking long-term growth from health care companies located around the
world, and Scudder Technology Fund, pursuing long-term growth by investing in
companies that develop, produce, or distribute technology.

If you have any questions regarding Scudder Zero Coupon 2000 Fund or any
other Scudder fund, please do not hesitate to call Investor Relations at
1-800-225-2470. Or visit Scudder's Web site at http://funds.scudder.com.

Sincerely,

/s/Daniel Pierce

Daniel Pierce
President,
Scudder Zero Coupon 2000 Fund

3 - Scudder Zero Coupon 2000 Fund
<PAGE>
PERFORMANCE UPDATE as of December 31, 1997
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/97 $10,000 Cumulative Annual
- --------------------------------------
SCUDDER ZERO COUPON 2000 FUND
- --------------------------------------
1 Year $ 10,653 6.53% 6.53%
5 Year $ 13,638 36.38% 6.40%
10 Year $ 24,899 148.99% 9.55%

- --------------------------------------
LB GOVERNMENT/CORPORATE BOND INDEX
- --------------------------------------
1 Year $ 10,975 9.75% 9.75%
5 Year $ 14,430 44.30% 7.61%
10 Year $ 23,984 139.84% 9.13%
- --------------------------------------

- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------

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 2000 FUND
Year Amount
- ----------------------
'87 $10,000
'88 $11,171
'89 $13,449
'90 $14,067
'91 $16,884
'92 $18,257
'93 $21,178
'94 $19,500
'95 $23,221
'96 $23,372
'97 $24,899

LB GOVERNMENT/CORPORATE BOND INDEX
Year Amount
- ----------------------
'87 $10,000
'88 $10,759
'89 $12,291
'90 $13,307
'91 $15,450
'92 $16,621
'93 $18,459
'94 $17,811
'95 $21,240
'96 $21,853
'97 $23,894

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>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 10.92 $ 12.61 $ 12.27 $ 13.76 $ 12.55 $ 12.85 $ 10.95 $ 12.38 $ 11.77 $ 11.88
INCOME DIVIDENDS.. $ .63 $ .52 $ .83 $ .94 $ .93 $ .83 $ .31 $ .62 $ .68 $ .63
CAPITAL GAINS
DISTRIBUTIONS..... $ -- $ .03 $ .08 $ -- $ 1.39 $ .89 $ .59 $ -- $ -- $ --
FUND TOTAL
RETURN (%)........ 11.71 20.39 4.59 20.03 8.13 16.00 -7.92 19.08 .65 6.53
INDEX TOTAL
RETURN (%)........ 7.58 14.23 8.28 16.12 7.58 11.03 -3.51 19.24 2.90 9.75
</TABLE>

4 - Scudder Zero Coupon 2000 Fund

<PAGE>

Portfolio Management Discussion
Dear Shareholders,

Scudder Zero Coupon 2000 Fund provided a 30-day net annualized SEC yield of
4.86% as of December 31, 1997. The Fund's total return of 6.53% for the 12-month
period reflects a $0.11 increase in the Fund's net asset value to $11.88, plus
$0.63 per share in income distributions. The unmanaged Lehman Brothers
Government/Corporate Bond Index's return during the same period was 9.75%. The
difference in return between the Fund and its comparative index mirrors the
Fund's ever-shortening average maturity.

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 and the minimization of reinvestment risk,
with the additional advantages of professional management, diversification, and
liquidity. The Fund invests in high quality zero coupon bonds that pay no
current 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
par value.

Bonds Benefit as Inflation Fades

The year 1997 was rewarding for most bond investors as the market's focus
gradually shifted from the possibility of an overheating U.S. economy and
increases in inflation to the Asian currency crisis and speculation about
deflation. As Asian currencies such as the Korean won and the Thai baht
surrendered approximately half of their value versus the U.S. dollar from July
to December, expectations grew that lower-cost Asian imports and reduced profit
expectations for global U.S.-based companies would keep the domestic economy and
inflation under control for some time to come, despite near full employment.
Yield declines -- as shown in the chart above -- and price gains in the Treasury
bond sector reflected this favorable environment.

THE ORIGINAL DOCUMENT HAS A LINE CHART HERE

LINE CHART TITLE:

U.S. Treasury Yield Curve
12/31/96 versus 12/31/97

LINE CHART DATA:

12/31/97 12/31/96

---------------------------------------------------------------
3 mos 5.186% 5.342%

6 mos 5.297 5.435

1 yr 5.488 5.476

2 yrs 5.868 5.642

3 yrs 6.010 5.669

5 yrs 6.206 5.705

10 yrs 6.418 5.741

30 yrs 6.641 5.924

Portfolio Review

Our goal in managing Scudder Zero Coupon 2000 Fund is to maximize the value of
your investment on the December 2000 maturity date. Since zero coupon bonds such
as those held by the Fund 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

5 - Scudder Zero Coupon 2000 Fund

<PAGE>

maturity date, we try to limit share price volatility where possible while at
the same time seeking a higher return than that provided by many other
fixed-income investments.

As the Fund approaches its maturity in the year 2000, we continue to gradually
shorten the duration of the Fund, keeping over 90% of the bonds in the Fund's
portfolio within two months of the target date, and almost 99% within one year
of the date. For the same reason, we are keeping the Fund's duration in a
neutral stance in terms of its permissible range: As of December 31, 1997, the
Fund's duration was 3 years, in the middle of its allowable range of two years
to four years. (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 and the more
stable its price is likely to be.)

Economic and Market Prospects

Amid the gloom (and economic pain for the people of Asia) of the Asian currency
crisis is a ray of sunshine -- the relaxing of inflation worries in the U.S.
bond market. Though no one can predict exactly how long this period of
tranquility for bond investors will last, we expect this slow-growth,
low-inflation environment to continue and to

6 - Scudder Zero Coupon 2000 Fund

<PAGE>

benefit Treasury investors over the coming months. As we approach Scudder Zero
Coupon 2000 Fund's target year, we will monitor events influencing the bond
market closely and adjust the Fund's duration and maturity structure
accordingly. We will continue to seek to maximize the Fund's net asset value on
its maturity date.

Sincerely,

Your Portfolio Management Team

/s/Timothy G. Raney /s/Stephen A. Wohler

Timothy G. Raney 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 Kemper
Investments, Inc. (SKI) 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 SKI'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 SKI's extensive resources.

Lead Portfolio Manager Timothy G. Raney has responsibility for overseeing the
Fund's day-to-day operations and setting the Fund's investment strategy. Tim,
who has eight years of investment industry experience, joined the Adviser in
1989 as a taxable securities trader and also played a key role in the
development of automated trade and compliance software. 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 SKI since 1979.

7 - Scudder Zero Coupon 2000 Fund

<PAGE>

Glossary of Investment Terms

INFLATION An overall increase in the prices of goods
and services, as happens when business and
consumer spending increases relative to the
supply of goods available in the marketplace
-- in other words, when too much money is
chasing too few goods. High inflation has a
negative impact on the prices of fixed-income
securities.

30-DAY SEC YIELD The standard yield reference for bond funds
since the SEC required all bond funds to
quote yields based on a prescribed formula.
This yield calculation reflects the 30-day
average of the net annualized income earnings
capability of every holding in a given fund's
portfolio, assuming each is held to maturity.

TOTAL RETURN The most common yardstick to measure the
performance of a fund. Total return --
annualized or compound -- is based on a
combination of capital return plus income and
capital gain distributions, if any, expressed
as a percentage gain or loss in value.

TREASURIES Negotiable debt obligations of the U.S.
government, secured by its full faith and
credit, and issued at various schedules and
maturities.

ZERO COUPON BOND A bond that makes no periodic interest
payments but instead is sold at a deep
discount from its face value. The buyer of
such a bond receives a rate of return through
the gradual appreciation of the security,
which is redeemed at face value on a
specified maturity date.

(Sources: SKI; Barron's Dictionary of Finance and Investment Terms)

8 - Scudder Zero Coupon 2000 Fund

<PAGE>

Investment Portfolio as of December 31, 1997

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Note, 5.125%, 11/30/98 .................................................... 100,000 99,562
U.S. Treasury Note, 5%, 1/31/99 ......................................................... 150,000 149,016
U.S. Treasury Separate Trading Registered Interest and Principal, 5/15/00, (5.65*) ...... 630,000 552,019
U.S. Treasury Separate Trading Registered Interest and Principal, 11/15/00, (5.68*) ..... 9,999,000 8,513,149
U.S. Treasury Separate Trading Registered Interest and Principal, 2/15/01, (5.70*) ...... 10,980,000 9,211,451
U.S. Treasury Separate Trading Registered Interest and Principal, 11/15/01, (5.72*) ..... 2,388,000 1,919,307
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Securities (Cost $19,842,017) 20,444,504
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $19,842,017) (a) 20,444,504
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) The cost for federal income tax purposes was $19,898,013. At December 31,
1997, unrealized appreciation based on tax cost consisted entirely of
aggregated gross unrealized appreciation of $546,491.

* Bond equivalent yield to maturity; not a coupon rate (unaudited).

The accompanying notes are an integral part of the financial statements.

9 - Scudder Zero Coupon 2000 Fund
<PAGE>

Financial Statements

Statement of Assets and Liabilities
as of December 31, 1997

<TABLE>
<CAPTION>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments, at market (identified cost $19,842,017) ................. $ 20,444,504
Interest receivable .................................................. 3,589
Receivable for Fund shares sold ...................................... 106,411
Other assets ......................................................... 380
----------------
Total assets ......................................................... 20,554,884
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Due to custodian bank ................................................ 33,273
Other payables and accrued expenses .................................. 67,639
----------------
Total liabilities .................................................... 100,912
-------------------------------------------------------------------------------------------
Net assets, at market value $ 20,453,972
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income .................................. 734,074
Unrealized appreciation on investments ............................... 602,487
Accumulated net realized loss ........................................ (1,330,864)
Paid-in capital ...................................................... 20,448,275
-------------------------------------------------------------------------------------------
Net assets, at market value $ 20,453,972
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($20,453,972 / 1,721,605 outstanding shares of beneficial ----------------
interest, $.01 par value, unlimited number of shares authorized) ..... $11.88
----------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

10 - Scudder Zero Coupon 2000 Fund
<PAGE>

Statement of Operations
year ended December 31, 1997

<TABLE>
<CAPTION>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest ............................................................. $ 1,387,950
-----------------
Expenses:
Management fee ....................................................... 129,600
Services to shareholders ............................................. 97,995
Custodian and accounting fees ........................................ 42,223
Trustees' fees and expenses .......................................... 22,312
Auditing ............................................................. 25,808
Reports to shareholders .............................................. 27,653
Registration fees .................................................... 14,766
Legal ................................................................ 13,713
Other ................................................................ 5,527
-----------------
Total expenses before reductions ..................................... 379,597
Expense reductions ................................................... (163,914)
-----------------
Expenses, net ........................................................ 215,683
---------------------------------------------------------------------------------------------
Net investment income 1,172,267
---------------------------------------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

11 - Scudder Zero Coupon 2000 Fund
<PAGE>

Statements of Changes in Net Assets

<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income .......................................... $ 1,172,267 $ 1,432,554
Net realized gain (loss) from investments ...................... 161,395 (261,794)
Net unrealized appreciation (depreciation) on investments
during the period ........................................... 1,997 (1,086,030)
--------------- ---------------
Net increase in net assets resulting from operations ........... 1,335,659 84,730
--------------- ---------------
Distributions to shareholders from net investment income ....... (1,127,761) (1,477,442)
--------------- ---------------
Fund share transactions:
Proceeds from shares sold ...................................... 3,450,490 6,651,479
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................... 1,105,633 1,435,813

Cost of shares redeemed ........................................ (9,750,463) (10,477,503)
--------------- ---------------
Net decrease in net assets from Fund share transactions ........ (5,194,340) (2,390,211)
--------------- ---------------
Decrease in net assets ......................................... (4,986,442) (3,782,923)
Net assets at beginning of period .............................. 25,440,414 29,223,337
Net assets at end of period (including undistributed net --------------- ---------------
investment income of $734,074 and $689,568, respectively) ...... $ 20,453,972 $ 25,440,414
--------------- ---------------
Other Information
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ...................... 2,161,757 2,359,785
--------------- ---------------
Shares sold .................................................... 290,883 560,049
Shares issued to shareholders in reinvestment of
distributions ............................................... 96,147 122,172
Shares redeemed ................................................ (827,182) (880,249)
--------------- ---------------
Net decrease in Fund shares .................................... (440,152) (198,028)
--------------- ---------------
Shares outstanding at end of period ............................ 1,721,605 2,161,757
--------------- ---------------
</TABLE>

The accompanying notes are an integral part of the financial statements.

12 - Scudder Zero Coupon 2000 Fund
<PAGE>

Financial Highlights

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

(a) Based on monthly average shares outstanding during the period.
(b) Total returns would have been lower had certain expenses not been reduced.

13 - Scudder Zero Coupon 2000 Fund
<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.

Security Valuation. Portfolio debt securities purchased with an original
maturity 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. Money market instruments having an original 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, as amended, 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, 1997, the Fund had a net tax basis capital loss carryforward of
approximately $1,275,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2002 ($723,000), December 31, 2003 ($178,000), and December 31, 2004 ($374,000)
the respective expiration dates.

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

14 - Scudder Zero Coupon 2000 Fund
<PAGE>

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, 1997, purchases and sales of investment
securities (excluding short-term investments) aggregated $1,246,960 and
$7,844,015, respectively.

C. Related Parties

Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.

Under the Management Agreement with Scudder Kemper, 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 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. In addition, the Adviser has agreed to maintain the annualized expenses
of the Fund at not more than 1.00% of average daily net assets until April 30,
1998. For the year ended December 31, 1997, the fee pursuant to these agreements
amounted to $129,600, all of which 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, 1997, the amount charged to the Fund by SSC
aggregated $46,588, of which $19,604 was not imposed, and $7,723 is unpaid at
December 31, 1997.

Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans for the Fund. For the year ended December 31, 1997, the
amount charged to the Fund by STC aggregated $8,564, of which $3,604 was not
imposed, and $111 is unpaid at December 31, 1997.

Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible 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, 1997, the amount charged to the Fund by SFAC aggregated $26,394, of
which $11,106 was not imposed, and $10,769 is unpaid at December 31, 1997.

15 - Scudder Zero Coupon 2000 Fund
<PAGE>

The Fund pays each Trustee not affiliated with the Adviser an annual retainer
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended December 31, 1997,
Trustees' fees and expenses aggregated $22,312.

16 - Scudder Zero Coupon 2000 Fund
<PAGE>

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,
1997, 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, 1997 by correspondence with the custodian. 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 Zero Coupon 2000 Fund as of December 31, 1997, 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 11, 1998

17 - Scudder Zero Coupon 2000 Fund

<PAGE>

Shareholder Meeting Results

A Special Meeting of Shareholders (the "Meeting") of Scudder Zero Coupon 2000
Fund (the "Fund") was held on October 27, 1997, at the offices of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), 25th Floor, 345
Park Avenue (at 51st Street), New York, New York 10154. At the Meeting, as
adjourned and reconvened, the following matters were voted upon by the
shareholders (the resulting votes for each matter are presented below). With
regard to certain proposals, it was recommended that the Meeting be reconvened
in order to provide shareholders with an additional opportunity to return their
proxies. The date of the reconvened meeting at which the matters were decided is
noted after the proposed matter.

1. To elect Trustees.

Number of Votes:
----------------

Director For Withheld
-------- --- --------

Henry P. Becton, Jr. 864,722 41,139

Dawn-Marie Driscoll 883,808 42,053

Peter B. Freeman 884,915 40,946

George M. Lovejoy, Jr. 888,114 37,747

Dr. Wesley W. Marple, Jr. 888,114 37,747

Daniel Pierce 888,308 37,553

Kathryn L. Quirk 887,907 37,954

Jean C. Tempel 884,253 41,608

2. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

846,297 34,327 45,237 911

3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise. (Approved on December 2, 1997.)

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

921,736 66,176 64,850 909

18 - Scudder Zero Coupon 2000 Fund

<PAGE>

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

925,395 57,220 70,147 909

5. To approve the revision of certain fundamental investment policies.

<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------

<S> <C> <C> <C> <C>
5.1 Diversification 800,708 51,639 72,603 911

5.2 Borrowing 795,238 57,108 72,604 911

5.3 Senior securities 796,950 57,016 70,984 911

5.4 Concentration 796,642 57,324 70,984 911

5.5 Underwriting of securities 800,708 50,233 74,009 911

5.6 Investment in real estate 802,328 48,614 74,008 911

5.7 Purchase of physical commodities 799,169 51,772 74,009 911

5.8 Lending 800,910 50,031 74,009 911
</TABLE>

6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.

Number of Votes:
----------------

For Against Abstain
--- ------- -------

864,900 13,903 47,058

19 - Scudder Zero Coupon 2000 Fund

<PAGE>
Officers and Trustees

Daniel Pierce*
President and Trustee

Henry P. Becton
Trustee; President and General Manager, WGBH Educational Foundation

Dawn-Marie Driscoll
Trustee; President, Driscoll Associates

Peter B. Freeman
Trustee; Corporate Director and Trustee

George M. Lovejoy, Jr.
Trustee; President and Director, Fifty Associates

Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University

Kathryn L. Quirk*
Trustee, Vice President and Assistant Secretary

Jean C. Tempel
Trustee; Managing Partner, Technology Equity Partners

Jerard K. Hartman*
Vice President

Thomas W. Joseph*
Vice President

Thomas F. McDonough*
Vice President, Treasurer and Secretary

John R. Hebble*
Assistant Treasurer

Caroline Pearson*
Assistant Secretary

*Scudder Kemper Investments, Inc.

20 - Scudder Zero Coupon 2000 Fund