KEMPER NATIONAL TAX FREE INCOME SERIES
497, 2001-01-10
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Supplement to the currently effective Prospectus of each of the listed funds:

<TABLE>
<S>                                                                <C>
Kemper Asian Growth Fund                                           Kemper Income and Capital Preservation Fund

Classic Growth Fund (Classes A, B and C only)                      Kemper Intermediate Municipal Bond Fund

Kemper Global Blue Chip Fund                                       Kemper International Fund

Kemper Global Income Fund                                          Kemper Municipal Bond Fund

Kemper High Yield Opportunity Fund                                 Kemper Ohio Tax-Free Income Fund

Kemper High Yield Fund II                                          Kemper Short-Term U.S. Government Fund

Kemper Horizon 20+ Portfolio                                       Kemper U.S. Growth and Income Fund

Kemper Horizon 10+ Portfolio                                       Kemper U.S. Mortgage Fund

Kemper Horizon 5 Portfolio                                         Value Fund (Classes A, B and C only)
</TABLE>

The applicable Board of each of the above-mentioned funds (identified in the
table below under the heading "Acquired Fund") recently approved an Agreement
and Plan of Reorganization (the "Plan") between each Fund and the corresponding
Acquiring Fund identified in the chart below. The proposed transaction is part
of Scudder Kemper's initiative to restructure and streamline the management and
operations of the funds it manages.

The Plan applicable to each Fund provides for the transfer of substantially all
of the assets and the assumption of all of the liabilities of the Fund solely in
exchange for voting shares of the corresponding Acquiring Fund. Following the
exchange, the Fund will distribute shares of the corresponding Acquiring Fund to
the Fund's shareholders as part of the Fund's cessation of operations as
provided for in the Plan. (Each transaction contemplated by a Plan is referred
to as a "Reorganization.")

Each Reorganization can be consummated only if, among other things, it is
approved by a majority vote of shareholders of the applicable Fund. A Special
Meeting (the "Meeting") of the shareholders of each Fund will be held on or
about May 15, 2001 or May 24, 2001 and shareholders will be given the
opportunity to vote on the Plan and any other matters affecting the Fund at that
time. In connection with each Meeting, the applicable Fund will deliver to its
shareholders: (i) a Proxy Statement/Prospectus describing in detail the
Reorganization and the Board's considerations in recommending that shareholders
approve the Reorganization, and (ii) a Prospectus for the Acquiring Fund.

If the Plan for a Fund is approved at the applicable Meeting and certain
conditions required by the Plan are satisfied, the Reorganization is expected to
become effective at 9:00 a.m. Eastern standard time on or about the appropriate
Proposed Reorganization Date identified in the chart below. If shareholder
approval of a Plan is delayed due to failure to obtain a quorum or otherwise,
the Reorganization will become effective as soon as practicable after the
receipt of shareholder approval.

In the event the shareholders of a Fund fail to approve the Plan for that Fund,
the Fund will continue to operate and the Fund's Board may resubmit the Plan for
shareholder approval or consider other proposals.
<TABLE>
<CAPTION>

Acquired Fund                                       Acquiring Fund                                Proposed Reorganization Date
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                                                    <C>
Kemper Asian Growth Fund                            Scudder Pacific Opportunities Fund                     May 28, 2001
------------------------------------------------------------------------------------------------------------------------------------
Classic Growth Fund                                 Scudder Capital Growth Fund                            June 25, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Global Blue Chip Fund                        Scudder Global Fund                                    June 18, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Global Income Fund                           Scudder Global Bond Fund                               June 18, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper High Yield Opportunity Fund                  Scudder High Yield Bond Fund (to be renamed            June 25, 2001
                                                    Scudder High Yield Opportunity Fund)
------------------------------------------------------------------------------------------------------------------------------------
Kemper High Yield Fund II                           Kemper High Yield Fund                                 May 28, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Horizon 20+ Portfolio                        Kemper Total Return Fund                               June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Horizon 10+ Portfolio                        Kemper Total Return Fund                               June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Horizon 5 Portfolio                          Kemper Total Return Fund                               June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Income and Capital Preservation Fund         Scudder Income Fund                                    June 25, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Intermediate Municipal Bond Fund             Scudder Medium Term Tax Free Fund                      June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper International Fund                           Scudder International Fund                             June 18, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Municipal Bond Fund                          Scudder Managed Municipal Bonds                        June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Ohio Tax-Free Income Fund                    Scudder Managed Municipal Bonds                        June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Short-Term U.S. Government Fund              Scudder Short Term Bond Fund                           June 25, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper U.S. Growth and Income Fund                  Scudder Growth and Income Fund                         June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund                           Kemper U.S. Government Securities Fund                 May 28, 2001
------------------------------------------------------------------------------------------------------------------------------------
Value Fund                                          Scudder Large Company Value Fund                       June 25, 2001
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

November 30, 2000

<PAGE>

                                                                SCUDDER
                                                                INVESTMENTS (SM)
                                                                [LOGO]

January 1, 2001
Prospectus


                                                    KEMPER TAX-FREE INCOME FUNDS


                                         Kemper Intermediate Municipal Bond Fund


                                                      Kemper Municipal Bond Fund


                                          Kemper California Tax-Free Income Fund


                                             Kemper Florida Tax-Free Income Fund


                                            Kemper New York Tax-Free Income Fund


                                                Kemper Ohio Tax-Free Income Fund


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

<PAGE>


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

   How the Funds Work                          How to Invest in the Funds

     4  Kemper Intermediate Municipal           50  Choosing a Share Class
        Bond Fund
                                                55  How to Buy Shares
     8  Kemper Municipal Bond Fund
                                                56  How to Exchange or Sell
    12  Kemper California Tax-Free                  Shares
        Income Fund
                                                57  Policies You Should Know
    16  Kemper Florida Tax-Free                     About
        Income Fund
                                                62  Understanding Distributions
    20  Kemper New York Tax-Free                    and Taxes
        Income Fund

    24  Kemper Ohio Tax-Free
        Income Fund

    28  Other Policies and Risks

    29  Who Manages and Oversees
        the Funds

    31  Financial Highlights

<PAGE>


How The Funds Work

These funds invest mainly in municipal bonds. Each fund follows its own goal.

Two of the funds invest in municipal securities from around the country, and
seek income that is free from regular federal income tax. Four of the funds
invest in securities from particular states, and seek income that is free from
regular federal income tax as well as state and local income tax for investors
in that state.

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




<PAGE>

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

                              ticker symbol      KIMAX       KIMBX       KIMCX
                                fund number      077         277         377



Kemper Intermediate Municipal Bond Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks as high a level of current interest income that is exempt from
federal income taxes as is consistent with preservation of capital.

The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax.

The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these. The fund can invest up to 20% of
net assets in securities whose income is subject to the federal alternative
minimum tax.

The portfolio managers look for securities that appear to offer the best income
potential and normally prefer those that cannot be called in before maturity. In
making their buy and sell decisions, the managers typically consider a number of
factors, such as economic outlook and possible interest rate movements to
specific security characteristics and changes in supply and demand within the
municipal bond market.

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

CREDIT QUALITY POLICIES Normally, at least 90% of the fund's municipal
securities are in the top four grades of credit quality. Up to 10% of the fund's
municipal securities may be junk bonds, which are those below the fourth credit
grade (i.e., grade BB/Ba and below). Compared to investment-grade bonds, junk
bonds generally pay higher yields and have higher volatility and higher risk of
default on payments.

                                       4
<PAGE>

Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they generally intend to keep
it between three and ten years. Also, while they're permitted to use various
types of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments and may not use them at all.


The Main Risks of Investing in the Fund

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

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.

A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may focus on investments in
certain geographic regions or sectors of the municipal market increases this
risk, because any factors affecting these regions or sectors could affect a
large portion of the fund's securities in a similar manner.

Other factors that could affect performance include:

o    the managers could be wrong in their analysis of interest rate trends,
     issuers, credit quality or other matters

o    derivatives could produce disproportionate losses

o    political or legal actions could change the way the fund's dividends are
     taxed

o    at times, market conditions might make it hard to value some investments or
     to get an attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

This fund is designed for investors in a moderate to high tax bracket who can
tolerate some risk to their principal and are interested in tax-free income.

                                       5
<PAGE>

The Fund's Performance History

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

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


Kemper Intermediate Municipal Bond Fund

--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                       Class A
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1991        0
1992        0
1993        0
1994        0
1995       14.08
1996        3.41
1997        7.52
1998        5.24
1999       -1.40


2000 Total Return as of September 30: 4.52%

Best Quarter: 5.19%, Q1 1995               Worst Quarter: -1.81%, Q2 1999


--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------
                            Since               Since            Since 11/1/94
                            12/31/98            12/31/94         Life of
                            1 Year              5 Years          fund
--------------------------------------------------------------------------------
Class A                     -4.07%              5.06%            5.16%
--------------------------------------------------------------------------------
Class B                     -5.01               4.63             4.72
--------------------------------------------------------------------------------
Class C                     -2.14               4.83             4.94
--------------------------------------------------------------------------------
Index                       -2.06               6.91             6.75*
--------------------------------------------------------------------------------

Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. In both the table and the chart, returns
for 1994-1996 would have been lower if operating expenses hadn't been reduced.

*  Since 10/31/94

                                       6
<PAGE>

How Much Investors Pay

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

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

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

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                                   0.55%     0.55%      0.55%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                         None      0.75       0.75
--------------------------------------------------------------------------------
Other Expenses**                                 0.55      0.57       0.58
--------------------------------------------------------------------------------
Total Annual Operating Expenses                  1.10      1.87       1.88
--------------------------------------------------------------------------------

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

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

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

--------------------------------------------------------------------------------
Example                        1 Year      3 Years      5 Years      10 Years
--------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares                  $384        $615          $865       $1,578
--------------------------------------------------------------------------------
Class B shares                   590         888         1,211        1,805
--------------------------------------------------------------------------------
Class C shares                   291         591         1,016        2,201
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares                  $384        $615          $865       $1,578
--------------------------------------------------------------------------------
Class B shares                   190         588         1,011        1,805
--------------------------------------------------------------------------------
Class C shares                   191         591         1,016        2,201
--------------------------------------------------------------------------------


                                       7
<PAGE>

--------------------------------------------------------------------------------
                                                 Class A     Class B     Class C
                               ticker symbol      KMBAX       KMBBX       KMBCX
                                 fund number      007         207         307


Kemper Municipal Bond Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks as high a level of current interest income that is exempt from
federal income taxes as is consistent with preservation of capital.

The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax.

The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these. The fund can invest up to 20% of
net assets in securities whose income is subject to the federal alternative
minimum tax.

The portfolio managers look for securities that appear to offer the best income
potential and normally prefer those that cannot be called in before maturity. In
making buy and sell decisions, the managers typically consider a number of
factors, such as economic outlook and possible interest rate movements to
specific security characteristics and changes in supply and demand within the
municipal bond market.

--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES Normally, at least 90% of the fund's municipal
securities are in the top four grades of credit quality. Up to 10% of the fund's
municipal securities may be junk bonds, which are those below the fourth credit
grade (i.e., grade BB/Ba and below). Compared to investment-grade bonds, junk
bonds generally pay higher yields and have higher volatility and higher risk of
default on payments.



                                       8
<PAGE>

Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they generally intend to keep
it over 15 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments and may not use them at all.


The Main Risks of Investing in the Fund

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

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.

A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may focus on investments in
certain geographic regions or sectors of the municipal market increases this
risk, because any factors affecting these regions or sectors could affect a
large portion of the fund's securities in a similar manner.

Other factors that could affect performance include:

o    the managers could be wrong in their analysis of interest rate trends,
     issuers, credit quality or other matters

o    derivatives could produce disproportionate losses

o    political or legal actions could change the way the fund's dividends are
     taxed

o    at times, market conditions might make it hard to value some investments or
     to get an attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

This fund is designed for long-term investors who can tolerate some risk to
their principal and are interested in tax-free income.


                                       9
<PAGE>

The Fund's Performance History

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

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

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


Kemper Municipal Bond Fund

--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                       Class A
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990        6.66
1991       12.78
1992        8.71
1993       13.20
1994       -5.51
1995       18.33
1996        3.33
1997        9.36
1998        5.76
1999       -3.63


2000 Total Return as of September 30: 6.67%

Best Quarter: 7.15%, Q1 1995               Worst Quarter: -5.35%, Q1 1994


--------------------------------------------------------------------------------
Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------
                                                                      Since
                                 Since       Since       Since        4/20/76
                                 12/31/98    12/31/94    12/31/89     Life of
                                 1 Year      5 Years     10 Years     fund
--------------------------------------------------------------------------------
Class A                          -7.94%      5.42%       6.17%        7.21%
--------------------------------------------------------------------------------
Class B                          -7.09       5.34        5.74         6.46
--------------------------------------------------------------------------------
Class C                          -4.42       5.52        5.79         6.48
--------------------------------------------------------------------------------
Index                            -2.06       6.91        6.89         *
--------------------------------------------------------------------------------

Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds.

*    The index was not in existence on the date of Class A shares inception.

                                       10
<PAGE>

How Much Investors Pay

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

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

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                                   0.41%      0.41%      0.41%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                         None       0.75       0.75
--------------------------------------------------------------------------------
Other Expenses**                                 0.30       0.37       0.38
--------------------------------------------------------------------------------
Total Annual Operating Expenses                  0.71       1.53       1.54
--------------------------------------------------------------------------------

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

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

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


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

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares                  $519        $667          $827       $1,293
--------------------------------------------------------------------------------
Class B shares                   556         783         1,034        1,398
--------------------------------------------------------------------------------
Class C shares                   257         486           839        1,835
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares                  $519        $667          $827       $1,293
--------------------------------------------------------------------------------
Class B shares                   156         483           834        1,398
--------------------------------------------------------------------------------
Class C shares                   157         486           839        1,835
--------------------------------------------------------------------------------

                                       11
<PAGE>

--------------------------------------------------------------------------------
                                               Class A     Class B     Class C
                              ticker symbol      KCTAX       KCTBX       KCTCX
                                fund number      009         209         309


Kemper California Tax-Free Income Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy


The fund seeks a high level of current income that is exempt from California
state and federal income taxes.

The fund normally invests at least 80% of net assets in California municipal
securities whose income is free from regular federal and California State income
tax.

The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these. The fund can invest up to 20% of
net assets in securities whose income is subject to the federal alternative
minimum tax.

The portfolio managers look for securities that appear to offer the best income
potential and normally prefer those that cannot be called in before maturity. In
making buy and sell decisions, the managers typically consider a number of
factors, such as economic outlook and possible interest rate movements to
specific security characteristics and changes in supply and demand within the
municipal bond market.

Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they generally intend to keep
it over 15 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments and may not use them at all.


--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES Normally, at least 90% of the fund's municipal
securities are in the top four grades of credit quality. Up to 10% of the fund's
municipal securities may be junk bonds, which are those below the fourth credit
grade (i.e., grade BB/Ba and below). Compared to investment-grade bonds, junk
bonds generally pay higher yields and have higher volatility and higher risk of
default on payments.


                                       12
<PAGE>


The Main Risks Of Investing In The Fund

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

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.

A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may focus on securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, California residents' high
sensitivity to taxes could make it hard to raise taxes in order to meet
obligations.

Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.

Other factors that could affect performance include:

o    the managers could be wrong in their analysis of interest rate trends,
     credit quality or other matters


o    derivatives could produce disproportionate losses


o    political or legal actions could change the way the fund's dividends are
     taxed


o    at times, market conditions might make it hard to value some investments or
     to get an attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

This fund is designed for California taxpayers who are in a moderate to high tax
bracket and are interested in a long-term income investment that generates
tax-free income.

                                       13
<PAGE>


The Fund's Performance History

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

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

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


Kemper California Tax-Free Income Fund

--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                       Class A
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990        6.70
1991       11.42
1992        8.25
1993       12.59
1994       -5.47
1995       19.48
1996        2.98
1997        8.59
1998        6.02
1999       -3.70


2000 Total Return as of September 30: 8.39%

Best Quarter: 7.68%, Q1 1995               Worst Quarter: -4.51%, Q1 1994


--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------
                                                                      Since
                                 Since       Since       Since        2/17/83
                                 12/31/98    12/31/94    12/31/89     Life of
                                 1 Year      5 Years     10 Years     fund
--------------------------------------------------------------------------------
Class A                          -7.98%      5.44%       5.96%        7.88%
--------------------------------------------------------------------------------
Class B                          -7.24       5.38        5.62         7.34
--------------------------------------------------------------------------------
Class C                          -4.65       5.37        5.36         7.02
--------------------------------------------------------------------------------
Index                            -2.06       6.91        6.89         8.44*
--------------------------------------------------------------------------------

Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds.

*  Since 2/28/83


                                       14
<PAGE>

How Much Investors Pay

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


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

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                                   0.52%      0.52%      0.52%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                         None       0.75       0.75
--------------------------------------------------------------------------------
Other Expenses**                                 0.33       0.37       0.37
--------------------------------------------------------------------------------
Total Annual Operating Expenses                  0.85       1.64       1.64
--------------------------------------------------------------------------------

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

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

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


--------------------------------------------------------------------------------
Example                        1 Year      3 Years      5 Years      10 Years
--------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares                  $533        $709          $900       $1,452
--------------------------------------------------------------------------------
Class B shares                   567         817         1,092        1,539
--------------------------------------------------------------------------------
Class C shares                   267         517           892        1,944
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares                  $533        $709          $900       $1,452
--------------------------------------------------------------------------------
Class B shares                   167         517           892        1,539
--------------------------------------------------------------------------------
Class C shares                   167         517           892        1,944
--------------------------------------------------------------------------------

                                       15
<PAGE>

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

                              ticker symbol      KFLAX       KFLBX       KFLCX
                                fund number      027         227         327


Kemper Florida Tax-Free Income Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks a high level of current income that is exempt from federal income
taxes.

The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax. In addition, the fund
invests at least 65% of net assets in Florida municipal securities and other
securities that are exempt from the Florida intangibles tax.

The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these. The fund can invest up to 20% of
net assets in securities whose income is subject to the federal alternative
minimum tax.

The portfolio managers look for securities that appear to offer the best income
potential and normally prefer those that cannot be called in before maturity. In
making buy and sell decisions, the managers typically consider a number of
factors, such as economic outlook and possible interest rate movements, specific
security characteristics and changes in supply and demand within the municipal
bond market. Although the managers may adjust the fund's dollar-weighted average
maturity (the effective maturity of the fund's portfolio), they generally intend
to keep it over 15 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments and may not use them at all.

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

CREDIT QUALITY POLICIES Normally, at least 90% of the fund's municipal
securities are in the top four grades of credit quality. Up to 10% of the fund's
municipal securities may be junk bonds, which are those below the fourth credit
grade (i.e., grade BB/Ba and below). Compared to investment-grade bonds, junk
bonds generally pay higher yields and have higher volatility and higher risk of
default on payments.


                                       16
<PAGE>

The Main Risks of Investing in the Fund

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

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.

A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may focus on securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, the state's agricultural,
retirement-related or tourism industries could experience cyclical downturns or
long-term erosion, hurting the local economy.

Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.

While the fund will generally seek investments that will permit the fund's
shares to be exempt from the Florida intangibles tax, there is no assurance that
the exemption will be available. To qualify for the exemption, at least 90% of
the fund's assets must be in exempt investments at year end.

Other factors that could affect performance include:

o    the managers could be wrong in their analysis of interest rate trends,
     credit quality or other matters

o    derivatives could produce disproportionate losses

o    political or legal actions could change the way the fund's dividends are
     taxed

o    at times, market conditions might make it hard to value some investments or
     to get an attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

This fund is designed for Florida residents who can invest for the long-term and
are interested in tax-free income.


                                       17
<PAGE>

The Fund's Performance History

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

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

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


Kemper Florida Tax-Free Income Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                       Class A
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1992        9.11
1993       13.50
1994       -3.91
1995       18.40
1996        2.70
1997        8.67
1998        5.48
1999       -4.22


2000 Total Return as of September 30: 6.26%

Best Quarter: 7.08%, Q1 1995               Worst Quarter: -4.85%, Q1 1994


--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------
                                                                Since 4/25/91
                         Since 12/31/98      Since 12/31/94     Life of
                         1 Year              5 Years            fund
--------------------------------------------------------------------------------
Class A                  -8.54%              4.98%              6.07%
--------------------------------------------------------------------------------
Class B                  -7.66               4.93               5.70
--------------------------------------------------------------------------------
Class C                  -5.00               5.12               5.72
--------------------------------------------------------------------------------
Index                    -2.06               6.91               6.68*
--------------------------------------------------------------------------------

Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. In both the table and the chart, returns
for 1993 would have been lower if operating expenses hadn't been reduced.

*  Since 4/30/91


                                       18
<PAGE>

How Much Investors Pay

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


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

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

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                                   0.54%      0.54%      0.54%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                         None       0.75       0.75
--------------------------------------------------------------------------------
Other Expenses**                                 0.46       0.48       0.45
--------------------------------------------------------------------------------
Total Annual Operating Expenses                  1.00       1.77       1.74
--------------------------------------------------------------------------------

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

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

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


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

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares                  $547        $754          $978       $1,620
--------------------------------------------------------------------------------
Class B shares                   580         857         1,159        1,694
--------------------------------------------------------------------------------
Class C shares                   277         548           944        2,052
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares                  $547        $754          $978       $1,620
--------------------------------------------------------------------------------
Class B shares                   180         557           959        1,694
--------------------------------------------------------------------------------
Class C shares                   177         548           944        2,052
--------------------------------------------------------------------------------


                                       19
<PAGE>

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

                              ticker symbol      KNTAX       KNTBX       KNTCX
                                fund number      026         226         326


Kemper New York Tax-Free Income Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks a high level of current income that is exempt from New York state
and New York City income taxes and federal income taxes.

The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax. In addition, the fund
invests at least 65% of net assets in New York municipal securities and other
securities that are exempt from New York state and New York City income taxes.

The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these. The fund can invest up to 20% of
net assets in securities whose income is subject to the federal alternative
minimum tax.

The portfolio managers look for securities that appear to offer the best income
potential and normally prefer those that cannot be called in before maturity. In
making buy and sell decisions, the managers typically consider a number of
factors, such as economic outlook and possible interest rate movements, to
changes in supply and demand within the municipal bond market.

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

OTHER QUALITY POLICIES Normally, at least 90% of the fund's municipal securities
are in the top four grades of credit quality. Up to 10% of the fund's municipal
securities may be junk bonds, which are those below the fourth credit grade
(i.e., grade BB/Ba and below). Compared to investment-grade bonds, junk bonds
generally pay higher yields and have higher volatility and higher risk of
default on payments.


                                       20
<PAGE>

Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they generally intend to keep
it over 15 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments and may not use them at all.


The Main Risks of Investing in the Fund

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

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.

A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may focus on securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, a downturn in the financial
industry could bring on a fiscal crisis in New York City, which has experienced
such crises before.

Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.

Other factors that could affect performance include:

o    the managers could be wrong in their analysis of interest rate trends,
     credit quality or other matters

o    derivatives could produce disproportionate losses

o    political or legal actions could change the way the fund's dividends are
     taxed

o    at times, market conditions might make it hard to value some investments or
     to get an attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

This fund is designed for New York resident taxpayers who are investing for the
long term and are interested in tax-free income.


                                       21
<PAGE>

The Fund's Performance History

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

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

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


Kemper New York Tax-Free Income Fund

--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                       Class A
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1990        5.93
1991       13.39
1992        9.43
1993       12.95
1994       -4.95
1995       17.98
1996        2.54
1997        8.89
1998        6.00
1999       -4.24


2000 Total Return as of September 30: 6.99%

Best Quarter: 6.44%, Q1 1995               Worst Quarter: -4.47%, Q1 1994


--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------
                                                                      Since
                                 Since       Since       Since        12/31/85
                                 12/31/98    12/31/94    12/31/89     Life of
                                 1 Year      5 Years     10 Years     fund
--------------------------------------------------------------------------------
Class A                          -8.53%      5.01%       6.07%        6.52%
--------------------------------------------------------------------------------
Class B                          -7.86       4.94        5.66         5.98
--------------------------------------------------------------------------------
Class C                          -5.11       5.09        5.65         5.97
--------------------------------------------------------------------------------
Index                            -2.06       6.91        6.89         7.84
--------------------------------------------------------------------------------

Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. In both the table and the chart, returns
for 1991 would have been lower if operating expenses hadn't been reduced.


                                       22
<PAGE>

How Much Investors Pay

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

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

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                                   0.55%      0.55%      0.55%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                         None       0.75       0.75
--------------------------------------------------------------------------------
Other Expenses**                                 0.34       0.41       0.40
--------------------------------------------------------------------------------
Total Annual Operating Expenses                  0.89       1.71       1.70
--------------------------------------------------------------------------------

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

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

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


--------------------------------------------------------------------------------
Example                        1 Year      3 Years      5 Years      10 Years
--------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares                  $537        $721          $921       $1,497
--------------------------------------------------------------------------------
Class B shares                   574         839         1,128        1,602
--------------------------------------------------------------------------------
Class C shares                   273         536           923        2,009
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares                  $537        $721          $921       $1,497
--------------------------------------------------------------------------------
Class B shares                   174         539           928        1,602
--------------------------------------------------------------------------------
Class C shares                   173         536           923        2,009
--------------------------------------------------------------------------------


                                       23
<PAGE>


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

                             ticker symbol      KOHAX       KOHBX       KOHCX
                               fund number      028         228         328

Kemper Ohio Tax-Free Income Fund
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The fund seeks a high level of current income that is exempt from Ohio state and
federal income taxes.

The fund normally invests at least 80% of net assets in municipal securities
whose income is free from regular federal income tax. In addition, the fund
invests at least 65% of total assets in Ohio municipal securities and other
securities that are exempt from Ohio state income taxes.

The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these. The fund can invest up to 20% of
net assets in securities whose income is subject to the federal alternative
minimum tax.

The portfolio managers look for securities that appear to offer the best income
potential and normally prefer those that cannot be called in before maturity. In
making buy and sell decisions, the managers typically consider a number of
factors, such as economic outlook and possible interest rate movements to
specific security characteristics and changes in supply and demand within the
municipal bond market.

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

CREDIT QUALITY POLICIES Normally, at least 90% of the fund's municipal
securities are in the top four grades of credit quality. Up to 10% of the fund's
municipal securities may be junk bonds, which are those below the fourth credit
grade (i.e., grade BB/Ba and below). Compared to investment-grade bonds, junk
bonds generally pay higher yields and have higher volatility and higher risk of
default on payments.



                                       24
<PAGE>

Although the managers may adjust the fund's dollar-weighted average maturity
(the effective maturity of the fund's portfolio), they generally intend to keep
it over 15 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments and may not use them at all.


The Main Risks of Investing in the Fund

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

As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices and, in
turn, a fall in the value of your investment. An increase in the fund's
dollar-weighted average maturity could make it more vulnerable to this risk.
Changes in interest rates will also affect the fund's yield; when rates decline,
fund yield tends to decline as well.

A second factor is credit quality. If a portfolio security declines in credit
quality it could hurt the fund's share price, or if a portfolio security goes
into default, it could hurt both the fund's yield and share price. This risk is
greater with junk bonds. The fact that the fund may focus on securities from a
single state increases this risk, because any factors affecting the state or
region, such as economic or fiscal problems, could affect a large portion of the
fund's securities in a similar manner. For example, the state's manufacturing or
agricultural industries could experience cyclical downturns or long-term
erosion, hurting the local economy.

Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given issuer than a diversified fund, factors affecting the
issuer could affect fund performance.

Other factors that could affect performance include:

o    the managers could be wrong in their analysis of interest rate trends,
     credit quality or other matters

o    derivatives could produce disproportionate losses

o    political or legal actions could change the way the fund's dividends are
     taxed

o    at times, market conditions might make it hard to value some investments or
     to get an attractive price for them

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

This fund is designed for Ohio investors in moderate to high tax brackets who
are interested in a long-term investment that seeks to offer tax-free income.


                                       25
<PAGE>

The Fund's Performance History

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

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

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


Kemper Ohio Tax-Free Income Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                       Class A
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1994       -3.67
1995       18.37
1996        3.14
1997        8.74
1998        5.85
1999       -3.25


2000 Total Return as of September 30: 5.36%

Best Quarter: 7.37%, Q1 1995               Worst Quarter: -5.03%, Q1 1994

--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
--------------------------------------------------------------------------------
                                                                      Since
                                                                      3/22/93
                            Since 12/31/98       Since 12/31/94       Life of
                            1 Year               5 Years              fund
--------------------------------------------------------------------------------
Class A                     -7.56%               5.36%                4.82%
--------------------------------------------------------------------------------
Class B                     -6.78                5.33                 4.68
--------------------------------------------------------------------------------
Class C                     -4.04                5.49                 4.67
--------------------------------------------------------------------------------
Index                       -2.06                6.91                 5.49*
--------------------------------------------------------------------------------

Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds.

                  In both the table and the chart, returns for 1993-1994 would
                  have been lower if operating expenses hadn't been reduced.

*  Since 3/31/93

                                       26
<PAGE>

How Much Investors Pay

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

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

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                                 0.55%       0.55%      0.55%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee                       None        0.75       0.75
--------------------------------------------------------------------------------
Other Expenses**                               0.46        0.53       0.51
--------------------------------------------------------------------------------
Total Annual Operating Expenses                1.01        1.83       1.81
--------------------------------------------------------------------------------

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

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

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


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

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares                  $548        $757          $983       $1,631
--------------------------------------------------------------------------------
Class B shares                   586         876         1,190        1,735
--------------------------------------------------------------------------------
Class C shares                   284         569           980        2,127
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares                  $548        $757          $983       $1,631
--------------------------------------------------------------------------------
Class B shares                   186         576           990        1,735
--------------------------------------------------------------------------------
Class C shares                   184         569           980        2,127
--------------------------------------------------------------------------------

                                       27
<PAGE>

Other Policies and Risks

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

o    Although major changes tend to be infrequent, each fund's Board could
     change that fund's investment goal without seeking shareholder approval.
     However, the policy of investing at least 80% of net assets in municipal
     securities for each fund cannot be changed without shareholder approval.

o    As a temporary defensive measure, any of these funds could shift up to 100%
     of assets into investments such as money market securities. This could
     prevent losses, but would mean that the fund would not be pursuing its
     goal. Temporary investments may be taxable.

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

This prospectus doesn't tell you about every policy or risk of investing in the
fund.

If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).

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

                                       28
<PAGE>

Who Manages and Oversees the Funds

The investment advisor

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

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

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

Fund Name                                              Fee Paid
---------------------------------------------------------------------
Kemper Intermediate Municipal Bond Fund                 0.55%
---------------------------------------------------------------------
Kemper Municipal Bond Fund                              0.41%
---------------------------------------------------------------------
Kemper California Tax-Free Income Fund                  0.52%
---------------------------------------------------------------------
Kemper Florida Tax-Free Income Fund                     0.54%
---------------------------------------------------------------------
Kemper New York Tax-Free Income Fund                    0.55%
---------------------------------------------------------------------
Kemper Ohio Tax-Free Income Fund                        0.55%
---------------------------------------------------------------------

                                       29
<PAGE>

The portfolio managers

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

Kemper Intermediate Municipal               Kemper Florida Tax-Free
Bond Fund                                   Income Fund

  Ashton P. Goodfield                        Eleanor R. Brennan
  Co-Lead Portfolio Manager                  Co-Lead Portfolio Manager
    o Began investment career in 1986          o Began investment career in 1986
    o Joined the advisor in 1986               o Joined the advisor in 1995
    o Joined the fund team in 1998             o Joined the fund team in 1998

  Philip G. Condon                           Philip G. Condon
  Co-Lead Portfolio Manager                  Co-Lead Portfolio Manager
    o Began investment career in 1976          o Began investment career in 1976
    o Joined the advisor in 1983               o Joined the advisor in 1983
    o Joined the fund team in 1999             o Joined the fund team in 2000

Kemper Municipal Bond Fund                   Rebecca L. Wilson
                                               o Began investment career in 1986
  Philip G. Condon                             o Joined the advisor in 1986
  Co-Lead Portfolio Manager                    o Joined the fund team in 1998
    o Began investment career in 1976
    o Joined the advisor in 1983            Kemper New York Tax-Free Income Fund
    o Joined the fund team in 1999
                                             Ashton P. Goodfield
  Eleanor R. Brennan                         Co-Lead Portfolio Manager
  Co-Lead Portfolio Manager                    o Began investment career in 1986
    o Began investment career in 1986          o Joined the advisor in 1986
    o Joined the advisor in 1995               o Joined the fund team in 1999
    o Joined the fund team in 1998
                                             Philip G. Condon
  Matthew J. Caggiano                        Co-Lead Portfolio Manager
    o Began investment career in 1989          o Began investment career in 1976
    o Joined the advisor in 1991               o Joined the advisor in 1983
    o Joined the fund team in 1999             o Joined the fund team in 2000

Kemper California Tax-Free                 Kemper Ohio Tax-Free Income Fund
Income Fund
                                             Eleanor R. Brennan
  Philip G. Condon                           Co-Lead Portfolio Manager
  Co-Lead Portfolio Manager                    o Began investment career in 1986
    o Began investment career in 1976          o Joined the advisor in 1995
    o Joined the advisor in 1983               o Joined the fund team in 1999
    o Joined the fund team in 2000
                                             Philip G. Condon
  Eleanor R. Brennan                         Co-Lead Portfolio Manager
  Co-Lead Portfolio Manager                    o Began investment career in 1976
    o Began investment career in 1986          o Joined the advisor in 1983
    o Joined the advisor in 1995               o Joined the fund team in 2000
    o Joined the fund team in 1999
                                             Rebecca L. Wilson
  Matthew J. Caggiano                          o Began investment career in 1986
    o Began investment career in 1989          o Joined the advisor in 1986
    o Joined the advisor in 1991               o Joined the fund team in 1998
    o Joined the fund team in 1999

                                       30
<PAGE>

Financial Highlights

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


Kemper Intermediate Municipal Bond Fund -- Class A

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year    $10.00   $10.53  $10.31   $10.06   $10.18
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss) (c)       .43      .42     .45      .46      .46
--------------------------------------------------------------------------------
  Net realized and unrealized
  gain (loss) on investment
  transactions                          (.02)    (.50)    .29      .29     (.04)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .41     (.08)    .74      .75      .42
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                 (.44)    (.42)   (.45)    (.46)    (.46)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --     (.03)   (.07)    (.04)    (.08)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.44)    (.45)   (.52)    (.50)    (.54)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of period         $9.97   $10.00  $10.53   $10.31   $10.06
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a) (b)                4.19     (.79)   7.34     7.62     4.15
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)                      14,564   17,774  19,140   16,591    16,869
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions %                            1.10      .96     .96      .96      1.04
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions %                            1.01      .96     .96      .96       .92
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) %                                4.41     4.15    4.35     4.55      4.45
--------------------------------------------------------------------------------
Portfolio turnover rate %                 17       30      14       80        80
--------------------------------------------------------------------------------

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

(b)  Total return would have been lower had certain expenses not been reduced.

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

                                       31
<PAGE>


Kemper Intermediate Municipal Bond Fund -- Class B

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year    $10.00   $10.52  $10.31   $10.06   $10.18
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss) (c)       .36      .34     .37      .38      .38
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions     (.03)    (.49)    .28      .29     (.04)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .33    (.15)     .65      .67      .34
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                 (.36)    (.34)   (.37)    (.38)    (.38)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --     (.03)   (.07)    (.04)    (.08)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.36)    (.37)   (.44)    (.42)    (.46)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of period         $9.97   $10.00  $10.53   $10.31   $10.06
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a) (b)                3.38    (1.48)   6.38     6.78     3.34
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period              4,856    5,328   5,245    4,571    4,333
($ in thousands)
--------------------------------------------------------------------------------
Ratio of expenses before expense        1.87     1.76    1.76     1.76     1.83
reductions %
--------------------------------------------------------------------------------
Ratio of expenses after expense         1.79     1.76    1.76     1.76     1.71
reductions %
--------------------------------------------------------------------------------
Ratio of net investment income          3.64     3.35    3.55     3.75     3.66
(loss) %
--------------------------------------------------------------------------------
Portfolio turnover rate %                 17       30      14       80       80
--------------------------------------------------------------------------------

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

(b)  Total return would have been lower had certain expenses not been reduced.

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

                                       32
<PAGE>


Kemper Intermediate Municipal Bond Fund -- Class C

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of period  $10.00   $10.53  $10.31   $10.06   $10.19
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------
  Net investment income (loss) (c)       .36      .34     .37      .39      .38
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions     (.03)    (.50)    .29      .29     (.05)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .33     (.16)    .66      .68      .33
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                 (.36)    (.34)   (.37)    (.39)    (.38)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --     (.03)   (.07)    (.04)    (.08)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.36)    (.37)   (.44)    (.43)    (.46)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of period         $9.97   $10.00  $10.53   $10.31   $10.06
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a) (b)                3.41   (1.56)    6.55     6.77     3.26
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in thousands)                       1,151    2,361     788      727      699
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions %                            1.88     1.72    1.73     1.73     1.77
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions %                            1.77     1.72    1.73     1.73     1.65
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) %                                3.64     3.39    3.58     3.78     3.72
--------------------------------------------------------------------------------
Portfolio turnover rate %                 17       30      14       80       80
--------------------------------------------------------------------------------

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

(b)  Total return would have been lower had certain expenses not been reduced.

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


                                       33
<PAGE>

Kemper Municipal Bond Fund -- Class A

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of period   $9.60   $10.61  $10.46   $10.18   $10.15
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------
  Net investment income (loss) (c)       .50      .48     .52      .54      .55
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions      .03     (.76)    .37      .36      .06
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .53     (.28)    .89      .90      .61
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                 (.50)    (.48)   (.52)    (.54)    (.55)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --     (.25)   (.22)    (.08)    (.03)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.50)    (.73)   (.74)    (.62)    (.58)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of period         $9.63    $9.60  $10.61   $10.46   $10.18
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a) (b)                5.70   (2.75)    8.84     9.15     6.00
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in millions)                        2,449    2,728   3,132    3,149    3,274
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions %                             .71      .69     .68      .68      .66
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions %                             .70      .69     .68      .68      .66
--------------------------------------------------------------------------------
Ratio of net investment income          5.27     4.86    4.97     5.29     5.35
(loss) %
--------------------------------------------------------------------------------
Portfolio turnover rate %                 44       70      65       77       97
--------------------------------------------------------------------------------

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

(b)  Total return would have been lower had certain expenses not been reduced.

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


                                       34
<PAGE>

Kemper Municipal Bond Fund -- Class B

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of period   $9.58   $10.58  $10.44   $10.15   $10.13
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------
  Net investment income (loss) (c)       .42      .40     .43      .45      .46
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions      .02     (.75)    .36      .37      .05
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .44     (.35)    .79      .82      .51
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                (.42)     (.40)   (.43)    (.45)    (.46)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --     (.25)   (.22)    (.08)    (.03)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.42)    (.65)   (.65)    (.53)    (.49)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of period         $9.60    $9.58  $10.58   $10.44   $10.15
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a) (b)                4.74    (3.48)   7.84     8.32     4.97
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period ($ in
millions)                                 61       75      78       61       43
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions %                            1.53     1.53    1.52     1.55     1.54
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions %                            1.52     1.53    1.52     1.55     1.54
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) %                                4.45     4.02    4.13     4.42     4.47
--------------------------------------------------------------------------------
Portfolio turnover rate %                 44       70      65       77       97
--------------------------------------------------------------------------------

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

(b)  Total return would have been lower had certain expenses not been reduced.

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


                                       35
<PAGE>


Kemper Municipal Bond Fund -- Class C

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning
of period                        $9.62   $10.62     $10.47    $10.18    $10.16
                                ------------------------------------------------
--------------------------------------------------------------------------------
Income from investment
operations:
--------------------------------------------------------------------------------
  Net investment income
  (loss) (c)                       .43      .40        .43       .46       .46
--------------------------------------------------------------------------------
  Net realized and unrealized
  gain (loss) on investment
  transactions                     .01     (.75)       .37       .37       .05
                                ------------------------------------------------
--------------------------------------------------------------------------------
  Total from investment
  operations                       .44     (.35)       .80       .83       .51
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income           (.42)    (.40)      (.43)     (.46)     (.46)
--------------------------------------------------------------------------------
  Net realized gains on
  investment transactions           --     (.25)      (.22)     (.08)     (.03)
                                ------------------------------------------------
--------------------------------------------------------------------------------
  Total distributions             (.42)    (.65)      (.65)     (.54)     (.49)
                                ------------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of period   $9.64    $9.62     $10.62    $10.47    $10.18
                                ------------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a) (b)          4.74    (3.47)      7.93      8.34      4.99
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of period
($ in millions)                      8        9         10         5         4
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions %              1.54     1.54       1.52      1.53      1.51
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions %              1.53     1.54       1.52      1.53      1.51
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) %                          4.44     4.01       4.13      4.44      4.50
--------------------------------------------------------------------------------
Portfolio turnover rate %           44       70         65        77        97
--------------------------------------------------------------------------------

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

(b)  Total return would have been lower had certain expenses not been reduced.

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

                                       36
<PAGE>


Kemper California Tax-Free Income Fund -- Class A

--------------------------------------------------------------------------------
Year ended August 31,                2000     1999     1998    1997      1996
--------------------------------------------------------------------------------
Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year   $7.10   $7.65    $7.52    $7.31    $7.35
                                    --------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)         .34     .34      .36      .38       .39
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions    .20    (.41)     .26      .25       .04
                                    --------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations     .54   (.07)      .62      .63      .43
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income               (.34)   (.34)    (.36)    (.38)     (.39)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                          --    (.14)    (.13)    (.04)     (.08)
                                    --------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                 (.34)   (.48)    (.49)    (.42)     (.47)
                                    --------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year         $7.30   $7.10    $7.65    $7.52     $7.31
                                    --------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                  7.97  (1.07)     8.56     8.78      5.92
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                         767,460 854,921  982,113  979,471 1,022,147
--------------------------------------------------------------------------------
Ratio of expenses before expense       .85     .82      .78      .79       .78
reductions (%)
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                         .84     .82      .78      .79       .78
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                            4.98    4.60     4.82     5.08      5.18
--------------------------------------------------------------------------------
Portfolio turnover rate (%)             57      62       61       79       100
--------------------------------------------------------------------------------

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

                                       37
<PAGE>


Kemper California Tax-Free Income Fund -- Class B

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year      $7.11   $7.66   $7.52    $7.32    $7.35
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)            .29     .28     .30      .32      .32
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions       .20    (.41)    .27      .24      .05
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations        .49    (.13)    .57      .56      .37
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                  (.29)   (.28)   (.30)    (.32)    (.32)
--------------------------------------------------------------------------------
  Net realized gains on investment        --     (.14)   (.13)    (.04)    (.08)
  transactions
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                    (.29)   (.42)   (.43)    (.36)    (.40)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year            $7.31   $7.11   $7.66    $7.52    $7.32
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                     7.14   (1.90)   7.79     7.73     5.16
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                             32,523  37,070  35,466   26,930   17,536
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                           1.64    1.65    1.63     1.62     1.63
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                           1.63    1.65    1.63     1.62     1.63
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                               4.19    3.75    3.97     4.25     4.33
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                57      62      61       79      100
--------------------------------------------------------------------------------

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


                                       38
<PAGE>

Kemper California Tax-Free Income Fund -- Class C

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year      $7.05   $7.60   $7.50    $7.31   $7.34
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)            .29     .28     .30      .32     .32
--------------------------------------------------------------------------------
  Net realized and unrealized gain        .21    (.41)    .23      .23     .05
  (loss) on investment transactions
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations        .50    (.13)    .53      .55     .37
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                  (.29)   (.28)   (.30)    (.32)   (.32)
--------------------------------------------------------------------------------
  Net realized gains on investment         --    (.14)   (.13)    (.04)   (.08)
  transactions
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                    (.29)   (.42)   (.43)    (.36)   (.40)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year            $7.26   $7.05   $7.60    $7.50   $7.31
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                     7.34   (1.91)   7.21     7.59    5.15
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                              5,354   3,947   6,693    1,506     855
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                           1.64    1.68    1.62     1.60    1.64
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                           1.63    1.68    1.62     1.60    1.64
--------------------------------------------------------------------------------
Ratio of net investment income           4.19    3.71    3.98     4.27    4.32
(loss) (%)
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                57      62      61       79     100
--------------------------------------------------------------------------------

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


                                       39
<PAGE>

Kemper Florida Tax-Free Income Fund -- Class A

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year      $9.72   $10.62  $10.42   $10.21   $10.27
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)            .45      .47     .49      .51     .52
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions       .13     (.68)    .35      .33     .08
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations        .58     (.21)    .84      .84     .60
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                  (.45)    (.47)   (.49)    (.51)   (.52)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                             --     (.22)   (.15)    (.12)   (.14)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                    (.45)    (.69)   (.64)    (.63)   (.66)
--------------------------------------------------------------------------------
Net asset value, end of year            $9.85    $9.72  $10.62   $10.42  $10.21
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                     6.15    (2.13)   8.27     8.37    5.83
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                             70,265   84,757 100,431   99,051 105,028
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                           1.00      .88     .85      .83     .84
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                            .99      .88     .85      .83     .84
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                               4.80     4.57    4.65     4.92    5.00
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                21       56      70       87     119
--------------------------------------------------------------------------------

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

                                       40
<PAGE>

Kemper Florida Tax-Free Income Fund -- Class B

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year      $9.71   $10.60  $10.40   $10.19  $10.26
                                       -----------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income                   .38      .39     .40      .42     .43
--------------------------------------------------------------------------------
  Net realized and unrealized gain        .12     (.67)    .35      .33     .07
  (loss) on investment transactions
                                       -----------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations         .50    (.28)    .75      .75     .50
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                  (.38)    (.39)   (.40)    (.42)   (.43)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                             --    (.22)   (.15)    (.12)   (.14)
                                       -----------------------------------------
--------------------------------------------------------------------------------
  Total distributions                    (.38)    (.61)   (.55)    (.54)   (.57)
                                       -----------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year            $9.83    $9.71  $10.60   $10.40  $10.19
                                       -----------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                     5.32   (2.85)    7.38     7.48    4.84
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                              5,915    6,474   6,379    4,226   2,752
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                           1.77     1.69    1.68     1.65    1.68
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                           1.76     1.69    1.68     1.65    1.68
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                               4.03     3.76    3.82     4.10    4.16
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                21       56      70       87     119
--------------------------------------------------------------------------------

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

                                       41
<PAGE>

Kemper Florida Tax-Free Income Fund -- Class C

--------------------------------------------------------------------------------
Year ended August 31,                 2000     1999     1998     1997      1996
--------------------------------------------------------------------------------
Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year    $9.71   $10.60   $10.41   $10.20   $10.26
                                    --------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)          .38      .39      .40      .42      .43
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions     .12     (.67)     .34      .33      .08
                                    --------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations      .50     (.28)     .74      .75      .51
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                (.38)    (.39)    (.40)    (.42)    (.43)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                           --     (.22)    (.15)    (.12)    (.14)
                                    --------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                  (.38)    (.61)    (.55)    (.54)    (.57)
                                    --------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year          $9.83    $9.71   $10.60   $10.41   $10.20
                                    --------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                   5.34    (2.84)    7.26     7.49     4.97
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                            1,199    1,249      721      568      325
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                         1.74     1.68     1.69     1.64     1.64
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                         1.73     1.68     1.69     1.64     1.64
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                             4.06     3.76     3.81     4.11     4.20
--------------------------------------------------------------------------------
Portfolio turnover rate (%)              21       56       70       87      119
--------------------------------------------------------------------------------

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

                                       42
<PAGE>


Kemper New York Tax-Free Income Fund -- Class A

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year  $10.22   $11.11   $10.93   $10.66    $10.80
                                   --------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)         .47      .49      .53      .56       .56
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions    .17     (.63)     .36      .36        --
                                    --------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations     .64     (.14)     .89      .92       .56
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income               (.47)    (.49)    (.53)    (.56)     (.56)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                          --     (.26)    (.18)    (.09)     (.14)
                                    --------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                 (.47)    (.75)    (.71)    (.65)     (.70)
                                    --------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year        $10.39   $10.22   $11.11   $10.93    $10.66
                                    --------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                  6.50   (1.52)     8.44     8.77      5.26
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                         200,806  235,800  268,155  272,777   294,121
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                         .89      .88      .84      .83       .83
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                         .88      .88      .84      .83       .83
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                            4.68     4.49     4.81     5.15      5.15
--------------------------------------------------------------------------------
Portfolio turnover rate (%)             26       69       77       92       104
--------------------------------------------------------------------------------

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

                                       43
<PAGE>

Kemper New York Tax-Free Income Fund -- Class B

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year      $10.23   $11.13  $10.94   $10.66 $10.80
                                       -----------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)             .38      .39     .44      .47    .47
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions        .17     (.64)    .37      .37     --
                                       -----------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations         .55     (.25)    .81      .84    .47
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                   (.38)    (.39)   (.44)    (.47)  (.47)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                              --     (.26)   (.18)    (.09)  (.14)
                                       -----------------------------------------
--------------------------------------------------------------------------------
  Total distributions                     (.38)    (.65)   (.62)    (.56)  (.61)
                                       -----------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year            $10.40   $10.23  $11.13   $10.94 $10.66
                                       -----------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                      5.60    (2.44)   7.65     7.96   4.36
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                              11,795   13,674  12,390   10,184  7,007
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                            1.71     1.73    1.67     1.67   1.69
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                            1.70     1.73    1.67     1.67   1.69
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                                3.86     3.64    3.98     4.31   4.29
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                 26       69      77       92    104
--------------------------------------------------------------------------------

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


                                       44
<PAGE>

Kemper New York Tax-Free Income Fund -- Class C

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year    $10.21  $11.10   $10.92  $10.65   $10.79
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income                  .39     .40      .44     .47      .47
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions      .17   (.63)      .36     .36       --
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .56   (.23)      .80     .83      .47
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                (.39)   (.40)    (.44)   (.47)    (.47)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --   (.26)     (.18)   (.09)    (.14)
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.39)  (.66)     (.66)   (.56)    (.61)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year          $10.38 $10.21    $11.10  $10.92   $10.65
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                    5.64  (2.33)     7.56    7.87     4.38
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                             3,541   3,968    3,775   2,973    1,218
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                          1.70    1.71     1.67    1.65     1.67
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                          1.69    1.71     1.67    1.65     1.67
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                              3.87    3.65     3.98    4.33     4.31
--------------------------------------------------------------------------------
Portfolio turnover rate (%)               26      69       77      92      104
--------------------------------------------------------------------------------

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

                                       45
<PAGE>


Kemper Ohio Tax-Free Income Fund -- Class A

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year     $9.97   $10.54  $10.22    $9.93    $9.81
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)           .46      .46     .47      .47      .48
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions     (.01)    (.53)    .39      .32      .12
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .45     (.07)    .86      .79      .60
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                 (.46)    (.46)   (.47)    (.47)    (.48)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --     (.04)   (.07)    (.03)      --
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.46)    (.50)   (.54)    (.50)    (.48)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year           $9.96    $9.97  $10.54   $10.22    $9.93
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                    4.58    (.66)    8.57     8.17     6.16
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                            24,319   30,324  31,731   29,931   29,496
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                          1.01      .94     .87      .89      .91
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                          1.00      .94     .87      .89      .91
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                              4.68     4.38    4.51     4.69     4.78
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                9       29      15       52       86
--------------------------------------------------------------------------------

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


                                       46
<PAGE>


Kemper Ohio Tax-Free Income Fund -- Class B

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year     $9.97   $10.54  $10.22    $9.93    $9.81
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)           .38      .38     .38      .39      .39
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions     (.02)    (.53)    .39      .32      .12
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .36     (.15)    .77      .71      .51
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                 (.38)    (.38)   (.38)    (.39)    (.39)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --     (.04)   (.07)    (.03)      --
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.38)    (.42)   (.45)    (.42)    (.39)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year           $9.95    $9.97  $10.54   $10.22    $9.93
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                    3.73   (1.55)    7.69     7.29     5.30
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in
thousands)                            11,132   12,658  11,100    9,147    7,330
--------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%)                          1.83     1.74    1.69     1.70     1.73
--------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%)                          1.82     1.74    1.69     1.70     1.73
--------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%)                              3.86     3.57    3.69     3.88     3.96
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                9       29      15       52       86
--------------------------------------------------------------------------------

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

                                       47
<PAGE>


Kemper Ohio Tax-Free Income Fund -- Class C

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

Per share operating performance
--------------------------------------------------------------------------------
Net asset value, beginning of year     $9.97   $10.54  $10.22    $9.93    $9.81
                                      ------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
  Net investment income (loss)           .38      .37     .38      .39      .39
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions     (.01)    (.53)    .39      .32      .12
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations       .37     (.16)    .77      .71      .51
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                 (.38)    (.37)   (.38)    (.39)    (.39)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                            --     (.04)   (.07)    (.03)      --
                                      ------------------------------------------
--------------------------------------------------------------------------------
  Total distributions                   (.38)    (.41)   (.45)    (.42)    (.39)
                                      ------------------------------------------
--------------------------------------------------------------------------------
Net asset value, end of year           $9.96    $9.97  $10.54   $10.22    $9.93
                                      ------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (a)                    3.74    (1.48)   7.70     7.32     5.28
--------------------------------------------------------------------------------

Ratios to average net assets and supplemental data
--------------------------------------------------------------------------------
Net assets, end of year ($ in          2,356    1,882   1,010      390      274
thousands)
--------------------------------------------------------------------------------
Ratio of expenses before expense        1.81     1.77    1.67     1.68     1.74
reductions (%)
--------------------------------------------------------------------------------
Ratio of expenses after expense         1.80     1.77    1.67     1.68     1.74
reductions (%)
--------------------------------------------------------------------------------
Ratio of net investment income          3.88     3.53    3.71     3.90     3.95
(loss) (%)
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                9       29      15       52       86
--------------------------------------------------------------------------------

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


                                       48
<PAGE>

How to Invest in the Funds

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

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

<PAGE>

Choosing a Share Class

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

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

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


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Classes and features                      Points to help you compare
----------------------------------------------------------------------------------
<S>                                       <C>

Class A

o Sales charges of up to 4.50% (2.75%     o Some investors may be able to reduce
  for Kemper Intermediate Municipal Bond    or eliminate their sales charges;
  Fund) charged when you buy shares         see next page

o In most cases, no charges when you      o Total annual expenses are lower than
  sell shares                               those for Class B or Class C

o No distribution fee
----------------------------------------------------------------------------------

Class B

o No charges when you buy shares          o The deferred sales charge rate falls to
                                            zero after six years
o Deferred sales charge declining from
  4.00%, charged when you sell shares     o Shares automatically convert to
  you bought within the last six years      Class A after six years, which means
                                            lower annual expenses going forward
o 0.75% distribution fee
----------------------------------------------------------------------------------

Class C

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

o 0.75% distribution fee
----------------------------------------------------------------------------------
</TABLE>

                                       50
<PAGE>


Class A shares

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


                        Sales charge as a     Sales charge as a
                        percent of offering   percent of your net
Your investment         price                 investment*
---------------------------------------------------------------------
All funds except Intermediate Municipal Bond Fund
---------------------------------------------------------------------
Up to $100,000          4.50%                 4.71%
---------------------------------------------------------------------
$100,000-$249,999       3.50                  3.63
---------------------------------------------------------------------
$250,000-$499,999       2.60                  2.67
---------------------------------------------------------------------
$500,000-$999,999       2.00                  2.04
---------------------------------------------------------------------
$1 million or more      0.00**                0.00**
---------------------------------------------------------------------


Intermediate Municipal Bond Fund only
---------------------------------------------------------------------
Up to $100,000          2.75%                  2.83%
---------------------------------------------------------------------
$100,000-$249,999       2.50                   2.56
---------------------------------------------------------------------
$250,000-$499,999       2.00                   2.04
---------------------------------------------------------------------
$500,000-$999,999       1.50                   1.52
---------------------------------------------------------------------
$1 million or more      0.00**                 0.00**
---------------------------------------------------------------------

*    Rounded to nearest one-hundredth percent.

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

The offering price includes the sales charge.

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

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


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


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


THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

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



                                       51
<PAGE>

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

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

o    reinvesting dividends or distributions

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

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

If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. ("Large Order NAV
Purchase Privilege"). This CDSC is waived under certain circumstances (see
"Policies You Should Know About"). Your financial representative or Kemper can
answer your questions and help you determine if you're eligible.

                                       52
<PAGE>

Class B shares

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

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


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

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

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


THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

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

                                       53
<PAGE>


Class C shares

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

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

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


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

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

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


THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

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



                                       54
<PAGE>

How to Buy Shares

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

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------
First investment                          Additional investments
----------------------------------------------------------------------------------

<S>                                       <C>
$1,000 or more for regular accounts       $100 or more for regular accounts

$250 or more for IRAs                     $50 or more for IRAs

$50 or more with an Automatic Investment  $50 or more with an Automatic
Plan                                      Investment Plan, payroll deduction or
                                          direct deposit
----------------------------------------------------------------------------------
Through a financial representative

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

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

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

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

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

o Follow the instructions at              o Follow the instructions at
  www.kemper.com                            www.kemper.com
----------------------------------------------------------------------------------
</TABLE>


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

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

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


                                       55
<PAGE>

How to Exchange or Sell Shares

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

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------
Exchanging into another fund              Selling shares
----------------------------------------------------------------------------------

<S>                                       <C>
$1,000 or more to open a new account      Some transactions, including most for
                                          over $50,000, can only be ordered in
$100 or more for exchanges between        writing with a signature guarantee; if
existing accounts                         you're in doubt, see page 58

----------------------------------------------------------------------------------
Through a financial representative

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

o Call (800) 621-1048 for instructions    o Call (800) 621-1048 for instructions
----------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)

Write a letter that includes:             Write a letter that includes:

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

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

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

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

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

o Follow the instructions at              o Follow the instructions at
  www.kemper.com                            www.kemper.com
----------------------------------------------------------------------------------
</TABLE>



                                       56
<PAGE>

Policies You Should Know About

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

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

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

Policies about transactions

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

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

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

Ordinarily, your investment will start to accrue dividends the next business day
after your purchase is processed. When selling shares you'll generally receive
the dividend for the day on which your shares were sold. The level of income
dividends will vary from one class to another based on the class' fees and
expenses.

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



                                       57
<PAGE>

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

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

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

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

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

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

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


                                       58
<PAGE>

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

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

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


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

o    withdrawals made through a systematic withdrawal plan. Such withdrawals may
     be made at a maximum of 10% per year of the net asset value of the account.

o    withdrawals related to certain retirement or benefit plans

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

o    for Class A shares purchased through the Large Order NAV Purchase
     Privilege, redemption of shares whose dealer of record at the time of the
     investment notifies Kemper Distributors that the dealer waives the
     applicable commission

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

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

                                       59
<PAGE>

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

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

How the funds calculate share price

The price at which you buy shares is as follows:

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

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

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


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

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

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



                                       60
<PAGE>

Other rights we reserve

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

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

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

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

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

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


                                       61
<PAGE>

Understanding Distributions and Taxes

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

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

o    Income dividends: declared daily and paid monthly

o    Short-term and long-term capital gains: November or December, or otherwise
     as needed

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

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


THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------

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

                                       62
<PAGE>


Dividends from these funds are generally tax free for most shareholders, meaning
that investors can receive them without incurring federal, and (for some
investors) state and local income tax liability. However, there are a few
exceptions:

o    a portion of each fund's dividends may be taxable as ordinary income if it
     came from investments in taxable securities

o    because each fund can invest up to 20% of net assets in securities whose
     income is subject to the federal alternative minimum tax (AMT), you may owe
     taxes on a portion of your dividends if you are among those investors who
     must pay AMT

The following table shows the usual tax status of transactions in fund shares as
well as that of any taxable distributions from the funds:


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

Generally taxed at capital gains rates
---------------------------------------------------------------------
o taxable income dividends you receive from a fund
---------------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
---------------------------------------------------------------------

If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend.

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

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



                                       63
<PAGE>

To Get More Information

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

Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus). If you'd like to ask for copies of these documents please
contact Kemper or the SEC (see below). If you're a shareholder and have
questions, please contact Kemper. Materials you get from Kemper are free; those
from the SEC involve a copying fee. If you like, you can look over these
materials in person at the SEC's Public Reference Room in Washington, DC or
request them electronically at [email protected].

SEC
450 Fifth Street, N.W.
Washington, DC 20549-6009
www.sec.gov
1-202-942-8090

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



SEC File Numbers

Kemper Intermediate Municipal Bond Fund    811-2353

Kemper Municipal Bond Fund                 811-2353

Kemper California Tax-Free Income Fund     811-3657

Kemper Florida Tax-Free Income Fund        811-3657

Kemper New York Tax-Free Income Fund       811-3657

Kemper Ohio Tax-Free Income Fund           811-3657



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


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

<PAGE>


                          KEMPER TAX-FREE INCOME FUNDS


           Kemper National Tax-Free Income Series ("National Trust"):
                  Kemper Municipal Bond Fund ("Municipal Fund")
     Kemper Intermediate Municipal Bond Fund ("Intermediate Municipal Fund")


              Kemper State Tax-Free Income Series ("State Trust"):
           Kemper California Tax-Free Income Fund ("California Fund")
              Kemper Florida Tax-Free Income Fund ("Florida Fund")
             Kemper New York Tax-Free Income Fund ("New York Fund")
                 Kemper Ohio Tax-Free Income Fund ("Ohio Fund")
                        (collectively the "State Funds")







                       STATEMENT OF ADDITIONAL INFORMATION

                                 January 1, 2001

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


The  Annual  Report to  Shareholders  of Kemper  Municipal  Bond Fund and Kemper
Intermediate  Municipal  Bond  Fund  dated  September  30,  2000  and of  Kemper
California Tax-Free Income Fund, Kemper Florida Tax-Free Income Fund, Kemper New
York Tax-Free  Income Fund and Kemper Ohio Tax-Free Income Fund dated August 31,
2000 is  incorporated  by  reference  and is  hereby  deemed  to be part of this
Statement of Additional Information.


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



<PAGE>


                                TABLE OF CONTENTS
                                -----------------

                                                                        Page
                                                                        ----

INVESTMENT OBJECTIVES AND POLICIES.........................................1
   Special Considerations Relating to New York Municipal Obligations......14
Additional Information About Investment Techniques........................26
INVESTMENT RESTRICTIONS...................................................36
NET ASSET VALUE...........................................................38
PURCHASE AND REDEMPTION OF SHARES.........................................39
   Purchase of Shares.....................................................39
   Redemption and Repurchase of Shares....................................43
   Special Features.......................................................47
   Additional Transaction Information.....................................50
   Performance............................................................52
   Capital Structure......................................................63
   Master/Feeder Structure................................................65
INVESTMENT ADVISOR........................................................65
   Investment Advisor.....................................................65
   Code of Ethics.........................................................67
   Officers and Trustees..................................................70
   KEMPER CA TAX-FREE INCOME FUND.........................................73
PORTFOLIO TRANSACTIONS....................................................92
   Brokerage Commissions..................................................92
   Portfolio Turnover.....................................................93
FINANCIAL STATEMENTS......................................................93







                                       i
<PAGE>

                       INVESTMENT OBJECTIVES AND POLICIES

Except as  otherwise  indicated,  each Fund's  objectives  and  policies are not
fundamental  and may be  changed  without a  shareholder  vote.  There can be no
assurance that the Funds will achieve their respective objectives.

Kemper Tax-Free Income Funds are two open-end  management  investment  companies
("Trusts"),  Kemper National  Tax-Free Income Series (the "National  Trust") and
Kemper State Tax-Free Income Series (the "State  Trust"),  that together offer a
choice of six investment  portfolios  ("Funds").  The National Trust consists of
two  "National  Funds" that invest  primarily in Municipal  Securities  and have
different  portfolio  maturity  policies  and the State  Trust  consists of four
"State Funds" that invest primarily in the Municipal  Securities of a particular
state.

Under normal  conditions,  as a fundamental  investment  policy,  each Fund will
maintain at least 80% of its  investments in obligations  issued by or on behalf
of states,  territories and possessions of the United States and the District of
Columbia and their political subdivisions,  agencies and instrumentalities,  the
income from which is exempt from federal income taxes ("Municipal  Securities").
The Funds may invest in "private  activity  bonds." The Funds  currently  do not
consider private  activity bonds to be Municipal  Securities for purposes of the
80% limitation.  Although no Fund has the current intention to do so, a Fund may
invest more than 25% of its net assets in  industrial  development  bonds.  Each
Fund is designed for persons who are seeking a high level of income  exempt from
federal income taxes and, in the case of certain State Funds,  from income taxes
of a  particular  state.  Through  a  single  investment  in  shares  of a Fund,
investors  receive  the  benefits  of  professional  management  and  liquidity.
Additionally,  each Fund offers the economic  advantages  of block  purchases of
securities  and  relief  from  administrative  details  such as  accounting  for
distributions  and the  safekeeping  of  securities.  The tax  exemption of Fund
dividends for federal income tax and, if applicable,  particular  state or local
tax purposes does not necessarily  result in exemption under the income or other
tax laws of any other state or local taxing  authority.  The laws of the several
states  and local  taxing  authorities  vary with  respect  to the  taxation  of
interest income and  investments,  and shareholders are advised to consult their
own tax  advisers as to the status of their  accounts  under state and local tax
laws.  The Funds may not be  appropriate  investments  for qualified  retirement
plans and Individual Retirement Accounts.

KEMPER MUNICIPAL BOND FUND ("Municipal  Fund"). The Municipal Fund seeks as high
a level of current  interest  income that is exempt from federal income taxes as
is consistent with  preservation of capital.  It pursues its objective,  through
investment  in a  professionally  managed,  diversified  portfolio  of Municipal
Securities. The dollar-weighted average portfolio maturity of the Municipal Fund
is expected  normally to be longer than 10 years,  although it is not limited as
to portfolio maturity.  For the Municipal Fund, all Municipal Securities will be
rated at the time of purchase within the four highest grades assigned by Moody's
Investors Service,  Inc.  ("Moody's"),  Standard & Poor's  Corporation  ("S&P"),
Fitch  Investors  Service,  Inc.  ("Fitch") or Duff & Phelps  Credit  Rating Co.
("Duff") or any other Nationally Recognized  Statistical Rating Organization (as
designated by the Securities and Exchange  Commission),  provided that up to 10%
of the Municipal Fund's net assets may be invested in Municipal  Securities that
are lower  rated or  unrated  ("junk  bonds").  From time to time,  the Fund may
purchase  insurance  on the  securities  in the  Fund's  portfolio.  While  such
insurance provides protection against default of the issuer, it does not protect
against a decline in the value of a security as a result of market conditions.

In  addition,  the Fund may invest in  certificates  of  participation,  inverse
floaters,  and advance refunded bonds, may purchase or sell portfolio securities
on a  when-issued  or  delayed  delivery  basis,  and may  engage  in  strategic
transactions,  including derivatives. Currently, it is anticipated that not more
than 5% of the net  assets of the Fund will be  invested  in  tax-exempt  leases
during the coming year.  The Fund does not intend to invest more than 25% of its
total assets in any one state.

KEMPER  INTERMEDIATE  MUNICIPAL BOND FUND  ("Intermediate  Municipal Fund"). The
Intermediate  Municipal  Fund seeks as high a level of current  interest  income
that is exempt from federal income taxes as is consistent  with  preservation of
capital.  The Fund pursues its objective through  investment in a professionally
managed,  diversified  portfolio of Municipal  Securities.  As a non-fundamental
policy,  the  dollar-weighted  average  portfolio  maturity of the  Intermediate
Municipal Fund, under normal market conditions,  will be between 3 and 10 years.
All  Municipal  Securities  will,  at the time of  purchase,  be within the four
highest  ratings  of  Moody's,  S&P,  Fitch  or  Duff  or any  other  Nationally
Recognized  Statistical Rating  Organization or will be of comparable quality as
determined  by the Funds'  Advisor ,  provided  that up to 10% of the Fund's net
assets may be
<PAGE>

invested  without  regard to this  limitation.  From time to time,  the Fund may
purchase  insurance  on the  securities  in the  Fund's  portfolio.  While  such
insurance provides protection against default of the issuer, it does not protect
against a decline in the value of a security as a result of market conditions.

In  addition,  the Fund may invest in  certificates  of  participation,  inverse
floaters,  and advance refunded bonds, may purchase or sell portfolio securities
on a  when-issued  or  delayed  delivery  basis,  and may  engage  in  strategic
transactions,  including derivatives. Currently, it is anticipated that not more
than 5% of the net  assets of the Fund will be  invested  in  tax-exempt  leases
during the coming year.  The Fund does not intend to invest more than 25% of its
total assets in any one state.

KEMPER CALIFORNIA TAX-FREE INCOME FUND ("California Fund") seeks a high level of
current income exempt from federal and California  state income taxes.  At least
90% of the Municipal  Securities  will,  at the time of purchase,  be within the
four  highest  ratings of Moody's,  S&P,  Fitch or Duff or any other  Nationally
Recognized  Statistical Rating  Organization or will be of comparable quality as
determined  by the Funds'  Advisor ,  provided  that up to 10% of the Fund's net
assets may be invested without regard to this limitation. From time to time, the
Fund may purchase  insurance on the  securities in the Fund's  portfolio.  While
such insurance  provides  protection  against default of the issuer, it does not
protect  against a  decline  in the  value of a  security  as a result of market
conditions.

In  addition,  the Fund may invest in  certificates  of  participation,  inverse
floaters,  and advance refunded bonds, may purchase or sell portfolio securities
on a  when-issued  or  delayed  delivery  basis,  and may  engage  in  strategic
transactions,  including derivatives. Currently, it is anticipated that not more
than 5% of the net  assets of the Fund will be  invested  in  tax-exempt  leases
during the coming year.

KEMPER  FLORIDA  TAX-FREE  INCOME FUND  ("Florida  Fund")  seeks a high level of
current income exempt from federal  income taxes.  At least 90% of the Municipal
Securities will, at the time of purchase,  be within the four highest ratings of
Moody's,  S&P,  Fitch or Duff or any  other  Nationally  Recognized  Statistical
Rating Organization or will be of comparable quality as determined by the Funds'
Advisor ,  provided  that up to 10% of the Fund's  net  assets  may be  invested
without  regard to this  limitation.  From time to time,  the Fund may  purchase
insurance  on the  securities  in the Fund's  portfolio.  While  such  insurance
provides protection against default of the issuer, it does not protect against a
decline in the value of a security as a result of market conditions.

In  addition,  the Fund may invest in  certificates  of  participation,  inverse
floaters,  and advance refunded bonds, may purchase or sell portfolio securities
on a  when-issued  or  delayed  delivery  basis,  and may  engage  in  strategic
transactions,  including derivatives. Currently, it is anticipated that not more
than 5% of the net  assets of the Fund will be  invested  in  tax-exempt  leases
during the coming year.

KEMPER NEW YORK  TAX-FREE  INCOME FUND ("New York  Fund")  seeks a high level of
current  income  exempt  from  federal,  New York State and New York City income
taxes. At least 90% of the Municipal  Securities  will, at the time of purchase,
be within the four highest  ratings of Moody's,  S&P, Fitch or Duff or any other
Nationally  Recognized  Statistical Rating Organization or will be of comparable
quality as  determined  by the Funds'  Advisor , provided  that up to 10% of the
Fund's net assets may be invested without regard to this  limitation.  From time
to  time,  the Fund may  purchase  insurance  on the  securities  in the  Fund's
portfolio.  While such  insurance  provides  protection  against  default of the
issuer,  it does not  protect  against a decline in the value of a security as a
result of market conditions.

In  addition,  the Fund may invest in  certificates  of  participation,  inverse
floaters,  and advance refunded bonds, may purchase or sell portfolio securities
on a  when-issued  or  delayed  delivery  basis,  and may  engage  in  strategic
transactions,  including derivatives. Currently, it is anticipated that not more
than 5% of the net  assets of the Fund will be  invested  in  tax-exempt  leases
during the coming year.

KEMPER OHIO  TAX-FREE  INCOME FUND ("Ohio  Fund")  seeks a high level of current
income  exempt from  federal and Ohio state  income  taxes.  At least 90% of the
Municipal  Securities will, at the time of purchase,  be within the four highest
ratings  of  Moody's,  S&P,  Fitch or Duff or any  other  Nationally  Recognized
Statistical  Rating  Organization or will be of comparable quality as determined
by the Funds'  Advisor , provided that up to 10% of the Fund's net assets may be
invested  without  regard to this  limitation.  From time to time,  the Fund may
purchase




                                       2
<PAGE>

insurance  on the  securities  in the Fund's  portfolio.  While  such  insurance
provides protection against default of the issuer, it does not protect against a
decline in the value of a security as a result of market conditions.

In  addition,  the Fund may invest in  certificates  of  participation,  inverse
floaters,  and advance refunded bonds, may purchase or sell portfolio securities
on a  when-issued  or  delayed  delivery  basis,  and may  engage  in  strategic
transactions,  including derivatives. Currently, it is anticipated that not more
than 5% of the net  assets of the Fund will be  invested  in  tax-exempt  leases
during the coming year.

Portfolio Maturity.  There are market and investment risks with any security and
a Fund's  return and net asset value will  fluctuate  over time.  Normally,  the
value of a Fund's  investments  varies inversely with changes in interest rates.
There can be no assurance that the objective of any Fund will be achieved.

The maturity of a security held by a Fund will generally be considered to be the
time remaining until repayment of the principal amount of such security,  except
that a security  will be treated  as having a maturity  earlier  than its stated
maturity date if it has technical  features (such as puts or demand features) or
a variable rate of interest  which, in the judgment of the Fund's Advisor , will
result in the  security  being valued in the market as though it has the earlier
maturity.  Intermediate-term  securities  generally  are  more  stable  and less
susceptible to changes in market value than longer-term  securities  although in
most cases they offer lower yields than  securities  with longer  maturities.  A
Fund, other than the Intermediate Municipal Fund, may take full advantage of the
entire range of  maturities of Municipal  Securities  and may adjust the average
maturity  of its  investments  from time to time,  depending  on the  Advisor 's
assessment  of  the  relative  yields   available  on  securities  of  different
maturities and its expectations of future changes in interest rates. However, it
is anticipated that, under normal market conditions,  each such Fund will invest
primarily in long-term Municipal Securities  (generally,  maturities of 15 years
or more),  except that the  Intermediate  Municipal  Fund,  under normal  market
conditions, will maintain a dollar weighted average portfolio maturity between 3
and 10 years.  A Fund will not normally  engage in the trading of securities for
the purpose of realizing short-term profits, but it will adjust its portfolio as
considered  advisable in view of prevailing or anticipated market conditions and
the  Fund's  investment  objective.  Accordingly,  a  Fund  may  sell  portfolio
securities in anticipation  of a rise in interest rates and purchase  securities
in anticipation  of a decline in interest rates. In addition,  a security may be
sold and another of comparable  quality purchased at approximately the same time
to take  advantage of what the Fund believes to be a temporary  disparity in the
normal yield  relationship  between the two  securities.  Yield  disparities may
occur for reasons not directly  related to the investment  quality of particular
issues or the general movement of interest rates, such as changes in the overall
demand for or supply of various types of Municipal  Securities or changes in the
investment  objectives of some investors.  Frequency of portfolio  turnover will
not be a limiting  factor  should a Fund deem it  desirable  to purchase or sell
securities.

State-Specific  Risk  Factors.  The  following  information  as to certain  risk
factors  is  given  to  investors  because  each  State  Fund  concentrates  its
investments  in Municipal  Securities of a particular  state.  Such  information
constitutes only a summary, does not purport to be a complete description and is
based upon information from official statements relating to securities offerings
of state  issuers.  Investors  should  remember  that rating  agencies do change
ratings periodically so that ratings mentioned here may have changed.




California Fund. As described in the California Fund's prospectus, the Fund will
invest in bonds issued by the State of California or its political subdivisions.
The Fund is  therefore  subject to various  statutory,  political  and  economic
factors unique to the State of California.  Discussed below are some of the more
significant  factors  that could affect the ability of the bond issuers to repay
interest  and  principal  on  California  securities  owned  by  the  Fund.  The
information is derived from various public  sources,  all of which are available
to  investors  generally,  and  which  the Fund  believes  to be  accurate.  The
following information constitutes only a brief summary, does not purport to be a
complete  description,  and is based on information  available as of the date of
this Prospectus from official statements and prospectuses relating to securities
offerings of the State of California  and various local  agencies in California.
While the Sponsors have not independently  verified such information,  they have
no reason to  believe  that such  information  is not  correct  in all  material
respects.


1995-96 through 1997-98 Fiscal Years



                                       3
<PAGE>

With  the  end of the  recession  of the  early  1990's  and a  growing  economy
beginning in 1995, the State's financial  condition  improved markedly through a
combination  of  increasing  revenues,  slowdown  in growth  of  social  welfare
programs,  and continued  spending  restraint.

The economy  grew  strongly  during  these fiscal  years,  and as a result,  the
General  Fund took in  substantially  greater tax revenues  (approximately  $2.2
billion in 1995-96,  $1.6  billion in 1996-97,  $2.4 billion in 1997-98 and $1.7
billion in 1998-99) than were  initially  planned when the budgets were enacted.
These  additional  funds were largely directed to school spending as mandated by
Proposition  98,  and to make up  shortfalls  from  reduced  federal  health and
welfare  aid in  1995-96  and  1996-97and  to fund  new  program  incentives  in
1998-1999..  The  accumulated  budget  deficit  from  the  recession  years  was
eliminated.


1998-99 Fiscal Year Budget

The following were major features of the 1998 Budget Act and certain  additional
fiscal bills enacted before the end of the legislative session:

The most  significant  feature of the 1998-99 budget was agreement on a total of
$1.4 billion of tax cuts.  The central  element was a bill which  provided for a
phased-in  reduction  of the  Vehicle  License  Fee  ("VLF").  Since  the VLF is
transferred to cities and counties under existing law, the bill provided for the
General Fund to replace the lost revenues.  Starting on January 1, 1999, the VLF
was reduced by 25 percent,  at a cost to the General Fund of approximately  $500
million in the 1998-99 Fiscal Year and about $1 billion annually thereafter.

In addition to the cut in VLF, the 1998-99  budget  included both  temporary and
permanent  increases in the personal  income tax dependent  credit ($612 million
General  Fund  cost in  1998-99,  and less in  future  years),  a  nonrefundable
renter's tax credit ($133 million),  and various  targeted  business tax credits
($106 million).

Proposition 98 funding for K-14 schools was increased by $1.7 billion in General
Fund moneys over revised 1997-98 levels,  approximately $300 million higher than
the minimum  Proposition 98 guarantee.  Of the 1998-99 funds, major new programs
included money for  instructional  and library  materials,  previously  deferred
maintenance, support for increasing the school year to 180 days and reduction of
class sizes in Grade 9.

Funding for higher education  increased  substantially  above the actual 1997-98
level. General Fund support was increased by $340 million (15.6 percent) for the
University of  California  and $267 million  (14.1  percent) for the  California
State University  system. In addition,  Community  Colleges funding increased by
$300 million (6.6 percent).

The budget included  increased  funding for health,  welfare and social services
programs. A 4.9 percent grant increase was included in the basic welfare grants,
the first increase in those grants in nine years.

Funding for the judiciary and criminal justice programs increased  approximately
11 percent over 1997-98;  primarily to reflect increased State support for local
trial courts and rising prison population.

Major  legislation  enacted  after the 1998 Budget Act  included new funding for
resources  projects,  a share of the purchase of the Headwaters Forest,  funding
for the Infrastructure  and Economic  Development Bank ($50 million) and funding
for the  construction of local jails. The State realized savings of $433 million
from a reduction in the State's  contribution to the State Teacher's  Retirement
System in 1998-99.

1999-2000 Fiscal Year Budget



                                       4
<PAGE>




The following were major features of the 1999 Budget Act:


Proposition 98 funding for K-12 schools was increased by $1.6 billion in General
Fund moneys over revised 1998-99 levels,  $108.6 million higher than the minimum
Proposition 98 guarantee.  Of the 1999-2000 funds,  major new programs  included
money for reading improvement,  new textbooks,  school safety, improving teacher
quality,  funding teacher bonuses,  providing greater  accountability for school
performance,  increasing  preschool  and after school care  programs and funding
deferred maintenance of school facilities.


Funding for higher education  increased  substantially  above the actual 1998-99
level.  General Fund support was increased by $184 million (7.3 percent) for the
University of California and $126 million (5.9 percent) for the California State
University  system. In addition,  Community Colleges funding increased by $324.3
million (6.6  percent).  As a result,  undergraduate  fees at the  University of
California  and the  California  State  University  System were  reduced for the
second  consecutive  year,  and the per-unit  charge at  Community  Colleges was
reduced by $1.


The Budget  included  increased  funding of nearly  $600  million for health and
human services.


About $800  million from the General Fund were  directed  toward  infrastructure
costs, including $425 million in additional funding for the Infrastructure Bank,
initial  planning  costs for a new  prison  in the  Central  Valley,  additional
equipment for train and ferry service,  and payment of deferred  maintenance for
state parks.

The Legislature enacted a one-year additional reduction of 10 percent of the VLF
for calendar  year 2000, at a General Fund cost of about $250 million in each of
FY  1999-2000  and  2000-01  to make  up  lost  funding  to  local  governments.
Conversion of this one-time  reduction to a permanent cut will remain subject to
the revenue tests in the legislation adopted in the prior year.


A  one-time  appropriation  of $150  million,  to be split  between  cities  and
counties,  was made to offset  property  tax  shifts  during  the early  1990's.
Additionally,  an ongoing $50 million was appropriated as a subvention to cities
for jail  booking or  processing  fees  charged by counties  when an  individual
arrested by city personnel is taken to a county detention facility.


The  State's  Legislative  Analyst  ("LAO")  issued a report  in  February  2000
indicating  General Fund revenues for the 18-month  period (January 2000 through
June 2001) could be as much as $4.2 billion  higher than the 2000-01  Governor's
Budget estimates. The LAO estimate was issued after analyzing actual revenue fro
December  1999  and  January  2000,  which  were not  available  at the time the
Governor's   Budget   estimate  were  prepared.   The  LAO  report  assumed  the
continuation of strong economic growth in the State during this period

Proposed 2000-01 Fiscal Year Budget
-----------------------------------



                                       5
<PAGE>

On January 10, 2000 Governor  Davis release his proposed  budget for Fiscal Year
2000-01.  The 2000-01  Governor's  Budget  generally  reflect  that General Fund
revenue for Fiscal Year  12999-2000  will be higher than  projection made at the
time of the 1999 Budget Act.

The Governor's  Budget  project  General Fund revenue and transfer in 2000-01 of
$68.2  billion.  This include  anticipated  payment from the tobacco  litigation
settlement  of $387.9  million and the receipt of tone-time  revue form the sale
assets.  More accurate revenue estimate will be available in May and June before
the  adoption of the Budget.  The  Governor  has  proposed  $167  million in tax
reduction initiatives.

The  Governor's  Budget  proposed  General Fund  expenditure  so $68,8  billion.
Included in the Budge are set-asides of $500 million for legal contingencies and
$100 million for various one-time legislative initiatives.  Base on the proposed
review and  expenditures,  the  Governor's  Budget  projects  the June 30,  2001
balance in the SFEU to be $1.238 billion.


Constitutional, Legislative and Other Factors

Certain California constitutional  amendments,  legislative measures,  executive
orders,  administrative  regulations  and voter  initiatives  could  produce the
adverse effects described below, among others.

Revenue  Distribution.   Certain  Debt  Obligations  in  the  Portfolio  may  be
obligations  of  issuers  which  rely in  whole or in part on  California  State
revenues for payment of these  obligations.  Property tax revenues and a portion
of the State's  General Fund  surplus are  distributed  to counties,  cities and
their  various  taxing  entities  and  the  State  assumes  certain  obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's  General Fund will be distributed in the future to counties,  cities and
their various entities is unclear.

Health Care  Legislation.  Certain  Debt  Obligations  in the  Portfolio  may be
obligations   which  are  payable  solely  from  the  revenues  of  health  care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.

The Federally  sponsored  Medicaid  program for health care services to eligible
welfare   beneficiaries  in  California  is  known  as  the  Medi-Cal   program.
Historically,  the Medi-Cal  program has  provided  for a  cost-based  system of
reimbursement  for inpatient  care  furnished to Medi-Cal  beneficiaries  by any
hospital wanting to participate in the Medi-Cal program,  provided such hospital
met applicable requirements for participation.  California law now provides that
the State of California  shall  selectively  contract with  hospitals to provide
acute inpatient  services to Medi-Cal  patients.  Medi-Cal  contracts  currently
apply only to acute inpatient services. Generally, such selective contracting is
made  on  a  flat  per  diem   payment   basis  for  all  services  to  Medi-Cal
beneficiaries,  and  generally  such  payment has not  increased  in relation to
inflation,  costs or other  factors.  Other  reductions  or  limitations  may be
imposed on payment  for  services  rendered  to  Medi-Cal  beneficiaries  in the
future.

Under  this  approach,  in most  geographical  areas of  California,  only those
hospitals which enter into a Medi-Cal contract with the State of California will
be  paid  for  non-emergency  acute  inpatient  services  rendered  to  Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain  circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.

California enacted  legislation in 1982 that authorizes private health plans and
insurers to contract  directly with hospitals for services to  beneficiaries  on
negotiated  terms.  Some  insurers  have  introduced  plans known as  "preferred
provider   organizations"   ("PPOs"),   which  offer  financial  incentives  for
subscribers  who use only the hospitals  which contract with the plan.  Under an
exclusive  provider plan, which includes most health  maintenance  organizations
("HMOs"),  private payors limit coverage to those services  provided by selected
hospitals.  Discounts  offered  to HMOs and PPOs may  result in  payment  to the
contracting  hospital  of less  than  actual  cost and the  volume  of  patients
directed to a hospital under an HMO or PPO contract may vary  significantly from
projections.  Often,  HMO or PPO  contracts are  enforceable  for a stated term,
regardless of provider  losses or of bankruptcy of the respective HMO or PPO. It
is expected  that  failure to execute and  maintain  such PPO and HMO  contracts
would  reduce  a  hospital's   patient  base  or  gross  revenues.   Conversely,
participation  may  maintain or increase  the  patient  base,  but may result in
reduced payment and lower net income to the contracting hospitals.

                                       6
<PAGE>


These Debt  Obligations may also be insured by the State of California  pursuant
to an insurance  program  implemented by the Office of Statewide Health Planning
and Development for health facility  construction  loans. If a default occurs on
insured Debt Obligations,  the State Treasurer will issue debentures payable out
of a reserve fund established  under the insurance program or will pay principal
and interest on an  unaccelerated  basis from  unappropriated  State funds.  The
Office of Statewide Health Planning and Development  commisisied  varios studies
commenced  in December  1983,  to  evaluate  the  adequacy  of the reserve  fund
established  under the insurance  program and based on certain  formulations and
assumptions found the reserve fund  substantially  underfunded.  The most recent
study,  prepared in December 1998 by Ernst & Young LLP,  concluded,  among other
things,  that  although  the fund would not meet  California  private  insurance
reserve standards,  reserves were sufficient and, assuming "normal and expected"
conditions, the Health Facility Construction Loan Insurance Fund, as of June 30,
1998,  should  maintain a positive  balance  over the long term.


Mortgages  and  Deeds.   Certain  Debt  Obligations  in  the  Portfolio  may  be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor  secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of  foreclosure  and the other on the type of debt  secured.
Under the  former,  a  deficiency  judgment is barred  when the  foreclosure  is
accomplished  by means of a  nonjudicial  trustee's  sale.  Under the latter,  a
deficiency  judgment  is barred  when the  foreclosed  mortgage or deed of trust
secures certain purchase money obligations. Another California statute, commonly
known as the "one form of  action"  rule,  requires  creditors  secured  by real
property to exhaust their real property security by foreclosure  before bringing
a personal action against the debtor. The fourth statutory  provision limits any
deficiency  judgment obtained by a creditor secured by real property following a
judicial  sale of such property to the excess of the  outstanding  debt over the
fair value of the property at the time of the sale, thus preventing the creditor
from obtaining a large  deficiency  judgment against the debtor as the result of
low bids at a judicial sale. The fifth statutory  provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to which
a deficiency judgment may be ordered against the debtor.


Upon the default of a mortgage or deed of trust with respect to California  real
property, the creditor's nonjudicial  foreclosure rights under the power of sale
contained  in the  mortgage  or deed of trust  are  subject  to the  constraints
imposed by  California  law upon  transfers of title to real property by private
power of sale.  During the  three-month  period  beginning  with the filing of a
formal  notice of default,  the debtor is entitled to reinstate  the mortgage by
making any overdue  payments.  Under  standard loan  servicing  procedures,  the
filing of the formal notice of default does not occur unless at least three full
monthly  payments  have  become  due and  remain  unpaid.  The  power of sale is
exercised  by posting and  publishing a notice of sale after  expiration  of the
three-month  reinstatement period which notice of sale must be given at least 60
days before the scheduled sale date. . The debtor may reinstate the mortgage, in
the manner described above, up to five business days prior to the scheduled sale
date.  Therefore,  the effective  minimum  period for  foreclosing on a mortgage
could be in excess of seven months after the initial  default.  Such time delays
in collections could disrupt the flow of revenues available to an issuer for the
payment of debt service on the  outstanding  obligations  if such defaults occur
with respect to a substantial  number of mortgages or deeds of trust securing an
issuer's obligations.


In  addition,  a court could find that there is  sufficient  involvement  of the
issuer in the nonjudicial sale of property  securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings  violate  the due  process  requirements  of the  Federal  or  State
Constitutions,  consequently  preventing  an issuer  from using the  nonjudicial
foreclosure remedy described above.

Certain Debt  Obligations in the Portfolio may be obligations  which finance the
acquisition  of  single  family  home  mortgages  for  low and  moderate  income
mortgagors.  These  obligations may be payable solely from revenues derived from
the home  mortgages,  and are  subject  to  California's  statutory  limitations
described  above  applicable  to  obligations  secured by real  property.  Under
California antideficiency  legislation,  there is no personal recourse


                                       7
<PAGE>

against a mortgagor of a single-family residence purchased with the loan secured
by the  mortgage,  regardless  of  whether  the  creditor  chooses  judicial  or
nonjudicial foreclosure.

Under  California law,  mortgage loans secured by  single-family  owner-occupied
dwellings may be prepaid at any time.  Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary  prepayments made during the first
five years during the term of the mortgage  loan,  and then only if the borrower
prepays  an  amount in excess  of 20% of the  original  principal  amount of the
mortgage  loan in a 12-month  period;  a prepayment  charge  cannot in any event
exceed six months'  advance  interest on the amount  prepaid during the 12-month
period in  excess  of 20% of the  original  principal  amount of the loan.  This
limitation  could  affect the flow of revenues  available  to an issuer for debt
service on the outstanding debt obligations which financed such home mortgages.

Proposition 9. On November 6, 1979, an initiative  known as  "Proposition  9" or
the "Gann Initiative" was approved by the California voters, which added Article
XIIIB to the  California  Constitution.  Under  Article  XIIIB,  State and local
governmental entities have an annual  "appropriations limit" and are not allowed
to spend certain  moneys called  "appropriations  subject to  limitation"  in an
amount higher than the "appropriations limit." Article XIIIB does not affect the
appropriation   of  moneys   which  are   excluded   from  the   definition   of
"appropriations  subject to limitation,"  including debt service on indebtedness
existing  or  authorized   as  of  January  1,  1979,  or  bonded   indebtedness
subsequently  approved  by the voters.  In general  terms,  the  "appropriations
limit" is required  to be based on certain  1978/79  expenditures,  and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services  provided by these entities.  Article XIIIB also provides that if these
entities'  revenues in any year exceed the amounts  permitted  to be spent,  the
excess  is to be  returned  by  revising  tax  rates or fee  schedules  over the
subsequent two years.

Proposition  13. Certain of the Debt  Obligations  may be obligations of issuers
who rely in whole or in part on ad valorem  real  property  taxes as a source of
revenue.  On June 6,  1978,  California  voters  approved  an  amendment  to the
California  Constitution  known as Proposition  13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA was to limit ad valorem
taxes on real  property  and to  restrict  the  ability  of taxing  entities  to
increase real property tax revenues.

Section 1 of Article  XIIIA,  as  amended,  limits the maximum ad valorem tax on
real  property  to 1% of full cash value to be  collected  by the  counties  and
apportioned  according  to law. The 1%  limitation  does not apply to ad valorem
taxes or special  assessments to pay the interest and redemption  charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article  XIIIA  defines  "full cash value" to mean "the  County  Assessor's
valuation  of real  property  as shown on the  1975/76 tax bill under `full cash
value' or,  thereafter,  the appraised  value of real  property when  purchased,
newly  constructed,  or a  change  in  ownership  has  occurred  after  the 1975
assessment." The full cash value may be adjusted  annually to reflect  inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable  local  data,  or reduced in the event of  declining  property  value
caused by damage, destruction or other factors.

Legislation  enacted by the California  Legislature  to implement  Article XIIIA
provides that  notwithstanding any other law, local agencies may not levy any ad
valorem property tax except to pay debt service on indebtedness  approved by the
voters  prior to July 1, 1978,  and that each  county  will levy the maximum tax
permitted by Article XIIIA.

Proposition  62. On November 4, 1986,  California  voters approved an initiative
statute known as Proposition 62. This initiative provided the following:

Requires  that  any tax for  general  governmental  purposes  imposed  by  local
governments be approved by resolution or ordinance  adopted by a two-thirds vote
of the  governmental  entity's  legislative  body and by a majority  vote of the
electorate of the governmental entity;

Requires  that any special tax  (defined as taxes  levied for other than general
governmental  purposes) imposed by a local governmental  entity be approved by a
two-thirds vote of the voters within that jurisdiction;

Restricts  the use of  revenues  from a special  tax to the  purposes or for the
service for which the special tax was imposed;



                                       8
<PAGE>

Prohibits  the  imposition  of ad  valorem  taxes  on  real  property  by  local
governmental entities except as permitted by Article XIIIA;

Prohibits  the  imposition of  transaction  taxes and sales taxes on the sale of
real property by local governments;

Requires  that any tax imposed by a local  government on or after August 1, 1985
be  ratified  by a  majority  vote of the  electorate  within  two  years of the
adoption of the initiative;

Requires  that,  in the  event a local  government  fails  to  comply  with  the
provisions  of this  measure,  a reduction in the amount of property tax revenue
allocated  to such local  government  occurs in an amount  equal to the revenues
received  by such  entity  attributable  to the tax levied in  violation  of the
initiative; and

Permits these provisions to be amended exclusively by the voters of the State of
California.

In September  1988,  the  California  Court of Appeal in City of  Westminster v.
County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that  Proposition 62 is  unconstitutional  to the extent that it requires a
general tax by a general law city,  enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of  voters.  The  Court  held that the  California  Constitution  prohibits  the
imposition  of a  requirement  that  local  tax  measures  be  submitted  to the
electorate by either  referendum or initiative.  It is impossible to predict the
impact of this  decision  on charter  cities,  on special  taxes or on new taxes
imposed after the effective  date of  Proposition  62. The  California  Court of
Appeal in City of Woodlake v. Logan, (1991) 230 Cal. App. 3d 1058,  subsequently
held that Proposition 62's popular vote requirements for future local taxes also
provided  for  an  unconstitutional  referenda.  The  California  Supreme  Court
declined  to  review  both the  City of  Westminster  and the  City of  Woodlake
decisions.

In Santa Clara Local Transportation  Authority v. Guardino,  (Sept. 28, 1995) 11
Cal. 4th 220,  reh'g  denied,  modified  (Dec.  14, 1995) 12 Cal. 4th 344e,  the
California  Supreme  Court  upheld the  constitutionality  of  Proposition  62's
popular vote requirements for future taxes, and specifically  disapproved of the
City of  Woodlake  decision  as  erroneous.  The  Court  did not  determine  the
correctness  of the City of  Westminster  decision,  because that case  appeared
distinguishable,  was not relied on by the  parties in  Guardino,  and  involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme  Court's  decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.

In McBrearty v. City of Brawley,  59 Cal.  App. 4th 1441,  69 Cal.  Rptr. 2d 862
(Cal.  Ct. App.  1997),  the Court of Appeal held that the city of Brawley  must
either  hold an  election  or cease  collection  of utility  taxes that were not
submitted to a vote. In 1991, the city of Brawley adopted an ordinance  imposing
a utility  tax on its  residents  and began  collecting  the tax  without  first
seeking voter  approval.  In 1996,  the taxpayer  petitioned for writ of mandate
contending  that  Proposition  62 required the city to submit its utility tax on
residents to vote of local electorate. The trial court issued a writ of mandamus
and the city appealed.

First,  the Court of Appeal held that the taxpayer's cause of action accrued for
statute of limitation  purposes at the time of the Guardino decision rather than
at the time when the city adopted the tax ordinance which was July 1991. Second,
the Court held that the voter approval  requirement in Proposition 62 was not an
invalid  mechanism  under  the state  constitution  for the  involvement  of the
electorate in the  legislative  process.  Third,  the Court  rejected the city's
argument that Guardino should only be applied on a prospective  basis.  Finally,
the Court held Proposition 218 (see discussion  below) did not impliedly protect
any local general taxes imposed prior January 1, 1995 against challenge.

Assembly Bill 1362  (Mazzoni),  introduced  February 28, 1997,  which would have
made the Guardino decision inapplicable to any tax first imposed or increased by
an ordinance or resolution  adopted before  December 14, 1995, was vetoed by the
Governor on October 11, 1997. The California State Senate had passed the Bill on
May 16, 1996 and the California  State Assembly had passed the bill on September
11,  1997.  It is not  clear  whether  the Bill,  if  enacted,  would  have been
constitutional  as a non-voted  amendment  to  Proposition  62 or as a non-voted
change to Proposition 62's operative date.


Proposition 87. On November 8, 1988,  California voters approved Proposition 87.
Proposition 87 amended Article XVI,  Section 16, of the California  Constitution
by authorizing  the California  Legislature to prohibit  redevelopment


                                       9
<PAGE>

agencies  from  receiving  any of the property  tax revenue  raised by increased
property  tax rates  levied to repay bonded  indebtedness  of local  governments
approved by voters on or after January 1, 1989.


Proposition  98. On November 8, 1988,  voters of the State approved  Proposition
98, a  combined  initiative  constitutional  amendment  and  statute  called the
"Classroom  Instructional  Improvement and  Accountability  Act." Proposition 98
changed State funding of public  education  below the  university  level and the
operation of the State  Appropriations  Limit,  primarily by  guaranteeing  K-14
schools a minimum share of General Fund revenues. Under Proposition 98 (modified
by Proposition 111 as discussed below),  K-14 schools are guaranteed the greater
of (a) in general,  a fixed percent of General Fund revenues ("Test 1"), (b) the
amount  appropriated to K-14 schools in the prior year,  adjusted for changes in
the cost of living  (measured  as in Article  XIII B by  reference  to State per
capita personal  income) and enrollment  ("Test 2"), or (c) a third test,  which
would  replace  Test 2 in any year  when the  percentage  growth  in per  capita
General Fund  revenues  from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for  changes  in  enrollment  and per  capita  General  Fund  revenues,  plus an
additional  small  adjustment  factor.  If  Test  3 is  used  in any  year,  the
difference  between Test 3 and Test 2 would  become a "credit" to schools  which
would be the basis of  payments  in future  years when per capita  General  Fund
revenue growth exceeds per capita personal income growth.

Proposition  98 permits the  Legislature  -- by two-thirds  vote of both houses,
with the Governor's  concurrence -- to suspend the K-14 schools' minimum funding
formula  for  a  one-year  period.   Proposition  98  also  contains  provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.



Proposition  111. On June 30, 1989,  the California  Legislature  enacted Senate
Constitutional   Amendment  1,  a  proposed   modification   of  the  California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional  Amendment 1 -- on the June 5, 1990 ballot
as  Proposition  111 -- was  approved  by the voters and took  effect on July 1,
1990.  Among a number of  important  provisions,  Proposition  111  recalculated
spending limits for the State and for local governments,  allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring  action  regarding  excess  tax  revenues,  reduced  the amount of the
funding  guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community  college districts in the base calculation for
the next year,  limited  the amount of State tax  revenue  over the limit  which
would be transferred to school districts and community  college  districts,  and
exempted  increased  gasoline  taxes  and  truck  weight  fees  from  the  State
appropriations  limit.  Additionally,  Proposition  111 exempted  from the State
appropriations limit funding for capital outlays.


Proposition  218.  On  November  5,  1996,  the  voters  of the  State  approved
Proposition  218, a  constitutional  initiative,  entitled the "Right to Vote on
Taxes Act" ("Proposition 218").  Proposition 218 adds Articles XIII C and XIII D
to the California  Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect both existing and
future taxes, assessments, fees and charges. Proposition 218 became effective on
November 6, 1996. The Sponsors are unable to predict  whether and to what extent
Proposition  218 may be  held to be  constitutional  or how  its  terms  will be
interpreted  and  applied  by the  courts  Proposition  218 could  substantially
restrict certain local  governments'  ability to raise future revenues and could
subject certain existing sources of revenue to reduction or repeal, and increase
local government costs to hold elections, calculate fees and assessments, notify
the  public and defend  local  government  fees and  assessments  in court.  For
example,  as  discussed  below,  a  California  appellate  court  in the case of
Consolidated  Fire Protection


                                       10
<PAGE>

Dist.  et. al. v. Howard Jarvis  Taxpayers  Assoc.  63 Cal. App., 4th 211 (1998)
upheld one of the  provisions  of  Proposition  218 that  allows a  majority  of
affected property owners to defeat local government attempts to increase certain
property based fees or charges.


Article XIII C of  Proposition  218  requires  majority  voter  approval for the
imposition, extension or increase of general taxes and two-thirds voter approval
for the imposition,  extension or increase of special taxes,  including  special
taxes  deposited into a local  government's  general fund.  Proposition 218 also
provides  that any general tax  imposed,  extended or  increased  without  voter
approval  by any  local  government  on or after  January  1,  1995 and prior to
November  6, 1996 shall  continue  to be imposed  only if approved by a majority
vote in an election held within two years of November 6, 1996.

Article XIII C of Proposition 218 also expressly extends the initiative power to
give voters the power to reduce or repeal  local  taxes,  assessments,  fees and
charges,  regardless of the date such taxes,  assessments,  fees or charges were
imposed.   This   extension   of   the   initiative   power   to   some   extent
constitutionalizes  the March 6, 1995 State Supreme  Court  decision in Rossi v.
Brown,  which upheld an  initiative  that repealed a local tax and held that the
State  constitution  does not preclude  the repeal,  including  the  prospective
repeal,  of a tax  ordinance  by an  initiative,  as  contrasted  with the State
constitutional   prohibition  on  referendum   powers  regarding   statutes  and
ordinances  which  impose  a tax.  Generally,  the  initiative  process  enables
California voters to enact  legislation upon obtaining  requisite voter approval
at a general election.  Proposition 218 extends the authority stated in Rossi v.
Brown by  expanding  the  initiative  power to  include  reducing  or  repealing
assessments,   fees  and  charges,   which  had   previously   been   considered
administrative   rather  than  legislative  matters  and  therefore  beyond  the
initiative power.

The  initiative  power granted under Article XIII C of  Proposition  218, by its
terms,  applies to all local  taxes,  assessments,  fees and  charges and is not
limited to local taxes, assessments, fees and charges that are property related.

Article  XIII D of  Proposition  218 adds  several  new  requirements  making it
generally more  difficult for local agencies to levy and maintain  "assessments"
for municipal services and programs. "Assessment" is defined to mean any levy or
charge  upon  real  property  for a  special  benefit  conferred  upon  the real
property.


Article XIII D of Proposition 218 also adds several provisions  affecting "fees"
and  "charges"  which are  defined as "any levy other than an ad valorem  tax, a
special tax, or an assessment,  imposed by a local  government  upon a parcel or
upon a person as an  incident  of  property  ownership,  including a user fee or
charge for a  property  related  service."  All new and,  after  June 30,  1997,
existing  property  related  fees  and  charges  must  conform  to  requirements
prohibiting,  among other things,  fees and charges which (i) generate  revenues
exceeding the funds required to provide the property related  service,  (ii) are
used for any  purpose  other  than  those  for which  the fees and  charges  are
imposed,  (iii) are for a service not actually used by, or immediately available
to,  the  owner of the  property  in  question,  or (iv)  are  used for  general
governmental  services,  including police,  fire or library services,  where the
service is available to the public at large in substantially  the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or  increased,  written  notice must be given to the record  owner of
each parcel of land affected by such fee or charges.  The local  government must
then hold a hearing upon the proposed  imposition  or increase of such  property
based fee,  and if written  protests  against the  proposal  are  presented by a
majority of the owners of the identified  parcels,  the local government may not
impose or increase the fee or charge.  This aspect of Proposition 218, section 4
of Article XIIID, was found not to constitute an unlawful referendum pursuant to
Article II, section 9 of the California Constitution. Following Guardino, supra,
in  this  regard,  the  court  held  that  these  "balloting  procedures  " were
constitutional.. Consolidated Fire Protection Dist., supra, at 225-26. Moreover,
except for fees or charges for sewer, water and refuse collection  services,  no
property  related  fee or charge may be imposed or  increased  without  majority
approval by the property  owners  subject to the fee or charge or, at the option
of the local agency, two-thirds voter approval by the electorate residing in the
affected area.


                                       11
<PAGE>

Florida Fund. As described in Florida Fund's prospectus, the Fund will invest in
securities  issued by the State of Florida or its  political  subdivisions.  The
Fund is therefore subject to various  statutory,  political and economic factors
unique to the State of Florida. Discussed below are some of the more significant
factors that could affect the ability of the bond issuers to repay  interest and
principal on Florida  securities  owned by the Fund. The  information is derived
from various public sources,  all of which are available to investors generally,
and which the Fund believes to be accurate.

Florida  has  experienced  substantial  population  increases  as  a  result  of
migration  to Florida  from other  areas of the United  States and from  foreign
countries.  This trend is expected to  continue.  Florida's  growth was close to
three  times the  national  average  during  the  1980's and about two times the
national  average during the 1990's.  This growth rate raised concerns about the
need for resource  management  and  conservation.  The growth rate of Florida is
expected to remain well above average for the  indefinite  future.  According to
the 1990 census report, Florida was the fourth most populous state in the nation
with a population of 12.9 million.  This represented an increase of 31% over its
1980  population  of 9.7  million.  At year end 2000  Florida's  population  was
approximately  15.6 million and the  population is expected to increase  another
15% to just  over 18  million  persons  by the  year  2010.  Increases  in State
revenues will be necessary to meet the increased  burdens on the various  public
and social services provided by the State of Florida.

Florida's ability to increase revenues and meet the needs of its population will
depend in part on its ability to foster  business and economic growth as well as
to diversify its economy  beyond its  traditional  reliance on  agriculture  and
tourism.  The  current  Florida  Department  of Labor  and  Employment  Security
statistics  show that the  State's  non-farm  labor  force grew by 3.8%  between
October 1999 and October  2000,  to a total of 7.2 million  jobs.  The growth in
Florida's service industry, including health care and business services, adds to
the  diversification of Florida's economy.  Tourism continues to be an important
element of  Florida's  economy.  Visit  Florida,  the State's  official  tourism
marketing  agency,  reported  that over 71  million  persons  visited  the State
between  July 1, 1999 and June 30,  2000.  Though the numbers are  significantly
higher then in prior  years,  much of the  increase is caused by a change in the
statistical  methodology used by Visit Florida.  The number of tourists visiting
Florida is affected by such factors as the weather in the northern  states,  the
political and economic climate in foreign  countries from which visitors come to
Florida  (e.g.  Canada  and South  America)  and the  general  state of the U.S.
economy.

Another  important  element of Florida's  growth is the  construction  industry.
There were 364,892  wage and  salaried  workers in  construction  in 1999.  This
represents 16,000, or 4.6% more jobs than in 1997. Construction spending totaled
$33,633 million in 1999, up 13.6% from 1998.  There were 166,500 new homes built
last year. This was the highest level of starts since 1988.

In 1992 Florida voters approved a State constitutional  amendment referred to as
"Save Our Homes." This amendment limits ad valorem taxes on homestead properties
and  restricts the ability of taxing  entities to increase real property  taxes.
While  property  taxes levied for payment of debt service are not  restricted by
the limitation,  the overall  creditworthiness of the governmental entity may be
adversely affected.  Taxing entities consisting  primarily of residential areas,
particularly  school  districts,  and  those  entities  close to their  tax rate
limitations are most likely to be adversely affected.

Under  current  law,  the State of Florida is  required  to  maintain a balanced
budget such that current expenses are met from current revenues. Further, in any
given  fiscal  year state  revenues  may not grow more than the  average  annual
growth  rate in  personal  income over the prior  five-year  period.  Any excess
revenues are  transferred  to the State's Budget  Stabilization  Fund until that
Fund  reaches  10% of the  general  collections  in the prior  year.  Any monies
collected in excess of the 10% limit are to be refunded to taxpayers  unless the
legislature, by a two-thirds vote of each House, increases the size of the Fund.
Although  Florida does not currently  impose an  individual  income tax, it does
impose a corporate  income tax that is allocable to the State, in addition to an
ad valorem tax on intangible  personal  property and sales and use taxes.  These
taxes  are a major  source  of  funds  to  meet  Florida's  expenses,  including
repayment of, and interest on,  obligations  backed solely by the full faith and
credit of the State, without recourse to any specific project.

The greatest  single source of state tax receipts is the sales and use tax. This
is projected to amount to $14 billion for fiscal year  2000-2001.  The sales and
use tax is 6%.  Approximately  10% of the  sales  tax is  designated  for  local


                                       12
<PAGE>

governments  and is  distributed  to the  respective  counties  in  which  it is
collected. In addition,  local governments may (by referendum) assess a 1% sales
surtax within their county.

Despite  Florida's rapid growth and recent  acceleration in debt financing,  the
State's debt burden  remains lower than that of other large  population  states.
Net debt payable from state  revenues as of June 30, 1999 is $602.12 per capita,
up from $577.13 in 1998 and $533.59 in 1997.

The State's  economy  should  continue to benefit from good  population  growth,
economic  diversification  and an  increase  in foreign  trade.  These  positive
economic  factors  combined  with the State's  moderate  debt  burden  suggest a
certain level of stability in the State's credit outlook.

As of mid-December  2000, the State's  general  obligation debt was rated Aa2 by
Moody's and AA+ by S&P.




                                       13
<PAGE>



New York Fund.  As  described in the New York Fund's  prospectus,  the Fund will
invest in bonds issued by the State of New York or its  political  subdivisions.
The Fund is  therefore  subject to various  statutory,  political  and  economic
factors  unique to the State of New York.  Discussed  below are some of the more
significant  factors  that could affect the ability of the bond issuers to repay
interest and principal on New York securities owned by the Fund. The information
is derived from various public sources,  all of which are available to investors
generally, and which the Fund believes to be accurate.

Special Considerations Relating to New York Municipal Obligations

Some  of  the  significant  financial  considerations  relating  to  the  Fund's
investments in New York Municipal  Securities are summarized below. This summary
information  is not  intended to be a complete  description  and is  principally
derived  from  the  Annual  Information  Statement  of the  State of New York as
supplemented and contained in official statements relating to issues of New York
Municipal  Securities that were available prior to the date of this Statement of
Additional  Information.  The  accuracy  and  completeness  of  the  information
contained in those official statements have not been independently verified.

State Economy. New York is one of the most populous states in the nation and has
a relatively high level of personal wealth.  The State's economy is diverse with
a comparatively large share of the nation's finance, insurance,  transportation,
communications and services  employment,  and a very small share of the nation's
farming  and  mining


                                       14
<PAGE>

activity.  The State's  location and its excellent air transport  facilities and
natural harbors have made it an important link in international commerce. Travel
and tourism  constitute an important  part of the economy.  Like the rest of the
nation,  New  York  has a  declining  proportion  of its  workforce  engaged  in
manufacturing, and an increasing proportion engaged in service industries.

Relative  to the  nation,  the State has a smaller  share of  manufacturing  and
construction  and a larger  share of  service-related  industries.  The  State's
finance,  insurance and real estate share, as measured by wages, is particularly
large  relative to the nation.  The State is likely to be less affected than the
nation  as a  whole  during  an  economic  recession  that  is  concentrated  in
manufacturing and  construction,  but likely to be more affected by any economic
downturn that is concentrated in the services sector.

The forecast of the State's economy shows continued  expansion  throughout 2000.
Most major sectors recorded  significant  employment gains for the first quarter
of 2000, with the services sector  accounting for most of the increase.  Much of
this increase occurred in business services.  The employment growth rate in 2000
is expected to be 2.1 percent,  which,  although  lower than 1999's 2.6 percent,
represents  another strong year relative to recent historical  performance.  The
unemployment  rate is expected to be 4.9 percent in 2000,  down from 5.1 percent
in 1999.  Personal  income is expected  to rise 6.1 percent in 2000,  with a 7.5
percent  increase  in wages.  Two major  factors  are  working to  produce  this
impressive  growth in wages.  One is the overall  tightness in the labor market,
and the other is strong growth in financial sector bonus payments.

Given the importance of the securities industry in the New York State economy, a
significant change in stock market performance during the forecast horizon could
result in financial sector profits and bonuses that are significantly  different
from those embodied in the forecast. Any actions by the Federal Reserve Board to
moderate  inflation by increasing  interest rates more than anticipated may have
an adverse  impact in New York given the  sensitivity  of  financial  markets to
interest  rate  shifts  and the  prominence  of  these  markets  in the New York
economy.  In  addition,  there is a  possibility  that  greater-than-anticipated
mergers,  downsizing,  and relocation of firms caused by deregulation and global
competition may have a significant adverse effect on employment growth.

There  can  be  no  assurance   that  the  State  economy  will  not  experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.

State Budget. The State  Constitution  requires the governor (the "Governor") to
submit to the State legislature (the  "Legislature") a balanced executive budget
which contains a complete plan of  expenditures  for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing  all  proposed  appropriations  or  reappropriations  and  any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan  constitutes  the proposed State  financial plan for that fiscal
year.  The Governor is required to submit to the  Legislature  quarterly  budget
updates  which  include  a  revised  cash-basis  state  financial  plan,  and an
explanation of any changes from the previous state financial plan.

State law  requires  the  Governor to propose a balanced  budget  each year.  In
recent  years,  the State  has  closed  projected  budget  gaps of $5.0  billion
(1995-96),  $3.9 billion  (1996-97),  $2.3 billion  (1997-98),  and less than $1
billion  (1998-99).  The State's  current fiscal year began on April 1, 2000 and
ends on March 31, 2001.  On March 30, 2000,  the State  adopted the debt service
portion of the State budget for the 2000-01  fiscal year;  the  remainder of the
budget was enacted by the State  Legislature  on May 5, 2000,  35 days after the
statutory deadline of April 1. The Governor approved the budget as passed by the
Legislature.  Prior to passing the budget in its entirety for the current fiscal
year,  the State  enacted  interim  appropriations  that  permitted the State to
continue its operations.

In 2000-01,  General Fund disbursements,  including transfers to support capital
projects,  debt service and other funds,  are  estimated at $38.92  billion,  an
increase of $1.75  billion or 4.72 percent over  1999-2000.  Projected  spending
under the 2000-01 enacted budget is $992 million above the Governor's  Executive
Budget recommendations, including 30-day amendments submitted January 31, 2000.

The 2000-01  Financial  Plan projects  closing  balances in the General Fund and
other  reserves of $3.2  billion,  including  $1.71 billion in the General Fund.
This closing  balance is  comprised  of $675  million in reserves for  potential
labor  costs  resulting  from new  collective  bargaining  agreements  and other
spending  commitments,  $547  million  in the  Tax  Stabilization  Reserve  Fund
("TSRF")  (for  use in case of  unanticipated  deficits),  $150  million  in the
Contingency Reserve Fund ("CRF") (which helps offset litigation risks), and $338
million in the  Community


                                       15
<PAGE>

Projects Fund ("CPF") (which finances legislative  initiatives).  In addition to
the $1.71  billion  balance in the General  Fund,  $1.2 billion is projected for
reserve in the STAR Special  Revenue Fund and $250 million in the Debt Reduction
Reserve Fund ("DRRF").

Several  developments  arising from negotiations on the budget will affect State
finances in subsequent years.  First, a portion of Legislative  additions to the
2000-01  Executive  Budget will recur at higher  spending  levels in 2001-02 and
beyond,  including  increased  funding for school aid, tuition  assistance,  and
prescription drug coverage for the elderly.  Second, the Legislature enacted the
Debt Reform Act of 2000 ("Debt Reform Act").  The Debt Reform Act, which applies
to new  State-supported  debt issued on or after April 1, 2000,  imposes caps on
new debt  outstanding  and new debt service costs,  restricts the use of debt to
capital purposes only, and restricts the maximum term of State debt issuances to
no more than 30 years.  Finally,  the State  adopted  an  additional  tax relief
package that will reduce tax receipts by $1.2 billion when fully effective; this
package  includes the  elimination  or reduction of gross receipts tax on energy
($330 million),  the expansion of the "Power for Jobs" energy tax credit program
($125  million),  a college tuition  deduction or credit taken against  personal
income taxes ($200 million), and reduction of the marriage penalty for taxpayers
who file jointly ($200 million).

The General  Fund is the  principal  operating  fund of the State and is used to
account for all financial transactions except those required to be accounted for
in another  fund. It is the State's  largest fund and receives  almost all State
taxes and other resources not dedicated to particular  purposes.  In the State's
2000-01  fiscal year,  the General Fund  (exclusive of transfers) is expected to
account for approximately 46.6 percent of all Governmental  funds  disbursements
and 67.8  percent of total State funds  disbursements.  General  Fund moneys are
also  transferred to other funds,  primarily to support certain capital projects
and debt service payments in other fund types.

Total General Fund  receipts and transfers  from other funds are projected to be
$39.72 billion in 2000-01,  an increase of $2.32 billion over  1999-2000.  Total
General Fund  disbursements  and  transfers  to other funds are  projected to be
$38.92 billion, an increase of $1.75 billion over 1999-2000.  Total General Fund
receipts and  transfers  from other funds in 2000-01 are  projected to be $39.72
billion,  an  increase  of $2.32  billion  from the $37.40  billion  recorded in
1999-2000.  This total includes $36.35 billion in tax receipts, $1.34 billion in
miscellaneous  receipts,  and $2.03 billion in transfers  from other funds.  The
transfer of $3.4 billion in net resources through the tax refund reserve account
from 1999-2000 to the 2000-01 fiscal period has the effect of  exaggerating  the
growth in State  receipts  from year to year by  depressing  reported  1999-2000
figures and inflating 2000-01 projections.

General Fund  disbursements,  including  transfers to support capital  projects,
debt  service and other funds,  are  currently  estimated  at $38.92  billion in
2000-01,  an increase of $1.75 billion or 4.7 percent over 1999-2000.  Following
the  pattern of the last three  fiscal  years,  education  programs  receive the
largest share of increased  funding in the 2000-01 Financial Plan. School aid is
projected  to grow by $850  million or 8.0 percent  over  1999-2000  (on a State
fiscal  year  basis).  Spending on other local  education  and higher  education
programs will also increase  significantly  from the prior year, growing by $376
million or 13.3 percent. Outside of education, the largest growth in spending is
for State operations ($507 million) and general State charges ($104 million).

Projected  spending  in the 2000-01  Financial  Plan is $992  million  above the
Executive Budget projections. The increase in General Fund spending is comprised
of  legislative  additions to the Executive  Budget  (primarily  in  education),
offset by various spending  reestimates,  including lower projected spending for
Medicaid, welfare, debt service and general State charges.

The  Financial  Plan also  reflects  the use of  resources  from the Health Care
Reform Act of 2000  ("HCRA  2000")  that will help  finance  several  health and
mental hygiene programs in Special Revenue Funds,  including  prescription  drug
assistance for the elderly,  supplemental  Medicare insurance,  and other public
health services.

Despite recent budgetary surpluses recorded by the State,  actions affecting the
level of receipts  and  disbursements,  the  relative  strength of the State and
regional economy,  and actions by the federal  government could impact projected
budget gaps for the State.  These gaps would  result  from a  disparity  between
recurring  revenues and the costs of  increasing  the level of support for State
programs.  To address a potential  imbalance in any given fiscal year, the State
would  be  required  to  take  actions  to  increase   receipts   and/or  reduce
disbursements  as it enacts  the  budget  for that  year,  and,  under the State
Constitution,  the Governor is required to propose a balanced  budget each year.
There  can be no  assurance,  however,  that  the  Legislature  will  enact  the
Governor's  proposals or that the State's actions will be sufficient to preserve
budgetary  balance in a given  fiscal year or to align  recurring  receipts


                                       16
<PAGE>

and  disbursements  in future fiscal years.  There can also be no assurance that
the Legislature will enact into law the Governor's Executive Budget, as amended,
or that the State's adopted budget  projections  will not differ  materially and
adversely from the projections set forth therein.

Over the long term, uncertainties with regard to the economy present the largest
potential  risk to future  budget  balance in New York  State.  For  example,  a
downturn in the financial markets or the wider economy is possible,  a risk that
is  heightened  by the lengthy  expansion  currently  underway.  The  securities
industry is more important to the New York economy than the national  economy as
a whole,  potentially  amplifying  the impact of an economic  downturn.  A large
change in stock market  performance  during the forecast horizon could result in
wage, bonus, and unemployment levels that are significantly different from those
embodied in the 2000-01  Financial  Plan  forecast.  Merging and  downsizing  by
firms, as a consequence of deregulation or continued  foreign  competition,  may
also have more significant adverse effects on employment than expected.

An ongoing risk to the 2000-01  Financial Plan arises from the potential  impact
of certain  litigation and federal  disallowances now pending against the State,
which could produce adverse  effects on the State's  projections of receipts and
disbursements.  The 2000-01 Financial Plan contains  projected  reserves of $150
million  in  2000-01  for  such  events,  but  assumes  no  significant  federal
disallowances or other federal actions that could affect State finances.

The 2000-01  Financial  Plan assumes the  availability  of certain  resources to
finance  portions  of General  Fund  spending  for fringe  benefits,  health and
welfare programs. These resources could become unavailable or decrease,  placing
additional pressures on budget balance.

The State ended its  1999-2000  fiscal  year in balance on a cash basis,  with a
General  Fund  cash-basis  surplus of $1.51  billion as  reported  by DOB. As in
recent years,  strong growth in receipts above forecasted  amounts produced most
of the year-end surplus.  Spending was also modestly below projections,  further
adding to the surplus.

The State  reported a closing  balance of $1.17  billion in the General Fund, an
increase of $275  million  over the  closing  balance  from the prior year.  The
balance was held in four accounts  within the General Fund:  the TSRF,  the CRF,
the  DRRF and the CPF  which is used to  finance  legislative  initiatives.  The
balance is  comprised of $547 million in the TSRF after a deposit of $74 million
in  1999-2000;  $107  million in the CRF;  $250  million  in the DRRF;  and $263
million in the CPF.

The closing fund balance  excludes  $3.97 billion that the State  deposited into
the tax refund reserve  account at the close of 1999-2000 to pay for tax refunds
in 2000-01 of which $521  million  was made  available  as a result of the Local
Government Assistance Corporation ("LGAC") financing program and was required to
be on deposit as of March 31, 2000. The tax refund reserve  account  transaction
has the effect of decreasing reported personal income tax receipts in 1999-2000,
while increasing reported receipts in 2000-01.

General Fund receipts and transfers  from other funds (net of tax refund reserve
account  activity)  for the 1999-2000  fiscal year totaled  $37.40  billion,  an
increase of 1.6 percent over 1998-99.  General Fund  disbursements and transfers
to other funds totaled $37.17 billion, an increase of 1.6 percent from the prior
fiscal year.

Many complex political, social and economic forces influence the State's economy
and finances,  which may in turn affect the State's Financial Plan. These forces
may affect  the State  unpredictably  from  fiscal  year to fiscal  year and are
influenced by governments,  institutions, and organizations that are not subject
to the State's control.  The State Financial Plan is also necessarily based upon
forecasts of national  and State  economic  activity.  Economic  forecasts  have
frequently  failed to predict  accurately the timing and magnitude of changes in
the national and the State  economies.  The DOB believes that its projections of
receipts and disbursements relating to the current State Financial Plan, and the
assumptions on which they are based, are reasonable.  The projections  assume no
changes in federal tax law, which could substantially alter the current receipts
forecast.  In  addition,  these  projections  do not  include  funding  for  new
collective  bargaining  agreements after the current  contracts  expire.  Actual
results,  however, could differ materially and adversely from their projections,
and those projections may be changed materially and adversely from time to time.

Debt  Limits and  Outstanding  Debt.  There are a number of methods by which the
State of New York may incur debt.  Under the State  Constitution,  the State may
not,  with limited  exceptions  for  emergencies,  undertake  long-term


                                       17
<PAGE>

general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters.  There is no limitation on the amount of
long-term  general  obligation  debt that may be so authorized and  subsequently
incurred by the State.

The State may undertake  short-term  borrowings  without  voter  approval (i) in
anticipation  of the receipt of taxes and  revenues,  by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general  obligation  bonds, by issuing bond
anticipation  notes.  The State may also,  pursuant to  specific  constitutional
authorization, directly guarantee certain obligations of the State of New York's
authorities and public benefit  corporations  ("Authorities").  Payments of debt
service on New York State general obligation and New York State-guaranteed bonds
and notes are legally enforceable obligations of the State of New York.

The State employs additional long-term financing mechanisms,  lease-purchase and
contractual-obligation   financings,   which  involve   obligations   of  public
authorities  or  municipalities  that are  State-supported  but are not  general
obligations of the State.  Under these  financing  arrangements,  certain public
authorities  and   municipalities   have  issued   obligations  to  finance  the
construction   and   rehabilitation   of  facilities  or  the   acquisition  and
rehabilitation of equipment,  and expect to meet their debt service requirements
through the receipt of rental or other  contractual  payments made by the State.
Although these  financing  arrangements  involve a contractual  agreement by the
State to make payments to a public authority,  municipality or other entity, the
State's obligation to make such payments is generally  expressly made subject to
appropriation  by the  Legislature  and the actual  availability of money to the
State  for   making  the   payments.   The  State  has  also   entered   into  a
contractual-obligation  financing  arrangement  with the LGAC to restructure the
way the State makes certain local aid payments.

Sustained  growth in the State's economy could  contribute to closing  projected
budget gaps over the next several years, both in terms of  higher-than-projected
tax receipts and in  lower-than-expected  entitlement spending. In the past, the
State  has  taken  management  actions  to  address  potential   financial  plan
shortfalls,  and DOB  believes  it could take  similar  actions  should  adverse
variances occur in its projections for the current fiscal year. In addition, the
State has projected year-end fund balances of up to $3.2 billion in 2000-01.

On January 13, 1992, S&P reduced its ratings on the State's  general  obligation
bonds from A to A- and, in  addition,  reduced its ratings on the State's  moral
obligation,  lease  purchase,  guaranteed and  contractual  obligation  debt. On
August 28, 1997, S&P revised its ratings on the State's general obligation bonds
from A- to A and  revised its ratings on the  State's  moral  obligation,  lease
purchase,  guaranteed  and  contractual  obligation  debt. On March 5, 1999, S&P
affirmed its A rating on the State's  outstanding  bonds. On March 10, 2000, S&P
assigned its A+ rating on New York State's long-term general obligations.

On January 6, 1992, Moody's reduced its ratings on outstanding limited-liability
State lease purchase and contractual obligations from A to Baa1. On February 28,
1994,  Moody's  reconfirmed  its A  rating  on the  State's  general  obligation
long-term  indebtedness.  On  March  20,  1998,  Moody's  assigned  the  highest
commercial paper rating of P-1 to the short-term notes of the State. On March 5,
1999,  Moody's  affirmed  its A2 rating  with a stable  outlook  to the  State's
general obligations.

New York State has never defaulted on any of its general obligation indebtedness
or its obligations  under  lease-purchase  or  contractual-obligation  financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.

Litigation.  The legal  proceedings  listed  below  involve  State  finances and
programs and miscellaneous civil rights, real property,  contract and other tort
claims in which the  State is a  defendant  and the  potential  monetary  claims
against the State are  substantial,  generally in excess of $100 million.  These
proceedings  could adversely affect the financial  condition of the State in the
2000-01  fiscal year or  thereafter.  The State will  describe  newly  initiated
proceedings which the State believes to be material, as well as any material and
adverse developments in the listed proceedings, in updates or supplements to its
Annual Information Statement.

Certain  litigation  pending against New York State or its officers or employees
could have a substantial or long-term adverse effect on New York State finances.
Among  the more  significant  of these  cases  are those  that  involve  (1) the
validity of agreements and treaties by which various  Indian tribes  transferred
title to New York State of certain  land


                                       18
<PAGE>

in central  and  upstate  New York;  (2)  certain  aspects  of New York  State's
Medicaid policies,  including its rates, regulations and procedures;  (3) action
seeking  enforcement of certain sales and excise taxes and tobacco  products and
motor fuel sold to non-Indian consumers on Indian reservations;  (4) a challenge
to the Governor's  application of his  constitutional  line item veto authority;
(5) a civil rights  action  alleging  that  Yonkers and its public  schools were
intentionally  segregated;  (6) a  challenge  to the  funding  for New York City
public schools;  and (7) a challenge as to the adequacy of the shelter allowance
granted to recipients of public assistance.

Adverse  developments in the proceedings  described above, other proceedings for
which  there are  unanticipated,  unfavorable  and  material  judgments,  or the
initiation of new proceedings  could affect the ability of the State to maintain
a balanced 2000-01  Financial Plan. The State believes that the proposed 2000-01
Financial Plan includes  sufficient reserves to offset the costs associated with
the payment of judgments  that may be required  during the 2000-01  fiscal year.
These reserves  include (but are not limited to) amounts  appropriated for Court
of Claims payments and projected fund balances in the General Fund. In addition,
any  amounts  ultimately  required  to be paid by the  State may be  subject  to
settlement or may be paid over a multi-year  period.  There can be no assurance,
however, that adverse decisions in legal proceedings against the State would not
exceed the amount of all potential  2000-01  Financial Plan resources  available
for the  payment of  judgments,  and could  therefore  affect the ability of the
State to maintain a balanced 2000-01 Financial Plan.

Although other litigation is pending against New York State, except as described
herein, no current litigation  involves New York State's authority,  as a matter
of  law,  to  contract  indebtedness,   issue  its  obligations,   or  pay  such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.

On November 23, 1998, the attorneys  general for forty-six states (including New
York)  entered  into a master  settlement  agreement  ("MSA")  with the nation's
largest tobacco manufacturers.  Under the terms of the MSA, the states agreed to
release  the  manufacturers  from all  smoking-related  claims in  exchange  for
specified payments and the imposition of restrictions on tobacco advertising and
marketing.  New York is projected to receive $25 billion over 25 years under the
MSA,  with  payments  apportioned  among the State (51  percent),  counties  (22
percent), and New York City (27 percent). The projected payments are an estimate
and subject to  adjustments  for,  among other things,  the annual change in the
volume of cigarette shipments and the rate of inflation.  From 1999-2000 through
2002-03,  the State  expects  to  receive  $1.54  billion  under the  nationwide
settlement with cigarette manufacturers. Counties, including New York City, will
receive settlement payments of $1.47 billion over the same period.

The State plans to use $1.29 billion in tobacco  settlement  money over the next
three  years to finance  health  programs  under HCRA 2000 ($1.01  billion)  and
projected increased costs in Medicaid ($274 million). The remaining $250 million
in one-time tobacco payments from 1999-2000 will be deposited to DRRF.

Authorities.  The fiscal stability of New York State is related, in part, to the
fiscal stability of its  Authorities,  which generally have  responsibility  for
financing,   constructing   and  operating   revenue-producing   public  benefit
facilities.  Authorities are not subject to the  constitutional  restrictions on
the incurrence of debt which apply to the State itself,  and may issue bonds and
notes within the amounts of, and as otherwise  restricted by, their  legislative
authorization.  The  State's  access  to the  public  credit  markets  could  be
impaired,  and the market price of its  outstanding  debt may be materially  and
adversely  affected,  if  any  of the  Authorities  were  to  default  on  their
respective   obligations,   particularly   with   respect   to   debt   that  is
State-supported or State-related.

Authorities  are  generally  supported  by revenues  generated  by the  projects
financed or operated,  such as fares,  user fees on bridges,  highway  tolls and
rentals for  dormitory  rooms and housing.  In recent years,  however,  New York
State has provided financial assistance through appropriations, in some cases of
a  recurring  nature,  to certain of the  Authorities  for  operating  and other
expenses and, in fulfillment of its commitments on moral obligation indebtedness
or  otherwise,  for debt  service.  This  operating  assistance  is  expected to
continue  to be  required  in  future  years.  In  addition,  certain  statutory
arrangements  provide for State local assistance  payments  otherwise payable to
localities to be made under certain  circumstances to certain  Authorities.  The
State has no obligation  to provide  additional  assistance to localities  whose
local   assistance   payments  have  been  paid  to   Authorities   under  these
arrangements.  However,  in the event that such local assistance payments are so
diverted, the affected localities could seek additional State funds.

                                       19
<PAGE>

For  purposes of analyzing  the  financial  condition of the State,  debt of the
State and of certain  public  authorities  may be classified as  State-supported
debt, which includes general obligation debt of the State and lease-purchase and
contractual  obligations of public authorities (and  municipalities)  where debt
service is paid from State appropriations  (including dedicated tax sources, and
other revenues such as patient  charges and dormitory  facilities  rentals).  In
addition, a broader classification,  referred to as State-related debt, includes
State-supported  debt,  as well as  certain  types  of  contingent  obligations,
including moral obligation financings, certain contingent contractual-obligation
financing  arrangements,  and State-guaranteed  debt described above, where debt
service is expected to be paid from other sources and State  appropriations  are
contingent in that they may be made and used only under certain circumstances.

New York City and Other  Localities.  The fiscal health of the State may also be
impacted by the fiscal health of its localities,  particularly  the City,  which
has required and continues to require significant  financial assistance from the
State.  The City  depends on State aid both to enable  the City to  balance  its
budget and to meet its cash  requirements.  There can be no assurance that there
will not be reductions in State aid to the City from amounts currently projected
or that State budgets will be adopted by the April 1 statutory  deadline or that
any such  reductions or delays will not have adverse  effects on the City's cash
flow or expenditures.  In addition, the Federal budget negotiation process could
result in a reduction in or a delay in the receipt of Federal grants which could
have additional adverse effects on the City's cash flow or revenues.

In 1975,  New York City  suffered a fiscal  crisis that  impaired the  borrowing
ability of both the City and New York  State.  In that year the City lost access
to the public credit markets.  The City was not able to sell short-term notes to
the public again until 1979. In 1975,  S&P suspended its A rating of City bonds.
This  suspension  remained in effect  until  March 1981,  at which time the City
received an investment grade rating of BBB from S&P.

On July 2, 1985,  S&P  revised  its  rating of City bonds  upward to BBB+ and on
November  19, 1987,  to A-. On February 3, 1998 and again on May 27,  1998,  S&P
assigned a BBB+  rating to the  City's  general  obligation  debt and placed the
ratings  on  CreditWatch  with  positive  implications.  On March 9,  1999,  S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.

Moody's  ratings of City bonds were  revised in November  1981 from B (in effect
since 1977) to Ba1, in November  1983 to Baa, in December  1985 to Baa1,  in May
1988 to A and again in February  1991 to Baa1.  On February  25,  1998,  Moody's
upgraded  approximately $28 billion of the City's general  obligations from Baa1
to A3. On June 9, 1998,  Moody's  affirmed  its A3 rating to the City's  general
obligations  and stated that its outlook was  stable.  In August  2000,  Moody's
upgraded  approximately $26 billion of the City's general obligations from A3 to
A2.

On March 8, 1999,  Fitch IBCA  upgraded New York City's $26 billion  outstanding
general  obligation  bonds from A- to A.  Subsequent  to that  time,  the City's
general obligation bonds have not been downgraded by Fitch IBCA.

In response to the City's fiscal crisis in 1975, the State took action to assist
the City in  returning  to fiscal  stability.  Among  those  actions,  the State
established the Municipal Assistance  Corporation for the City of New York ("NYC
MAC") to provide financing  assistance to the City; the New York State Financial
Control Board (the "Control Board") to oversee the City's financial affairs; and
the Office of the State Deputy  Comptroller for the City of New York ("OSDC") to
assist the  Control  Board in  exercising  its powers  and  responsibilities.  A
"control period" existed from 1975 to 1986, during which the City was subject to
certain statutorily-prescribed fiscal controls. The Control Board terminated the
control  period in 1986 when certain  statutory  conditions  were met. State law
requires the Control Board to reimpose a control period upon the occurrence,  or
"substantial  likelihood and imminence" of the  occurrence,  of certain  events,
including (but not limited to) a City operating budget deficit of more than $100
million or impaired access to the public credit markets.

Currently,  the City and its Covered  Organizations  (i.e., those  organizations
which  receive or may  receive  moneys  from the City  directly,  indirectly  or
contingently) operate under the City's Financial Plan. The City's Financial Plan
summarizes its capital,  revenue and expense  projections and outlines  proposed
gap-closing   programs  for  years  with  projected   budget  gaps.  The  City's
projections set forth in its Financial Plan are based on various assumptions and
contingencies,  some of which are uncertain and may not materialize.  Unforeseen
developments and changes in major  assumptions  could  significantly  affect the
City's  ability to balance  its budget as  required by State law and to meet its
annual cash flow and financing requirements.

                                       20
<PAGE>

New York City is heavily  dependent on New York State and federal  assistance to
cover  insufficiencies  in its revenues.  There can be no assurance  that in the
future federal and State  assistance  will enable the City to make up its budget
deficits.  Although the City has consistently maintained balanced budgets and is
projected to achieve  balanced  operating  results for the current  fiscal year,
there can be no assurance that the gap-closing actions proposed in its Financial
Plan can be  successfully  implemented or that the City will maintain a balanced
budget in future  years  without  additional  State aid,  revenue  increases  or
expenditure  reductions.  Additional  tax increases and  reductions in essential
City services could adversely affect the City's economic base.

The  projections  set forth in the City's  Financial  Plan were based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major  assumptions could  significantly  affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the condition
of the regional and local  economies,  the impact on real estate tax revenues of
the real estate market, wage increases for City employees  consistent with those
assumed in the  Financial  Plan,  employment  growth,  the ability to  implement
proposed reductions in City personnel and other cost reduction initiatives,  the
ability of the Health and Hospitals  Corporation  and the BOE to take actions to
offset   reduced   revenues,   the  ability  to  complete   revenue   generating
transactions,  provision  of State and Federal  aid and  mandate  relief and the
impact on City revenues and expenditures of Federal and State welfare reform and
any future legislation affecting Medicare or other entitlements.

To  successfully  implement its Financial  Plan,  the City and certain  entities
issuing  debt  for  the  benefit  of  the  City  must  market  their  securities
successfully.  This debt is issued to finance the  rehabilitation  of the City's
infrastructure  and other capital needs and to refinance  existing debt, as well
as to  finance  seasonal  needs.  In City  fiscal  years  1997-98,  1998-99  and
1999-2000,  the State  Constitutional  debt limit would have  prevented the City
from entering into new capital contracts.  To prevent disruptions in the capital
program,  two  actions  were  taken to  increase  the City's  capital  financing
capacity:  (i) the State  Legislature  created  the New York  City  Transitional
Finance  Authority  ("TFA") in 1997,  and (ii) in 1999,  the City created TSASC,
Inc., a not-for-profit  corporation empowered to issue tax-exempt debt backed by
tobacco  settlement  revenues.  Despite  these  actions,  the City,  in order to
continue its capital program,  will need additional financing capacity beginning
in City fiscal year  2000-01,  which could be provided  through  increasing  the
borrowing  authority of the TFA or amending the State  constitutional debt limit
for City fiscal year 2001-02 and thereafter.

The City Comptroller and other agencies and public officials have issued reports
and made public  statements  which,  among other  things,  state that  projected
revenues and  expenditures  may be different  from those  forecast in the City's
financial  plans.  It is reasonable  to expect that such reports and  statements
will continue to be issued and to engender public comment.

Certain localities, in addition to the City, have experienced financial problems
and have requested and received  additional New York State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional  assistance is not included in the State's
projections of its receipts and disbursements for the fiscal year.

Municipalities  and school districts have engaged in substantial  short-term and
long-term  borrowings.  State law  requires the  Comptroller  to review and make
recommendations  concerning  the budgets of those local  government  units other
than New York City that are  authorized  by State law to issue  debt to  finance
deficits during the period that such deficit financing is outstanding.

From time to time, federal expenditure reductions could reduce, or in some cases
eliminate,  federal funding of some local programs and accordingly  might impose
substantial  increased expenditure  requirements on affected localities.  If the
State,  the City or any of the  Authorities  were to  suffer  serious  financial
difficulties  jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely  affected.  Localities also face anticipated and potential problems
resulting from certain  pending  litigation,  judicial  decisions and long-range
economic trends.  Long-range  potential  problems of declining urban population,
increasing  expenditures  and  other  economic  trends  could  adversely  affect
localities and require increasing the State assistance in the future.

Ohio Fund. As described  above, the Ohio Fund will invest most of its net assets
in securities  issued by or on behalf of (or in certificates of participation in
lease-purchase  obligations of) the State of Ohio, political subdivisions


                                       21
<PAGE>

of the State,  or agencies or  instrumentalities  of the State or its  political
subdivisions  (Ohio  Obligations).  The Ohio Fund is  therefore  susceptible  to
general or particular economic,  political or regulatory factors that may affect
issuers of Ohio Obligations.  The following information constitutes only a brief
summary  of some of the  many  complex  factors  that may  have an  effect.  The
information  does not apply to "conduit"  obligations on which the public issuer
itself  has no  financial  responsibility.  This  information  is  derived  from
official  statements of certain Ohio issuers  published in connection with their
issuance of securities and from other  publicly  available  information,  and is
believed to be accurate. No independent verification has been made of any of the
following information.

Generally,  the  creditworthiness  of  Ohio  Obligations  of  local  issuers  is
unrelated  to that of  obligations  of the  State  itself,  and the State has no
responsibility to make payments on those local obligations.

There may be specific  factors that at particular times apply in connection with
investment in particular Ohio Obligations or in those  obligations of particular
Ohio issuers.  It is possible  that the  investment  may be in  particular  Ohio
Obligations, or in those of particular issuers, as to which those factors apply.
However, the information below is intended only as a general summary, and is not
intended as a discussion of any specific  factors that may affect any particular
obligation or issuer.

Ohio is the seventh most  populous  state.  The 1990 Census count of  10,847,100
indicated a 0.5% population increase from 1980. The Census estimate for 1999 was
11,256,700.

While diversifying more into the service and other non-manufacturing  areas, the
Ohio economy  continues to rely in part on durable goods  manufacturing  largely
concentrated  in motor  vehicles  and  equipment,  steel,  rubber  products  and
household appliances.  As a result,  general economic activity, as in many other
industrially-developed  states,  tends to be more  cyclical  than in some  other
states and in the nation as a whole.  Agriculture is an important segment of the
economy,  with over half the State's area  devoted to farming and  approximately
16% of total employment in agribusiness.

In earlier years, the State's overall  unemployment  rate was commonly  somewhat
higher than the national figure. For example,  the reported 1990 average monthly
State rate was 5.7%,  compared to the 5.5% national figure.  However,  in recent
years (except  1999) the annual State rates were below the national  rates (4.3%
vs. 4.5% in 1998,  4.3% vs. 4.2% in 1999, and with State rates  slightly  higher
than national rates in January through March 2000 but the same or slightly lower
in April  through  August)).  The  unemployment  rate and its effects vary among
geographic areas of the State.

There can be no assurance that future national,  regional or state-wide economic
difficulties,  and the resulting  impact on State or local  government  finances
generally,  will not adversely  affect the market value of Ohio Obligations held
in the Ohio Fund or the ability of particular  obligors to make timely  payments
of debt service on (or lease payments relating to) those Obligations.

The State operates on the basis of a fiscal biennium for its  appropriations and
expenditures,  and is  precluded by law from ending its July 1 to June 30 fiscal
year (FY) or fiscal biennium in a deficit  position.  Most State  operations are
financed  through the General Revenue Fund (GRF),  for which the personal income
and sales-use  taxes are the major  sources.  Growth and depletion of GRF ending
fund balances show a consistent pattern related to national economic conditions,
with the ending FY balance  reduced during less  favorable and increased  during
more favorable economic periods. The State has well-established  procedures for,
and has timely taken, necessary actions to ensure resource/expenditure  balances
during less favorable  economic periods.  Those procedures  included general and
selected reductions in appropriations spending.

The  1992-93  biennium  presented  significant  challenges  to  State  finances,
successfully  addressed.  To allow time to resolve certain budget differences an
interim  appropriations  act was enacted effective July 1, 1991; it included GRF
debt  service and lease rental  appropriations  for the entire  biennium,  while
continuing  most  other  appropriations  for a month.  Pursuant  to the  general
appropriations  act for the  entire  biennium,  passed  on July 11,  1991,  $200
million was  transferred  from the Budget  Stabilization  Fund (BSF,  a cash and
budgetary management fund) to the GRF in FY 1992.

Based on updated  results and  forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected and
then timely addressed an FY 1992 imbalance in GRF resources and


                                       22
<PAGE>

expenditures.  In response,  the Governor  ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately  $184
million;  the $100.4  million BSF balance and  additional  amounts  from certain
other funds were  transferred  late in the FY to the GRF, and  adjustments  were
made in the timing of certain tax payments.

A significant GRF shortfall  (approximately $520 million) was then projected for
FY 1993. It was addressed by appropriate legislative and administrative actions,
including  the  Governor's  ordering  $300  million  in  selected  GRF  spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance  was  approximately  $111  million,  of  which,  as a first  step to its
replenishment, $21 million was deposited in the BSF.

None of the spending  reductions were applied to appropriations  needed for debt
service or lease rentals relating to any State obligations.

The 1994-95 biennium presented a more affirmative  financial  picture.  Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF. The
biennium  ended June 30,  1995 with a GRF ending fund  balance of $928  million,
which , after leaving in the GRF an unreserved and  undesignated  balance of $70
million,  was transferred to the BSF ($535.2  million) and other funds including
school  assistance  funds and,  in  anticipation  of  possible  federal  program
changes, a human services stabilization fund.

From a higher than forecast 1996-97 mid-biennium GRF fund balance,  $100 million
was transferred for elementary and secondary  school computer  network  purposes
and $30 million to a new State transportation infrastructure fund. Approximately
$400.8  million  served  as a basis  for  temporary  1996  personal  income  tax
reductions  aggregating  that  amount.  Of the  1996-97  biennium-ending  $834.9
million GRF fund balance $250 million went to school  buildings,  $94 million to
the  school   computer   network,   $44.2  million  for  school   textbooks  and
instructional  materials and a distance learning program, and $34 million to the
BSF, and the $263 million balance to the State income tax reduction fund.

The 1998-99  biennium  ending GRF  balances  were $1.5  billion  (cash) and $976
million (fund).  Of that fund balance,  $325.7 million was transferred to school
building  assistance,  $46.3  million  to the BSF,  $90  million  for  classroom
computers and interactive video distance  learning,  and the remaining amount to
the State income tax reduction fund. The GRF appropriations acts for the current
2000-01  biennium  (one for all  education  purposes,  and one for  general  GRF
purposes) were passed in June,  1999and promptly signed (after selective vetoes)
by the Governor. Those acts provided for total GRF biennial expenditures of over
$39.8 billion.  Necessary GRF debt service and lease-rental  appropriations  for
the  entire  biennium  were  requested  in the  Governor's  proposed  budget and
incorporated in the appropriations bills as introduced, and were included in the
bill  versions  as passed by the House and the  Senate and in the acts as passed
and signed.

From the June 30, 2000 FY ending GRF fund balance of over $855 million transfers
were made in  amounts  of $610  million  to the  income  reduction  fund and $49
million to the BSF. The BSF had an October 5, 2000  balance of slightly  over $1
billion.

The State's  incurrence  or  assumption of debt without a vote of the people is,
with  exceptions  noted  below,   prohibited  by  current  State  constitutional
provisions.  The State may incur debt,  limited in amount to $750,000,  to cover
casual  deficits  or failures in  revenues  or to meet  expenses  not  otherwise
provided for. The Constitution  expressly  precludes the State from assuming the
debts of any local  government  or  corporation.  (An  exception is made in both
cases for any debt incurred to repel invasion,  suppress  insurrection or defend
the State in war.)

By 16 constitutional  amendments approved from 1921 to date (the latest in 1999)
Ohio voters  authorized  the incurrence of State debt and the pledge of taxes or
excises to its payment. At October 5, 2000, over $1.2 billion (excluding certain
highway bonds  payable  primarily  from highway user  receipts) of this debt was
outstanding.  The only such State debt at that date  authorized  to be  incurred
were portions of the highway bonds, and the following: (a) up to $100 million of
obligations for coal research and development may be outstanding at any one time
($29.6  million   outstanding);   (b)  obligations   for  local   infrastructure
improvements,  no more than $120  million of which may be issued in any calendar
year (over $1.07  billion  outstanding);  and (c) up to $200  million in general
obligation bonds for parks,  recreation and natural resources purposes which may
be outstanding at any one time ($131.4  million  outstanding,  with no more than
$50 million to be issued in any one year).

                                       23
<PAGE>

The electors in 1995  approved a  constitutional  amendment  extending the local
infrastructure  bond program  (authorizing  an additional  $1.2 billion of State
full faith and credit  obligations  to be issued over 10 years for the purpose),
and authorizing  additional highway bonds (expected to be payable primarily from
highway user receipts).  The latter  authorizes not more than $1.2 billion to be
outstanding  at any time and not more than $220 million to be issued in a fiscal
year.

A  constitutional  amendment  approved  by the voters in 1999  authorizes  State
general  obligation  debt to pay  costs of  facilities  for a system  of  common
schools throughout the State ($130.1 million  outstanding as of October 5, 2000)
and facilities for state supported and assisted institutions of higher education
($150 million  outstanding,  with an  additional  $150 million in the process of
sale).

That 1999 amendment also provided that State general  obligation  debt and other
debt  represented by direct  obligations of the State (including that authorized
by the Ohio Public Facilities  Commission and Ohio Building Authority,  and some
authorized by the Treasurer),  may not be issued if future FY total debt service
on those  direct  obligations  to be paid from the GRF or net  lottery  proceeds
exceeds  5% of total  estimated  revenues  of the State for the GRF and from net
State lottery proceeds during the FY of issuance.

The  General  Assembly  has  placed  on the  November  2000  ballot  a  proposed
constitutional  amendment  that would  authorize the issuance of State bonds for
land conservation and revitalization  purposes (including statewide  brownfields
clean-up).  For each of the two purposes, not more than $50,000,000 in principal
amount  may be  issued  in any FY and not more than  $200,000,000  in  principal
amount may be outstanding in accordance  with their terms at any time. The bonds
for  conservation  purposes  would be State general  obligations,  and those for
revitalization  purposes would be special  obligations of the State payable from
revenues and receipts to be designated by the General Assembly.

The Constitution  also authorizes the issuance of State  obligations for certain
purposes,  the  owners of which do not have the right to have  excises  or taxes
levied to pay debt service. Those special obligations include obligations issued
by the Ohio Public Facilities  Commission and the Ohio Building  Authority,  and
certain obligations issued by the State Treasurer,  over $5billion of which were
outstanding at October 5, 2000.

In recent years,  State agencies have participated in transportation  and office
building projects that may have some local as well as State use and benefit,  in
connection with which the State enters into lease purchase agreements with terms
ranging from 7 to 20 years. Certificates of participation, or special obligation
bonds of the State or a local agency,  are issued that represent  fractionalized
interests in or are payable  from the State's  anticipated  payments.  The State
estimates  highest future FY payments  under those  agreements (as of October 5,
2000) to be  approximately  $28 million (of which $23.9  million is payable from
sources other than the GRF, such as federal highway money distributions).  State
payments under all those agreements are subject to biennial appropriations, with
the lease terms being two years subject to renewal if appropriations are made.

A  1990  constitutional   amendment   authorizes  greater  State  and  political
subdivision participation (including financing) in the provision of housing. The
General  Assembly  may  for  that  purpose   authorize  the  issuance  of  State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).

A 1994  constitutional  amendment  pledges  the full faith and credit and taxing
power of the State to  meeting  certain  guarantees  under the  State's  tuition
credit program which provides for purchase of tuition  credits,  for the benefit
of State  residents,  guaranteed to cover a specified amount when applied to the
cost  of  higher  education  tuition.  (A  1965  constitutional  provision  that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)

State and local agencies issue  obligations  that are payable from revenues from
or  relating  to  certain   facilities   (but  not  from  taxes).   By  judicial
interpretation,   these   obligations  are  not  "debt"  within   constitutional
provisions.  In general, payment obligations under lease-purchase  agreements of
Ohio public agencies (in which  certificates of participation may be issued) are
limited in duration to the agency's  fiscal period,  and are renewable only upon
appropriations being made available for the subsequent fiscal period.

                                       24
<PAGE>

Local school districts in Ohio receive a major portion (state-wide  aggregate of
less than 50% in FY 2000) of their operating  moneys from State  subsidies,  but
are dependent on local  property  taxes,  and in 127 districts (as of October 5,
2000) on  voter-authorized  income  taxes,  for  significant  portions  of their
budgets.  Litigation,  similar  to  that  in  other  states,  has  been  pending
questioning  the  constitutionality  of  Ohio's  system of  school  funding  and
compliance  with  the  constitutional  requirement  that  the  State  provide  a
"thorough and efficient  system of common schools." In May 2000 the Ohio Supreme
Court in a 4-3 decision concluded, as it had in 1997, that the State, even after
crediting  significant  gubernatorial and legislative steps in recent years, did
not comply with that requirement.  It set as general base threshold requirements
that every  school  district  have enough  funds to operate,  an ample number of
teachers, sound and safe buildings, and equipment sufficient for all students to
be  afforded  an  educational   opportunity.   The  Court  maintains  continuing
jurisdiction,  and has  scheduled  for June 2001  further  review by it of State
responses to its ruling. With particular respect to funding sources, the Supreme
Court repeated its  conclusion  that property taxes no longer may be the primary
means of school  funding in Ohio,  noting  that  recent  efforts to reduce  that
historic reliance have been laudable but in its view insufficient.

A small  number of the  State's  611  local  school  districts  have in any year
required special assistance to avoid year-end deficits. A now superseded program
provided  for school  district  cash need  borrowing  directly  from  commercial
lenders,  with diversion of State subsidy  distributions to repayment if needed.
The annual  number of loans  under this  program  ranged  from 10 to 44, and the
aggregate  annual  dollar  amount of loans  ranged from over $11 million to over
$113  million  for  one),  $113.2  million  (including  $90  million  to one for
restructuring its prior loans).

Ohio's 943  incorporated  cities and  villages  rely  primarily  on property and
municipal  income taxes to finance their  operations.  With other  subdivisions,
they also receive local  government  support and property tax relief moneys from
State resources.

For those few  municipalities  and school  districts that on occasion have faced
significant  financial  problems,  there are  statutory  procedures  for a joint
State/local  commission to monitor the fiscal  affairs and for  development of a
financial plan to eliminate deficits and cure any defaults.  (Similar procedures
have  recently been  extended to counties and  townships.)  ""} As of October 5,
2000,  six  municipalities   were  in  "fiscal  emergency"  status  and  two  in
preliminary  "fiscal watch" status,  and a school  district  "fiscal  emergency"
provision was applied to 10 districts with three on  preliminary  "fiscal watch"
status.

At present the State  itself does not levy ad valorem  taxes on real or tangible
personal  property.  Those taxes are levied by political  subdivisions and other
local taxing  districts.  The  Constitution has since 1934 limited to 1% of true
value in money the amount of the  aggregate  levy  (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions,  without
a vote of the electors or a municipal charter provision,  and statutes limit the
amount of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred  to  as  the  "ten-mill  limitation").  Voted  general  obligations  of
subdivisions  are payable from property taxes that are unlimited as to amount or
rate.


         o        the issuer is organized  under the laws of an emerging  market
                  country;

         o        the  issuer's  principal  securities  trading  market is in an
                  emerging market; or

         o        at   least   50%   of   the   issuer's   non-current   assets,
                  capitalization,  gross revenue or profit in any one of the two
                  most recent  fiscal years is derived  (directly or  indirectly
                  through  subsidiaries)  from assets or  activities  located in
                  emerging markets.

         o        Under normal market conditions,  the Fund may invest up to 35%
                  of its assets in equity  securities of issuers in the U.S. and
                  other developed markets.  In evaluating the appropriateness of
                  such  investments for the Fund, the Manager takes into account
                  the  issuer's  involvement  in the  emerging  markets  and the
                  potential impact of that involvement on business results.

                                       25
<PAGE>

               ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES

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

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

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

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

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

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

Advance  Refunded  Bonds.  The Fund may purchase  Municipal  Securities that are
subsequently refunded by the issuance and delivery of a new issue of bonds prior
to the date on which the outstanding issue of bonds can be redeemed or paid. The
proceeds  from the new issue of bonds  are  typically  placed in an escrow  fund
consisting  of


                                       26
<PAGE>

U.S.  Government  obligations  that are used to pay the interest,  principal and
call premium on the issue being refunded.  The Fund may also purchase  Municipal
Securities that have been refunded prior to purchase by the Fund.

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

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

Issuers of such high yielding  securities often are highly leveraged and may not
have available to them more  traditional  methods of financing.  Therefore,  the
risk  associated  with  acquiring the  securities  of such issuers  generally is
greater than is the case with higher rated  securities.  For example,  during an
economic  downturn  or a  sustained  period of  rising  interest  rates,  highly
leveraged  issuers of high yield  securities  may experience  financial  stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest  payment  obligations.   The  issuer's  ability  to  service  its  debt
obligations may also be adversely affected by specific  corporate  developments,
or the issuer's inability to meet specific projected business forecasts,  or the
unavailability  of  additional  financing.  The risk of loss from default by the
issuer is significantly greater for the holders of high yield securities because
such  securities  are generally  unsecured and are often  subordinated  to other
creditors  of the  issuer.  Prices  and  yields of high  yield  securities  will
fluctuate over time and, during periods of economic  uncertainty,  volatility of
high yield  securities  may  adversely  affect the  Fund's net asset  value.  In
addition,  investments  in high yield zero coupon or pay-in-kind  bonds,  rather
than  income-bearing  high yield securities,  may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.

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

Credit  quality in the  high-yield  securities  market can change  suddenly  and
unexpectedly,  and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
generally the policy of the Advisor not to rely exclusively on ratings issued by
established credit rating agencies,  but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the Fund's
investment  objective by investment in such  securities may be more dependent on
the Advisor 's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio  security be  downgraded,  the Advisor will  determine
whether  it is in the best  interests  of the Fund to retain or  dispose of such
security.

A  portion  of the junk  bonds  acquired  by the  Fund  will be  purchased  upon
issuance, which may involve special risks because the securities so acquired are
new issues.  In such  instances the Fund may be a  substantial  purchaser of the
issue and therefore have the opportunity to participate in structuring the terms
of the  offering.  Although  this may enable the Fund to seek to protect  itself
against  certain  of such  risks,  the  considerations  discussed  herein  would
nevertheless remain applicable.

                                       27
<PAGE>

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

Interfund Borrowing and Lending Program. Each Fund has received exemptive relief
from the SEC which  permits the Funds to  participate  in an  interfund  lending
program among certain investment companies advised by the Manager. The interfund
lending  program  allows the  participating  funds to borrow money from and loan
money to each other for temporary or emergency purposes.  The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating  funds,  including  the  following:  (1) no fund may borrow  money
through the program  unless it receives a more  favorable  interest  rate than a
rate  approximating  the  lowest  interest  rate at which  bank  loans  would be
available to any of the participating  funds under a loan agreement;  and (2) no
fund may lend money  through  the program  unless it  receives a more  favorable
return than that available from an investment in repurchase  agreements  and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment  objectives and policies (for instance,
money market  funds would  normally  participate  only as lenders and tax exempt
funds only as borrowers).  Interfund loans and borrowings may extend  overnight,
but could  have a maximum  duration  of seven  days.  Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed.  Any delay in repayment to a lending
fund could result in a lost  investment  opportunity  or additional  costs.  The
program is subject to the  oversight  and  periodic  review of the Boards of the
participating  funds.  To the extent a Fund is  actually  engaged  in  borrowing
through the interfund lending program, the Funds, as a matter of non-fundamental
policy,  may not borrow for other than temporary or emergency  purposes (and not
for leveraging).

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

Inverse  Floaters.  Each of the Funds may  invest in inverse  floaters.  Inverse
floaters are debt  instruments  with a floating  rate of interest  that bears an
inverse relationship to changes in short-term market interest rates. Investments
in this type of security  involve  special risks as compared to investments  in,
for example, a fixed rate municipal security.  The fund could lose money and its
NAV could decline if movements in interest  rates are  incorrectly  anticipated.
Moreover,  the markets for securities of this type may be less developed and may
have less liquidity than the markets for more traditional municipal securities.

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

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

                                       28
<PAGE>

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

Municipal Lease Obligations and Participation Interests. Participation interests
represent  undivided  interests  in  municipal  leases,   installment   purchase
contracts, conditional sales contracts or other instruments. These are typically
issued  by a trust or other  entity  which has  received  an  assignment  of the
payments to be made by the state or political  subdivision  under such leases or
contracts. They may be variable rate or fixed rate.

The Fund may  purchase  from  banks  participation  interests  in all or part of
specific holdings of municipal obligations,  provided the participation interest
is fully  insured.  Each  participation  is backed by an  irrevocable  letter of
credit or guarantee of the selling  bank that the Advisor has  determined  meets
the prescribed  quality standards of the Fund.  Therefore,  either the credit of
the issuer of the municipal  obligation or the selling bank, or both,  will meet
the quality standards of the particular Fund. The Fund has the right to sell the
participation  back to the bank after seven days' notice for the full  principal
amount of the Fund's interest in the municipal obligation plus accrued interest,
but only (i) as required to provide  liquidity  to the Fund,  (ii) to maintain a
high quality investment portfolio or (iii) upon a default under the terms of the
municipal  obligation.  The  selling  bank  will  receive a fee from the Fund in
connection  with the  arrangement.  The Fund  will  not  purchase  participation
interests unless in the opinion of bond counsel, counsel for the issuers of such
participations  or counsel  selected  by the  Advisor , the  interest  from such
participations  is exempt from regular  federal income tax and state income tax,
if applicable, for the Fund.

A municipal lease obligation may take the form of a lease,  installment purchase
contract  or  conditional  sales  contract  which is  issued by a state or local
government and  authorities to acquire land,  equipment and  facilities.  Income
from such  obligations  is  generally  exempt  from state and local taxes in the
state of issuance.  Municipal lease obligations frequently involve special risks
not normally  associated with general  obligations or revenue bonds.  Leases and
installment  purchase or conditional  sale contracts (which normally provide for
title in the leased asset to pass  eventually to the  governmental  issuer) have
evolved as a means for  governmental  issuers to acquire  property and equipment
without meeting the constitutional  and statutory  requirements for the issuance
of debt. The debt issuance  limitations are deemed to be inapplicable because of
the  inclusion in many leases or contracts of  "non-appropriation"  clauses that
relieve the governmental  issuer of any obligation to make future payments under
the lease or  contract  unless  money is  appropriated  for such  purpose by the
appropriate  legislative  body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the  temporary  abatement of payments
in the event the issuer is prevented  from  maintaining  occupancy of the leased
premises or utilizing  the leased  equipment.  Although the  obligations  may be
secured by the leased  equipment or facilities,  the disposition of the property
in the event of  nonappropriation  or foreclosure  might prove  difficult,  time
consuming and costly,  and result in a delay in recovery or the failure to fully
recover the Fund's original investment.

Certain municipal lease  obligations and  participation  interests may be deemed
illiquid for the purpose of the Fund's  limitation  on  investments  in illiquid
securities.  Other  municipal  lease  obligations  and  participation  interests
acquired by the Fund may be  determined  by the Advisor to be liquid  securities
for the purpose of such  limitation.  In determining  the liquidity of municipal
lease obligations and participation  interests, the Fund Advisor will consider a
variety  of factors  including:  (1) the  willingness  of dealers to bid for the
security;  (2) the number of dealers  willing to purchase or sell the obligation
and the number of other potential buyers;  (3) the frequency of trades or quotes
for the obligation;  and (4) the nature of the marketplace  trades. In addition,
the Advisor will consider  factors unique to particular  lease  obligations  and
participation  interests affecting the marketability  thereof. These include the
general  creditworthiness  of the issuer,  the  importance  to the issuer of the
property  covered by the lease and the likelihood that the  marketability of the
obligation will be maintained  throughout the time the obligation is held by the
Fund.

                                       29
<PAGE>

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

Municipal  Securities.  Municipal  obligations  are  issued  by or on  behalf of
states,  territories  and  possessions of the United States and their  political
subdivisions,  agencies  and  instrumentalities  and the District of Columbia to
obtain funds for various public purposes.  The interest on these  obligations is
generally exempt from federal income tax in the hands of most investors. The two
principal  classifications  of  municipal  obligations  are "notes" and "bonds."
Municipal  notes are generally used to provide for short-term  capital needs and
generally have  maturities of one year or less.  Municipal  notes  include:  Tax
Anticipation  Notes;  Revenue  Anticipation  Notes; Bond Anticipation Notes; and
Construction Loan Notes.

Tax   Anticipation   Notes  are  sold  to  finance   working  capital  needs  of
municipalities.  They are generally  payable from specific tax revenues expected
to be  received  at a future  date.  Revenue  Anticipation  Notes are  issued in
expectation  of receipt of other types of revenue.  Tax  Anticipation  Notes and
Revenue  Anticipation  Notes are  generally  issued in  anticipation  of various
seasonal  revenue  such  as  income,   sales,  use  and  business  taxes.   Bond
Anticipation  Notes are sold to provide interim  financing and Construction Loan
Notes are sold to provide  construction  financing.  These  notes are  generally
issued in  anticipation  of long-term  financing  in the market.  In most cases,
these  monies  provide for the  repayment  of the notes.  After the projects are
successfully  completed and accepted,  many projects receive permanent financing
through  the FHA under  Fannie Mae or GNMA.  There are,  of course,  a number of
other types of notes issued for different purposes and secured  differently than
those described above.

Municipal  bonds,  which  meet  longer-term  capital  needs and  generally  have
maturities   of  more   than  one  year   when   issued,   have  two   principal
classifications: "general obligation" bonds and "revenue" bonds.

Issuers of general obligation bonds include states, counties,  cities, towns and
regional  districts.  The proceeds of these  obligations are used to fund a wide
range of public projects  including the  construction or improvement of schools,
highways  and  roads,  water and sewer  systems  and a variety  of other  public
purposes.  The basic security of behind general obligation bonds is the issuer's
pledge of its full faith,  credit, and taxing power for the payment of principal
and  interest.  The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.

The principal  security for a revenue bond is generally the net revenues derived
from a particular  facility or group of facilities  or, in some cases,  from the
proceeds of a special excise or other  specific  revenue  source.  Revenue bonds
have been issued to fund a wide variety of capital projects including: electric,
gas, water and sewer systems;  highways,  bridges and tunnels;  port and airport
facilities;  colleges and  universities;  and hospitals.  Although the principal
security behind these bonds varies widely,  many provide additional  security in
the form of a debt  service  reserve  fund whose monies may also be used to make
principal and interest  payments on the issuer's  obligations.  Housing  finance
authorities have a wide range of security including  partially or fully-insured,
rent-subsidized  and/or collateralized  mortgages,  and/or the net revenues from
housing or other public  projects.  In addition to a debt service  reserve fund,
some  authorities  provide  further  security  in the form of a state's  ability
(without  obligation) to make up  deficiencies  in the debt reserve fund.  Lease
rental  bonds  issued by a state or local  authority  for capital  projects  are
secured  by annual  lease  rental  payments  from the state or  locality  to the
authority sufficient to cover debt service on the authority's obligations.

Some issues of municipal bonds are payable from United States Treasury bonds and
notes held in escrow by a trustee,  frequently a commercial  bank.  The interest
and  principal on these U.S.  Government  securities  are  sufficient to pay all
interest and principal  requirements of the municipal  securities when due. Some
escrowed  Treasury  securities  are  used to  retire  municipal  bonds  at their
earliest  call date,  while others are used to retire  municipal  bonds at their
maturity.

Securities   purchased   for  the  Fund  may  include   variable/floating   rate
instruments,  variable mode instruments,  put bonds, and other obligations which
have a specified maturity date but also are payable before maturity after notice



                                       30
<PAGE>

by the holder ("demand obligations").  Demand obligations are considered for the
Fund's purposes to mature at the demand date.

There are,  in  addition,  a variety of hybrid and  special  types of  municipal
obligations  as  well as  numerous  differences  in the  security  of  municipal
obligations  both within and between the two  principal  classifications  (i.e.,
notes and bonds) discussed above.

An entire  issue of  municipal  securities  may be  purchased  by one or a small
number of institutional  investors such as the Fund. Thus, such an issue may not
be said to be  publicly  offered.  Unlike the  equity  securities  of  operating
companies or mutual funds which must be registered  under the  Securities Act of
1933  prior to offer and sale  unless an  exemption  from such  registration  is
available,  municipal  securities,  whether publicly or privately  offered,  may
nevertheless  be readily  marketable.  A secondary  market  exists for municipal
securities which have been publicly offered as well as securities which have not
been  publicly   offered   initially  but  which  may  nevertheless  be  readily
marketable.  Municipal  securities  purchased  for the Fund are  subject  to the
limitations on holdings of securities which are not readily  marketable based on
whether it may be sold in a reasonable  time  consistent with the customs of the
municipal  markets  (usually  seven  days) at a price (or  interest  rate) which
accurately  reflects  its recorded  value.  The Fund  believes  that the quality
standards  applicable to their investments enhance  marketability.  In addition,
stand-by  commitments,  participation  interests  and  demand  obligations  also
enhance marketability.

Provisions  of the federal  bankruptcy  statutes  relating to the  adjustment of
debts of political  subdivisions  and authorities of states of the United States
provide that, in certain circumstances,  such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of  creditors,   which   proceedings   could  result  in  material  and  adverse
modification  or  alteration of the rights of holders of  obligations  issued by
such subdivisions or authorities.

Litigation challenging the validity under state constitutions of present systems
of financing  public  education has been initiated or adjudicated in a number of
states,  and  legislation has been introduced to effect changes in public school
finances  in  some  states.   In  other  instances  there  has  been  litigation
challenging  the issuance of pollution  control revenue bonds or the validity of
their  issuance  under state or federal law which  litigation  could  ultimately
affect the validity of those Municipal  Securities or the tax-free nature of the
interest thereon.

For the purpose of the Fund's investment restrictions, the identification of the
"issuer" of municipal obligations which are not general obligation bonds is made
by the  Advisor  on  the  basis  of the  characteristics  of the  obligation  as
described  above,  the most  significant of which is the source of funds for the
payment of principal and interest on such obligations.

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

Strategic  Transactions and Derivatives.  Each Fund may, but is not required to,
utilize various other investment  strategies as described below for a variety of
purposes,  such as hedging various market risks, managing the effective maturity
or  duration  of the  Fund's  portfolio,  or  enhancing  potential  gain.  These
strategies may be executed through the use of derivative contracts.

In the course of pursuing these  investment  strategies,  the Funds may purchase
and  sell   exchange-listed  and   over-the-counter  put  and  call  options  on
securities,  fixed-income indices and other financial instruments,  purchase and
sell futures contracts and options thereon,  and enter into various transactions
such as swaps, caps, floors or collars  (collectively,  all the above are called
"Strategic Transactions").  In addition, strategic transactions may also include
new  techniques,  instruments  or  strategies  that are  permitted as regulatory
changes occur.  Strategic  Transactions may be used without limit (except to the
extent  that 80% of the  Funds'  net  assets  are  required  to be  invested  in
tax-exempt municipal  securities,  and as limited by the Funds' other investment
restrictions  and subject to certain  limits imposed by the 1940 Act) to attempt
to protect against possible changes in the market value of securities held in or
to be purchased  for the Funds'  portfolio  resulting  from  securities  markets
fluctuations,  to  protect  the  Funds'


                                       31
<PAGE>

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 Funds' 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 each 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 Funds to utilize these
Strategic  Transactions  successfully  will  depend on the Advisor 's ability to
predict  pertinent  market  movements,  which cannot be assured.  The Funds will
comply  with  applicable   regulatory   requirements  when  implementing   these
strategies, techniques and instruments.  Strategic Transactions will not be used
to alter fundamental  investment  purposes and  characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations,  enter
into certain  offsetting  positions)  to cover its  obligations  under  options,
futures and swaps to limit leveraging of the Fund.

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

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

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

                                       32
<PAGE>

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.

Each 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. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the  Counterparty to sell the option back to a Fund at a formula
price within seven days. A Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.

Unless the  parties  provide  for it,  there is no central  clearing or guaranty
function in an OTC option.  As a result,  if the  Counterparty  fails to make or
take delivery of the security,  currency or other  instrument  underlying an OTC
option  it has  entered  into  with a Fund or  fails  to make a cash  settlement
payment due in  accordance  with the terms of that option,  a Fund will lose any
premium  it paid  for the  option  as well  as any  anticipated  benefit  of the
transaction.  Accordingly,  the Advisor 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.  A 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 other nationally recognized statistical
rating  organization  ("NRSRO") or are  determined  to be of  equivalent  credit
quality by the Advisor . The staff of the  Securities  and  Exchange  Commission
("SEC")  currently takes the position that OTC options  purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the  in-the-money  amount,
if any) are  illiquid,  and are subject to a Fund's  limitation  on investing no
more than 15% of its net assets in illiquid securities.

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

Each Fund may  purchase  and sell call  options  on  securities  including  U.S.
Treasury  and  agency   securities,   municipal   obligations,   mortgage-backed
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 and futures contracts. All calls sold by a Fund must be "covered" (i.e.,
a Fund must own the securities or futures  contract subject to the call) or must
meet the asset segregation  requirements  described below as long as the call is
outstanding.  Even though a Fund will receive


                                       33
<PAGE>

the option  premium  to help  protect  it  against  loss,  a call sold by a Fund
exposes a 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 a Fund to hold a security  or  instrument  which it
might otherwise have sold.

Each  Fund may  purchase  and sell put  options  on  securities  including  U.S.
Treasury   and  agency   securities,   mortgage-backed   securities,   municipal
obligations  and  Eurodollar  instruments  (whether  or not it holds  the  above
securities in its  portfolio)  and on securities  indices and futures  contracts
other  than  futures  on  individual   corporate  debt  and  individual   equity
securities.  Each Fund will not sell put options if, as a result,  more than 50%
of such 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 a Fund may be
required to buy the  underlying  security at a  disadvantageous  price above the
market price.

General  Characteristics of Futures.  Each Fund may enter into futures contracts
or  purchase  or sell put and call  options on such  futures as a hedge  against
anticipated  interest  rate or  fixed-income  market  changes  and for  duration
management,  and for risk management and return enhancement,  purposes.  Futures
are  generally  bought  and sold on the  commodities  exchanges  where  they are
listed,  with payment of initial and variation  margin as described  below.  The
sale of a futures  contract  creates a firm obligation by a Fund, as seller,  to
deliver to the buyer the specific type of 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.

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

Each Fund will not enter into a futures  contract or related  option (except for
closing transactions) if, immediately  thereafter,  the sum of the amount of its
initial margin and premiums on open futures  contracts and options thereon would
exceed 5% of a 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.  Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through  the sale or  purchase  of options  on  individual  securities  or other
instruments.  Options on  securities  indices  and other  financial  indices are
similar to options on a security or other  instrument  except that,  rather than
settling by physical delivery of the underlying instrument,  they settle by cash
settlement,  i.e.,  an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds,  in the case of a call, or is less than,
in the case of a put, the exercise  price of the option  (except if, in the case
of an OTC option, physical delivery is specified).  This amount of cash is equal
to the excess of the closing  price of the index over the exercise  price of the
option,  which  also may be  multiplied  by a formula  value.  The seller of the
option is  obligated,  in return for the premium  received,  to make delivery of
this  amount.  The  gain or loss on an  option  on an  index  depends  on  price
movements in the instruments making up the market,  market segment,  industry or
other  composite  on which the  underlying  index is based,  rather  than  price
movements in  individual  securities,  as is the case with respect to options on
securities.

                                       34
<PAGE>

Combined Transactions. Each Fund may enter into multiple transactions, including
multiple  options  transactions,  multiple  futures  transactions  and  multiple
interest rate transactions and any combination of futures,  options 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  Advisor  , it is in the  best  interests  of a Fund  to do so.  A  combined
transaction  will usually  contain  elements of risk that are present in each of
its component transactions.  Although combined transactions are normally entered
into based on the Advisor '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 a
Fund may enter are  interest  rate and index and other swaps and the purchase or
sale of related caps, floors and collars.  Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio,  as a duration  management  technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund will not sell interest rate caps or floors where it does
not own securities or other  instruments  providing the income stream a Fund may
be obligated  to pay.  Interest  rate swaps  involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest,  e.g.,
an exchange of floating  rate payments for fixed rate payments with respect to a
notional  amount of principal.  An index swap is an agreement to swap cash flows
on a notional  amount based on changes in the values of the  reference  indices.
The purchase of a cap entitles the  purchaser to receive  payments on a notional
principal  amount from the party selling such cap to the extent that a specified
index exceeds a predetermined  interest rate or amount.  The purchase of a floor
entitles the purchaser to receive  payments on a notional  principal amount from
the party selling such floor to the extent that a specified  index falls below a
predetermined  interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a  predetermined  range of interest
rates or values.

Each Fund will usually  enter into swaps on a net basis,  i.e.,  the two payment
streams  are  netted  out in a cash  settlement  on the  payment  date or  dates
specified in the  instrument,  with a Fund receiving or paying,  as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter  into  offsetting  positions)  to cover its  obligations  under
swaps,  the Manager and each 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.  Each Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements,  is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent  credit quality by the
Manager. If there is a default by the Counterparty,  a 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.

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

OTC options  entered into by a Fund,  including  those on securities,  financial
instruments or indices and OCC issued and exchange  listed index  options,  will
generally  provide  for cash  settlement.  As a result,  when a Fund sells these
instruments  it will only  segregate an amount of cash or liquid assets equal to
its accrued net obligations,  as there is


                                       35
<PAGE>

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

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

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

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

Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund

When-Issued Securities.  The Fund may from time to time purchase equity and debt
securities on a "when-issued",  "delayed  delivery" or "forward delivery" basis.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the  commitment  to purchase is made,  but delivery and payment for the
securities  takes place at a later date.  During the period between purchase and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. When the Fund purchases such securities, it immediately assumes the
risks of ownership, including the risk of price fluctuation.  Failure to deliver
a security purchased on this basis may result in a loss or missed opportunity to
make an alternative investment.

To the extent that assets of the Fund are held in cash pending the settlement of
a purchase of securities,  the Fund would earn no income.  While such securities
may be sold prior to the settlement date, the Fund intends to purchase them with
the  purpose of actually  acquiring  them unless a sale  appears  desirable  for
investment  reasons.  At the time the Fund makes the  commitment  to  purchase a
security on this basis,  it will record the transaction and reflect the value of
the  security  in  determining  its net asset  value.  The  market  value of the
securities may be more or less than the purchase price.  The Fund will establish
a segregated  account in which it will maintain cash and liquid securities equal
in value to commitments for such securities.

                             INVESTMENT RESTRICTIONS

The following restrictions may not be changed with respect to a Fund without the
approval of a majority of the outstanding  voting securities of such Fund which,
under the 1940 Act and the rules  thereunder  and as used in this


                                       36
<PAGE>

Statement of Additional  Information,  means the lesser of (i) 67% of the shares
of such  Fund  present  at a  meeting  if the  holders  of more  than 50% of the
outstanding  shares of such Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of such Fund.

The  Municipal  Fund and the  Intermediate  Municipal  Fund have  elected  to be
classified  as  diversified  series  of  an  open-end  investment  company.  The
California  Fund,  the  Florida  Fund,  the New York Fund and the Ohio Fund have
elected to be classified  as  non-diversified  series of an open-end  investment
company.

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

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

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

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

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

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

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

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



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

         (1)      borrow money in an amount greater than 5% of its total assets,
                  except for temporary or emergency purposes;


         (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-


                                       37
<PAGE>

                  money at the time of purchase,  the in-the-money amount may be
                  excluded in computing the 5% limit;

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

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

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


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

                                 NET ASSET VALUE

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

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

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

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

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

Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these  portfolio  assets  in terms of U.S.  dollars  is


                                       38
<PAGE>

calculated by converting the Local Currency into U.S.  dollars at the prevailing
currency exchange rate on the valuation date.

Fund  Accounting  Agent.  Scudder Fund  Accounting  Corporation,  ("SFAC"),  Two
International  Place,  Boston,  MA  02110,  a  subsidiary  of The  Advisor  , is
responsible for determining the daily net asset value per share of the Funds and
maintaining all accounting records related thereto.  Currently, SFAC receives no
fee for its services to the Funds.

                        PURCHASE AND REDEMPTION OF SHARES

Purchase of Shares

Alternative  Purchase  Arrangements.  Class A  shares  of each  Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial  sales charge but are subject to higher  ongoing  expenses  than Class A
shares and a contingent deferred sales charge payable upon certain  redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares  are sold  without  an initial  sales  charge but are  subject to
higher  ongoing  expenses  than  Class A shares,  are  subject  to a  contingent
deferred  sales charge  payable upon certain  redemptions  within the first year
following  purchase,  and do not convert into another class.  Class I shares are
offered at net asset value  without an initial  sales charge and are not subject
to a contingent  deferred  sales charge or a Rule 12b-1  distribution  fee. When
placing purchase orders,  investors must specify which class of shares the order
is for.

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

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

<S>             <C>                                               <C>             <C>
Class A         Maximum initial sales charge of 4.5% of            None           Initial sales charge waived or reduced
                the public offering price (2.75% for                              for certain purchases
                the Intermediate Municipal Fund)
Class B         Maximum contingent deferred sales                 0.75%           Shares convert to Class A shares six
                charge of 4% of redemption proceeds;                              years after issuance
                declines to zero after six years
Class C         Contingent deferred sales charge of 1%            0.75%           No conversion feature
                of redemption proceeds for redemptions
                made during first year after purchase
Class I         None                                               None
</TABLE>

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

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

Initial Sales Charge Alternative -- Class A Shares. The public offering price of
Class A shares for purchasers  choosing the initial sales charge  alternative is
the net asset value plus a sales charge, as set forth below.

                                       39
<PAGE>

                     Kemper Intermediate Municipal Bond Fund

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

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

*        Rounded to the nearest one-hundredth percent.

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

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


                           Kemper Municipal Bond Fund
                     Kemper California Tax-Free Income Fund
                       Kemper Florida Tax-Free Income Fund
                      Kemper New York Tax-Free Income Fund
                        Kemper Ohio Tax-Free Income Fund

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

<S>                                              <C>                    <C>                 <C>
Less than $100,000                               4.50%                  4.71%               4.00%
$100,000 but less than $250,000                  3.50                   3.63                3.00
$250,000 but less than $500,000                  2.60                   2.67                2.25
$500,000 but less than $1 million                2.00                   2.04                1.75
$1 million and over                              0.00**                 0.00**              ***
</TABLE>

*        Rounded to the nearest one-hundredth percent.

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

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

Each Fund  receives  the entire net asset value of all its Class A shares  sold.
Kemper Distributors, Inc. ("KDI"), the Funds' principal underwriter, retains the
sales charge on sales of Class A shares from which it allows  discounts from the
applicable  public  offering price to investment  dealers,  which  discounts are
uniform for all  dealers in the United  States and its  territories.  The normal
discount allowed to dealers is set forth in the above table.  Upon notice to all
dealers with whom it has sales agreements,  KDI may reallow to dealers up to the
full applicable  sales charge,  as shown in the above table,  during periods and
for  transactions  specified in such notice and such  reallowances  may be based
upon attainment of minimum sales levels.  During periods when 90% or more of the
sales charge is reallowed, such dealers may be deemed to be underwriters as that
term is defined in the Securities Act of 1933.

Class A shares of a Fund may be  purchased  at net asset value by any  purchaser
provided  that the amount  invested in such Fund or Kemper  Mutual  Funds listed
under "Special Features -- Class A Shares -- Combined Purchases" totals at least
$1,000,000  (the "Large Order NAV Purchase  Privilege")  including  purchases of
Class A shares  pursuant  to the  "Combined  Purchases,"  "Letter of Intent" and
"Cumulative  Discount"  features described under "Special  Features".  The Large
Order NAV Purchase  Privilege  for certain  Kemper  Mutual Funds also applies to


                                       40
<PAGE>

purchases by certain participant-directed retirement plans as described in their
respective Statements of Additional Information.  Redemption within two years of
shares purchased under the Large Order NAV Purchase  Privilege may be subject to
a contingent deferred sales charge. See "Purchase,  Repurchase and Redemption of
Shares  --  Contingent  Deferred  Sales  Charge  --  Large  Order  NAV  Purchase
Privilege."

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

Class A shares of a Fund or any other Kemper  Mutual Fund listed under  "Special
Features -- Class A Shares -- Combined  Purchases" may be purchased at net asset
value in any amount by members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin,  et al. v. Kemper  Short-Term Global Income Fund, et
al., Case No. 93 C 5231 (N.D. IL). This privilege is generally  non-transferable
and continues  for the lifetime of  individual  class members and for a ten-year
period for non-individual  class members.  To make a purchase at net asset value
under this  privilege,  the investor  must,  at the time of  purchase,  submit a
written  request that the  purchase be processed at net asset value  pursuant to
this  privilege  specifically  identifying  the  purchaser  as a  member  of the
"Tabankin  Class." Shares purchased under this privilege will be maintained in a
separate account that includes only shares  purchased under this privilege.  For
more details concerning this privilege, class members should refer to the Notice
of (1)  Proposed  Settlement  with  Defendants;  and (2)  Hearing  to  Determine
Fairness of Proposed  Settlement,  dated August 31, 1995,  issued in  connection
with the aforementioned court proceeding.  For sales of Fund shares at net asset
value  pursuant to this  privilege,  KDI may at its  discretion  pay  investment
dealers and other financial services firms a concession,  payable quarterly,  at
an  annual  rate of up to  0.25%  of net  assets  attributable  to  such  shares
maintained and serviced by the firm. A firm becomes  eligible for the concession
based  upon  assets in  accounts  attributable  to shares  purchased  under this
privilege in the month after the month of purchase and the concession  continues
until terminated by KDI. The privilege of purchasing Class A shares of a Fund at
net asset value under this privilege is not available if another net asset value
purchase privilege also applies.

Class A shares may be sold at net asset  value in any  amount to: (a)  officers,
trustees, directors, employees (including retirees) and sales representatives of
a Fund, its Manager, its principal  underwriter or certain affiliated companies,
for themselves or members of their families; (b) registered  representatives and
employees  of  broker-dealers  having  selling  group  agreements  with  KDI and
officers, directors and employees of service agents of the Funds, for themselves
or their spouses or dependent  children;  (c)  shareholders  who owned shares of
Kemper Value Series,  Inc.  ("KVS") on September 8, 1995, and have  continuously
owned shares of KVS (or a Kemper Fund  acquired by exchange of KVS shares) since
that date, for themselves or members of their families;  (d) any trust, pension,
profit-sharing  or other  benefit  plan for only such  persons;  (e) persons who
purchase  such shares  through bank trust  departments  that process such trades
through an  automated,  integrated  mutual fund clearing  program  provided by a
third party  clearing  firm;  and (f) persons  who  purchase  shares of the Fund
through  KDI  as  part  of an  automated  billing  and  wage  deduction  program
administered  by  RewardsPlus  of  America  for  the  benefit  of  employees  of
participating  employer groups. Class A shares may be sold at net asset value in
any  amount  to  selected  employees  (including  their  spouses  and  dependent
children)   of  banks  and  other   financial   services   firms  that   provide
administrative  services  related to order  placement  and payment to facilitate
transactions  in shares of the Funds for their clients  pursuant to an agreement
with KDI or one of its affiliates.  Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund  shares  may  purchase  a  Fund's  Class A  shares  at net  asset  value
hereunder.  Class A shares may be sold at net asset  value in any amount to unit
investment   trusts  sponsored  by  Ranson  &  Associates,   Inc.  In  addition,
unitholders of unit investment trusts sponsored by Ranson & Associates,  Inc. or
its predecessors may purchase a Fund's Class A shares at net asset value


                                       41
<PAGE>

through reinvestment  programs described in the prospectuses of such trusts that
have such  programs.  Class A shares  of a Fund may be sold at net  asset  value
through certain investment advisors registered under the Investment Advisors Act
of 1940 and other  financial  services  firms that  adhere to certain  standards
established  by KDI,  including a  requirement  that such shares be sold for the
benefit of their clients  participating in an investment  advisory program under
which  such  clients  pay a fee to the  investment  advisor  or  other  firm for
portfolio  management  and other  services.  Such shares are sold for investment
purposes  and on the  condition  that  they will not be  resold  except  through
redemption or  repurchase by the Funds.  The Funds may also issue Class A shares
at net asset value in connection with the acquisition of the assets of or merger
or  consolidation  with  another  investment  company,  or  to  shareholders  in
connection  with the  investment  or  reinvestment  of income and  capital  gain
dividends.

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

The  sales  charge  scale is  applicable  to  purchases  made at one time by any
"purchaser" which includes: an individual;  or an individual,  his or her spouse
and  children  under the age of 21; or a trustee or other  fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income  tax  under  Section  501(c)(3)  or  (13)  of  the  Code;  or a  pension,
profit-sharing  or other  employee  benefit plan whether or not qualified  under
Section  401  of  the  Code;  or  other   organized  group  of  persons  whether
incorporated  or not,  provided the  organization  has been in existence  for at
least six months and has some  purpose  other than the  purchase  of  redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales  charge,  all orders from an  organized  group will have to be
placed  through a single  investment  dealer  or other  firm and  identified  as
originating from a qualifying purchaser.

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

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

Class B shares of a Fund  will  automatically  convert  to Class A shares of the
same Fund six years after  issuance on the basis of the relative net asset value
per share. The purpose of the conversion  feature is to relieve holders of Class
B shares from the distribution services fee when they have been outstanding long
enough for KDI to have been compensated for distribution  related expenses.  For
purposes  of  conversion  to  Class  A  shares,  shares  purchased  through  the
reinvestment of dividends and other  distributions  paid with respect to Class B
shares in a shareholder's  Fund account will be converted to Class A shares on a
pro rata basis.

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

Which  Arrangement  is Better for You?  The decision as to which class of shares
provides  a more  suitable  investment  for an  investor  depends on a number of
factors,  including the amount and intended length of the


                                       42
<PAGE>

investment.  Investors making investments that qualify for reduced sales charges
might consider Class A shares.  Investors who prefer not to pay an initial sales
charge  and who plan to hold  their  investment  for more than six  years  might
consider Class B shares. Investors who prefer not to pay an initial sales charge
but who plan to redeem  their  shares  within six years might  consider  Class C
shares. Orders for Class B shares or Class C shares for $500,000 or more will be
declined.  Orders  for Class B shares or Class C shares  by  employer  sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent will be invested instead in Class A shares
at net asset  value  where  the  combined  subaccount  value in a Fund or Kemper
Mutual  Funds  listed  under  "Special  Features  -- Class A Shares --  Combined
Purchases"  is in excess  of $5  million  including  purchases  pursuant  to the
"Combined  Purchases,"  "Letter of Intent" and  "Cumulative  Discount"  features
described under "Special  Features." For more information  about the three sales
arrangements,  consult your financial  representative or the Shareholder Service
Agent.  Financial  services firms may receive different  compensation  depending
upon which  class of shares  they sell.  Class I shares  are  available  only to
certain institutional investors.

General.  Shares of a Fund are sold at their public offering price, which is the
net asset value per share of the Fund next determined after an order is received
in proper form plus,  with respect to Class A shares,  an initial  sales charge.
The minimum initial investment is $1,000 and the minimum  subsequent  investment
is $100 but such  minimum  amounts may be changed at any time.  An order for the
purchase of shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until a Fund determines that it
has received  payment of the proceeds of the check. The time required for such a
determination  will vary and cannot be  determined  in advance.  Net  investment
income is  allocated  to those shares for which  payment has been  received.  To
begin accruing dividends as soon as possible, purchasers may wire payment to the
sub-custodian, United Missouri Bank of Kansas City, N.A., 10th and Grand Avenue,
Kansas City, Missouri 64106.

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

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

Tax  Identification  Number. Be sure to complete the Tax  Identification  Number
section of the Fund's  application  when you open an  account.  Federal  tax law
requires  each  Fund  to  withhold  31%  of  taxable  dividends,  capital  gains
distributions  and  redemption and exchange  proceeds from accounts  (other than
those of certain exempt payees) without a correct  certified  Social Security or
tax  identification  number and  certain  other  certified  information  or upon
notification  from the IRS or a broker that  withholding is required.  Each Fund
reserves  the  right to  reject  new  account  applications  without  a  correct
certified Social Security or tax  identification  number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct  certified Social Security or tax  identification  number. A shareholder
may avoid  involuntary  redemption by providing the  applicable  Fund with a tax
identification  number  during the 30-day  notice  period.  Shareholders  should
direct their inquiries to Kemper Service Company, 811 Main Street,  Kansas City,
Missouri  64105-2005 or to the firm from which they  received this  Statement of
Additional Information.

Redemption and Repurchase of Shares

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

The  conversion  of Class B  shares  to Class A  shares  may be  subject  to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other  assurance  acceptable  to each Fund to the effect that (a) the
assessment of the  distribution  services fee with respect to Class B shares and
not Class A shares and the  assessment


                                       43
<PAGE>

of the administrative services fee with respect to each class does not result in
a Fund's  dividends  constituting  "preferential  dividends"  under the Internal
Revenue  Code,  and (b) that the  conversion of Class B shares to Class A shares
does not  constitute  a taxable  event  under the  Internal  Revenue  Code.  The
conversion  of  Class B  shares  to  Class A  shares  may be  suspended  if such
assurance is not  available.  In that event,  no further  conversions of Class B
shares would occur,  and shares might continue to be subject to the distribution
services  fee for an  indefinite  period  that may extend  beyond  the  proposed
conversion date.

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

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

The redemption  price for shares of a Fund will be the net asset value per share
of that Fund next determined  following receipt by the Shareholder Service Agent
of a properly  executed request with any required  documents as described above.
Payment for shares  redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly  executed  request
accompanied by any outstanding  share  certificates in proper form for transfer.
When a Fund is asked to redeem  shares  for  which it may not have yet  received
good  payment  (i.e.,  purchases  by  check,  EXPRESS-Transfer  or  Bank  Direct
Deposit),  it  may  delay  transmittal  of  redemption  proceeds  until  it  has
determined  that  collected  funds have been  received  for the purchase of such
shares,  which  may be up to 10 days  from  receipt  by a Fund  of the  purchase
amount. The redemption within two years of Class A shares purchased at net asset
value  under  the  Large  Order  NAV  Purchase  Privilege  may be  subject  to a
contingent  deferred sales charge (see  "Purchase,  Repurchase and Redemption of
Shares -- Initial Sales Charge  Alternative -- Class A Shares"),  the redemption
of Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge -- Class B Shares" below), and the
redemption  of Class C shares  within the first year  following  purchase may be
subject to a contingent  deferred sales charge (see  "Contingent  Deferred Sales
Charge -- Class C Shares" below).

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

Shareholders  can request the following  telephone  privileges:  expedited  wire
transfer redemptions and EXPRESS-Transfer  transactions (see "Special Features")
and  exchange  transactions  for  individual  and  institutional   accounts  and
pre-authorized  telephone  redemption  transactions  for  certain  institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone  exchange  privilege is automatic unless the shareholder
refuses it on the  account  application.  A Fund or its agents may be liable for
any  losses,  expenses  or  costs  arising  out of  fraudulent  or


                                       44
<PAGE>

unauthorized  telephone  requests  pursuant to these privileges unless a Fund or
its agents reasonably believe,  based upon reasonable  verification  procedures,
that the telephone  instructions are genuine. The shareholder will bear the risk
of loss, including loss resulting from fraudulent or unauthorized  transactions,
as long as the reasonable verification procedures are followed. The verification
procedures  include  recording   instructions,   requiring  certain  identifying
information before acting upon instructions and sending written confirmations.

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

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

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

Contingent  Deferred  Sales  Charge -- Large  Order NAV  Purchase  Privilege.  A
contingent  deferred  sales  charge may be imposed  upon  redemption  of Class A
shares that are purchased under the Large Order NAV Purchase

                                       45
<PAGE>

Privilege as follows:  1% if they are  redeemed  within one year of purchase and
0.50% if they are redeemed during the second year following purchase. The charge
will  not  be  imposed  upon   redemption  of  reinvested   dividends  or  share
appreciation.  The  charge  is  applied  to the  value  of the  shares  redeemed
excluding  amounts not  subject to the charge.  The  contingent  deferred  sales
charge will be waived in the event of: (a) redemption of shares of a shareholder
(including a registered joint owner) who has died; (b) redemption of shares of a
shareholder  (including  a  registered  joint  owner) who after  purchase of the
shares being redeemed  becomes totally disabled (as evidenced by a determination
by the federal Social Security  Administration);  (c) redemptions under a Fund's
Systematic  Withdrawal  Plan at a maximum of 10% per year of the net asset value
of the account; and (d) redemptions of shares whose dealer of record at the time
of the investment notifies KDI that the dealer waives the commission  applicable
to such Large Order NAV Purchase.

Contingent  Deferred Sales Charge -- Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon  redemption of any share  appreciation  or reinvested  dividends on Class B
shares.  The charge is computed at the  following  rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.

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

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

The  contingent  deferred  sales charge will be waived:  (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration)  of  the  shareholder   (including  a  registered  joint  owner)
occurring after the purchase of the shares being  redeemed,  (b) in the event of
the death of the shareholder  (including a registered joint owner),  and (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below)

Contingent  Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge  of 1% may be  imposed  upon  redemption  of Class C  shares  if they are
redeemed  within  one year of  purchase.  The charge  will not be  imposed  upon
redemption of reinvested dividends or share appreciation.  The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The  contingent  deferred  sales  charge  will be waived  in the  event of:  (a)
redemption of shares of a shareholder  (including a registered  joint owner) who
has died;  (b)  redemption  of shares of a  shareholder  (including a registered
joint owner) who after  purchase of the shares being  redeemed  becomes  totally
disabled  (as  evidenced  by a  determination  by the  federal  Social  Security
Administration);  and (c) redemptions under a Fund's Systematic  Withdrawal Plan
at a maximum of 10% per year of the net asset value of the account.

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

The rate of the  contingent  deferred  sales charge under the schedule  above is
determined by the length of the period of ownership.  Investments are tracked on
a monthly  basis.  The period of ownership for this purpose begins the first day
of the month in which the order for the investment is received.  In the event no
specific  order is  requested  when  redeeming  shares  subject to a  contingent
deferred  sales  charge,   the  redemption   will  be  made  first  from  shares
representing reinvested dividends and then from the earliest purchase of shares.
KDI receives any contingent deferred sales charge directly.

                                       46
<PAGE>

Reinvestment  Privilege. A shareholder who has redeemed Class A shares of a Fund
or any Kemper  Mutual Fund listed under  "Special  Features -- Class A Shares --
Combined  Purchases"  (other  than  shares  of the  Kemper  Cash  Reserves  Fund
purchased  directly  at net asset  value)  may  reinvest  up to the full  amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the listed Kemper Mutual Funds.  A shareholder  of a Fund or Kemper
Mutual  Fund who  redeems  Class A shares  purchased  under the Large  Order NAV
Purchase  Privilege  (see  "Purchase,  Repurchase  and  Redemption  of Shares --
Initial Sales Charge  Alternative -- Class A Shares") or Class B shares or Class
C shares and incurs a  contingent  deferred  sales charge may reinvest up to the
full amount redeemed at net asset value at the time of the reinvestment in Class
A shares,  Class B shares or Class C shares, as the case may be, of a Fund or of
Kemper Mutual Funds.  The amount of any  contingent  deferred  sales charge also
will be reinvested.  These reinvested shares will retain their original cost and
purchase date for purposes of the  contingent  deferred  sales  charge.  Also, a
holder of Class B shares who has  redeemed  shares may  reinvest  up to the full
amount redeemed,  less any applicable  contingent deferred sales charge that may
have been imposed  upon the  redemption  of such  shares,  at net asset value in
Class A shares of a Fund or of the Kemper  Mutual Funds  listed  under  "Special
Features  --  Class A Shares  --  Combined  Purchases."  Purchases  through  the
reinvestment  privilege  are  subject  to the  minimum  investment  requirements
applicable to the shares being  purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features -- Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the  redemption.  If a loss is realized on the  redemption of a Funds'
shares,  the  reinvestment  in the same Fund may be subject  to the "wash  sale"
rules if made within 30 days of the  redemption,  resulting in a postponement of
the recognition of such loss for federal income tax purposes. In addition,  upon
a reinvestment,  the shareholder may not be permitted to take into account sales
charges  incurred on the original  purchase of shares in computing their taxable
gain or loss.  The  reinvestment  privilege may be terminated or modified at any
time.

Special Features

Class A Shares  --  Combined  Purchases.  Each  Fund's  Class A  shares  (or the
equivalent)  may be purchased  at the rate  applicable  to the discount  bracket
attained by  combining  concurrent  investments  in Class A shares of any of the
following funds: Kemper Aggressive Growth Fund, Kemper Asian Growth Fund, Kemper
Blue Chip Fund,  Kemper  California  Tax-Free Income Fund,  Kemper Cash Reserves
Fund,  Kemper  Contrarian  Fund,  Kemper  Emerging  Markets Growth Fund,  Kemper
Florida Tax-Free Income Fund, Kemper Global Blue Chip Fund, Kemper Global Income
Fund,  Kemper  Growth Fund,  Kemper High Yield Fund,  Kemper High Yield Fund II,
Kemper High Yield Opportunity Fund, Kemper Horizon 10+ Portfolio, Kemper Horizon
20+  Portfolio,   Kemper   Horizon  5  Portfolio,   Kemper  Income  and  Capital
Preservation Fund, Kemper Intermediate Municipal Bond Fund, Kemper International
Fund,  Kemper  International  Research  Fund,  Kemper Large Company  Growth Fund
(currently  available  only to employees of The Advisor  Investments,  Inc.; not
available in all states), Kemper Latin America Fund, Kemper Municipal Bond Fund,
Kemper New Europe  Fund,  Kemper New York  Tax-Free  Income  Fund,  Kemper  Ohio
Tax-Free  Income  Fund,  Kemper  Research  Fund  (currently  available  only  to
employees of The Advisor  Investments,  Inc.;  not  available in all states),  ,
Kemper  Retirement  Fund -- Series  III,  Kemper  Retirement  Fund -- Series IV,
Kemper  Retirement Fund -- Series V, Kemper Retirement Fund -- Series VI, Kemper
Retirement Fund -- Series VII, Kemper S&P 500 Index Fund, Kemper Short-Term U.S.
Government Fund, Kemper Small Cap Value Fund, Kemper Small Cap Value+Growth Fund
(currently  available  only to employees of The Advisor  Investments,  Inc.; not
available  in all  states),  Kemper Small  Capitalization  Equity  Fund,  Kemper
Strategic Income Fund, Kemper Target 2010 Fund, Kemper Target 2011 Fund , Kemper
Technology Fund,  Kemper Total Return Fund,  Kemper U.S.  Government  Securities
Fund,  Kemper U.S.  Growth and Income Fund,  Kemper U.S.  Mortgage Fund,  Kemper
Value+Growth Fund, Kemper Worldwide 2004 Fund,  Kemper-Dreman Financial Services
Fund and Kemper-Dreman  High Return Equity Fund ("Kemper Mutual Funds").  Except
as noted below,  there is no combined  purchase  credit for direct  purchases of
shares of Zurich Money Funds, Cash Equivalent Fund,  Tax-Exempt California Money
Market Fund, Cash Account Trust, Investors Municipal Cash Fund or Investors Cash
Trust ("Money Market Funds"), which are not considered "Kemper Mutual Funds" for
purposes hereof.  For purposes of the Combined Purchases feature described above
as well as for the Letter of Intent and Cumulative  Discount features  described
below,  employer  sponsored  employee benefit plans using the subaccount  record
keeping  system made  available  through the  Shareholder  Service  Agent or its
affiliates may include: (a) Money Market Funds as "Kemper Mutual Funds," (b) all
classes of shares of any Kemper Mutual Fund, and (c) the value of any other plan
investments,  such  as  guaranteed  investment  contracts  and  employer  stock,
maintained on such subaccount record keeping system.

                                       47
<PAGE>

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

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

Class A Shares  --  Availability  of  Quantity  Discounts.  An  investor  or the
investor's  dealer or other financial  services firm must notify the Shareholder
Service  Agent or KDI  whenever a quantity  discount or reduced  sales charge is
applicable to a purchase. Upon such notification,  the investor will receive the
lowest  applicable  sales  charge.  Quantity  discounts  described  above may be
modified or terminated at any time.

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

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

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

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

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


                                       48
<PAGE>
General.  Shares of a Kemper  Mutual  Fund with a value in excess of  $1,000,000
(except  Kemper Cash Reserves  Fund)  acquired by exchange  from another  Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged  thereafter until
they have been owned for 15 days (the "15Day Hold  Policy").  The Fund  reserves
the right to invoke the 15-Day Hold Policy of  exchanges of  $1,000,000  or less
if, in the Advisor 's judgment, the exchange activity may have an adverse effect
on the fund. In particular, a pattern of exchanges that coincides with a "market
timing"  strategy  may be  disruptive  to the Kemper fund and  therefore  may be
subject to the 15-Day  Hold  Policy.  For  purposes of  determining  whether the
15-Day Hold Policy applies to a particular exchange,  the value of the shares to
be  exchanged  shall be  computed  by  aggregating  the  value of  shares  being
exchanged for all accounts under common control, direction, or advice, including
without limitation,  accounts administered by a financial services firm offering
market timing,  asset allocation or similar services.  The total value of shares
being  exchanged must at least equal the minimum  investment  requirement of the
Kemper  Fund into which they are being  exchanged.  Exchanges  are made based on
relative  dollar  values of the shares  involved  in the  exchange.  There is no
service  fee for an  exchange;  however,  dealers or other  firms may charge for
their services in effecting exchange transactions. Exchanges will be effected by
redemption  of shares of the fund held and purchase of shares of the other fund.
For federal income tax purposes, any such exchange constitutes a sale upon which
a gain or loss may be realized,  depending  upon whether the value of the shares
being  exchanged  is more or less than the  shareholder's  adjusted  cost basis.
Shareholders   interested  in  exercising  the  exchange  privilege  may  obtain
prospectuses of the other funds from dealers,  other firms or KDI. Exchanges may
be accomplished by a written request to KSvC,  Attention:  Exchange  Department,
P.O.  Box 419557,  Kansas  City,  Missouri  64141-6557,  or by  telephone if the
shareholder  has given  authorization.  Once the  authorization  is on file, the
Shareholder  Service Agent will honor  requests by telephone at  1-800-621-1048,
subject  to  the  limitations  on  liability  under  "Purchase,  Repurchase  and
Redemption of Shares -- General." Any share certificates must be deposited prior
to any exchange of such shares.  During  periods when it is difficult to contact
the  Shareholder  Service  Agent by  telephone,  it may be  difficult to use the
telephone exchange  privilege.  The exchange privilege is not a right and may be
suspended,  terminated or modified at any time. Except as otherwise permitted by
applicable  regulations,  60 days' prior written  notice of any  termination  or
material  change will be provided.  Exchanges  may only be made for Kemper Funds
that are eligible for sale in the shareholder's  state of residence.  Currently,
Tax-Exempt California Money Market Fund is available for sale only in California
and the portfolios of Investors  Municipal Cash Fund are available for sale only
in certain states.

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

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

Bank Direct  Deposit.  A shareholder  may purchase  additional  shares of a Fund
through an automatic  investment program.  With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"),  investments are made  automatically  (minimum $50
and maximum $50,000) from the shareholder's  account at a bank, savings and loan
or credit union



                                       49
<PAGE>

into the shareholder's  Fund account.  By enrolling in Bank Direct Deposit,  the
shareholder authorizes the Fund and its agents to either draw checks or initiate
Automated  Clearing  House debits  against the  designated  account at a bank or
other  financial  institution.  This privilege may be selected by completing the
appropriate  section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending  written  notice to KSvC,  P.O.  Box 419415,  Kansas  City,  Missouri
64141-6415.  Termination by a shareholder  will become  effective  within thirty
days after the  Shareholder  Service Agent has received the request.  A Fund may
immediately  terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's  financial  institution.  The Funds may terminate or modify
this privilege at any time.

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

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

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

Additional Transaction Information

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

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



                                       50
<PAGE>

In addition to the discounts or commissions described above, KDI will, from time
to  time,  pay  or  allow  additional  discounts,   commissions  or  promotional
incentives, in the form of cash, to firms that sell shares of the Funds. In some
instances, such discounts,  commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain  minimum  amounts of shares of the Funds or other funds  underwritten by
KDI.

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

Investment  dealers  and other  firms  provide  varying  arrangements  for their
clients to purchase  and redeem the Funds'  shares.  Some may  establish  higher
minimum  investment  requirements  than set forth above.  Firms may arrange with
their clients for other investment or  administrative  services.  Such firms may
independently  establish and charge additional amounts to their clients for such
services,  which charges would reduce the clients'  return.  Firms also may hold
the Funds'  shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with  respect to or control  over the  accounts of specific  shareholders.  Such
shareholders  may obtain access to their  accounts and  information  about their
accounts only from their firm.  Certain of these firms may receive  compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee  accounts.  In addition,  certain  privileges
with respect to the purchase and  redemption  of shares or the  reinvestment  of
dividends may not be available through such firms. Some firms may participate in
a  program  allowing  them  access  to their  clients'  accounts  for  servicing
including,  without  limitation,  transfers of  registration  and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive  compensation  from the Funds through the Shareholder  Service Agent for
these  services.  This  Statement of  Additional  Information  should be read in
connection with such firms' material regarding their fees and services.

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

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

Dividends.  All the net  investment  income  of a Fund is  declared  daily  as a
dividend  on shares  for which the Fund has  received  payment.  Net  investment
income of a Fund consists of all interest income earned on portfolio assets less
all  expenses of the Fund.  Income  dividends  will be  distributed  monthly and
dividends of net realized capital gains will be distributed annually.

The level of income  dividends  per share (as a  percentage  of net asset value)
will be lower for Class B and Class C shares than for Class A and Class I shares
primarily as a result of the distribution services fee applicable to Class B and
Class C shares.

Distributions of capital gains, if any, will be paid in the same amount for each
class.

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



                                       51
<PAGE>

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

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

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

Any  dividends of a Fund that are  reinvested  normally  will be  reinvested  in
shares of the same class of that same Fund. However, upon written request to the
Shareholder  Service  Agent,  a  shareholder  may elect to have  Fund  dividends
invested  in shares of the same  class of another  Kemper  Fund at the net asset
value  of  such  class  of such  other  fund.  See  "Purchase,  Repurchase,  and
Redemption of Shares",  "Special Features--Class A Shares--Combined  Purchases",
for a list of such other  Kemper  Funds.  To use this  privilege  of investing a
Fund's dividends in shares of another Kemper Fund,  shareholders must maintain a
minimum  account value of $1,000 in the Fund  distributing  the  dividends.  The
Funds will  reinvest  dividend  checks (and future  dividends) in shares of that
same Fund and class if checks are returned as undeliverable. Dividends and other
distributions of a Fund in the aggregate amount of $10 or less are automatically
reinvested  in shares of the Fund  unless  the  shareholder  requests  that such
policy not be applied to the shareholder's account.

Performance

The Funds may advertise several types of performance  information for a class of
shares,  including "average annual total return" and "total return." Performance
information will be computed  separately for Class A, Class B, Class C and Class
I shares.  Each of these  figures is based upon  historical  results  and is not
representative of the future performance of any class of the shares. A Fund with
fees or expenses  being  waived or  absorbed  by The Advisor may also  advertise
performance information before and after the effect of the fee waiver or expense
absorption.

A Fund's historical  performance or return for a class of shares may be shown in
the form of "yield," "tax equivalent  yield,"  "average annual total return" and
"total return"  figures.  These various  measures of  performance  are described
below.  Performance  information will be computed  separately for each class. In
certain cases, The Advisor has waived or reduced its management fee and absorbed
certain  operating  expenses  for some of the Funds for the  periods  and to the
extent specified in the prospectus and this Statement of Additional Information.
See " Investment Advisor and Underwriter."  Because of these waivers and expense
absorptions,  the  performance  results  for such  Funds  may be shown  with and
without the effect of these waivers and expense absorptions. Performance results
not giving  effect to waivers and  expense  absorptions  will be lower.  Certain
performance  information set forth in this section for the New York Fund are for
the  predecessor  of the New York Fund,  also named  "Kemper  New York  Tax-Free
Income Fund."

Yield is a measure of the net investment  income per share earned by a Fund over
a specific  one-month or 30-day period  expressed as a percentage of the maximum
offering price of the Fund's shares (which is net asset value for Class B, Class
C, and Class I) at the end of the period. Tax equivalent yield is the yield that
a  taxable  investment  must  generate  in order to equal a Fund's  yield for an
investor in a stated  federal  income tax bracket for the  Municipal  Fund,  the
Intermediate  Municipal Fund, or the Florida Fund, in a stated combined  federal
and state income tax bracket for the California  Fund, and the Ohio Fund, and in
a stated combined  federal,  New York State and New York City income tax bracket
for the New York Fund.  The tax  equivalent  yield for the Florida Fund does not
include the potential  effect of an exemption from the Florida  intangibles tax.
Average  annual total return and total  return  measure both the net  investment
income  generated by, and the effect of any realized or unrealized  appreciation
or depreciation of, the underlying investments in a Fund.

A Fund's yield is computed in accordance with a standardized  method  prescribed
by rules of the Securities and Exchange  Commission.  The yields are shown below
based upon the one-month  period ended  September 30, 2000 for the Municipal and
Intermediate Municipal Funds and August 31, 2000 for the State Funds.



                                       52
<PAGE>

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


Municipal Fund                     4.41%             3.78%             3.76%
Intermediate Municipal Fund        3.78%             3.07%             3.10%
California Fund                    4.19%             3.62%             3.62%
Florida Fund                       4.17%             3.62%             3.62%
New York Fund                      4.21%             3.66%             3.66%
Ohio Fund                          3.95%             3.35%             3.37%




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

                          YIELD = 2 [ (a - b +1 )^6 - 1]
                                       -----
                                        cd
Where:
                  A       =       dividends and interest earned during the
                                  period.
                  B       =       expenses accrued for the period (net of
                                  reimbursements).
                  C       =       the average daily number of shares outstanding
                                  during the period that were entitled to
                                  receive dividends.
                  D       =       the maximum  offering price per share on the
                                  last day of the  period  (which  is net  asset
                                  value for Class B and Class C shares).

In computing  the  foregoing  yield,  each Trust  follows  certain  standardized
accounting  practices  specified by Securities  and Exchange  Commission  rules.
These practices are not  necessarily  consistent with those that each Trust uses
to prepare  its annual and  interim  financial  statements  in  conformity  with
generally accepted accounting principles.

Each Fund's tax  equivalent  yield is computed by dividing  that  portion of the
Fund's yield  (computed as described  above) that is tax-exempt by one minus the
stated federal income tax rate and adding the result to that portion, if any, of
the yield of the Fund that is not tax-exempt.  The California  Fund's,  New York
Fund's,  and Ohio  Fund's  Class A shares' tax  equivalent  yield is computed by
dividing that portion of the Fund's Class A shares' yield (computed as described
above) that is tax-exempt by one minus the stated combined  federal,  state and,
if  applicable,  city income tax rate and adding the result to that portion,  if
any, of the yield of the Class A shares of the Fund that is not tax-exempt.  For
additional  information  concerning  tax-exempt  yields,  see "Tax-Exempt versus
Taxable  Yield"  below.  The  tax  equivalent   yields  for  the  Municipal  and
Intermediate  Municipal Funds for the one-month  period ended September 30, 2000
and for the State Funds for the  one-month  period ended August 31, 2000 are set
forth below.

<TABLE>
<CAPTION>
Fund -- Tax Type (Marginal Rate)               Class A Shares      Class B Shares      Class C Shares
--------------------------------               --------------      --------------      --------------
<S>                                                <C>                  <C>                <C>

Municipal-- Federal (37.1%)                        7.01%                6.01%              5.98%
Intermediate Municipal Fund-- Federal (37.1%)      6.01%                4.88%              4.93%
California-- Combined (42.9%)                      7.33%                6.34%              6.34%
Florida-- Federal only (37.1%)                     6.63%                5.76%              5.76%
New York-- Combined (44.2%)                        7.54%                6.56%              6.56%
Ohio-- Combined (41.2%)                            6.72%                5.70%              5.73%

</TABLE>

A Fund's average annual total return  quotation is computed in accordance with a
standardized   method  prescribed  by  rules  of  the  Securities  and  Exchange
Commission.  The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the  Fund's  shares on the  first day of the  period,  adjusting  to deduct  the
maximum  sales  charge  (in the  case of  Class A  shares),  and  computing  the
"redeemable  value" of that investment at the end of the period.  The redeemable
value in the case of Class B shares or Class C shares includes the effect of the
applicable  contingent  deferred  sales charge that may be imposed at the end of
the period. The redeemable value is then divided by the initial investment,  and
this  quotient is taken to the Nth root (N  representing  the number of years in
the period) and 1 is subtracted  from the result,  which is then



                                       53
<PAGE>

expressed as a percentage.  The calculation  assumes that all income and capital
gains  dividends paid by the Fund have been reinvested at net asset value on the
reinvestment  dates during the period.  Average  annual total return figures for
various periods are set forth in the table below.

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

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

A Fund's  performance  figures  are based upon  historical  results  and are not
necessarily  representative of future  performance.  A Fund's Class A shares are
sold at net asset  value  plus a maximum  sales  charge of 4.5%  (2.75%  for the
Intermediate  Municipal Fund) of the offering price. Class B, Class C, and Class
I shares  are sold at net  asset  value.  Redemptions  of Class B shares  may be
subject  to a  contingent  deferred  sales  charge  that is 4% in the first year
following the purchase,  declines by a specified percentage each year thereafter
and becomes zero after six years. Redemption of Class C shares may be subject to
a 1%  contingent  deferred  sales charge in the first year  following  purchase.
Average annual total return  figures do, and total return  figures may,  include
the effect of the  contingent  deferred  sales charge for the Class B shares and
Class C  shares  that  may be  imposed  at the end of the  period  in  question.
Performance  figures for the Class B shares and Class C shares not including the
effect of the applicable contingent deferred sales charge would be reduced if it
were included.  Returns and net asset value will fluctuate.  Factors affecting a
Fund's  performance  include general market  conditions,  operating expenses and
investment  management.  Any  additional  fees  charged  by a  dealer  or  other
financial  services  firm would reduce the returns  described  in this  section.
Shares of a Fund are redeemable at the then current net asset value of the Fund,
which may be more or less than original cost.

A Fund's  performance  may be  compared to that of the  Consumer  Price Index or
various unmanaged bond indexes such as the Lehman Brothers  Municipal Bond Index
and the Salomon  Brothers High Grade Bond Index, and may also be compared to the
performance of other fixed income, state municipal bond funds (as applicable) or
general  municipal  bond  mutual  funds or mutual  fund  indexes as  reported by
independent mutual fund reporting  services such as Lipper Analytical  Services,
Inc. ("Lipper").  Lipper performance  calculations are based upon changes in net
asset value with all dividends  reinvested  and do not include the effect of any
sales charges.

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



                                       54
<PAGE>

money market funds.  Performance of U.S. Treasury obligations may be based upon,
among  other  things,  various  U.S.  Treasury  bill  indexes.  Certain of these
alternative  investments  may  offer  fixed  rates  of  return,  and  guaranteed
principal and may be insured.

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


A Fund may include in its sales  literature and shareholder  reports a quotation
of the current  "distribution rate" for a class of a Fund.  Distribution rate is
simply a measure of the level of dividends  distributed for a specified  period.
It differs from yield,  which is a measure of the income  actually earned by the
Fund's  investments,  and from  total  return,  which is a measure of the income
actually earned by, plus the effect of any realized and unrealized  appreciation
or depreciation of such  investments  during the period.  Distribution  rate is,
therefore,  not intended to be a complete  measure of performance.  Distribution
rate may  sometimes be greater than yield since,  for  instance,  it may include
gains from the sale of options or other short-term and possibly  long-term gains
(which may be  non-recurring)  and may not include the effect of amortization of
bond  premiums.  As  reflected  under  "Investment  Policies and  Techniques  --
Additional  Investment  Information," option writing can limit the potential for
capital appreciation.





                                       55
<PAGE>









                                       56
<PAGE>

                           KEMPER MUNICIPAL BOND FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to September  30, 2000 reflect the actual  performance  of these classes of
shares.  Returns  for Class B and C shares for the period  April 20, 1976 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the higher operating expenses applicable to Class B and C shares. The
performance  figures are also adjusted to reflect the maximum current contingent
deferred sales charge of 4% for Class B shares and 1% for Class C shares

The adjustment is calculated by measuring the actual monthly return differential
between the Class B and C shares and the Class A shares over a common three year
period (June 30, 1996 to June 30,1999).  This relative performance comparison is
then used to impute Class B and C share  performance  from Class A share returns
for monthly periods prior to the inception of such Class B and C shares.

The returns in the chart below assume reinvestment of distributions at net asset
value and  represent  both  actual past  performance  figures for each class and
adjusted  performance  figures  of the  Class  B and C  shares  of the  Fund  as
described  above;  they do not guarantee future results.  Investment  return and
principal value will fluctuate so that an investor's shares, when redeemed,  may
be worth more or less than their original cost.


                      MUNICIPAL FUND -- SEPTEMBER 30, 2000*

                               1 year     5 Years      10 Years       Life of
       Average Annual Total                                           Class
           Return Table
           ------------

Class A Shares                  0.96%      4.33%        6.70%         7.26%
Class B Shares                  1.74%      4.23%        6.27%         6.59%
Class C Shares                  4.74%      4.42%        6.33%         6.61%


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

*        Because  Class B and C shares were not  introduced  until May 31, 1994,
         the total return for Class B and C shares for the period prior to their
         introduction  is based upon the  performance of Class A shares from the
         commencement of investment  operations,  April 20, 1976 through May 31,
         1994. Actual performance of Class B and C shares is shown beginning May
         31, 1994.

               INTERMEDIATE MUNICIPAL FUND -- SEPTEMBER 30, 2000*


       Average Annual Total
          Return Table
          -------------

                                      1 year     5 Years       Life of
                                                               Class
          Class A Shares              1.36%       3.87%        5.20%
          Class B Shares              0.39%       3.47%        4.79%
          Class C Shares              3.41%       3.64%        4.98%


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

*        Since November 1, 1994 for all classes.


                     KEMPER CALIFORNIA TAX-FREE INCOME FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to August 31,  2000  reflect  the actual  performance  of these  classes of
shares. Returns for Class B and C shares for the period February 17, 1983 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the higher



                                       57
<PAGE>

operating expenses  applicable to Class B and C shares. The performance  figures
are also  adjusted to reflect  the maximum  current  contingent  deferred  sales
charge of 4% for Class B shares and 1% for Class C shares

The adjustment is calculated by measuring the actual monthly return differential
between the Class B and C shares and the Class A shares over a common three year
period (June 30, 1996 to June 30,1999).  This relative performance comparison is
then used to impute Class B and C share  performance  from Class A share returns
for monthly periods prior to the inception of such Class B and C shares.

The returns in the chart below assume reinvestment of distributions at net asset
value and  represent  both  actual past  performance  figures for each class and
adjusted  performance  figures  of the  Class  B and C  shares  of the  Fund  as
described  above;  they do not guarantee future results.  Investment  return and
principal value will fluctuate so that an investor's shares, when redeemed,  may
be worth more or less than their original cost.




                       CALIFORNIA FUND-- AUGUST 31, 2000*

        Average Annual
     Total Return Table
     ------------------

                                  1 year     5 Years    10 Years   Life of Class
        Class A Shares             3.18%      4.98%       6.73%         8.12%
        Class B Shares             4.14       4.95%       6.39%         7.64%
        Class C Shares            7..34%      5.01%       6.17%         7.35%


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

*        Because  Class B and C shares were not  introduced  until May 31, 1994,
         the total return for Class B and C shares for the period prior to their
         introduction  is based upon the  performance of Class A shares from the
         commencement  of investment  operations,  February 17, 1983 through May
         31, 1994. Actual performance of Class B and C shares is shown beginning
         May 31, 1994

                       KEMPER FLORIDA TAX-FREE INCOME FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to August 31,  2000  reflect  the actual  performance  of these  classes of
shares.  Returns  for Class B and C shares for the period  April 25, 1991 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the higher operating expenses applicable to Class B and C shares. The
performance  figures are also adjusted to reflect the maximum current contingent
deferred sales charge of 4% for Class B shares and 1% for Class C shares

The adjustment is calculated by measuring the actual monthly return differential
between the Class B and C shares and the Class A shares over a common three year
period (June 30, 1996 to June 30,1999).  This relative performance comparison is
then used to impute Class B and C share  performance  from Class A share returns
for monthly periods prior to the inception of such Class B and C shares.

The returns in the chart below assume reinvestment of distributions at net asset
value and  represent  both  actual past  performance  figures for each class and
adjusted  performance  figures  of the  Class  B and C  shares  of the  Fund  as
described  above;  they do not guarantee future results.  Investment  return and
principal value will fluctuate so that an investor's shares, when redeemed,  may
be worth more or less than their original cost.




                                       58
<PAGE>

                        FLORIDA FUND -- AUGUST 31, 2000*


       Average Annual total
          Return Table
          ------------

                                     1 year    5 Years   Life of Class
          Class A Shares             1.36%      4.27%        6.40%
          Class B Shares             2.32%      4.20%        6.10%
          Class C Shares             5.34%      4.37%        6.13%



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

* Because Class B and C shares were not introduced until May 31, 1994, the total
return for Class B and C shares for the period  prior to their  introduction  is
based upon the performance of Class A shares from the commencement of investment
operations,  April 25, 1991 through May 31, 1994. Actual  performance of Class B
and C shares is shown beginning May 31, 1994.



                      KEMPER NEW YORK TAX-FREE INCOME FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to August 31,  2000  reflect  the actual  performance  of these  classes of
shares. Returns for Class B and C shares for the period December 31, 1985 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the higher operating expenses applicable to Class B and C shares. The
performance  figures are also adjusted to reflect the maximum current contingent
deferred sales charge of 4% for Class B shares and 1% for Class C shares

The adjustment is calculated by measuring the actual monthly return differential
between the Class B and C shares and the Class A shares over a common three year
period (June 30, 1996 to June 30,1999).  This relative performance comparison is
then used to impute Class B and C share  performance  from Class A share returns
for monthly periods prior to the inception of such Class B and C shares.

The returns in the chart below assume reinvestment of distributions at net asset
value and  represent  both  actual past  performance  figures for each class and
adjusted  performance  figures  of the  Class  B and C  shares  of the  Fund  as
described  above;  they do not guarantee future results.  Investment  return and
principal value will fluctuate so that an investor's shares, when redeemed,  may
be worth more or less than their original cost.


                        NEW YORK FUND -- AUGUST 31, 2000*


        Average Annual
      Total Return Table          1 year     5 Years    10 Years        Life of
      ------------------                                                Fund
                                                                        ----

        Class A Shares             1.72%      4.45%      6.63%          6.76%
        Class B Shares             2.60%      4.39%      6.23%          6.23%
        Class C Shares             5.64%      4.55%      6.22%          6.22%


* Because Class B and C shares were not introduced until May 31, 1994, the total
return for Class B and C shares for the period  prior to their  introduction  is
based upon the performance of Class A shares from the commencement of investment
operations,  December 31, 1985 through May 31, 1994. Actual performance of Class
B and C shares is shown beginning May 31, 1994

                        KEMPER OHIO TAX-FREE INCOME FUND


Performance  figures for Class B and C shares of the Fund for the period May 31,
1994 to August 31,  2000  reflect  the actual  performance  of these  classes of
shares.  Returns  for Class B and C shares for the period  March 22, 1993 to May
31, 1994 are derived from the historical performance of Class A shares, adjusted
to reflect the higher



                                       59
<PAGE>

operating expenses  applicable to Class B and C shares. The performance  figures
are also  adjusted to reflect  the maximum  current  contingent  deferred  sales
charge of 4% for Class B shares and 1% for Class C shares

The adjustment is calculated by measuring the actual monthly return differential
between the Class B and C shares and the Class A shares over a common three year
period (June 30, 1996 to June 30,1999).  This relative performance comparison is
then used to impute Class B and C share  performance  from Class A share returns
for monthly periods prior to the inception of such Class B and C shares.

The returns in the chart below assume reinvestment of distributions at net asset
value and  represent  both  actual past  performance  figures for each class and
adjusted  performance  figures  of the  Class  B and C  shares  of the  Fund  as
described  above;  they do not guarantee future results.  Investment  return and
principal value will fluctuate so that an investor's shares, when redeemed,  may
be worth more or less than their original cost.


                          OHIO FUND -- AUGUST 31, 2000*

        Average Annual
      Total Return Table         1 year     5 Years   Life of Class
      ------------------
        Class A Shares           -0.13%      4.35%        5.18%
        Class B Shares            0.73%      4.27%        5.09%
        Class C Shares            3.74%      4.46%        5.09%


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

*        Because  Class B and C shares were not  introduced  until May 31, 1994,
         the total return for Class B and C shares for the period prior to their
         introduction  is based upon the  performance of Class A shares from the
         commencement of investment  operations,  March 22, 1993 through May 31,
         1994. Actual performance of Class B and C shares is shown beginning May
         31, 1994.

There  may  be  quarterly   periods  following  the  periods  reflected  in  the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.

Investors may want to compare a Fund's  performance to that of  certificates  of
deposit  offered by banks and other  depository  institutions.  Certificates  of
deposit   represent   an   alternative   (taxable)   income-producing   product.
Certificates of deposit may offer fixed or variable interest rates and principal
is guaranteed  and may be insured.  Withdrawal of the deposits prior to maturity
normally  will be  subject  to a  penalty.  Rates  offered  by banks  and  other
depository  institutions  are  subject  to change at any time  specified  by the
issuing institution. The shares of a Fund are not insured and net asset value as
well as yield will fluctuate. Shares of a Fund are redeemable at net asset value
which may be more or less than original cost.  Redemption of Class B and Class C
shares may be subject to a contingent deferred sales charge. The bonds held by a
Fund are  generally  of longer  term than most  certificates  of deposit and may
reflect longer-term market interest rate fluctuations.

Investors  also may want to compare  the  performance  of a Fund to that of U.S.
Treasury  bills,  notes or bonds.  Treasury  obligations  are issued in selected
denominations.  Rates of Treasury  obligations are fixed at the time of issuance
and payment of principal  and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely  with  interest  rates prior to  maturity  and will equal par value at
maturity.  The net asset  value of a Fund will  fluctuate.  Shares of a Fund are
redeemable  at net asset  value  which may be more or less than  original  cost.
Redemption of Class B and Class C shares may be subject to a contingent deferred
sales charge. Each Fund's yield will also fluctuate.

Investors may also want to compare performance of a Fund to that of money market
funds.  Money market fund yields will fluctuate and shares are not insured,  but
share values usually remain stable.


                                       60
<PAGE>


From time to time,  a Fund may compare  its  after-tax  total  return to that of
taxable  investments,  including  but not  limited to  certificates  of deposit,
taxable money market funds or U.S.  Treasury bills.  Tax equivalent total return
represents the total return that would be generated by a taxable investment that
produced  the same amount of  after-tax  income and change in net asset value as
the Fund in each period.

Tax-Exempt  Versus Taxable Yield.  You may want to determine which investment --
tax-exempt  or taxable -- will provide you with a higher  after-tax  return.  To
determine  the  taxable  equivalent  yield,  simply  divide  the yield  from the
tax-exempt  investment by 1 minus your  marginal tax rate.  The tables below are
provided for your convenience in making this calculation for selected tax-exempt
yields and taxable  income  levels.  These yields are  presented for purposes of
illustration  only and are not  representative  of any  yield  that any class of
shares of a Fund may  generate.  The tables are based upon the 2000  federal and
state tax rates and brackets.

 Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under
                                    $124,500

<TABLE>
<CAPTION>
                                                                               A Tax-Exempt Yield of:
            Taxable Income                   Your Marginal        4%       5%       6%       7%      8%        9%
      Single               Joint           Federal Tax Rate             Is Equivalent to a Taxable Yield of
      ------               -----           ----------------             ------------------------------------
<S>                  <C>                        <C>              <C>      <C>      <C>     <C>     <C>        <C>


$25,350-$61,400      $42,350-$102,300           28.0%            5.56     6.94     8.33     9.72   11.11      12.50
Over $61,400         Over $102,300              31.0%            5.80     7.25     8.70    10.14   11.59      13.04
</TABLE>


<TABLE>
<CAPTION>
                                               Combined                        A Tax-Exempt Yield of:
            Taxable Income                  California and        4%       5%       6%       7%      8%        9%
      Single               Joint           Federal Tax Rate             Is Equivalent to a Taxable Yield of
      ------               -----           ----------------             -----------------------------------
<S>                                              <C>             <C>      <C>      <C>     <C>     <C>      <C>

 $25,350 - $26,644   $42,350 - $53,288           32.3%           5.91     7.39     8.86    10.34   11.82    13.29
 $26,644 - $33,673   $53,288 - $67,376           33.8%           6.04     7.55     9.06    10.57   12.08    13.60
 $53,673 - $61,400   $67,376 - $102,300          34.7%           6.13     7.66     9.19    10.72   12.25    13.78
   Over $61,400        Over $102,300             37.4%           6.39     7.99     9.58    11.18   12.78    14.38
</TABLE>


<TABLE>
<CAPTION>
                                               Combined                        A Tax-Exempt Yield of:
            Taxable Income                  N.Y. City, N.Y.       4%       5%       6%       7%      8%        9%
                                                 State
      Single               Joint         and Federal Tax Rate           Is Equivalent to a Taxable Yield of
      ------               -----         --------------------           -----------------------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

 $25,350 - $61,400   $42,350 - $102,300          36.1%           6.26     7.82     9.39    10.95   12.52    14.08
   Over $61,400        Over $102,300             38.8%           6.54     8.17     9.80    11.44   13.07    14.78
</TABLE>

<TABLE>
<CAPTION>
                                               Combined                        A Tax-Exempt Yield of:
            Taxable Income                     Ohio and           4%       5%       6%       7%      8%        9%
      Single               Joint           Federal Tax Rate             Is Equivalent to a Taxable Yield of
      ------               -----           ----------------             ------------------------------------

<S>        <C>                                   <C>             <C>      <C>      <C>     <C>     <C>      <C>
 $25,350 - $40,000                               30.9%           5.79     7.24     8.68    10.13   11.58    13.02
 $40,000 - $61,400   $42,350 - $80,000           31.4%           5.83     7.29     8.75    10.20   11.66    13.12
                     $80,000 - $100,000          31.9%           5.87     7.34     8.81    10.28   11.75    13.22
                    $100,000 - $102,300          32.5%           5.93     7.41     8.89    10.37   11.85    13.33
 $61,400 - $80,000                               34.2%           6.08     7.60     9.12    10.64   12.16    13.68
$80,000 - $100,000                               34.7%           6.13     7.66     9.19    10.72   12.25    13.78
   Over $100,000       Over $102,000             35.4%           6.19     7.74     9.29    10.84   12.38    13.93
</TABLE>


 Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under
                                    $126,600*




                                       61
<PAGE>

<TABLE>
<CAPTION>
                                               Combined                        A Tax-Exempt Yield of:
            Taxable Income                     Ohio and           4%       5%       6%       7%      8%        9%
      Single               Joint           Federal Tax Rate             Is Equivalent to a Taxable Yield of
      ------               -----           ----------------             -----------------------------------

<S>        <C>       <C>       <C>              <C>              <C>      <C>      <C>     <C>     <C>      <C>
 $25,750 - $40,000                              31.09%           5.80     7.26     8.71    10.16   11.61    13.06
 $40,001 - $62,450   $43,051 - $80,000          31.61%           5.85     7.31     8.77    10.24   11.70    13.16
                     $80,001 - $100,000         32.12%           5.89     7.37     8.84    10.31   11.79    13.26
                    $100,001 - $104,050         32.79%           5.95     7.44     8.93    10.42   11.90    13.39
 $62,451 - $80,000                              34.46%           6.10     7.63     9.15    10.68   12.21    13.73
$80,001 - $100,000                              34.95%           6.15     7.69     9.22    10.76   12.30    13.84
   Over $100,000       Over $104,050            35.59%           6.21     7.76     9.32    10.87   12.42    13.97
</TABLE>


 Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over
                                   $124,500 *

<TABLE>
<CAPTION>
                                                                               A Tax-Exempt Yield of:
            Taxable Income                   Your Marginal        4%       5%       6%       7%      8%        9%
      Single               Joint           Federal Tax Rate             Is Equivalent to a Taxable Yield of
      ------               -----           ----------------             -----------------------------------
<S>                  <C>                         <C>             <C>      <C>     <C>      <C>     <C>      <C>
$61,400 - $128,100   $102,300 - $155,950         31.9%           5.87     7.34     8.81    10.28   11.75    13.25
$128,100 - $278,450  $155,950 - $278,450         37.1%           6.36     7.95     9.54    11.13   12.72    14.31
Over $278,450        Over $278,450               40.8%           6.76     8.45    10.14    11.82   13.51    15.21

</TABLE>

<TABLE>
<CAPTION>
                                                                               A Tax-Exempt Yield of:
            Taxable Income                  Your California       4%       5%       6%       7%      8%        9%
      Single               Joint           Federal Tax Rate             Is Equivalent to a Taxable Yield of
      ------               -----           ----------------             -----------------------------------
<S>                                              <C>             <C>      <C>     <C>      <C>     <C>      <C>
$61,400 - $128,100   $102,300 - $155,950         38.2%           6.74     8.09     9.71    11.33   12.94    14.56
$128,100 - $278,450  $155,950 - $278,450         42.9%           7.01     8.76    10.51    12.26   14.01    15.76
Over $278,000        Over $278,450               46.3%           7.59     9.49    11.39    13.28   15.18    17.08
</TABLE>


<TABLE>
<CAPTION>
                                               Combined                        A Tax-Exempt Yield of:
            Taxable Income               N.Y. City, N.Y. State   4%       5%       6%       7%      8%        9%
      Single               Joint         and Federal Tax Rate           Is Equivalent to a Taxable Yield of
      ------               -----         --------------------           -----------------------------------
<S>                                              <C>             <C>      <C>     <C>      <C>     <C>      <C>
$61,400 - $128.100   $102,300 - $155,950         39.6%           6.65     8.28     9.93    11.59   13.25    14.90
$128,100 - $278,450  $155,950 - $278,450         44.2%           7.17     8.96    10.75    12.54   14.34    16.13
Over $278,450        Over $278,450               47.5%           7.62     9.52    11.43    13.33   15.24    17.14
</TABLE>


<TABLE>
<CAPTION>                                               Combined                        A Tax-Exempt Yield of:
            Taxable Income                     Ohio and           4%       5%       6%       7%      8%        9%
      Single               Joint           Federal Tax Rate             Is Equivalent to a Taxable Yield of
      ------               -----           ----------------             -----------------------------------
<S>                                              <C>             <C>      <C>     <C>      <C>     <C>      <C>
$100,000 - $128,100  $102,300 - $155,950         36.2%           6.27     7.84     9.40    10.97   12.54    14.11
$128,100 - $200,000  $155,950 - $200,000         41.1%           6.79     8.49    10.19    11.88   13.58    15.28
$200,000 - $278,000  $200,000 - $278,450         41.4%           6.83     8.53    10.24    11.95   13.65    15.36
Over $278,450        Over $278,450               44.8%           7.25     9.06    10.87    12.68   14.49    16.30
</TABLE>


*    This table assumes a decrease of $3.00 of itemized deductions for each $100
     of  adjusted  gross  income  over  $121,200.  For a married  couple with an
     adjusted  gross  income  between  $181,800  and  $304,300  (single  between
     $121,200 and $243,700), add 0.7% to the above Marginal Federal Tax Rate for
     each personal and dependency exemption. The taxable equivalent yield is the
     tax-exempt yield divided by: 100% minus the adjusted tax rate. For example,
     if the table tax rate is 37.1% and you are married with no dependents,  the
     adjusted tax rate is 38.5% (37.1% + 0.7% + 0.7%). For a tax-exempt yield of
     6%, the taxable equivalent yield is about 9.8% (6% / (100% - 38.5%)).

**   The  tables  do not  reflect  the  impact  of the New York  State Tax Table
     Benefit  Recapture  that  is  intended  to  eliminate  the  benefit  of the
     graduated rate structure and applies to taxable income between $100,000 and
     $150,000.



                                       62
<PAGE>


 Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over
                                    $126,600

<TABLE>
<CAPTION>
                                               Combined                        A Tax-Exempt Yield of:
            Taxable Income                     Ohio and           4%       5%       6%       7%      8%        9%
      Single               Joint           Federal Tax Rate             Is Equivalent to a Taxable Yield of
      ------               -----           ----------------             -----------------------------------
<S>                  <C>                        <C>              <C>      <C>     <C>      <C>     <C>      <C>
$100,000 - $130,250  $104,050 - $158,550        35.59%           6.21     7.76     9.32    10.87   12.42    13.97
$130,251 - $200,000  $158,551 - $200,000        40.26%           6.70     8.37    10.04    11.72   13.39    15.07
$200,001 - $283,150  $200,001 - $283,150        40.63%           6.74     8.42    10.11    11.79   13.47    15.16
Over $283,150        Over 283,150               43.97%           7.14     8.92    10.71    12.49   14.28    16.06
</TABLE>

Capital Structure

The National Trust was organized under the name "Kemper  Municipal Bond Fund" as
a business  trust  under the laws of  Massachusetts  on October  24, 1985 with a
single  investment  portfolio.  Effective  January 31, 1986 the Municipal Trust,
pursuant to a reorganization,  succeeded to the assets and liabilities of Kemper
Municipal  Bond  Fund,  Inc.,  a  Maryland  corporation  organized  in 1977 as a
successor to Kemper Municipal Bond Fund,  Ltd., a Nebraska  limited  partnership
organized in April 1976.  Effective November 1, 1994, the Trust changed its name
to "Kemper National Tax-Free Income Series".  Each National Fund is an open-end,
diversified Fund.

The State Trust was organized under the name "Kemper California  Tax-Free Income
Fund" as a business  trust under the laws of  Massachusetts  on October 24, 1985
with a single  investment  portfolio.  Effective  January  31,  1986,  the Trust
pursuant to a  reorganization  succeeded to the assets and liabilities of Kemper
California Tax-Free Income Fund, Inc., a Maryland corporation organized in 1983.
On July 27, 1990,  the Trust changed its name to "Kemper State  Tax-Free  Income
Series"  and changed the name of its  initial  portfolio  to "Kemper  California
Tax-Free Income Fund".  The predecessor to the New York Fund, also named "Kemper
New York Tax-Free Income Fund", was organized as a business trust under the laws
of  Massachusetts  on August 9, 1985.  Prior to May 28,  1988,  that  investment
company was known as "Tax-Free  Income  Portfolios" and it offered two series of
shares,  the  National  Portfolio  and the New  York  Portfolio.  Pursuant  to a
reorganization  on May 27, 1988,  the National  Portfolio was terminated and the
New York  Portfolio  continued as the sole  remaining  series of Kemper New York
Tax-Free Income Fund,  which was reorganized  into the New York Fund as a series
of  the  State  Trust  on  July  27,  1990.  Each  State  Fund  is an  open-end,
non-diversified Fund.

Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Funds",  all having no par value, which may be divided by the
Board of Trustees into classes of shares.  Currently, the National Trust has two
Funds that offer four classes of shares and the State Trust has eight Funds that
offer three classes of shares. These are Class A, Class B and Class C shares, as
well as (for the  National  Trust  only)  Class I shares,  which have  different
expenses,  which may affect  performance,  and that are  available  for purchase
exclusively by the following investors:  (1) tax-exempt retirement plans (Profit
Sharing,  401(k),  Money  Purchase  Pension  and Defined  Benefit  Plans) of The
Advisor and its  affiliates  and rollover  accounts  from those  plans;  (2) the
following investment advisory clients of The Advisor and its investment advisory
affiliates that invest at least $1 million in the National  Funds:  unaffiliated
benefit  plans,  such as  qualified  retirement  plans  (other  than  individual
retirement accounts and self-directed retirement plans);  unaffiliated banks and
insurance  companies  purchasing for their own accounts;  and endowment funds of
unaffiliated non-profit  organizations;  (3) investment-only  accounts for large
qualified  plans,  with at least $50  million in total  plan  assets or at least
1,000 participants; (4) trust and fiduciary accounts of trust companies and bank
trust departments  providing fee based advisory services that invest at least $1
million in a Fund; (5) policy holders under  Zurich-American  Insurance  Group's
collateral  investment  program  investing at least  $200,000 in a Fund; and (6)
investment  companies  managed by The  Advisor  that invest  primarily  in other
investment  companies.  The Board of Trustees of either Trust may  authorize the
issuance of additional  classes and additional Funds if deemed  desirable,  each
with its own investment objective,  policies and restrictions.  Since the Trusts
may offer multiple Funds,  each is known as a "series  company".  Shares of each
Fund of a Trust have equal  noncumulative  voting rights except that Class B and
Class C shares have  separate and  exclusive  voting rights with respect to each
Fund's Rule 12b-1 Plan. Shares of each class also have equal rights with respect
to dividends,  assets and  liquidation  of such Fund subject to any  preferences
(such as resulting  from  different  Rule 12b-1  distribution  fees),  rights or
privileges  of any  classes of shares of a Fund.  Shares of each Trust are fully
paid and nonassessable  when issued,  are transferable  without  restriction and
have no  preemptive or  conversion  rights.  The Trusts are not required to hold
annual shareholder meetings and do not intend to do so. However,  they will hold
special  meetings


                                       63
<PAGE>


as required or deemed desirable for such purposes as electing trustees, changing
fundamental policies or approving an investment management agreement. Subject to
the Agreement and  Declaration of Trust of each Trust,  shareholders  may remove
trustees.  Shareholders  will vote by Fund and not in the  aggregate or by class
except when voting in the aggregate is required  under the 1940 Act, such as for
the election of trustees, or when voting by class is appropriate.

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

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

Trustees  may be removed  from  office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the  written  request  of the  holders  of not less than 10% of the
outstanding  shares.  Upon the written request of ten or more  shareholders  who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding  shares of a Trust stating that such  shareholders wish to
communicate  with the  other  shareholders  for the  purpose  of  obtaining  the
signatures  necessary to demand a meeting to consider removal of a trustee,  the
Trust has undertaken to disseminate  appropriate materials at the expense of the
requesting shareholders.

The  Declaration  of  Trust  of each  Trust  provides  that  the  presence  at a
shareholder meeting in person or by proxy of at least 30% of the shares entitled
to vote on a matter shall  constitute a quorum.  Thus, a meeting of shareholders
of a Trust  could take place  even if less than a majority  of the  shareholders
were  represented on its scheduled  date.  Shareholders  would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum,  such as the election of trustees and ratification of the selection of
independent auditors. Some matters requiring a larger vote under the Declaration
of Trust of a Trust,  such as  termination  or  reorganization  of the Trust and
certain  amendments of the  Declaration of Trust,  would not be affected by this
provision;  nor would  matters  which  under the 1940 Act  require the vote of a
"majority of the outstanding voting securities". as defined in the 1940 Act.

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

Under Massachusetts law,  shareholders of a Massachusetts  business trust could,
under certain  circumstances,  be held  personally  liable for  obligations of a
Trust. The Declaration of Trust of each Trust,  however,  disclaims  shareholder
liability for acts or  obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Trust or the trustees.  Moreover,  the  Declaration  of Trust of
each Trust provides for indemnification out of Trust property for all losses and
expenses of any shareholder  held  personally  liable for the obligations of the
Trust and the Trust will be covered by  insurance  which the  trustees  consider
adequate to cover foreseeable tort claims.

Thus,  the  risk  of a  shareholder  incurring  financial  loss  on  account  of
shareholder  liability is  considered  by The Advisor  remote and not  material,
since it is limited to  circumstances  in which a disclaimer is inoperative  and
the Trust itself is unable to meet its obligations.


                                       64
<PAGE>

Master/Feeder Structure

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

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


                               INVESTMENT ADVISOR

Investment Advisor


Zurich Scudder  Investments,  Inc. (the "Advisor "), 354 Park Avenue,  New York,
New York 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 Advisor  introduced
Scudder  International  Fund,  Inc., the first mutual fund available in the U.S.
investing internationally in securities of issuers in several foreign countries.
The predecessor firm reorganized from a partnership to a corporation on June 28,
1985.  On December 31, 1997,  Zurich  Insurance  Company  ("Zurich")  acquired a
majority interest in the Advisor, and Zurich Kemper Investments,  Inc., a Zurich
subsidiary,  became part of the Advisor.  The Advisor's  name changed to Scudder
Kemper  Investments,  Inc.  On  September  7,  1998,  the  businesses  of Zurich
(including  Zurich's  70%  interest  in  Advisor  ) and the  financial  services
businesses  of B.A.T  Industries  p.l.c.  ("B.A.T")  were combined to form a new
global  insurance  and  financial  services  company  known as Zurich  Financial
Services  Group.  By way of a dual  holding  company  structure,  former  Zurich
shareholders  initially owned  approximately  57% of Zurich  Financial  Services
Group,  with the balance  initially  owned by former  B.A.T  shareholders.  . On
October 17, 2000, the dual-headed  holding company structure of Zurich Financial
Services  Group,  comprised of Allied  Zurich p.l.c.  in the United  Kingdom and
Zurich Allied in Switzerland,  was unified into a single Swiss holding  company,
Zurich Financial Services. On January 1, 2001, Scudder Kemper Investments,  Inc.
changed its name to Zurich Scudder 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 Advisor's income is professional  fees received from
providing  continuous  investment advice.  Today, it provides investment counsel
for many individuals and institutions,  including insurance companies, colleges,
industrial  corporations,  and  financial and banking  organizations  as well as
providing investment advice to over ] open and closed-end mutual funds.

The Advisor  maintains a large research  department,  which conducts  continuous
studies of the factors that affect the position of various industries, companies
and  individual   securities.   The  Advisor  receives   published  reports  and
statistical  compilations  from issuers and other  sources,  as well as analyses
from  brokers  and  dealers  who  may  execute  portfolio  transactions  for the
Advisor's clients. However, the Advisor regards this information and material as
an  adjunct  to  its  own  research  activities.   The  Advisor's  international
investment management team travels the



                                       65
<PAGE>

world,  researching hundreds of companies.  In selecting the securities in which
the Funds may invest,  the conclusions  and investment  decisions of the Advisor
with  respect  to the Funds  are  based  primarily  on the  analyses  of its own
research department.

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

In certain cases, the investments for a fund are managed by the same individuals
who manage one or more other  mutual  funds  advised by the  Advisor,  that have
similar names,  objectives and investment  styles.  You should be aware that the
Funds are likely to differ  from these  other  mutual  funds in size,  cash flow
pattern and tax matters.  Accordingly, the holdings and performance of the Funds
can be expected to vary from those of these other mutual funds.

There is one investment management agreement for the Municipal Fund, one for the
Intermediate  Municipal Fund and a separate investment  management agreement for
each of the State Funds. The agreements are substantially the same.  Pursuant to
the investment management agreements, The Advisor acts as each Fund's investment
adviser,  manages its investments,  administers its business affairs,  furnishes
office facilities and equipment,  provides clerical and administrative  services
and permits any of its officers or employees to serve  without  compensation  as
trustees or officers of the Trust if elected to such  positions.  The agreements
provide that the Trust pays the charges and expenses of its operations including
the  fees and  expenses  of the  trustees  (except  those  who are  officers  or
employees  of The  Advisor  ),  independent  auditors,  counsel,  custodian  and
transfer  agent  and the cost of share  certificates,  reports  and  notices  to
shareholders,  brokerage  commissions or transaction costs, costs of calculating
net asset  value and  maintaining  all  accounting  records  thereto,  taxes and
membership dues.

Each Trust bears the expenses of  registration of its shares with the Securities
and Exchange  Commission  and pays the cost of qualifying  and  maintaining  the
qualification  of the Trusts' shares for sale under the  securities  laws of the
various states ("Blue Sky expenses").  ""The Advisor has agreed to reimburse the
Municipal  Fund  should  all  operating  expenses  of that Fund,  including  the
compensation of The Advisor , but excluding interest,  taxes, distribution fees,
extraordinary expenses and brokerage commissions or transaction costs, exceed 1%
of average net assets of the Municipal Fund on an annual basis.

The Advisor has agreed to reimburse  the  California  Fund should all  operating
expenses of the California Fund, including the compensation of the Advisor , but
excluding taxes, interest,  distribution services fees,  extraordinary expenses,
and brokerage  commissions or transaction costs,  exceed 1 1/2% of the first $30
million of average  daily net assets and 1% of average daily net assets over $30
million on an annual basis.

The  agreements  provide  that the Advisor  shall not be liable for any error of
judgment or of law, or for any loss  suffered by the Trusts in  connection  with
the matters to which the agreements relate, except a loss resulting from willful
misfeasance,  bad faith or gross  negligence  on the part of the  Advisor in the
performance  of its  obligations  and  duties,  or by  reason  of  its  reckless
disregard of its obligations and duties under the agreements.

Each of the investment  management  agreements  continues in effect from year to
year so long as its  continuation is approved at least annually by a majority of
the trustees of the  applicable  Trust who are not parties to such  agreement or
interested persons of any such party except in their capacity as trustees of the
Trust  and by the  shareholders  of the Fund  subject  thereto  or the  Board of
Trustees.  Each  agreement may be terminated at any time upon 60 days' notice by
either  party,  or by a  majority  vote of the  outstanding  shares  of the Fund
subject thereto, and will terminate automatically upon assignment. If additional
Funds become subject to the  investment  management  agreements,  the



                                       66
<PAGE>

provisions concerning continuation, amendment and termination shall be on a Fund
by Fund basis. Additional Funds may be subject to a different agreement.

Responsibility  for  overall  management  of each Trust  rests with its Board of
Trustees and officers.  Professional  investment  supervision is provided by the
Advisor.  The  investment  management  agreement  for a Fund  provides  that the
Advisor shall act as the Fund's investment  adviser,  manage its investments and
provide the Fund with various services and facilities.

The current investment management fee rates paid by the Funds are as follows:

The  Municipal  Fund pays the  Advisor an  investment  management  fee,  payable
monthly,  at the annual rate of 0.45% of the first $250 million of average daily
net  assets,  0.43% of average  daily net assets  between  $250  million  and $1
billion,  0.41% of average daily net assets between $1 billion and $2.5 billion,
0.40% of average daily net assets between $2.5 billion and $5 billion,  0.38% of
average daily net assets  between $5 billion and $7.5 billion,  0.36% of average
daily net assets  between $7.5 billion and $10 billion,  0.34% of average  daily
net assets  between $10 billion and $12.5 billion and 0.32% of average daily net
assets over $12.5 billion.

Each  State  Fund  and  the  Intermediate  Municipal  Fund  pay the  Advisor  an
investment  management  fee,  payable  monthly,  at the  annual  rate  (computed
separately for each State Fund and for the Intermediate Municipal Fund) of 0.55%
of the first $250 million of average  daily net assets,  0.52% of average  daily
net assets  between  $250  million  and $1 billion,  0.50% of average  daily net
assets  between $1 billion and $2.5  billion,  0.48% of average daily net assets
between $2.5 billion and $5 billion,  0.45% of average daily net assets  between
$5 billion and $7.5  billion,  0.43% of average  daily net assets  between  $7.5
billion and $10 billion,  0.41% of average daily net assets  between $10 billion
and $12.5 billion and 0.40% of average daily net assets over $12.5 billion.

The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below.

<TABLE>
<CAPTION>
Fund                       Fiscal 2000     Fiscal 1999        Fiscal 1998
----                       -----------     -----------        -----------


<S>                       <C>               <C>               <C>
Municipal                 $10,795,156       12,538,000        $13,233,000
Intermediate Municipal       $124,700         $150,000          $ 127,000
California                 $4,239,099       $5,174,000         $5,352,000
Florida                      $454,274         $563,000           $576,000
New York                   $1,242,994       $1,505,000         $1,543,000
Ohio                         $218,857         $252,000           $226,000

</TABLE>



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

Code of Ethics

The Funds,  the Advisor and  principal  underwriter  have each adopted  codes of
ethics under rule 17j-1 of the Investment  Company Act. Board members,  officers
of the  Funds  and  employees  of the  Advisor  and  principal  underwriter  are
permitted to make personal securities  transactions,  including  transactions in
securities  that may be purchased or held by the Funds,  subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Advisor 's Code
of Ethics contains provisions and requirements  designed to identify and address
certain  conflicts of interest  between personal  investment  activities and the
interests  of the  Funds.  Among  other  things,  the  Advisor 's Code of Ethics
prohibits  certain types of  transactions  absent prior  approval,  imposes time
periods  during  which  personal   transactions  may  not  be  made  in  certain
securities,  and requires the submission of duplicate broker  confirmations  and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio  managers,  traders,  research  analysts  and others  involved  in the
investment  advisory  process.  Exceptions to these and other  provisions of the
Advisor  's Code of Ethics  may be granted  in  particular  circumstances  after
review by appropriate personnel.



                                       67
<PAGE>

Administrative Services. Administrative services are provided to each Fund under
an administrative services agreement ("administrative  agreement") with KDI. KDI
bears all its  expenses of  providing  services  pursuant to the  administrative
agreement between KDI and a Fund, including the payment of service fees. For the
services   under   the   administrative   agreement,   each  Fund  pays  KDI  an
administrative  services fee, payable monthly, at the annual rate of up to 0.25%
of average daily net assets of each class of the Fund.


KDI has entered into related  arrangements with various  broker-dealer firms and
other  service or  administrative  firms  ("firms"),  that provide  services and
facilities for their customers or clients who are investors of a Fund. The firms
provide such office space and equipment,  telephone  facilities and personnel as
is necessary  or  beneficial  for  providing  information  and services to their
clients.  Such  services and  assistance  may  include,  but are not limited to,
establishing  and  maintaining  accounts  and records,  processing  purchase and
redemption   transactions,   answering  routine  inquiries   regarding  a  Fund,
assistance  to clients in changing  dividend  and  investment  options,  account
designations  and  addresses  and such other  administrative  services as may be
agreed  upon from time to time and  permitted  by  applicable  statute,  rule or
regulation.  With  respect to Class A shares,  KDI pays each firm a service fee,
normally  payable  quarterly,  at an  annual  rate of (a) up to 0.10% of the net
assets in Trust accounts that it maintains and services  attributable to Class A
shares  acquired prior to October 1, 1993, and (b) up to 0.25% of the net assets
in Trust accounts that it maintains and services  attributable to Class A shares
acquired on or after  October 1, 1993,  in each case  commencing  with the month
after investment. The Fund and KDI further agree that the administrative service
fee will be  computed at an annual rate of 0.15 of 1% based upon the assets with
respect  to which KDI  provides  administrative  services.  Notwithstanding  the
foregoing,  the administrative  service fee with respect to Class A Shares shall
be paid at an annual  rate of (a) 0.10 of 1% of net assets of those  accounts in
the Fund  attributable to such shares acquired prior to October 1, 1993, and (b)
0.15 of 1% of net  assets of those  accounts  in the Fund  attributable  to such
shares acquired on or after October 1, 1993. With respect to Class B and Class C
shares,  KDI currently advances to firms the first-year service fee at a rate of
up to 0.25% of the purchase  price of such shares.  For periods  after the first
year,  KDI currently  intends to pay firms a service fee at an annual rate of up
to 0.25%  (calculated  monthly and normally  paid  quarterly)  of the net assets
attributable  to Class B and Class C shares  maintained and serviced by the firm
and the fee  continues  until  terminated  by KDI or the  Trust.  Firms to which
service  fees  may be paid  include  broker-dealers  affiliated  with  KDI.  The
administrative  services  fee may be  increased  to an  annual  rate of 0.25% of
average  daily net  assets of any  class of the Trust in the  discretion  of the
Board of Trustees and without shareholder approval.


Administrative services fees paid by each Fund are set forth below:

<TABLE>
<CAPTION>

                                                                        Total Service Fees           Service Fees Paid
                                                                              Paid by                by Administrator
                                          Administrative                   Administrator                to Kemper
                                    Service Fees Paid by Fund                to Firms                Affiliated Firms
                                    -------------------------                --------                -----------------
<S>                 <C>        <C>           <C>           <C>               <C>                          <C>
                    Fiscal
Fund                 Year      Class A       Class B       Class C
----                 ----      -------       -------       -------

Municipal            2000    $4,681,000     $169,000      $22,000            $5,291,000                   $11,000
Intermediate         2000
   Municipal                    $37,000      $13,000       $4,000               $40,000                        $0
California           2000    $1,677,000      $82,000      $12,000            $1,704,000                        $0
Florida              2000      $172,000      $15,000       $3,000              $186,000                    $1,000
New York             2000      $420,000      $32,000       $8,000              $457,000                    $7,000
Ohio                 2000      $55,000       $29,000       $5,000               $92,000                        $0


</TABLE>



<TABLE>
<CAPTION>
                                                                        Total Service Fees           Service Fees Paid
                                                                              Paid by                by Administrator
                                          Administrative                   Administrator                to Kemper
                                    Service Fees Paid by Fund               to Firms                 Affiliated Firms
                                    -------------------------               ---------                -----------------
<S>                 <C>      <C>            <C>          <C>                <C>                             <C>

                    Fiscal
Fund                 Year      Class A       Class B       Class C
----                 ----      -------       -------       -------

Municipal            1999    $5,532,610     $193,203     $25,094            $5,753,646                      $0
Intermediate         1999     $43,217       $12,311       $5,525              $60,682                       $0
   Municipal
California           1999    $1,759,174     $93,621      $12,294            $1,864,829                      $0
Florida              1999     $185,832      $16,590       $2,413             $204,834                       $0
New York             1999     $497,646      $33,337      $10,330             $541,216                       $0
Ohio                 1999     $74,612       $31,198       $3,044             $108,830                       $0
</TABLE>


                                       68
<PAGE>



<TABLE>
<CAPTION>
                                                                        Total Service Fees           Service Fees Paid
                                                                              Paid by                by Administrator
                                          Administrative                   Administrator                to Kemper
                                    Service Fees Paid by Fund                to Firms                Affiliated Firms
                                    -------------------------                --------                -----------------
<S>                 <C>        <C>           <C>           <C>                <C>                         <C>

                    Fiscal
Fund                 Year      Class A       Class B       Class C
----                 ----      -------       -------       -------

Municipal            1998                    $170,000      $18,000            $5,694,000                  $16,000
                               $5,474,00
Intermediate                   $32,000       $11,000       $1,000             $57,000                     $0
   Municipal         1998
California           1998      $1,708,000    $76,000       $9,000             $1,806,000                  $0
Florida              1998      $178,000      $14,000       $1,000             $193,000                    $0
New York             1998      $490,000      $28,000       $8,000             $523,000                    $16,000
Ohio                 1998      $63,000       $25,000       $2,000             $92,000                     $0
</TABLE>

KDI also may provide  some of the above  services  and may retain any portion of
the fee  under  the  administrative  agreement  not paid to firms to  compensate
itself  for  administrative  functions  performed  for a  Fund.  Currently,  the
administrative  services  fee payable to KDI is at the annual  ratio of 0.15% of
the Fund's assets for which KDI provides administrative services.

Certain  trustees or officers of the Funds are also directors or officers of The
Advisor or KDI as indicated under "Officers and Trustees."

Custodian,  Transfer Agent and Shareholder  Service Agent. State Street Bank and
Trust Company,  ("SSB") 225 Franklin  Street,  Boston,  Massachusetts  02110, as
custodian,  has custody of all  securities  and cash of each Fund. It attends to
the  collection  of  principal  and income,  and payment for and  collection  of
proceeds of securities bought and sold by each Fund.


"SSB" is also each Fund's transfer agent and dividend-paying  agent. Pursuant to
a services agreement with SSB, Kemper Service Company ("KSvC"),  an affiliate of
the Advisor , serves as  "Shareholder  Service Agent" of each Fund and, as such,
performs all of SSB's duties as transfer  agent and dividend  paying agent.  SSB
receives as transfer agent, and pays to KSvC as follows:  annual account fees of
$14.00 ($23.00 for retirement accounts) plus account set up charges, annual fees
associated with the contingent  deferred sales charges (Class B shares only), an
asset based fee of 0.02% and out-of-pocket expense  reimbursement.  SSB's fee is
reduced by certain earnings credits in favor of each Trust.


 The following  shows for each Fund's 2000 fiscal year the  shareholder  service
fees SSB remitted to KSvC.


            Fund                                       Fees SSB Paid to KSvC ($)

            Kemper Municipal Bond Fund                          1,414,438
            Kemper Intermediate Municipal Bond Fund                 0
            Kemper California Tax-Free Income Fund               385,377
            Kemper Florida Tax-Free Income Fund                   40,467
            Kemper New York Tax-Free Income Fund                 130,672
            Kemper Ohio Tax-Free Income Fund                      45,347


Independent  Auditors  and  Reports  to  Shareholders.  The  Funds'  independent
auditors,  Ernst & Young LLP, 233 South Wacker Drive,  Chicago,  Illinois 60606,
audit and report on the  Funds'  annual  financial  statements,



                                       69
<PAGE>

review certain regulatory reports and the Funds' federal income tax returns, and
perform other professional accounting,  auditing, tax and advisory services when
engaged  to do  so by  the  Funds.  Shareholders  will  receive  annual  audited
financial statements and semi-annual unaudited financial statements.

LEGAL COUNSEL.  Vedder,  Price,  Kaufman & Kammholz,  222 North LaSalle  Street,
Chicago, Illinois 60601, serves as legal counsel to the Funds.

Officers and Trustees

The officers  and  trustees of the Trusts,  their  birthdates,  their  principal
occupations  and their  affiliations,  if any,  with The  Advisor , the  Trusts'
Advisor and KDI, the Trusts' principal underwriter, are as follows:

JOHN W. BALLANTINE  (2/16/46),  Trustee,  1500 North Lake Shore Drive,  Chicago,
Illinois;  First  Chicago NBD  Corporation/The  First  National Bank of Chicago:
1996-1998 Executive Vice President and Chief Risk Management Officer;  1995-1996
Executive Vice President and Head of International Banking;  1992-1995 Executive
Vice President, Chief Credit and Market Risk Officer.

LEWIS A. BURNHAM  (1/8/33),  Trustee,  16410 Avila  Boulevard,  Tampa,  Florida;
Retired; formerly,  Partner, Business Resources Group; formerly,  Executive Vice
President, Anchor Glass Container Corporation.

DONALD L.  DUNAWAY  (3/8/37),  Trustee,  7515  Pelican  Bay  Boulevard,  Naples,
Florida;  Retired;  formerly,  Executive Vice President,  A.O. Smith Corporation
(diversified manufacturer).

ROBERT B.  HOFFMAN  (12/11/36),  Trustee,  1530 North  State  Parkway,  Chicago,
Illinois; Chairman, Harnischfeger Industries, Inc. (machinery for the mining and
paper industries);  formerly Vice Chairman and Chief Financial Officer, Monsanto
Company (agricultural,  pharmaceutical and nutritional/food products); formerly,
Vice President, Head of International Operations,  FMC Corporation (manufacturer
of machinery and chemicals).

DONALD R. JONES  (1/17/30),  Trustee,  182 Old Wick Lane,  Inverness,  Illinois;
Retired;  Director,  Motorola,  Inc.  (manufacturer of electronic  equipment and
components);  formerly,  Executive Vice President and Chief  Financial  Officer,
Motorola, Inc.

SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto,  Commissioner,  Internal  Revenue  Service;  prior  thereto,  Assistant
Attorney General, U.S. Department of Justice; Director, Bethlehem Steel Corp.

WILLIAM P. SOMMERS  (7/22/33),  Trustee,  24717 Harbour View Drive,  Ponte Vedra
Beach, Florida; Consultant and Director, SRI Consulting;  formerly President and
Chief Executive Officer, SRI International (research and development); formerly,
Executive Vice President,  Iameter (medical  information and educational service
provider);  prior  thereto,  Senior Vice President and Director,  Booz,  Allen &
Hamilton Inc.  (management  consulting  firm)(retired);  Director,  Rohr,  Inc.,
Therapeutic Discovery Corp. and Litton Industries.

THOMAS  W.  LITTAUER  (4/26/55),  Trustee,  Chairman  and Vice  President*,  Two
International  Place,  Boston,  Massachusetts;   Managing  Director,  Advisor  ;
formerly,   Head  of  Broker  Dealer  Division  of  an  unaffiliated  investment
management  firm during 1997;  prior  thereto,  President  of Client  Management
Services of an unaffiliated investment management firm from 1991 to 1996.

MARK S. CASADY  (9/21/60),  President*,  345 Park  Avenue,  New York,  New York;
Managing  Director,  Advisor  ;  formerly,  Institutional  Sales  Manager  of an
unaffiliated mutual fund distributor.

PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary, Advisor
 .


LINDA  C.  COUGHLIN*  (1/1/52),   Trustee,   Two  International  Place,  Boston,
Massachusetts; Managing Director, Advisor.



                                       70
<PAGE>

KATHRYN L. QUIRK  (12/3/52),  Vice  President*,  345 Park Avenue,  New York, New
York; Managing Director, Advisor .

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

JOHN  R.  HEBBLE  (6/27/58),   Treasurer*,   Two  International  Place,  Boston,
Massachusetts; Senior Vice President, Advisor .

BRENDA LYONS (2/21/63),  Assistant Treasurer*,  Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor .

CAROLINE  PEARSON  (4/1/62),  Assistant  Secretary*,  Two  International  Place,
Boston,  Massachusetts;  Senior Vice President,  Advisor ; formerly,  Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.

MAUREEN  E. KANE  (2/14/62),  Assistant  Secretary*,  Two  International  Place,
Boston,  Massachusetts;  Vice  President,  Advisor ;  formerly,  Assistant  Vice
President  of  an  unaffiliated   investment  management  firm;  prior  thereto,
Associate  Staff  Attorney  of  an  unaffiliated   investment  management  firm;
Associate, Peabody & Arnold (law firm).

ASHTON P. GOODFIELD (10/3/63),  Senior Vice President,  Two International Place,
Boston, Massachusetts; Vice President, Advisor .


ELEANOR R. BRENNAN (3/3/64),  Senior Vice President,  Two  International  Place,
Boston, Massachusetts; Vice President, Advisor .


Additional Officer for  Kemper National Tax-Free Income Series:


PHILIP G. CONDON  (8/15/50) Vice President,  Two  International  Place,  Boston,
Massachusetts; Managing Director, Advisor .


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



The  trustees  and officers who are  "interested  persons" as  designated  above
receive no  compensation  from the Funds.  The table below shows amounts paid or
accrued to those trustees who are not  designated  "interested  persons"  during
each Fund's' 2000 fiscal year, except that the information in the last column is
for calendar year 1999.


                                         Aggregate
                                  Compensation from Funds
                                  -----------------------


                                                              Total Compensation
                                                                  from Trusts
Name of Trustee              National Trust     State Trust   Paid to Trustees**
---------------              --------------     -----------   ------------------


John W. Ballantine                $7,900             $4,900            $57,200
Lewis A. Burnham                  $7,400             $4,800            $89,300
Donald L. Dunaway*                $8,700             $5,500            $97,000
Robert B. Hoffman                 $8,000             $5,300            $8,7800
Donald R. Jones                   $7,800             $5,000            $87,800
Shirley D. Peterson                $7300             $4,700            $82,800
William P. Sommers                $7,500             $4,700            $82,800




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

*        Includes deferred fees.  Pursuant to deferred  compensation  agreements
         with the Funds,  deferred  amounts  accrue  interest  monthly at a rate
         equal to the yield of Zurich  Money Funds -- Zurich  Money Market Fund.
         Total deferred fees (including interest thereon) payable from the Funds
         through  August 31,  1999 and  September  30,  1999 to Mr.  Dunaway are
         $40,599 and $33,088 from National and State Trusts, respectively.




                                       71
<PAGE>

**       Includes compensation for service on the boards of XX Kemper funds with
         XX fund  portfolios.  Each trustee  currently serves as a trustee of XX
         Kemper funds with XX fund portfolios.

As of November  30, 2000,  the  officers and trustees of the Funds,  as a group,
owned less than 1% of the then outstanding  shares of each Fund. No person owned
of record 5% or more of the outstanding  shares of any class of any Fund, except
that the following owned of record shares of the following Funds:



<TABLE>
<CAPTION>
  ----------------------------------- -------------------------------------- --------------------------------------


                 NAME                                 CLASS                               PERCENTAGE

  ----------------------------------- -------------------------------------- --------------------------------------
<S>                                                   <C>                                    <C>


  Kemper Municipal Bond Fund

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

  First Clearing Corporation
  10700 Wheat First Drive
  Glen Allen, VA  23060-9243                           A                                     7.48

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

  National Financial Services Corp
  FBO Jeanette M. Zupancic &
  Judith Eggers
  200 Liberty Street # 4 Floor                         B
  New York, NY  10281-1003                                                                   9.71


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

  Donaldson Lufkin Jenrette
  Securities Corporation Inc.
  P O Box 2052
  Jersey City, NJ  07303                               B                                     8.92


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

  Merrill Lynch Pierce F&S
  FBO Customers
  4800 Deer Lake Dr East 3rd Fl
  Jacksonville,  FL  32246                             B                                     5.28


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

  First Clearing Corporation
  --------------------------
  10700 Wheat First Drive
  Glen Allen, VA  23060-9243
                                                       B                                     6.73


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

  National Financial Services Corp
  FBO Joseph P Checrallah
  200 Liberty Street # 4 Floor                         C                                     8.33
  New York, NY  10281-1003


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

  Donaldson Lufkin Jenrette
  Securities Corporation Inc.
  P O Box 2052                                         C                                     10.96
  Jersey City, NJ  07303


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

  Merrill Lynch Pierce F&S
  FSBO Customers
  4800 Deer Lake Dr East 3rd Fl                        C                                     7.44
  Jacksonville,  FL  32246


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


                                       72
<PAGE>

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

  First Clearing Corporation
  --------------------------
  10700 Wheat First Drive
  Glen Allen, VA  23060-9243                           C                                     8.37


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

  LPL Financial Services
  9785 Towne Centre Dr
  San Diego, CA  92121                                 C                                     5.76


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

  KEMPER CA TAX-FREE INCOME FUND
  ------------------------------

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

  Salomon Smith Barney Inc.
  Mutual Fund/ Comm Dept
  333 W. 34th St Fl 3                                  A                                     7.06
  New York, NY  10001-2483

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

  Fiserv Securities, Inc.
  Attn: Mutual Funds Dept
  One Commerce Square                                  A                                     7.50
  2005 Market Street Suite 1200
  Philadelphia, PA  19103

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

     First Clearing Corporation
  10700 Wheat First Drive
  Glen Allen, VA  23060-9243
                                                       A                                     6.52


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

  Dean Witter
  FBO Mary D. Gretter
  Mutual Funds Operations                              A                                     7.81
  5 World Trade Ctr.
  New York, NY  10048-0205


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

  National Financial Services Corp
  FBO Frank E Goncalves &
  Dick Decoit
  200 Liberty Street # 4 Floor                         B
  New York, NY  10281-1003                                                                   12.06


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

  Fiserv Securities, Inc.
  Attn: Mutual Funds Dept
  One Commerce Square
  2005 Market Street Suite 1200                        B                                     9.86
  Philadelphia, PA  19103

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

     First Clearing Corporation
  FBO Nancy A Saloman
  10700 Wheat First Drive
  Glen Allen, VA  23060-9243                           B                                     7.26

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

  Dean Witter
  FBO Lydia M Karlowicz
  Mutual Funds Operations
  5 World Trade Ctr.                                   B                                     9.14
  New York, NY  10048-0205


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

                                       73
<PAGE>

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

  Helena G. Hale TTEE
  Helena Hale LIV TRUST                                                                      6.51
                                                       C

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

     First Clearing Corporation
  10700 Wheat First Drive
  Glen Allen, VA  23060-9243                           C                                     38.17

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

  Wedbush Morgan Securities
  P O Box 30014
  Los Angeles, CA  90030-0014                          C                                     22.00


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

  KEMPER NY TAX-FREE INCOME FUND
  ------------------------------

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

  National Financial Services Corp
  FBO Danielle Rozgon
  200 Liberty Street # 4 Floor                         A                                    14.55
  New York, NY  10281-1003

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

  National Financial Services Corp
  FBO Carmel Grech &
  Pauline Grech                                        B                                    22.17
  200 Liberty Street # 4 Floor
  New York, NY  10281-1003

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

  Solomon Smith Barney Inc.
  333 West 34th St- 3rd Fl.                            B
  New York, NY  10001                                                                        5.55

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

  Merrill Lynch Pierce F&S
  FBO Customers
  ATTN Fund Administration
  4800 Deer Lake Dr East 3rd Fl                        B                                     5.06
  Jacksonville,  FL  32246

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

  PaineWebber
  FBO Diane Riklis
  Mutual Fund Department                               C                                    20.49
  1000 Harbor Blvd #8 Floor
  Weehawken, NJ  07087-6727


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

  Advest Inc.
  90 State House Square
  Hartford, CT  06103                                  C                                    21.71

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

  Merrill Lynch Pierce F&S
  FBO Customers
  ATTN Fund Administration
  4800 Deer Lake Dr East 3rd Fl                        C                                    22.88
  Jacksonville,  FL  32246

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

                                       74
<PAGE>

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

  KEMPER FLORIDA TAX FREE INCOME
  ------------------------------
  FUND
  ----

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

  National Financial Services Corp
  FBO NationsBank NA
  200 Liberty Street # 4 Floor                         A                                     7.28
  New York, NY  10281-1003

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

  Merrill Lynch Pierce F&S
  FBO Customers
  ATTN Fund Administration                             A                                    12.14
  4800 Deer Lake Dr East 3rd Fl
  Jacksonville,  FL  32246

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

  National Financial Services Corp
  FBO Lottie P Strickland
  200 Liberty Street # 4 Floor                         B                                     6.96
  New York, NY  10281-1003

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

  Donaldson Lufkin Jenrette
  Securities Corporation Inc.
  P. O Box 2052                                        B                                     7.12
  Jersey City, NJ  07303

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

  Merrill Lynch Pierce F&S
  FBO Customers
  ATTN Fund Administration                             B                                    19.41
  4800 Deer Lake Dr East 3rd Fl
  Jacksonville,  FL  32246

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


  W Foster Dugas Jr.
  Pamela L Dugas                                       B                                     5.09


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

  Legg Mason Wood Walker Inc.
  P O Box 1476
  Baltimore MD  21203                                  B                                     8.40

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

  National Financial Services Corp
  FBO David I Pinkham
  Mary E. Pinkham
  200 Liberty Street # 4 Floor                         C                                    16.23
  New York, NY  10281-1003

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

  Donaldson Lufkin Jenrette
  Securities Corporation Inc.                          C
  P. O Box 2052                                                                             11.20
  Jersey City, NJ  07303

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

  Fiserv Securities, Inc.
  Attn: Mutual Funds Dept
  One Commerce Square                                  C
  2005 Market Street Suite 1200                                                              6.38
  Philadelphia, PA  19103

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

  Southwest Securities Inc.
  FBO Patricia  G. Kaighin
  Box 509002                                           C                                    36.19
  Dallas, TX  75250

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

                                       75
<PAGE>

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

  LPL Financial Services
  9785 Towne Centre Dr
  San Diego, CA  92121                                 C                                    13.18

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


  KEMPER OHIO TAX-FREE INCOME FUND
  --------------------------------

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

  National Financial Services Corp
  FBO Nancy C Young
  200 Liberty Street # 4 Floor                         A                                     5.86
  New York, NY  10281-1003

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

  First Clearing Corporation
  Inversiones Pecena CA
  10700 Wheat First Drive                              A                                    32.54
  Glen Allen, VA  23060-9243

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

  National Financial Services Corp
  FBO Ralph E. Povenmire
  200 Liberty Street # 4 Floor                         B                                    11.79
  New York, NY  10281-1003

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

  Donaldson Lufkin Jenrette
  Securities Corporation Inc.
  P. O Box 2052                                        B                                     5.36
  Jersey City, NJ  07303

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

  Fiserv Securities, Inc.
  Attn: Mutual Funds Dept
  One Commerce Square
  2005 Market Street Suite 1200                        B                                    43.25
  Philadelphia, PA  19103

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

  First Clearing Corporation
  FBO Eugene W Betz Tr.
  10700 Wheat First Drive                              B                                     7.46
  Glen Allen, VA  23060-9243

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

  Carey & CO.
  C/O Huntington National Bank
  Tr. Dept/Security Cage HC 1022                       B                                     5.79
  PO Box 1558
  Columbus, OH  43215

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

  Merrill Lynch Pierce F&S
  FBO Customers
  ATTN Fund Administration                             C                                     5.13
  4800 Deer Lake Dr East 3rd Fl
  Jacksonville,  FL  32246

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

  Fiserv Securities, Inc.
  Attn: Mutual Funds Dept
  One Commerce Square                                  C                                    55.97
  2005 Market Street Suite 1200
  Philadelphia, PA  19103

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

  First Clearing Corporation
  FBO Shirley Y De Ryck
  10700 Wheat First Drive
  Glen Allen, VA  23060-9243                           C                                    16.99

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

                                       76
<PAGE>

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

  Kathleen K Fayen TTEE  for
  Kathleen K Fayen Rev Tr
                                                       C                                     7.40

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


  KEMPER INTERMMEDIATE MUNICIPAL
  ------------------------------
  BOND FUND
  ---------

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

  National Financial Services Corp
  FBO Laura A Pettigrew
  200 Liberty Street # 4 Floor                         A                                     6.84
  New York, NY  10281-1003

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

  Donaldson Lufkin Jenrette
  Securities Corporation Inc.                          A                                     7.57
  P. O Box 2052
  Jersey City, NJ  07303

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

  First Clearing Corporation
  FBO Diane L Schildmeier
  10700 Wheat First Drive                              A                                     9.80
  Glen Allen, VA  23060-9243

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

  GK Enterprises
  26000 Whiting Way                                    A                                     7.80
  Monee, IL  60449

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

  Woodstock A Partnership
  C/O Wood County Trust Co.                            A                                     5.51
  P O Box 8000
  Wisconsis Rapids, WI  54495

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


  Elsie P Viles                                        B                                    12.58


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

  National Financial Services Corp
  FBO Stan W Daniel                                    B                                    17.94
  200 Liberty Street # 4 Floor
  New York, NY  10281-1003

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


  Jacqueline Burnett                                   B                                     7.75


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

  Donaldson Lufkin Jenrette
  Securities Corporation Inc.
  P. O Box 2052                                        B                                     8.71
  Jersey City, NJ  07303

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

  Merrill Lynch Pierce, F & S Inc.
  FBO Customers                                        B                                     6.00
  4800 Deer Lake Dr. E. Fl 3
  Jacksonville, FL  32246

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

                                       77
<PAGE>

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

  Edward D. Jones & Co.
  Cyrilla A Distefano TTEE
  P. O. Box 2500                                       B                                     6.20
  Maryland Heights, MO  63043

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

  Karen L. West TTEE for
  Karen L West LIV TRUST
                                                       C                                    12.53

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

  PaineWebber
  Mutual Fund Department
  1000 Harbor Blvd #8 Floor                            C                                    13.94
  Weehawken, NJ  07087-6727


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

  Legg Mason Wood Walker Inc.
  P O Box 1476
  Baltimore MD  21203                                  C                                    10.31


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

  Gregory Fox & Kevin Fox
  Mark Fox TTEE
  FBO Eugene R & Mary M Fox                            C                                    11.83
  709 Laurel LN
  Severna Park , MD  21146

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

  Dean Witter
  FBO Audry Greenfeig
  Mutual Funds Operations                              C                                    12.28
  5 World Trade Ctr.
  New York, NY  10048-0205


  ----------------------------------- ------------------------------------- ---------------------------------------
</TABLE>



                                       78
<PAGE>




                                       79
<PAGE>




                                       80
<PAGE>




                                       81
<PAGE>




                                       82
<PAGE>




                                       83
<PAGE>




                                       84
<PAGE>


PRINCIPAL  UNDERWRITER.  Pursuant  to  separate  underwriting  and  distribution
services  agreements  ("distribution  agrements"),   Kemper  Distributors,  Inc.
("KDI"), 222 South Riverside Plaza,  Chicago,  Illinois,  60606, an affiliate of
The Advisor , is the principal  underwriter  and  distributor  for the shares of
each  Fund  and acts as agent of each  Fund in the  continuous  offering  of its
shares.  KDI  bears all its  expenses  of  providing  services  pursuant  to the
distribution  agreement,  including the payment of any  commissions.  Each Trust
pays the cost for the prospectus and  shareholder  reports to be set in type and
printed  for  existing   shareholders,   and  KDI  pays  for  the  printing  and
distribution of copies thereof used in connection with the offering of shares to
prospective  investors.  KDI also pays for  supplementary  sales  literature and
advertising costs.


Class A Shares.  KDI  receives  no  compensation  from the  Trusts as  principal
underwriter  for Class A shares and pays all  expenses of  distribution  of each
Fund's Class A shares under the  distribution  agreement not  otherwise  paid by
dealers or other  financial  services  firms.  As indicated  under  "Purchase of
Shares,"  KDI retains the sales  charge upon the  purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares. The
following  information concerns the underwriting  commissions paid in connection
with the distribution of each Fund's Class A Shares for the fiscal years noted.


<TABLE>
<CAPTION>

                                                                        Commissions           Commissions Paid
                                                  Commissions Retained  Underwriter            To Kemper
Class A Shares                 Fiscal Year End    by Underwriter       Paid to All Firms      AffiliatedrFirms
--------------                 ---------------    --------------       -----------------     ----------------
<S>                            <C>                <C>                  <C>                        <C>


Municipal Fund                 9/30/00            $133,087                  $0                     $0
                               9/30/99            $325,000                  $0                     $0
                               9/30/98            $291,000              $1,764,000                 $0

Intermediate                                                                                       $0
   Municipal Fund              9/30/00             $3,965                   $0

                               9/30/99             $8,000                   $0                     $0
                               9/30/98            $14,000                $133,000                  $0

California Fund                8/31/00            $52,012                   $0                     $0
                               8/31/99            $92,000                   $0                     $0
                               8/31/98            $134,000               $793,000                  $0

Florida Fund                   8/31/00            $12,148                   $0                     $0
                               8/31/99            $26,000                   $0                     $0
                               8/31/98            $28,000                $90,000                   $0

Ohio Fund                      8/31/00             $1,709                   $0                    $0
                               8/31/99             $5,000                   $0                    $0
                               8/31/98             $8,000                $44,000                  $0

New York Fund                  8/31/00            $13,498                   $0                    $0
                               8/31/99            $22,000                 $3,000                  $0
                               8/31/98            $47,000                $178,000                 $0

</TABLE>

Class B and C Shares.  Each Fund has  adopted a plan under Rule 12b-1 (the "Rule
12b-1 Plan") that  provides for fees payable as an expense of the Class B shares
and Class C shares that are used by KDI to pay for distribution and services for
those  classes.  Because  12b-1  fees are paid out of fund  assets on an ongoing
basis they will,  over time,  increase the cost of an  investment  and cost more
than other types of sales charges.



                                       85
<PAGE>



Expenses of the Funds and of KDI in connection with the Rule 12b-1 plans for the
Class B and Class C Shares  are set forth  below.  A portion  of the  marketing,
sales and operating expenses shown below could be considered overhead expense.

For its services under the distribution agreement,  KDI receives a fee from each
Fund,  payable monthly,  at the annual rate of 0.75% of average daily net assets
of each Fund  attributable  to Class B shares.  This fee,  pursuant  to the Rule
12-b1 Plan. is accrued daily as an expense of Class B shares.  KDI also receives
any contingent deferred sales charges. See "Purchase,  Repurchase and Redemption
of Shares --  Contingent  Deferred  Sales Charge Class B Shares." KDI  currently
compensates firms for sales of Class B shares at a commission rate of 3.75%.

For its services under the distribution agreement,  KDI receives a fee from each
Fund  pursuant to the Rule 12b-1 Plan,  payable  monthly,  at the annual rate of
0.75% of average daily net assets of each Fund  attributable  to Class C shares.
This  fee is  accrued  daily as an  expense  of Class C  shares.  KDI  currently
advances  to firms the  first  year  distribution  fee at a rate of 0.75% of the
purchase  price of Class C  shares.  For  periods  after  the  first  year,  KDI
currently  pays firms for sales of Class C shares a  distribution  fee,  payable
quarterly,  at an annual  rate of 0.75% of net  assets  attributable  to Class C
shares  maintained  and  serviced  by the  firm  and  the  fee  continues  until
terminated by KDI or a Trust.  KDI also receives any  contingent  deferred sales
charges. See "Purchase,  Repurchase and Redemption of Shares Contingent Deferred
Sales Charges Class C Shares".

<TABLE>
<CAPTION>

                                                                                     Other Distribution Expenses Paid by KDI
                                                                                     ---------------------------------------
                                   Contingent               Commissions
                      Distribution  Deferred      Total       Paid By
                       Fees Paid      Sales    Commissions   KDI to KDI Advertising             Marketing  Misc.
Class B         Fiscal   by Fund      Charges   Paid by KDI   Affiliated     and     Prospectus and Sales  Operating  Interest
Shares          Year     to KDI    Paid to KDI   to Firms       Firms   Literature   Printing   Expenses   Expenses  Expenses
------          ----     ------    -----------   --------       -----   ----------   --------   --------   --------  --------
<S>             <C>     <C>          <C>         <C>          <C>       <C>        <C>        <C>        <C>        <C>


Municipal       2000    $517,887     $226,086    $198,321     0         $22,755     $2,753     $26,525    $11,753    $469,390
   Fund
Intermediate    2000    $39,409      $23,806     $17,639      0         $3,092      $367       $3,871     $9,670     $58,238
   Municipal
   Fund
California      2000    $250,140     $100,335    $136,027     0         $11,460     $7,243     $2,4222    $7,595     $243,913
   Fund
Florida Fund    2000    $47,359      $31,463     $23,409      0         $,2633      $376       $3,940     $3,745     $36,356
New York        2000    $93,452      $46,212     $32,618      0         $4,446      $750       $8,629     $4,707     $89,387

   Fund

Ohio Fund       2000    $89,167      $35,127     $35,742      0         $4,414      $629       $7,278     $4,680     $77,343

</TABLE>



<TABLE>
<CAPTION>
                                                                                     Other Distribution Expenses Paid by KDI
                                                                                     ---------------------------------------
                                   Contingent               Commissions
                      Distribution  Deferred      Total       Paid By
                       Fees Paid      Sales    Commissions   KDI to KDI Advertising            Marketing  Misc.
Class B         Fiscal   by Fund      Charges   Paid by KDI   Affiliated     and     Prospectus and Sales  Operating  Interest
Shares          Year     to KDI    Paid to KDI   to Firms       Firms   Literature   Printing   Expenses   Expenses  Expenses
------          ----     ------    -----------   --------       -----   ----------   --------   --------   --------  ---------
<S>             <C>     <C>          <C>         <C>          <C>       <C>        <C>        <C>         <C>       <C>


Municipal       1999    $597,767     $209,995    $532,611     $0        $61,664     $6,801     $157,616   $33,259    $391,480
   Fund
Intermediate    1999    $38,277      $57,047     $75,305      $0        $7,016      $764       $17,472    $9,314     $43,822
   Municipal
   Fund
California      1999    $284,154     $103,037    $361,948     $0        $36,854     $4,299     $98,907    $26,424    $190,980
   Fund
Florida Fund    1999    $50,197      $19,524     $77,818      $0        $5,680      $647       $14,826    $12,973    $30,184
New York        1999    $99,902      $21,523     $166,454     $0        $12,017     $1,129     $32,842    $14,399    $71,536
   Fund
Ohio Fund       1999    $93,843      $28,137     $150,027     $0        $11,349     $1,268     $31,307    $15,809    $64,669
</TABLE>



                                       86
<PAGE>

<TABLE>
<CAPTION>
                                                                                     Other Distribution Expenses Paid by KDI
                                                                                     ---------------------------------------
                                   Contingent               Commissions
                       Distribution Deferred      Total       Paid By
                        Fees Paid     Sales    Commissions   KDI to KDI Advertising            Marketing  Misc.
Class B        Fiscal    by Fund     Charges   Paid by KDI   Affiliated     and     Prospectus and Sales  Operating  Interest
Shares         Year     to KDI    Paid to KDI   to Firms       Firms   Literature   Printing   Expenses   Expenses  Expenses
------         ----     ------    -----------   --------       -----   ----------   --------   --------   --------  ---------

<S>            <C>       <C>         <C>         <C>          <C>         <C>         <C>        <C>        <C>
Municipal      1998      $511,000    $92,000     $716,000     $0          $75,663     $6,558     $158,274   $38,132
   Fund                                                                                                                $331,385
Intermediate   1998      $38,000     $11,000     $59,000      $0          $6,609      $574       $13,524    $14,204    $31,502
   Municipal
   Fund
California     1998      $231,000    $52,000     $386,000     $0          $41,766     $3,642     $87,612    $22,658
   Fund                                                                                                                $167,704
Florida Fund   1998      $41,000     $4,000      $52,000      $0          $6,761      $625       $14,559    $13,021    $29,307
New York       1998      $83,000     $14,000     $100,000     $0          $10,894     $950       $22,688    $14,257    $59,407
   Fund
Ohio Fund      1998      $75,000     $24,000     $92,000      $0          $10,297     $907       $21,887    $15,258    $58,545

</TABLE>


<TABLE>
<CAPTION>
                                                                          Other Distribution Expenses Paid by KDI
                                                                          ----------------------------------------
                                                            Distribution
                                    Contingent     Total     Fees Paid
                       Distribution  Deferred   Distribution     By
                        Fees Paid     Sales      Fees Paid    KDI to KDI Advertising            Marketing    Misc.
Class C         Fiscal    by Fund     Charges       by KDI    Affiliated  and        Prospectus and Sales  Operating  Interest
Shares          Year     to KDI    Paid to KDI    to Firms   Firms       Literature  Printing   Expenses   Expenses  Expenses
------          ----     ------    -----------    --------   -----       ----------  --------   --------   --------  --------
<S>             <C>      <C>       <C>          <C>                <C>     <C>       <C>         <C>        <C>        <C>


Municipal       2000     $66,451   $3,466       $66,867            0       $9,134     $1,018     $9,402     $8,708     $36,604
   Fund
Intermediate    2000     $11,583    $266        $14,350            0       $1,589     $181       $1,711     $9,233     $14,240
   Municipal
   Fund
California      2000     $35,644   $4,638       $39,529            0       $3,004     $366       $4,900     $4,838     $13,635
   Fund
Florida Fund    2000     $7,939      -          $9,579             0       $870       $120       $2,695     $3,095     $7,259
New York        2000     $27,665    $664        $29,408            0       $2,355     $302       $4,227     $3,911     $18,945

   Fund

Ohio Fund       2000     $15,088   $1,217       $16,725            0       $4,214     $682       $8,190     $4,879     $8,435

</TABLE>

<TABLE>
<CAPTION>
                                                                          Other Distribution Expenses Paid by KDI
                                                                          ----------------------------------------
                                                            Distribution
                                    Contingent     Total     Fees Paid
                       Distribution  Deferred   Distribution     By
                        Fees Paid     Sales      Fees Paid    KDI to KDI Advertising            Marketing    Misc.
Class C         Fiscal    by Fund     Charges       by KDI    Affiliated  and        Prospectus and Sales  Operating  Interest
Shares          Year     to KDI    Paid to KDI    to Firms   Firms       Literature  Printing   Expenses   Expenses  Expenses
------          ----     ------    -----------    --------   -----       ----------  --------   --------   --------  --------
<S>             <C>      <C>       <C>          <C>                <C>     <C>       <C>         <C>        <C>        <C>

Municipal       1999     $76,642   $5,198      $71,321           $0       $12,181     $1,763     $28,199    $9,912     $28,980
   Fund
Intermediate    1999     $18,198   $1,779      $23,454           $0       $4,848      $650       $16,128    $6,894     $9,497
   Municipal
   Fund
California      1999     $38,304   $5,183      $43,024           $0       $6,840      $883       $15,111    $6,878     $9,744
   Fund
Florida Fund    1999     $6,997     $0         $8,349            $0       $1,878      $202       $7,261     $4,795     $4,694
New York        1999     $30,926   $333        $35,559           $0       $3,848      $670       $13,515    $5,716     $13,917
   Fund
Ohio Fund       1999     $8,984    $415        $11,956           $0       $2,511      $263       $8,571     $5,247     $5,162
</TABLE>


                                       87
<PAGE>


<TABLE>
<CAPTION>
                                                                          Other Distribution Expenses Paid by KDI
                                                                          ----------------------------------------
                                                            Distribution
                                    Contingent     Total     Fees Paid
                       Distribution  Deferred   Distribution     By
                        Fees Paid     Sales      Fees Paid    KDI to KDI Advertising            Marketing    Misc.
Class C         Fiscal    by Fund     Charges       by KDI    Affiliated  and        Prospectus and Sales  Operating  Interest
Shares          Year     to KDI    Paid to KDI    to Firms   Firms       Literature  Printing   Expenses   Expenses  Expenses
------          ----     ------    -----------    --------   -----       ----------  --------   --------   --------  --------
<S>             <C>      <C>       <C>          <C>                <C>     <C>       <C>         <C>        <C>        <C>

Municipal       1998     $55,000      $5,000     $62,000      $0          $15,528     $1,308     $31,058    $17,514    $24,052
   Fund
Intermediate    1998     $5,000       $0         $7,000       $0          $1,875      $148       $3,797     $9,412     $6,693
   Municipal
   Fund
California      1998     $28,000      $2,000     $32,000      $0          $6,312      $390       $13,253    $11,488    $7,115
   Fund
Florida Fund    1998     $5,000       $0         $4,000       $0          $874        $57        $1,943     $9,802     $3,744
New York        1998     $24,000      $2,000     $28,000      $0          $7,733      $571       $15,839    $12,715    $11,176
   Fund
Ohio Fund       1998     $5,000       $0         $7,000       $0          $2,620      $188       $5,025     $10,701    $3,664
</TABLE>


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

 *       From 11/1/94 to 9/30/95.

**       From 3/15/95 to 8/31/95.



Rule 12b-1 Plan

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

Each distribution agreement and Rule 12-b1 Plan continues in effect from year to
year so long as such continuance is approved for each class at least annually by
a vote of the Board of Trustees of the Trust, including the Trustees who are not
interested  persons  of the Trust and who have no direct or  indirect  financial
interest in the agreement or Plan.  Each agreement  automatically  terminates in
the  event  of its  assignment  and may be  terminated  for a class  at any time
without penalty by a Trust or by KDI upon 60 days notice.  Termination by a Fund
with  respect to a class may be by vote of a majority of the Board of  Trustees,
or a majority of the  Trustees who are not  interested  persons of the Trust and
who have no  direct  or  indirect  financial  interest  in the  agreement,  or a
"majority of the  outstanding  voting  securities"  of the class of the Fund, as
defined under the Investment Company Act of 1940. The Rule 12b-1 Plan may not be
amended  for a class to  increase  the fee to be paid by a Fund with  respect to
such class without approval by a majority of the outstanding  voting  securities
of such  class of the  Fund and all  material  amendments  must in any  event be
approved by the Board of Trustees in the manner  described above with respect to
the continuation of the agreement.  The provisions  concerning the continuation,
amendment and  termination of the  distribution  agreement are on a Fund by Fund
basis and for each Fund on a class by class basis.

TAXES.  Each Fund  intends to  continue  to qualify  as a  regulated  investment
company under Subchapter M of the Code and, if so qualified,  will not be liable
for federal income taxes to the extent its earnings are  distributed.  Each Fund
intends to meet the requirements of the Code applicable to regulated  investment
companies distributing  tax-exempt interest dividends and, therefore,  dividends
representing  net  interest  received  on  Municipal   Securities  will  not  be
includable  by  shareholders  in their  gross  income  for  federal  income  tax
purposes,  except to the extent  such  interest  is  subject to the  alternative
minimum tax as discussed below.  Dividends  representing  taxable net investment
income (such as net interest income from temporary investments in obligations of
the U.S.  Government)  and net short-term  capital gains, if any, are taxable to
shareholders as ordinary income and long-term capital gain dividends are taxable
to  shareholders as long-term  capital gains,  regardless of how long the shares
have been held and whether  received in cash or shares.  Gains  attributable  to
market  discount  on  Municipal  Securities  acquired  after  April 30, 1993 are
treated as  ordinary  income.  Long-term  capital  gain  dividends  received  by
individual  shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 12 months. Dividends



                                       88
<PAGE>

declared by a Fund in October, November or December to shareholders of record as
of a date in one of those  months and paid  during  the  following  January  are
treated as paid on December 31 of the calendar year declared for federal  income
tax purposes.

A Fund's options and futures  transactions are subject to special tax provisions
that may accelerate or defer recognition of certain gains or losses,  change the
character of certain gains or losses, or alter the holding periods of certain of
a Fund's  securities.  For  federal  income tax  purposes,  a Fund is  generally
required to recognize its  unrealized  gains and losses at year end on financial
futures  contracts,  options  thereon,  index options and listed options on debt
securities.  Any  gain  or loss  recognized  on such  financial  instruments  is
generally  considered to be 60% long-term and 40%  short-term  without regard to
the holding period of the contract or option.

A shareholder  who redeems shares of a Fund will recognize  capital gain or loss
for federal income tax purposes measured by the difference  between the value of
the shares redeemed and the adjusted cost basis of the shares.  The gain or loss
will be a capital  gain or loss and will be long-term if the shares are held for
a period of more than one year.  Any loss on shares held six months or less will
be  a  long-term   capital  loss  to  the  extent  any  long-term  capital  gain
distribution  is made with respect to such shares during the period the investor
owns the shares.  In the case of  shareholders  holding shares of a Fund for six
months or less and  subsequently  selling those shares at a loss after receiving
an  exempt-interest  dividend,  the loss will be disallowed to the extent of the
exempt-interest  dividends received.  However, the Secretary of the Treasury may
issue  regulations to shorten the required  holding period from six months to 31
days.

A shareholder who has redeemed shares of a Fund or any Kemper Mutual Fund listed
under  "Purchase,  Repurchase,  and Redemption of Shares -- Special  Features --
Class A Shares -- Combined  Purchases"  may reinvest the amount  redeemed at net
asset value at the time of the  reinvestment  in shares of any Fund or in shares
of the other Kemper  Mutual Funds  within six months of the  redemption.  If the
redeemed  shares were purchased after October 3, 1989 and were held less than 91
days, then the lesser of (a) the sales charge waived on the reinvestment shares,
or (b) the sales  charge  incurred on the  redeemed  shares,  is included in the
basis  of the  reinvestment  shares  and is not  included  in the  basis  of the
redeemed shares. If a shareholder  realizes a loss on the redemption or exchange
of a Fund's  shares and  reinvests  in that same  Fund's  shares  within 30 days
before or after the redemption or exchange,  the  transactions may be subject to
the wash sale rules  resulting in a postponement of the recognition of such loss
for federal  income tax  purposes.  An exchange of a Fund's shares for shares of
another fund is treated as a redemption and  reinvestment for federal income tax
purposes upon which gain or loss may be recognized.

Interest on  indebtedness  which is  incurred  to purchase or carry  shares of a
mutual fund which distributes  exempt-interest  dividends during the year is not
deductible  for  federal  income  tax  purposes.  Further,  the Funds may not be
appropriate  investments for persons who are  "substantial  users" of facilities
financed  by  industrial  development  bonds  held by the Funds or are  "related
persons" to such users;  such persons should  consult their tax advisers  before
investing in the Funds.

The  "Superfund  Act of 1986" (the  "Superfund  Act")  imposes a separate tax on
corporations  at a rate of 0.12% of the excess of such  corporation's  "modified
alternative  minimum  taxable  income" over $2 million.  A portion of tax-exempt
interest,  including exempt-interest dividends from a Fund, may be includible in
modified alternative minimum taxable income.  Corporate shareholders are advised
to consult their tax advisers with respect to the  consequences of the Superfund
Act.

A taxable dividend received shortly after the purchase of shares reduces the net
asset value of the shares by the amount of the dividend and,  although in effect
a return of capital, will be taxable to the shareholder.  If the net asset value
of shares were reduced below the  shareholder's  cost by dividends  representing
gains  realized  on sales of  securities,  such  dividends  would be a return of
investment though taxable as stated above.

Net interest on certain  "private  activity  bonds" issued on or after August 8,
1986 is treated as an item of tax preference and may,  therefore,  be subject to
both the  individual  and  corporate  alternative  minimum  tax.  To the  extent
provided  by  regulations  to be  issued  by  the  Secretary  of  the  Treasury,
exempt-interest  dividends from a Fund are to be treated as interest on "private
activity  bonds" in  proportion  to the interest the Fund  receives from private
activity bonds, reduced by allowable deductions.



                                       89
<PAGE>


For the 1999  calendar  year,  7%, 9%, 6%, 12%,  10% and 17% of the net interest
income of the Municipal,  Intermediate Municipal,  California, Florida, New York
and Ohio Funds, respectively, was derived from "private activity bonds."


Exempt-interest  dividends,  except to the  extent  of  interest  from  "private
activity  bonds",  are not  treated as a tax  preference  item.  For a corporate
shareholder,  however,  such  dividends  will be  included in  determining  such
corporate shareholder's "adjusted current earnings." Seventy-five percent of the
excess, if any, of "adjusted current earnings" over the corporate  shareholder's
alternative  minimum  taxable  income  with  certain  adjustments  will be a tax
preference  item.  Corporate  shareholders  are  advised  to  consult  their tax
advisers with respect to alternative minimum tax consequences.

Shareholders  will be required to disclose on their  federal  income tax returns
the  amount  of  tax-exempt   interest   earned   during  the  year,   including
exempt-interest dividends received from a Fund.

Individuals  whose  modified  income  exceeds a base  amount  will be subject to
federal  income tax on up to 85% of their  Social  Security  benefits.  Modified
income  includes   adjusted  gross  income,   tax-exempt   interest,   including
exempt-interest dividends from a Fund, and 50% of Social Security benefits.


Municipal  Fund.  During the fiscal year ended  September 30, 2000,  100% of the
income dividends paid by the Municipal Fund constituted tax-exempt dividends for
federal income tax purposes.

Intermediate  Municipal  Fund.  During the fiscal year ended September 30, 2000,
100% of the income dividends paid by the Intermediate Municipal Fund constituted
tax-exempt dividends for federal income tax purposes.


California  Fund.  Dividends  paid by the  California  Fund,  to the  extent  of
interest  received on  California  state and local  government  issues,  will be
exempt from California income taxes provided at least 50% of the total assets of
the California  Fund are invested in such issues at the close of each quarter in
the taxable year. Any  short-term  and long-term  capital gain dividends will be
includable  in  California  personal  taxable  income  as  dividend  income  and
long-term  capital  gain,  respectively,  and are taxed at  ordinary  income tax
rates.


During the fiscal year ended August 31, 2000, 100% of the income  dividends paid
by  the  California  Fund  constituted  tax-exempt  dividends  for  federal  and
California income tax purposes. Dividends paid by the California Fund, including
capital gain distributions, will be taxable to corporate shareholders subject to
the California corporate franchise tax.



Florida  Fund.  Dividends  paid by the  Florida  Fund,  including  capital  gain
distributions,  to  individual  shareholders  will not be subject to the Florida
income tax since Florida does not impose a personal  income tax.  Dividends paid
by the Florida Fund,  including capital gain  distributions,  will be taxable to
corporate  shareholders  that are subject to the Florida  corporate  income tax.
During the fiscal year ended August 31, 2000, 100% of the income  dividends paid
by the Florida Fund  constituted  tax-exempt  dividends  for federal  income tax
purposes.  Additionally,  Florida  imposes an  "intangibles  tax" at the rate of
$1.00 per $1,000 of taxable  value of certain  securities  and other  intangible
assets owned by Florida residents on January 1st of each year. Cash held in bank
accounts, U.S. Government securities and Florida Municipal Securities are exempt
from this intangibles tax. The first $20,000 of securities subject to the tax is
also exempt from the intangibles tax. Further, any person owing less than $60.00
of intangibles tax is exempt from the tax. Florida's intangibles tax statute was
recently revised.  Under the most recent  revisions,  if on December 31st of any
year the Florida Fund's  portfolio  consists of at least 90% of assets which are
exempt from the intangibles tax (primarily U.S. Government  securities,  Florida
Municipal  Securities  and cash held in bank  accounts),  then the shares of the
Florida  Fund are  exempt  from the  intangibles  tax.  If less  than 90% of the
Florida  Fund's  assets  are exempt  from the  intangibles  tax,  then only that
portion  of  the  value  of the  Florida  Fund's  shares  attributable  to  U.S.
Government  securities will be exempt from the Florida intangibles tax. Thus, in
order to take full  advantage of the exemption from the  intangibles  tax in any
year, the Florida Fund could be required to sell all  non-exempt  assets held in
its portfolio and reinvest the proceeds in exempt assets prior to December 31st.
Transaction  costs involved in restructuring the portfolio in this fashion would
likely  reduce  the  Florida  Fund's  investment  return  and might  exceed  any
increased investment return the Florida Fund achieved by investing in non-exempt
assets  during the year.  On December 31,  1999,  the Florida  Fund's  portfolio
consisted solely of assets exempt from the intangibles tax.



                                       90
<PAGE>




New York Fund.  Dividends  paid by the New York Fund  representing  net interest
received on New York Municipal Securities will be exempt from New York State and
New York City income taxes. Any short-term and long-term  capital gain dividends
will be  includable  in New York  State  and New York  City  taxable  income  as
dividend  income and  long-term  capital  gain,  respectively,  and are taxed at
ordinary income tax rates.


During the fiscal year ended August 31, 2000, 100% of the income  dividends paid
by the New York Fund  constituted  tax-exempt  dividends  for federal,  New York
State and New York City  income  tax  purposes.  Dividends  paid by the New York
Fund,  including  capital  gain  distributions,  will be  taxable  to  corporate
shareholders  that are  subject  to New York  State and New York City  corporate
franchise tax.




Ohio Fund.  Dividends  paid by the Ohio Fund with respect to its shares that are
properly  attributable to interest on, or gain from the sale,  exchange or other
disposition of, interest-bearing obligations issued by or on behalf of the State
of Ohio,  political  subdivisions  thereof, or agencies or  instrumentalities of
Ohio or its political subdivisions ("Ohio Municipal Securities") are exempt from
the Ohio personal  income tax,  school  district and  municipal  income taxes in
Ohio,  and are  excluded  from  the net  income  base  of the  Ohio  corporation
franchise tax when distributed or deemed distributed to holders of shares of the
Ohio  Fund.  This  discussion  of Ohio  taxes  assumes  that the Ohio  Fund will
continue to qualify as a regulated investment company under the Internal Revenue
Code and that at all times at least 50% of the value of the total assets of such
Fund  consists of Ohio  Obligations  or similar  obligations  of other states or
their subdivisions.


For the fiscal period ended August 31, 2000,  100% of the income  dividends paid
by the Ohio  Fund  constituted  tax-exempt  dividends  for  federal  income  tax
purposes.


General.  The tax  exemption of Fund  dividends  for federal  income tax and, if
applicable,  particular state or local tax purposes does not necessarily  result
in  exemption  under the  income  or other tax laws of any other  state or local
taxing  authority.  The laws of the several states and local taxing  authorities
vary with  respect to the  taxation  of  interest  income and  investments,  and
shareholders  are advised to consult  their own tax advisers as to the status of
their  accounts under state and local tax laws. The Funds may not be appropriate
investments for qualified retirement plans and Individual Retirement Accounts.

The  Trusts  are  required  by law to  withhold  31% of  taxable  dividends  and
redemption  proceeds paid to certain  shareholders  who do not furnish a correct
taxpayer  identification  number (in the case of individuals,  a social security
number) and in certain other circumstances.



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<PAGE>

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

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

                             PORTFOLIO TRANSACTIONS

Brokerage Commissions

Allocation of brokerage is supervised by the Advisor .


The primary objective of the Advisor 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
Advisor 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 a Fund to reported  commissions paid by others.  The Advisor
routinely reviews commission rates,  execution and settlement services performed
and makes internal and external comparisons.


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

When it can be done consistently with the policy of obtaining the most favorable
net  results,  it  is  the  Advisor  '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 Advisor 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 Advisor may place orders
with a  broker/dealer  on the basis that the  broker/dealer  has or has not sold
shares of a Fund.  In effecting  transactions  in  over-the-counter  securities,
orders are placed with the principal market makers for the security being traded
unless,  after  exercising  care,  it appears  that more  favorable  results are
available elsewhere.

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

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



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<PAGE>

The Board reviews, from time to time, whether the recapture for the benefit of a
Fund of some portion of the brokerage commissions or similar fees paid by a Fund
on portfolio transactions is legally permissible and advisable.

The table below shows approximate  brokerage  commissions paid by each Fund then
existing for the last three  fiscal  years and for the most recent  fiscal year,
the  percentage  thereof  that  was  allocated  to  firms  based  upon  research
information provided.


                                Allocated to Firms
                               Based on Research in
Fund           Fiscal 2000          Fiscal 2000      Fiscal 1999   Fiscal 1998
----           -----------          -----------      -----------   -----------


Municipal      $0                       0%          $282,468      $3,048,000
Intermediate   $0                       0%          $0            $13,000
California     $0                       0%          $89,658       $1,464,000
Florida        $0                       0%          $8,124        $146,000
New York       $0                       0%          $26,862       $701,000
Ohio           $0                       0%          $300          $49,000




Portfolio Turnover

Portfolio  turnover  rate is  defined  by the SEC as the ratio of the  lesser of
sales or purchases to the monthly average value of such securities  owned during
the year,  excluding all securities  whose  remaining  maturities at the time of
acquisition were one year or less.

Higher levels of activity by a Fund result in higher  transaction  costs and may
also  result  in  taxes on  realized  capital  gains  to be borne by the  Fund's
shareholders.  Purchases  and sales are made for a Fund whenever  necessary,  in
management's opinion, to meet a Fund's objective.

Portfolio turnover rates for the two most recent fiscal periods are as follows:

            Fund         Fiscal Year Ended 2000    Fiscal Year Ended 1999

     Municipal                     44%                       70%
     Intermediate                  17%                       30%
     California                    57%                       62%
     Florida                       21%                       56%
     New York                      26%                       69%
     Ohio                           9%                       29%

                              FINANCIAL STATEMENTS

The financial  statements appearing in each Fund's Annual Report to Shareholders
are incorporated herein by reference. Each Fund's Annual Report accompanies this
Statement of Additional Information.




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<PAGE>




APPENDIX-- RATINGS OF INVESTMENTS

Standard & Poor's Corporation Bond Ratings

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

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

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

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

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

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

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

Moody's Investors Service, Inc., Bond Ratings

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

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

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

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

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

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



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<PAGE>

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

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

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

Fitch Long-Term Debt Ratings

AAA.  Highest credit  quality.  `AAA' ratings  denote the lowest  expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments.  This capacity is highly unlikely to be
adversely affected by foreseeable events.

AA. Very high credit  quality.  `AA' ratings  denote a very low  expectation  of
credit risk.  They indicate very strong capacity for timely payment of financial
commitments.  This  capacity  is not  significantly  vulnerable  to  foreseeable
events.

A. High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial  commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB. Good credit quality.  `BBB' ratings  indicate that there is currently a low
expectation  of credit  risk.  The  capacity  for timely  payment  of  financial
commitments is considered adequate,  but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity.  This is the lowest
investment-grade category.

BB.  Speculative.  `BB' ratings  indicate that there is a possibility  of credit
risk  developing,  particularly  as the result of adverse  economic  change over
time;  however,  business or  financial  alternatives  may be available to allow
financial  commitments  to be met.  Securities  rated in this  category  are not
investment grade.

B. Highly  speculative.  `B' ratings  indicate that  significant  credit risk is
present,  but a limited  margin of safety  remains.  Financial  commitments  are
currently being met; however,  capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

CCC,  CC, C. High  default  risk.  Default is a real  possibility.  Capacity for
meeting  financial  commitments  is solely  reliant  upon  sustained,  favorable
business or economic developments.  A `CC' rating indicates that default of some
kind appears probable. `C' ratings signal imminent default.

DDD, DD, D. Default.  The ratings of  obligations  in this category are based on
their prospects for achieving  partial or full recovery in a  reorganization  or
liquidation  of  the  obligor.   While  expected   recovery  values  are  highly
speculative  and cannot be estimated with any precision,  the following serve as
general  guidelines.  `DDD' obligations have the highest potential for recovery,
around  90%-100% of  outstanding  amounts and accrued  interest.  `DD' indicates
potential  recoveries  in the  range of  50%-90%,  and `D' the  lowest  recovery
potential, i.e., below 50%.

Entities  rated  in  this  category  have  defaulted  on  some  or all of  their
obligations.  Entities  rated `DDD' have the highest  prospect for resumption of
performance  or  continued  operation  with or  without a formal  reorganization
process.  Entities  rated  `DD'  and  `D'  are  generally  undergoing  a  formal
reorganization or liquidation process;  those rated `DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated `D' have a
poor prospect for repaying all obligations.

Fitch Short-Term Debt Ratings

F1.  Highest credit  quality.  Indicates the Best capacity for timely payment of
financial commitments;  may have an added "+" to denote any exceptionally strong
credit feature.

F2. Good credit quality. A satisfactory capacity for timely payment of financial
commitments,  but the  margin  of  safety  is not as great as in the case of the
higher ratings.



                                       95
<PAGE>

F3.  Fair  credit  quality.   The  capacity  for  timely  payment  of  financial
commitments is adequate;  however,  near-term  adverse changes could result in a
reduction to non-investment grade.

B.  Speculative.  Minimal capacity for timely payment of financial  commitments,
plus  vulnerability  to  near-term  adverse  changes in  financial  and economic
conditions.

C. High  default  risk.  Default is a real  possibility.  Capacity  for  meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.

D.  Default. Denotes actual or imminent payment default.

Commercial Paper Ratings

Commercial  paper rated by Standard & Poor's  Ratings  Services  ("S&P") has the
following   characteristics:   Liquidity   ratios  are  adequate  to  meet  cash
requirements.  Long-term  senior  debt is rated "A" or  better.  The  issuer has
access to at least two additional channels of borrowing. Basic earnings and cash
flow  have an  upward  trend  with  allowance  made for  unusual  circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position  within the industry.  The  reliability  and quality of management  are
unquestioned.  Relative  strength  or weakness  of the above  factors  determine
whether the issuer's commercial paper is rated A-1 or A-2.

The ratings  Prime-1 and Prime-2 are the two highest  commercial  paper  ratings
assigned  by Moody's  Investors  Service,  Inc.  ("Moody's").  Among the factors
considered by it in assigning  ratings are the following:  (1) evaluation of the
management of the issuer;  (2) economic  evaluation of the issuer's  industry or
industries and an appraisal of  speculative-type  risks which may be inherent in
certain  areas;  (3)  evaluation  of  the  issuer's   products  in  relation  to
competition and customer  acceptance;  (4) liquidity;  (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years;  (7) financial
strength of a parent company and the relationships  which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public  interest  questions and  preparations  to meet such
obligations.  Relative  strength  or weakness  of the above  factors  determines
whether the issuer's commercial paper is rated Prime-1 or 2.

Municipal Notes

Moody's: The highest ratings for state and municipal short-term  obligations are
"MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG 3" in the case of
an issue having a variable rate demand feature). Notes rated "MIG 1" or "VMIG 1"
are judged to be of the "best  quality".  Notes rated "MIG 2" or "VMIG 2" are of
"high  quality," with margins or protection  "ample  although not as large as in
the  preceding  group".  Notes  rated  "MIG  3" or  "VMIG  3" are of  "favorable
quality," with all security  elements  accounted for but lacking the strength of
the preceding grades.

S&P:  The  "SP-1"  rating  reflects  a "very  strong or strong  capacity  to pay
principal and interest". Notes issued with "overwhelming safety characteristics"
will be rated "SP-1+".  The "SP-2" rating reflects a "satisfactory  capacity" to
pay principal and interest.

Fitch:  The highest ratings for state and municipal  short-term  obligations are
"F-1+," "F-1," and "F-2".


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