KEMPER PORTFOLIOS, 485APOS, 1998-11-02

KEMPER PORTFOLIOS
485APOS, 1998-11-02

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Filed electronically with the Securities and Exchange Commission
on November 2, 1998.

File No. 2-76806
File No 811-3440

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 / /
Pre-Effective Amendment No. / /
Post-Effective Amendment No.28 / X /
---
And
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /

Amendment No. 30 / X /
---

KEMPER PORTFOLIOS
-----------------
(Exact Name of Registrant as Specified in Charter)

222 South Riverside Plaza, Chicago, Illinois 60606
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (312) 537-7000

Philip J. Collora, Vice President and Secretary
-----------------------------------------------
Kemper Portfolios
-----------------
222 South Riverside Plaza
-------------------------
Chicago, Illinois 60606
-----------------------
(Name and Address of Agent for Service)

It is proposed that this filing will become effective (check appropriate box):
<TABLE>
<S> <C>

/ / Immediately upon filing pursuant to paragraph ( b ) / / days after filing pursuant to paragraph ( a ) ( 1 )
/ / days after filing pursuant to paragraph ( a ) ( 2 ) / / On ( date ) pursuant to paragraph ( b )
/ X / On January 1, 1999 pursuant to paragraph ( a ) ( 1 ) / / On ( date ) pursuant to paragraph ( a ) ( 2 ) of Rule 485.

/ / If Appropriate, check the following box:
This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
</TABLE>

<PAGE>

KEMPER PORTFOLIOS:
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

Items Required By Form N-1A
---------------------------

PART A
- ------
<TABLE>
<CAPTION>

Item No. Item Caption Prospectus Caption
- -------- ------------ ------------------

<S> <C> <C>
1. Front and Back Cover Pages FRONT AND BACK COVER

2. Risk / Return Summary: ABOUT THE FUNDS
Investments, Risks and INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Performance PRINCIPAL RISK STRATEGIES OF THE FUNDS

3. Risk/Return Summary: Fee EXPENSE INFORMATION
Table

4. Investment Objectives, INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Principal Investment INVESTMENT APPROACH OF THE FUNDS
Strategies, and Related PRINCIPAL RISKS
Risks

5. Management's Discussion of NOT APPLICABLE
Fund Performance

6. Management, Organization, INVESTMENT MANAGER
and Capital Structure PORTFOLIO MANAGEMENT

7. Shareholder Information TRANSACTION INFORMATION
SHARE PRICE

8. Distribution Arrangements DISTRIBUTIONS AND TAXES
TRANSACTION INFORMATION

9. Financial Highlights FINANCIAL HIGHLIGHTS
Information

2
<PAGE>

KEMPER PORTFOLIOS:
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

CROSS-REFERENCE SHEET
PART B
- ------

Item No. Item Caption Caption in Statement of Additional Information
- -------- ------------ ----------------------------------------------

10. Cover Page and Table of COVER PAGE
Contents TABLE OF CONTENTS

11. Fund History INVESTMENT MANAGER AND UNDERWRITER

12. Description of the Fund INVESTMENT POLICIES AND TECHNIQUES
and Its Investments and ADDITIONAL INVESTMENT INFORMATION
Risks. INVESTMENT RESTRICTIONS

13. Management of the Fund OFFICERS AND TRUSTEES
INVESTMENT MANAGER AND UNDERWRITER

14. Control Persons and OFFICERS AND TRUSTEES
Principal Holders of INVESTMENT MANAGER AND UNDERWRITER
Securities

15. Investment Advisory and INVESTMENT MANAGER AND UNDERWRITER
Other Services OFFICERS AND TRUSTEES

16. Brokerage Allocation PORTFOLIO TRANSACTIONS
and Other Practices BROKERAGE COMMISSIONS

17. Capital Stock and INVESTMENT POLICIES AND TECHNIQUES
Other Securities

18. Purchase, Redemption and PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Pricing of Shares NET ASSET VALUE

19. Taxation of the Fund. DIVIDENDS AND TAXES

20. Underwriters. INVESTMENT MANAGER AND UNDERWRITER

21. Calculation of Performance PERFORMANCE
Data.

</TABLE>
22. Financial Statements. INAPPLICABLE

3
<PAGE>

LONG TERM
INVESTING
IN A
SHORT TERM
WORLD

January 1, 1999

Prospectus

Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value

Kemper Income Funds

Kemper Adjustable Rate U.S. Government Fund
Kemper Diversified Income Fund
Kemper U.S. Government Securities Fund
Kemper High Yield Fund
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund

The Securities and Exchange Commission is not responsible
for the accuracy or completeness of the information
in any prospectus, and gives no opinion
as to the merit of any mutual fund as an investment.

<PAGE>

CONTENTS

FIXED INCOME INVESTING.............................................4
Investment approach of the funds.................................4
Principal risk factors of the funds..............................4
ABOUT THE FUNDS......................................................6
Kemper Adjustable Rate U.S. Government Fund........................6
To Be Updated.....................................................13
Kemper Diversified Income Fund....................................14
Kemper U.S. Government Securities Fund............................22
Kemper High Yield Fund............................................28
Kemper High Yield Opportunity Fund................................36
Kemper Income and Capital Preservation Fund.......................44
Kemper U.S. Mortgage Fund.........................................52
Kemper Short-Intermediate Government Fund.........................60
To Be Updated.....................................................66
Investment Manager................................................67
ABOUT YOUR INVESTMENT...............................................69
Choosing a share class..........................................69
Buying shares...................................................72
Selling and exchanging shares...................................78
Distributions and taxes.........................................79
Transaction information.........................................81

2
<PAGE>

FIXED INCOME INVESTING

Investment approach of the funds

This prospectus presents a selection of income funds with distinct investment
approaches. Investors receive the benefits of professional management and
liquidity through a single investment in shares of a fund.

Income funds offer you the opportunity to earn high current income, paid either
monthly or quarterly. Income funds invest in bonds, mortgage pools (such as
Ginnie Maes), and, occasionally, high-yield stocks. While market appreciation or
depreciation is part of an income fund's return, interest income is the most
important feature of these funds. Investors who are seeking higher income than a
money market fund provides, or who are seeking to balance their growth
investments with income, are typical shareholders in income funds.

Principal risk factors of the funds

There are market and investment risks with any security and the value of an
investment in the funds will fluctuate over time.

Interest rates. Normally the value of a fund's investments varies inversely with
changes in interest rates so that in periods of rising interest rates, the value
of a fund's portfolio declines.

Maturity. Generally, longer -term securities are more susceptible
to changes in value as a result of interest-rate changes than are
shorter-term securities.

Credit quality. Fixed Income Securities are generally assigned ratings that
assess the issuer's ability to make principal and interest payments on time.
Those rated within the four highest grades by Moody's, S&P, Fitch or Duff are
generally considered to be "investment grade." Like higher rated securities,
securities rated in the Baa/BBB categories are considered to have adequate
capacity to pay principal and interest, although they may have fewer protective
provisions than higher rated securities and thus may be adversely affected by
severe economic circumstances and are considered to have speculative
characteristics.

Portfolio strategy. The portfolio management team's skill in choosing
appropriate investments for the funds will determine in large part the funds'
ability to achieve their respective investment objectives.

High Yield/High Risk Securities (Diversified, High Yield and Opportunity funds).
Investments in high yield securities (often referred to as "junk bonds") are
more likely to be effected by negative developments in their issuer or industry,
and entail relatively greater risk of loss of income and principal than
investments in higher rated

3
<PAGE>

securities. Market prices of high yield securities
may fluctuate more than market prices of higher rated securities.

4
<PAGE>

FIXED INCOME INVESTING

Foreign Securities (Diversified, High Yield, Income and Capital and Opportunity
Funds). Foreign investments by certain funds involve risk and opportunity
considerations not typically associated with investing in U.S. companies. The
fund's net asset value may change in response to changes in currency exchange
rates even though the value of the foreign securities in local currency terms
may not have changed. A fund's investments in foreign securities may be in
developed countries or in countries considered by the fund's investment manager
to be developing or "emerging" markets, which involve exposure to economic
structures that are generally less diverse and mature than in the United States,
and to political systems that may be less stable.

No Government Guarantee. The government guarantee of the U.S.
Government securities in which certain funds invest (principally the
Adjustable Rate, Government, Mortgage and Short-Intermediate
Government funds) does not guarantee the market value of the shares
of the funds.

ABOUT THE FUNDS

KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND

Investment objective and principal strategies
Kemper Adjustable Rate U.S. Government Fund seeks high current income consistent
with low volatility of principal. The fund's investment objective and policies
may be changed without a vote of shareholders.

The fund is designed for the investor who seeks a higher yield than a money
market fund or an insured bank certificate of deposit and less fluctuation in
net asset value than a longer-term bond fund; unlike money market funds,
however, the fund does not seek to maintain a stable net asset value and, unlike
an insured bank certificate of deposit, the fund's shares are not insured.

Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rates movements, credit quality, maturity, and the
investment manager's skill

5
<PAGE>

in managing the fund's portfolio. Please refer to "Fixed Income Investing"
at the front of this prospectus for details.

6
<PAGE>

KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND

Past performance
The chart and table that follow illustrate the changes in the fund's performance
from year to year, as well as performance over time. Of course, past performance
is not necessarily an indication of future performance.

Total returns for years ended December 31

A BAR CHART IS TO BE INSERTED HERE, BUT IT IS PRESENTLY BLANK.
- --------------------------------------------------------------------------------
BAR CHART
- --------------------------------------------------------------------------------

During the fund's last 10 years of operation, the fund's greatest quarterly gain
was ______ % (cite calendar quarter), and the fund's greatest quarterly loss was
_______% (cite calendar quarter).

<TABLE>
<CAPTION>
Average Annual Total Returns

<S> <C> <C> <C> <C> <C>
Class A Class B Class C Class I Salomon
Brothers
For periods ended 6-month T-bill
December 31, 1998

One Year __.__% __.__% __.__% __.__% __.__%
Five Years __.__% __.__% __.__% __.__% __.__%
Ten Years __.__% __.__% __.__% __.__% __.__%
</TABLE>

Salomon Brothers 6-month T-Bill Index is an unmanaged index based on the average
monthly yield of a 6-month Treasury Bill. Rates of Treasury obligations are
fixed at issuance, and payment of principal and interest is backed by the U.S.
Treasury. Market value will generally fluctuate inversely with interest rates
prior to maturity and will equal par at maturity. Due to their short maturities,
Treasury Bills experience very low market volatility. Index returns assume
reinvestment of dividends and, unlike the fund's returns, do not reflect any
fees or expenses.

7
<PAGE>

KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND

Expense information

The following information is designed to help you understand the various costs
and expenses of investing in the fund. Each class of shares has a different set
of transaction fees, which will vary based on the length of time you hold shares
in the fund and the amount of your investment. You will find details about fee
discounts and waivers in the Buyingshares and Special features sections.

- -------------------------------------------------------------------------------
Shareholder fees: Fees charged directly to your account in the fund for various
transactions.
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Maximum Sales Charge on Purchases 3.5% None None None
(as a % of offering price)
- -------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested
Dividends None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (as a % None(1) 4% 1% None
of redemption proceeds)
- -------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and .50% during the second year.

- -------------------------------------------------------------------------------
Annual fund operating expenses: Paid by the fund before it distributes its net
investment income (expressed as a % of average daily net assets).
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Investment management fee
- -------------------------------------------------------------------------------
Distribution (12b-1) fees
- -------------------------------------------------------------------------------
Other expenses
- -------------------------------------------------------------------------------
Total fund operating expenses
- -------------------------------------------------------------------------------

8
<PAGE>

KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND

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

Fees and expenses if you sold shares after: Fees and expenses if you did not sell your shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C Class I Class A Class B Class C Class I

1 Year 1 Year
- ------------------------------------------------------------------------------------------------------------
3 Years 3 Years
- ------------------------------------------------------------------------------------------------------------
5 Years 5 Years
- ------------------------------------------------------------------------------------------------------------
10 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
</TABLE>

Principal strategies and investments

The fund seeks high current income consistent with low volatility of principal.
Generally, the fund invests at least 65% of its total assets in adjustable rate
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The fund may invest without limit in Mortgage-Backed
Securities. Mortgage-Backed Securities can have either a fixed rate of interest
or an adjustable rate.

Adjustable rate securities bear interest at rates that adjust at periodic
intervals in response to changes in market levels of interest rates generally.
As the interest rates are reset periodically, yields on such securities will
gradually align themselves to reflect changes in market interest rates. The
adjustable interest rate feature of the securities in which the fund invests
generally will act as a buffer to reduce sharp changes in the fund's net asset
value in response to normal interest rate fluctuations. As the interest rates on
the fund's investments are reset periodically, yields of portfolio securities
will gradually align themselves to reflect changes in market rates

9
<PAGE>

KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND

and should cause the net asset value of the fund's shares to fluctuate less
dramatically than it would if the fund invested in long-term, fixed rate
securities.

The fund may also invest up to 35% of its total assets in securities other than
adjustable rate U.S. Government Securities including, without limitation,
privately issued Mortgage-Backed Securities, commercial paper and other debt
obligations of corporations and other business organizations, certificates of
deposit, bankers' acceptances and time deposits and other debt securities such
as convertible securities and preferred stocks. These securities will, at the
time of purchase, be rated within the two highest grades (Aaa or Aa) assigned by
Moody's Investors Service, Inc. ("Moody's"), or (AAA or AA) by Standard & Poor's
Corporation ("S&P"), or will be non-rated but of comparable quality in the
opinion of the investment manager.

While not a principal strategy, the fund may also utilize financial futures
contracts and options.

From time to time, the fund may invest up to 100% of its assets in short-term
high-grade debt securities, cash and cash equivalents for temporary defensive
purposes. Defensive investments should serve to lessen volatility in an adverse
market, although they will also generate lower returns than most other kinds of
investments in most markets. Because this defensive policy differs from the
fund's investment objective, the fund may not achieve its goals during a
defensive period.

More information about investments and strategies is provided in the Statement
of Additional Information. Of course, there can be no guarantee that by
following these strategies, the fund will achieve its objective.

Related risks

Adjustable rate securities allow the fund to participate in increases in
interest rates through periodic adjustments in the interest rate resulting in
both higher current yields and lower price fluctuations. During periods of
declining interest rates, of course, the coupon rates may readjust downward,
resulting in lower yields to the fund. Further, because of their adjustable
nature, the value of adjustable rate mortgages is unlikely to rise during
periods of declining interest rates to the same extent as fixed rate
instruments. Interest rate declines may result in accelerated prepayment, and
the proceeds from such prepayments must be reinvested at lower prevailing
interest rates. However, during periods of rising interest rates, changes in the
coupon rate lag behind changes in the market rate, possibly resulting in a lower
net asset value until the

10
<PAGE>

coupon resets to market rates. Thus, investors could
suffer some principal loss if they sold their shares of the fund before the
interest rates on portfolio investments are adjusted to reflect current market
rates. During periods of extreme fluctuations in interest rates, the fund's net
asset value will fluctuate as well.

11
<PAGE>

KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND

Financial highlights

The tables below are intended to help you understand the fund's financial
performance for the past several years. The total return figures show what an
investor in the fund would have earned (or lost) assuming reinvestment of all
distributions. This information has been audited by Ernst & Young LLP whose
report, along with the fund's financial statements, is included in the annual
report, which is available upon request (see back cover).

TO BE UPDATED

12
<PAGE>

KEMPER DIVERSIFIED INCOME FUND

Investment objective and principal strategies

Kemper Diversified Income Fund seeks a high current return. The fund's
investment objective and policies may be changed without a vote of shareholders.

Although the fund may invest in high-yield/high risk debt securities
and common stocks, the investment manager seeks to moderate overall
portfolio risk through diversification. Factors considered include:
o Relative value
o Interest rate outlook
o Yield curve outlook
o Foreign currency outlook

Principal risks

The fund's principal risks are associated with investing in high yield/high risk
fixed income securities: interest rates movements, credit quality, maturity, and
the investment manager's skill in managing the fund's portfolio. The fund may
also be exposed to foreign security and currency risk. Please refer to "Fixed
Income Investing" at the front of this prospectus for details.

13
<PAGE>

KEMPER DIVERSIFIED INCOME FUND

Total returns for years ended December 31

During the fund's last 10 years of operation, the fund's greatest quarterly gain
was ______ % (cite calendar quarter), and the fund's greatest quarterly loss was
_______% (cite calendar quarter).

<TABLE>
<CAPTION>
Average Annual Total Returns

<S> <C> <C> <C> <C> <C>
Class A Class B Class C Class I Lehman
6-month T-bill Brothers
Government/Coporate
For periods ended Bond Index
December 31, 1998

One Year __.__% __.__% __.__% __.__% __.__%
Five Years __.__% __.__% __.__% __.__% __.__%
Ten Years __.__% __.__% __.__% __.__% __.__%
</TABLE>

The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment grade
corporate debt securities. Index returns assume reinvestment of dividends and,
unlike the fund's returns, do not reflect any fees or expenses.

14
<PAGE>

KEMPER DIVERSIFIED INCOME FUND

Expense information

- -------------------------------------------------------------------------------
Shareholder fees: Fees charged directly to your account in the fund for various
transactions.
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Maximum Sales Charge on Purchases 4.5% None None None
(as a % of offering price)
- -------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested
Dividends None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (as a % None(1) 4% 1% None
of redemption proceeds)
- -------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and .50% during the second year.

15
<PAGE>

KEMPER DIVERSIFIED INCOME FUND
Example
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.

Fees and expenses if you sold shares after: Fees and expenses if you did not sell your shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C Class I Class A Class B Class C Class I

Principal strategies and investments
The fund pursues its objective by investing primarily in fixed income securities
and dividend-paying common stocks and by writing options.

Under normal market conditions, the fund will invest at least 65% of its total
assets in income producing investments. Investment in equity securities will
primarily be in dividend-paying common stocks. The percentage of assets invested
in fixed income and equity securities will vary from time to time depending upon
the judgment of the investment manager as to general market and economic
conditions, trends in yields and interest rates and changes in fiscal or
monetary policies.

The fund may invest without limit in high yield, fixed income securities,
commonly referred to as "junk bonds," that are in the lower rating categories
and those that are non-rated.

The fund may invest up to 50% of its total assets in foreign securities that are
traded principally in securities markets outside the United States.

16
<PAGE>

KEMPER DIVERSIFIED INCOME FUND

In seeking to achieve its investment objective, the fund will invest in fixed
income securities based on the investment manager's analysis without relying on
any published ratings. The fund will invest in a particular fixed income
security if in the investment manager's view, the increased yield offered,
regardless of published ratings, is sufficient to compensate for a reasonable
element of assumed risk. Since investments will be based upon the investment
manager's analysis rather than upon published ratings, achievement of the fund's
goals may depend more upon the abilities of the investment manager than would
otherwise be the case.

While not a principal strategy, the fund may also utilize financial futures
contracts and options.

Related risks

Lower-rated and non-rated securities, which are commonly referred to as "junk
bonds," have widely varying characteristics and quality. These lower rated and
non-rated fixed income securities are considered, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and generally will involve more
credit risk than securities in the higher rating categories. The market values
of such securities tend to reflect individual corporate developments to a
greater extent than do those of higher rated securities, which react primarily
to fluctuations in the general level of interest rates. Such lower rated
securities also are more sensitive to economic conditions than are higher rated
securities. Adverse publicity and investor perceptions regarding lower rated
bonds, whether or not based on fundamental analysis, may depress the prices for
such securities. These and other factors adversely affecting the market value of
high yield securities will adversely affect the fund's net asset value.

17
<PAGE>

KEMPER DIVERSIFIED INCOME FUND

When investing in junk bonds, the fund seeks to achieve the highest yields
possible while reducing relative risk through (a) broad diversification, (b)
credit analysis by the investment manager of the issuers in which the fund
invests, (c) purchase of high yield securities at discounts from par or stated
value when practicable and (d) monitoring and seeking to anticipate changes and
trends in the economy and financial markets that might affect the prices of
portfolio securities. The investment manager, while seeking maximum current
yield, will monitor current corporate developments with respect to portfolio
securities and potential investments and to broad trends in the economy.

The fund may have difficulty disposing of certain junk bonds 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.

Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the entity
issuing the security. Dividend and interest payments may be repatriated based on
the exchange rate at the time of disbursement or payment, and restrictions on
capital flows may be imposed. Losses and other expenses may be incurred in
converting between various currencies.

Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.

18
<PAGE>

KEMPER DIVERSIFIED INCOME FUND

Investment in emerging securities markets may entail the lack of adequate
custody arrangements for the fund's assets, overly burdensome repatriation and
similar restrictions, the lack of organized and liquid securities markets,
unacceptable political risks or other reasons. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited. In the past, markets of developing or emerging market countries have
been more volatile than the markets of developed countries; however, such
markets often have provided higher rates of return to investors. The investment
manager believes that these characteristics can be expected to continue in the
future.

19
<PAGE>

KEMPER DIVERSIFIED INCOME FUND

Financial highlights

To Be Updated

20
<PAGE>

KEMPER U.S. GOVERNMENT SECURITIES FUND

Investment objective and principal strategies

Kemper U.S. Government Securities Fund seeks high current income, liquidity and
security of principal. The fund's investment objective and policies may be
changed without a vote of shareholders.

The fund invests predominantly in GNMA securities. The investment manager
focuses on managing the portfolio's duration and selecting mortgage securities
that are undervalued in comparison with other sectors of the market.

Principal risks

The fund's principal risks are associated with investing in fixed income
securities: interest rates movements, credit quality, maturity, and the
investment manager's skill in managing the fund's portfolio. Please refer to
"Fixed Income Investing" at the front of this prospectus for details.

21
<PAGE>

KEMPER U.S. GOVERNMENT SECURITIES FUND

Total returns for years ended December 31

During the fund's last 10 years of operation, the fund's greatest quarterly gain
was ______ % (cite calendar quarter), and the fund's greatest quarterly loss was
_______% (cite calendar quarter).

<TABLE>
<CAPTION>
Average Annual Total Returns

<S> <C> <C> <C> <C> <C>
Class A Class B Class C Class I Salomon
Brothers 30-
For periods ended Year GNMA Index
December 31, 1998

One Year __.__% __.__% __.__% __.__% __.__%
Five Years __.__% __.__% __.__% __.__% __.__%
Ten Years __.__% __.__% __.__% __.__% __.__%
</TABLE>

The Salomon Brothers 30-Year GNMA Index is unmanaged, is on a total return basis
with all dividends reinvested and is comprised of GNMA 30-year pass throughs of
single family and graduated payment mortgages. In order for a GNMA coupon to be
included in the index, it must have at least $200 million of outstanding coupon
product. Index returns assume reinvestment of dividends and, unlike the fund's
returns, do not reflect any fees or expenses.

22
<PAGE>

KEMPER U.S. GOVERNMENT SECURITIES FUND

Expense information

- -------------------------------------------------------------------------------
Shareholder fees: Fees charged directly to your account in the fund for various
transactions.
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Maximum Sales Charge on Purchases 4.5% None None None
(as a % of offering price)
- -------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested
Dividends None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (as a % None(1) 4% 1% None
of redemption proceeds)
- -------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and .50% during the second year.

- --------------------------------------------------------------------------------
Annual fund operating expenses: Paid by the fund before it distributes its net
investment income (expressed as a % of average daily net assets).
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Investment management fee
- -------------------------------------------------------------------------------
Distribution (12b-1) fees
- -------------------------------------------------------------------------------
Other expenses
- -------------------------------------------------------------------------------
Total fund operating expenses
- -------------------------------------------------------------------------------

23
<PAGE>
KEMPER U.S. GOVERNMENT SECURITIES FUND

Fees and expenses if you sold shares after: Fees and expenses if you did not sell your shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C Class I Class A Class B Class C Class I

Principal strategies and investments

The fund seeks high current income, liquidity and security of principal by
investing in obligations issued or guaranteed by the U.S. Government or its
agencies, and by obtaining rights to acquire such securities.

The fund invests up to 100% in Government National Mortgage Association ("GNMA")
Certificates of the modified pass-through type. These GNMA Certificates are debt
securities issued by a mortgage banker or other mortgagee and represent an
interest in one or a pool of mortgages insured by the Federal Housing
Administration or guaranteed by the Veterans Administration. GNMA guarantees the
timely payment of monthly installments of principal and interest on modified
pass-through Certificates at the time such payments are due, whether or not such
amounts are collected by the issuer of these Certificates on the underlying
mortgages. Mortgages included in single family residential mortgage pools
backing an issue of GNMA Certificates have a maximum maturity of 30 years. The
registered holders of GNMA Certificates (such as the fund) receive scheduled
payments of principal and interest each month.

The fund may also invest in other U.S. Government Securities. There
are two broad categories of U.S. Government-related debt
instruments:

o direct obligations of the U.S. Treasury

24
<PAGE>

o securities issued or guaranteed by U.S. Government agencies. U.S.
Treasury obligations are backed by the "full faith and credit"
of the United States.

They differ primarily in interest rates, the length of maturities and the dates
of issuance. In the case of U.S. Government agency obligations, some are backed
by the full faith and credit of the United States and others are backed only by
the rights of the issuer to borrow from the U.S. With respect to securities
supported only by the credit of the issuing agency or by an additional line of
credit with the U.S. Treasury, there is no guarantee that the U.S. Government
will provide support to such agencies and such securities may involve risk of
loss of principal and interest. U.S. Government Securities of the type in which
the fund may invest have historically involved little risk of loss of principal
if held to maturity.

While not a principal strategy, the fund may also utilize financial futures
contracts and options.

Related risks

The potential for appreciation in the event of a decline in interest rates may
be limited or negated by increased principal prepayments in respect to certain
Mortgage-Backed Securities, such as GNMA Certificates. Prepayments of high
interest rate Mortgage-Backed Securities during times of declining interest
rates will tend to lower the return of the fund and may even result in losses to
the fund if some securities were acquired at a premium. Moreover, during periods
of rising interest rates, prepayments of Mortgage-Backed Securities may decline,
resulting in the extension of the fund's average portfolio maturity. As a
result, the fund's portfolio may experience greater volatility during periods of
rising interest rates than under normal market conditions. With respect to U.S.
Government Securities supported only by the credit of the issuing agency or by
an additional line of credit with the U.S. Treasury, there is no guarantee that
the U.S. Government will provide support to such agencies and such securities

25
<PAGE>

may involve risk of loss of principal and interest. The fund will not invest in
Mortgage-Backed Securities issued by private issuers.

KEMPER U.S. GOVERNMENT SECURITIES FUND

Financial highlights

To Be Updated

26
<PAGE>

KEMPER HIGH YIELD FUND

Investment objective and principal strategies

Kemper High Yield Fund seeks the highest level of current income obtainable from
a professionally managed, diversified portfolio of fixed income securities which
the fund's investment manager considers consistent with reasonable risk. The
fund's investment objective and policies may be changed without a vote of
shareholders.

The fund invests predominantly in high yield fixed income securities, including
junk bonds and foreign securities.

Principal risks

The fund's principal risks are associated with investing in fixed income
securities: interest rates movements, high yield/high risk securities, foreign
securities, credit quality, maturity, and the investment manager's skill in
managing the fund's portfolio. Please refer to "Fixed Income Investing" at the
front of this prospectus for details.

27
<PAGE>

KEMPER HIGH YIELD FUND

Total returns for years ended December 31

During the fund's last 10 years of operation, the fund's greatest quarterly gain
was ______ % (cite calendar quarter), and the fund's greatest quarterly loss was
_______% (cite calendar quarter).

<TABLE>
<CAPTION>
Average Annual Total Returns

<S> <C> <C> <C> <C> <C>
Class A Class B Class C Class I Salomon
Brothers Long-Term
For periods ended High Yield Bond Index
December 31, 1998

One Year __.__% __.__% __.__% __.__% __.__%
Five Years __.__% __.__% __.__% __.__% __.__%
Ten Years __.__% __.__% __.__% __.__% __.__%
</TABLE>

The Salomon Brothers Long-Term High Yield Bond Index is on a total return basis
and is comprised of high yield bonds with a par value of $50 million or higher
and a remaining maturity of ten years or longer rated BB+ or lower by Standard &
Poor's Corporation or Ba1 or lower by Moody's Investors Service, Inc. This index
is unmanaged. Index returns assume reinvestment of dividends and, unlike the
fund's returns, do not reflect any fees or expenses.

28
<PAGE>

KEMPER HIGH YIELD FUND

Expense information

- -------------------------------------------------------------------------------
Shareholder fees: Fees charged directly to your account in the fund for various
transactions.
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Maximum Sales Charge on Purchases 4.5% None None None
(as a % of offering price)
- -------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested
Dividends None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (as a % None(1) 4% 1% None
of redemption proceeds)
- -------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and .50% during the second year.

29
<PAGE>

KEMPER HIGH YIELD FUND
Example
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.

Fees and expenses if you sold shares after: Fees and expenses if you did not sell your shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C Class I Class A Class B Class C Class I

Principal strategies and investments

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

The fund anticipates that under normal circumstances 90 to 100% of its assets
will be invested in fixed income. The high yield, fixed income securities in
which the fund intends to invest are commonly referred to as "junk bonds" and
normally offer a current yield or yield to maturity that is significantly higher
than the yield available from securities rated in the four highest categories
assigned by S&P or Moody's. The characteristics of the securities in the fund's
portfolio, such as the maturity and the type of issuer, will affect yields and
yield differentials, which vary over time.

In seeking to achieve its investment objectives, the fund will invest in fixed
income securities based on the investment manager's analysis without relying on
published ratings. The fund will invest in a particular security if in the view
of the investment manager the increased yield offered, regardless of published
ratings, is sufficient to compensate for a reasonable element of assumed risk.
Since investments will be based upon the investment manager's analysis rather
than upon published ratings,

30
<PAGE>

KEMPER HIGH YIELD FUND

achievement of the fund's goals may depend more upon the abilities
of the investment manager than would otherwise be the case

While not a principal strategy, the fund may also utilize financial futures
contracts and options.

Related risks

Lower-rated and non-rated securities, which are commonly referred to as "junk
bonds," have widely varying characteristics and quality. These fixed income
securities are considered, on balance, to be predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories. The market values of these
securities tend to reflect individual corporate developments to a greater extent
than do those of higher rated securities, which react primarily to fluctuations
in the general level of interest rates. Junk bonds also are more sensitive to
economic conditions than are higher rated securities. Adverse publicity and
investor perceptions regarding lower rated bonds, whether or not based on
fundamental analysis, may depress the prices for such securities. These and
other factors adversely affecting the market value of high yield securities will
adversely affect the fund's net asset value. In addition, the fund may have
difficulty pricing or disposing of certain junk bonds because they may have a
thin trading market.

31
<PAGE>

KEMPER HIGH YIELD FUND

Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.

32
<PAGE>

KEMPER HIGH YIELD FUND

33
<PAGE>

KEMPER HIGH YIELD FUND

Financial highlights

To Be Updated

34
<PAGE>

KEMPER HIGH YIELD OPPORTUNITY FUND

Investment objective and principal strategies

Kemper High Yield Opportunity Fund seeks total return through high current
income and capital appreciation. The fund's investment objective and policies
may be changed without a vote of shareholders.

While the fund invests primarily in high yield bonds, it also has the
flexibility to invest in equity securities and emerging market debt securities.
These investments are made to enhance total return.

Principal risks

35
<PAGE>

KEMPER HIGH YIELD OPPORTUNITY FUND

Total returns for years ended December 31

During the fund's last 10 years of operation, the fund's greatest quarterly gain
was ______ % (cite calendar quarter), and the fund's greatest quarterly loss was
_______% (cite calendar quarter).

<TABLE>
<CAPTION>
Average Annual Total Returns

<S> <C> <C> <C> <C> <C>
Class A Class B Class C Class I Salomon
Brothers Long-Term
For periods ended High Yield Bond Index
December 31, 1998

Life of Fund __.__% __.__% __.__% __.__% __.__%

</TABLE>

Long-Term High Yield Bond Index is on a total return basis and is comprised of
high yield bonds with a par value of $50 million or higher and a remaining
maturity of ten years or longer rated BB+ or lower by Standard & Poor's
Corporation or Ba1 or lower by Moody's Investors Service, Inc. This index is
unmanaged. Index returns assume reinvestment of dividends and, unlike the fund's
returns, do not reflect any fees or expenses.

36
<PAGE>

KEMPER HIGH YIELD OPPORTUNITY FUND

Expense information

- -------------------------------------------------------------------------------
Shareholder fees: Fees charged directly to your account in the fund for various
transactions.
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Maximum Sales Charge on Purchases 4.5% None None None
(as a % of offering price)
- -------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested
Dividends None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (as a % None(1) 4% 1% None
of redemption proceeds)
- -------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and .50% during the second year.

37
<PAGE>

KEMPER HIGH YIELD OPPORTUNITY FUND
Example
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.

Fees and expenses if you sold shares after: Fees and expenses if you did not sell your shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C Class I Class A Class B Class C Class I

38
<PAGE>

KEMPER HIGH YIELD OPPORTUNITY FUND

Principal strategies and investments

The fund seeks total return through high current income and capital
appreciation. The fund will invest primarily in fixed income securities and
under normal market conditions, the fund will invest at least 65% of its total
assets in high yield, fixed income securities. The fund anticipates that under
normal conditions approximately 80 to 90% of its total assets will be held in
high yield, fixed income securities.

The high yield, fixed income securities in which the fund intends to invest are
commonly referred to as "junk bonds" and normally offer a current yield or yield
to maturity that is significantly higher than the yield available from
securities rated in the four highest categories assigned by S&P or Moody's. The
characteristics of the securities in the fund's portfolio, such as the maturity
and the type of issuer, will affect yields and yield differentials, which vary
over time.

In seeking to achieve its investment objective, the fund will invest in fixed
income securities based on the investment manager's analysis without relying on
published ratings. The fund will invest in a particular security if in the view
of the investment manager the increased yield offered, regardless of published
ratings, is sufficient to compensate for a reasonable element of assumed risk.
Since investments will be based upon the investment manager's analysis rather
than upon published ratings, achievement of the fund's goals may depend more
upon the abilities of the investment manager than would otherwise be the case.

While not a principal strategy, the fund may also purchase equity securities,
borrow money for leverage purposes, utilize financial futures contracts and
options.

39
<PAGE>

Related risks

Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.

40
<PAGE>

patterns and the possible imposition of exchange controls. The prices of
such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.

41
<PAGE>

KEMPER HIGH YIELD OPPORTUNITY FUND

Financial highlights

To Be Updated

42
<PAGE>

KEMPER INCOME AND CAPITAL PRESERVATION FUND

Investment objective and principal strategies

Kemper Income and Capital Preservation Fund seeks as high a level of current
income as is consistent with prudent investment management, preservation of
capital and ready marketability of its portfolio. The fund's investment
objective and policies may be changed without a vote of shareholders.

In pursuit of its dual objectives, the fund focuses on:

o Security selection
o Asset allocation changes
o Interest rate sensitivity adjustments

The fund invests predominantly in corporate bonds.

Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rates movements, credit quality, maturity, and the
investment manager's skill in managing the fund's portfolio. Please refer to
"Fixed Income Investing" at the front of this prospectus for details.

43
<PAGE>

KEMPER INCOME AND CAPITAL PRESERVATION FUND

Total returns for years ended December 31

During the fund's last 10 years of operation, the fund's greatest quarterly gain
was ______ % (cite calendar quarter), and the fund's greatest quarterly loss was
_______% (cite calendar quarter).

<TABLE>
<CAPTION>
Average Annual Total Returns

<S> <C> <C> <C> <C> <C>
Class A Class B Class C Class I Lehman Brothers
Aggregate Bond
For periods ended Index
December 31, 1998

One Year __.__% __.__% __.__% __.__% __.__%
Five Years __.__% __.__% __.__% __.__% __.__%
Ten Years __.__% __.__% __.__% __.__% __.__%

</TABLE>

The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of intermediate-term government bonds, investment grade corporate
debt securities and mortgage backed securities. Index returns assume
reinvestment of dividends and, unlike the fund's returns, do not reflect any
fees or expenses.

44
<PAGE>

KEMPER INCOME AND CAPITAL PRESERVATION FUND

Expense information

- -------------------------------------------------------------------------------
Shareholder fees: Fees charged directly to your account in the fund for various
transactions.
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Maximum Sales Charge on Purchases 4.5% None None None
(as a % of offering price)
- -------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested
Dividends None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (as a % None(1) 4% 1% None
of redemption proceeds)
- -------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and .50% during the second year.

45
<PAGE>

KEMPER INCOME AND CAPITAL PRESERVATION FUND
Example
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.

Fees and expenses if you sold shares after: Fees and expenses if you did not sell your shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C Class I Class A Class B Class C Class I

Principal strategies and investments

46
<PAGE>

KEMPER INCOME AND CAPITAL PRESERVATION FUND

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

Superior security selection with an emphasis on corporate bonds, is a critical
focus. The investment manager seeks to buy and hold the securities of companies
whose balance sheets, cash flows and/or fundamental business prospects are
expected to improve, and conversely to sell securities which cannot meet these
criteria. The fund will also trade securities based on their perceived value.

The fund invests predominantly in corporate debt securities which are rated Aaa,
Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P and mortgage backed
securities.

The investment manager seeks to determine the appropriate asset class weightings
among corporate bonds, U.S. Government securities and mortgage backed
securities. Within the corporate bond holdings of the fund, the investment
manager's strategy focuses on specific industry weightings and overall credit
quality.

While not a principal strategy, the fund may also invest in fixed income
securities that are rated below BBB by S&P and Baa by Moody's or are non-rated,
invest in foreign securities and foreign currency transactions, utilize
financial futures contracts and options.

47
<PAGE>

Related risks

Corporate debt securities rated within the four highest grades by Moody's or S&P
are generally considered to be "investment grade." Like higher rated securities,
securities rated in the BBB or Baa categories are considered to have adequate
capacity to pay principal and interest, although they may have fewer protective
provisions than higher rated securities and thus may be adversely affected by
severe economic circumstances and are considered to have speculative
characteristics.

Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.

<PAGE>
48

KEMPER INCOME AND CAPITAL PRESERVATION FUND

49
<PAGE>

KEMPER INCOME AND CAPITAL PRESERVATION FUND

Financial highlights

To Be Updated.

50
<PAGE>

KEMPER U.S. MORTGAGE FUND

Investment objective and principal strategies

Kemper U.S. Mortgage Fund seeks maximum current return from U.S. Government
securities. The fund's investment objective and policies may be changed without
a vote of shareholders.

The fund invests predominantly in mortgaged backed securities.

51
<PAGE>

KEMPER U.S. MORTGAGE FUND

Total returns for years ended December 31

During the fund's last 10 years of operation, the fund's greatest quarterly gain
was ______ % (cite calendar quarter), and the fund's greatest quarterly loss was
_______% (cite calendar quarter).

<TABLE>
<CAPTION>
Average Annual Total Returns

<S> <C> <C> <C> <C> <C>
Class A Class B Class C Class I Salomon Brothers
30-Year GNMA
For periods ended Index
December 31, 1998

One Year __.__% __.__% __.__% __.__% __.__%
Five Years __.__% __.__% __.__% __.__% __.__%
Ten Years __.__% __.__% __.__% __.__% __.__%

</TABLE>

Salomon Brothers 30-Year GNMA Index, an unmanaged index, is based on total
return with all dividends reinvested and is comprised of GNMA 30-year pass
throughs of single family and graduated payment mortgages. In order for a GNMA
coupon to be included in the index, it must have at least $200 million of
outstanding coupon product. Index returns assume reinvestment of dividends and,
unlike the fund's returns, do not reflect any fees or expenses.

52
<PAGE>

KEMPER U.S. MORTGAGE FUND

Expense information

- -------------------------------------------------------------------------------
Shareholder fees: Fees charged directly to your account in the fund for various
transactions.
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Maximum Sales Charge on Purchases 4.5% None None None
(as a % of offering price)
- -------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested
Dividends None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (as a % None(1) 4% 1% None
of redemption proceeds)
- -------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and .50% during the second year.

53
<PAGE>

KEMPER U.S. MORTGAGE FUND
Example
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.

Fees and expenses if you sold shares after: Fees and expenses if you did not sell your shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C Class I Class A Class B Class C Class I

Principal strategies and investments

54
<PAGE>

KEMPER U.S. MORTGAGE FUND

The fund seeks maximum current return from a portfolio of U.S.
Government Securities.

Generally, at least 65% of the fund's total assets normally are invested in
Mortgage-Backed Securities. Mortgage-Backed Securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There are currently three
basic types of Mortgage-Backed Securities:

o those issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities, such as the Government National Mortgage
Association ("Ginnie Mae" or "GNMA"), the Federal National Mortgage
Association ("Fannie Mae" or "FNMA") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac" or "FHLMC")

o those issued by private issuers that represent an interest in
or are collateralized by Mortgage-Backed Securities issued or
guaranteed by the U.S. Government or one of its agencies or
instrumentalities

o those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or Mortgage-Backed Securities without
a government guarantee but usually having some form of private credit
enhancement.

The dominant issuers or guarantors of Mortgage-Backed Securities today are GNMA,
FNMA and FHLMC. GNMA creates mortgage securities from pools of government
guaranteed or insured mortgages. FNMA and FHLMC issue Mortgage-Backed Securities
from pools of conventional and federally insured and/or guaranteed residential
mortgages obtained from various entities. Mortgage-Backed Securities issued by
GNMA, FNMA and FHLMC are considered U.S. Government Securities. The fund does
not invest in Mortgage-Backed Securities issued by private issuers.

U.S. Government Securities of the type in which the fund may invest have
historically involved little risk of loss of principal if held to maturity,
although valuations will change in various markets and, as a result, the value
of Fund shares when you redeem may be more or less than the amount invested.

55
<PAGE>

While not a principal strategy, the fund may utilize financial futures contracts
and options.

56
<PAGE>

KEMPER U.S. MORTGAGE FUND

Related risks

As interest rates rise, the value of the fund's investments will tend to decline
and, as interest rates fall, the value of the fund's investments will tend to
increase. In addition, the potential for appreciation in the event of a decline
in interest rates may be limited or negated by increased principal prepayments
in respect to certain Mortgage-Backed Securities, such as GNMA Certificates.
Prepayment of high interest rate Mortgage-Backed Securities during times of
declining interest rates will tend to lower the return of the fund and may even
result in losses to the fund if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of
Mortgage-Backed Securities may decline, resulting in the extension of the fund's
average portfolio maturity. As a result, the fund's portfolio may experience
greater volatility during periods of rising interest rates than under normal
market conditions.

57
<PAGE>

KEMPER U.S. MORTGAGE FUND

Financial highlights

To Be Updated.

58
<PAGE>

KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

Investment objective and principal strategies

Kemper Short-Intermediate Government Fund seeks, with equal emphasis, high
current income and preservation of capital from a portfolio composed primarily
of short and intermediate-term U.S. Government securities. The fund's investment
objective and policies may be changed without a vote of shareholders.

Under normal market conditions, the fund maintains a dollar-weighted average
portfolio maturity of more than two years but less than five years. Short and
intermediate-term securities generally are more stable and less susceptible to
principal decline than longer term securities. While short and intermediate-term
securities in most cases offer lower yields than securities with longer
maturities, the fund will seek to enhance income through limited investment in
fixed income securities other than U.S. Government Securities. The investment
manager believes that investment in short and intermediate-term securities
allows the fund to seek both high current income and preservation of capital.

Principal risks

59
<PAGE>

KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

Past performance

The chart and table that follow illustrate the changes in the fund's performance
from year to year, as well as performance over time. Of course, past performance
is not necessarily an indication of future performance.

Total returns for years ended December 31

During the fund's last 10 years of operation, the fund's greatest quarterly gain
was ______ % (cite calendar quarter), and the fund's greatest quarterly loss was
_______% (cite calendar quarter).

<TABLE>
<CAPTION>
Average Annual Total Returns

<S> <C> <C> <C> <C> <C>
Class A Class B Class C Class I Merrill Lynch
1-5 Government/
For periods ended GNMA Index
December 31, 1998

One Year __.__% __.__% __.__% __.__% __.__%
Five Years __.__% __.__% __.__% __.__% __.__%
Ten Years __.__% __.__% __.__% __.__% __.__%

</TABLE>

The Merrill Lynch Market Weighted Index, an unmanaged index, is comprised of the
universe of 1-5 year Treasuries plus the Merrill Lynch GNMA Index. Index returns
assume reinvestment of dividends and, unlike the fund's returns, do not reflect
any fees or expenses.

60
<PAGE>

KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

Expense information

- -------------------------------------------------------------------------------
Shareholder fees: Fees charged directly to your account in the fund for various
transactions.
- -------------------------------------------------------------------------------
Class A Class B Class C Class I
- -------------------------------------------------------------------------------
Maximum Sales Charge on Purchases 4.5% None None None
(as a % of offering price)
- -------------------------------------------------------------------------------
Maximum Sales Charge on Reinvested
Dividends None None None None
- -------------------------------------------------------------------------------
Redemption Fee None None None None
- -------------------------------------------------------------------------------
Exchange Fee None None None None
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (as a % None(1) 4% 1% None
of redemption proceeds)
- -------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% during the first year and .50% during the second year.

61
<PAGE>

KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
Example
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.

Fees and expenses if you sold shares after: Fees and expenses if you did not sell your shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Class A Class B Class C Class I Class A Class B Class C Class I

Principal strategies and investments

62
<PAGE>

KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

The fund seeks, with equal emphasis, high current income and preservation of
capital from a portfolio composed primarily of short and intermediate-term U.S.
Government Securities.

Generally, the fund invests at least 65% of its total assets in U.S.
Government Securities and repurchase agreements of U.S. Government
Securities. There are two broad categories of U.S.
Government-related debt instruments:

o direct obligations of the U.S. Treasury

o securities issued or guaranteed by U.S. Government agencies.
U.S. Treasury obligations are backed by the "full faith and
credit" of the United States.

The maturity of a security held by the fund will generally be considered to be
the time remaining until repayment of the principal amount of such security,
except that the maturity of a security may be considered to be a shorter period
in the case of (a) contractual rights to dispose of a security, because such
rights limit the period during which the fund bears a market risk with respect
to the security, and (b) Mortgage-Backed Securities, because of possible
prepayment of principal on the mortgages underlying such securities.

Up to 35% of the total assets of the fund may be invested in fixed
income securities other than U.S. Government Securities. Such other
fixed income securities include:

o corporate debt securities that are rated at the time of
purchase within the four highest grades by either Moody's (Aaa, Aa, A, or
Baa) or S&P (AAA, AA, A, or BBB)

63
<PAGE>

KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

o commercial paper that is rated at the time of purchase within
the two highest grades by either Moody's (Prime-1 or Prime-2) or
S&P (A-1 or A-2)

o bank certificates of deposit (including term deposits) or bankers'
acceptances issued by domestic banks (including their foreign branches) and
Canadian chartered banks having total assets in excess of $1 billion

o repurchase agreements with respect to any of the foregoing.

While not a principal strategy, the fund may also utilize financial futures
contracts and options.

64
<PAGE>

KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

Financial highlights

TO BE UPDATED

65
<PAGE>

INVESTMENT MANAGER

The funds retain the investment management firm of Scudder Kemper Investments,
Inc., Two International Place, Boston, MA, to manage their daily investment and
business affairs subject to the policies established by the funds' Boards.
Scudder Kemper Investments, Inc. actively manages the funds' investments.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities. Scudder
Kemper Investments, Inc. is one of the largest and most experienced investment
management organizations worldwide. They are one of the ten largest mutual fund
companies in the U.S., managing more than $230 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.

Portfolio management
The following investment professionals are associated with the funds as
indicated:

Adjustable Rate U.S. Government Fund
U.S. Government Securities Fund
U.S. Mortgage Fund
Short-Intermediate Government Fund

Name & Title Joined the Fund Responsibilities & Background
- --------------------------------------------------------------------------------
Richard L. 1996 Joined Scudder Kemper in March
Vandenberg 1996. He began his investment
Lead Manager career in ____.

Scott E. Dolan 1998 Joined Scudder Kemper in 1989.
He began his investment career in ____.

John E. Dugenske 1998 Joined Scudder Kemper in 1998.
He began his investment career in ____.
- --------------------------------------------------------------------------------

66
<PAGE>

Diversified Income Fund

Name & Title Joined the Fund Responsibilities & Background
- --------------------------------------------------------------------------------
Joseph P. 1997 Joined Scudder Kemper in April
Beimford, Lead 1976. He began his investment
Manager career in ____.

Robert S. 1994 Joined Scudder Kemper in 1993.
Cessine He began his investment career
in ____.

Harry E. Resis, 1992 Joined Scudder Kemper in June
Jr. 1988. He began his investment
career in ____.

Michael A. 1990 Joined Scudder Kemper in
McNamara February 1972. He began his
investment career in ____.

Richard L. 1996 Joined Scudder Kemper in March
Vandenberg 1996. He began his investment
career in ____.

M. Isabel 1990 Joined Scudder Kemper in 1990.
Saltzman She began her investment career
in ____.

High Yield Fund

Name & Title Joined the Fund Responsibilities & Background
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Michael 1990 Joined Scudder Kemper in
McNamara, February 1972. He began his
Co-Manager investment career in ____.

Harry E. Resis, 1992 Joined Scudder Kemper in June
Jr., 1988. He began his investment
Co-Manager career in ____.
- --------------------------------------------------------------------

67
<PAGE>

High Yield Opportunity Fund

Name & Title Joined the Fund Responsibilities & Background
- --------------------------------------------------------------------------------
Michael 1990 Joined Scudder Kemper in
McNamara, February 1972. He began his
Co-Manager investment career in ____.

Harry E. Resis, 1992 Joined Scudder Kemper in June
Jr., 1988. He began his investment
Co-Manager career in ____.

Daniel J. Doyle 1997 Joined Scudder Kemper in
February 1986. He began his
investment career in ____.
- --------------------------------------------------------------------------------

Income and Capital Preservation Fund

Name & Title Joined the Fund Responsibilities & Background
- --------------------------------------------------------------------------------
Robert S. 1994 Joined Scudder Kemper in 1993.
Cessine, Lead He began his investment career
Manager in ____.

Stephen A. Wohler 1998 Joined Scudder Kemper in 1979.
He began his investment career
in ____.

Year 2000 issue

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

ABOUT YOUR INVESTMENT

Choosing a share class

Each fund provides investors with the option of purchasing shares in the
following ways:

68
<PAGE>

Class A Shares Offered at net asset value plus a
maximum sales charge of 4.5% (3.5% for the
Adjustable Rate and Short-Intermediate
Government Funds) of the offering price.
Reduced sales charges apply to purchases of
$100,000 or more. Class A shares purchased at
net asset value under the Large Order NAV
Purchase Privilege may be subject to a 1%
contingent deferred sales charge if redeemed
within one year of purchase and a .50%
contingent deferred sales charge if redeemed
during the second year of purchase.

Class B Shares Offered at net asset value, subject to
a Rule 12b-1 distribution fee and a contingent
deferred sales charge that declines from 4% to
zero on certain redemptions made within six
years of purchase. Class B shares automatically
convert into Class A shares (which have lower
ongoing expenses) six years after purchase.

Class C Shares Offered at net asset value without an
initial sales charge, but subject to a Rule
12b-1 distribution fee and a 1% contingent
deferred sales charge on redemptions made
within one year of purchase. Class C shares do
not convert into another class.

Class I Shares Offered at net asset value. There is
no initial sales charge, contingent deferred
sales charge or Rule 12b-1 distribution fee.

When placing purchase orders, investors must specify whether the order is for
Class A, Class B, Class C or Class I shares. Each class of shares represents
interests in the same portfolio of investments of a fund.

The decision as to which class to choose depends on a number of factors,
including the amount and intended length of the investment. Investors 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. Institutional investors will wish to select
Class I shares. For more information about the these arrangements, consult your
financial representative or the Shareholder Service Agent. Be aware that
financial services firms may receive different compensation depending upon which
class of shares they sell.

69
<PAGE>

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 most Kemper
Funds.

Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares also apply to the aggregate amount of purchases made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
Kemper Distributors, Inc. 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.

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 Funds (computed at the maximum offering price at the
time of the purchase for which the discount is applicable) already owned by the
investor.

Exchange Privilege -- General. Shareholders of Class A, Class B, Class C and
Class I shares may exchange their shares for shares of the corresponding class
of Kemper Mutual Funds (and in the case of Class I shares, Zurich Money Market
Fund). Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange from another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15 Day Hold Policy").

For purposes of determining any 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.

70
<PAGE>

Buying shares

Class A Shares

Public
Offering Amount of Purchase Sales Charge Sales Charge as a
Price. as a % of % of Net
Including Offering Price Amount Invested
Sales Charge -------------- ---------------

Less than $50,000 5.75%
$50,000 but less than 4.50
$100,000
$100,000 but less than 3.50
$250,000
$250,000 but less than 2.60
$500,000
$500,000 but less than 2.00
$1 million
$1 million and over 0.00**

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

NAV Purchases Class A shares of a fund may be purchased at net asset value by:

o shareholders in connection with the investment or
reinvestment of income and capital gain dividends

o a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation
plan or a participant-directed qualified retirement plan
which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than
200 eligible employees

o any purchaser with Kemper Funds investment totals of at
least $1,000,000

o unitholders of unit investment trusts sponsored by
Ranson & Associates, Inc. or its predecessors through
reinvestment programs described in the prospectuses of
such trusts that have such programs

o officers, trustees, directors, employees (including
retirees) and sales representatives of a fund, its
investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their
families

o persons who purchase shares through bank trust
departments that process such trades through an
automated, integrated mutual fund clearing program
provided by a third party clearing firm

o registered representatives and employees of
broker-dealers having selling group agreements with
Kemper Distributors

o officers, directors, and employees of service agents of
the funds

o 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)

o selected employees (including their spouses and
dependent children) of banks and other financial
services firms that provide administrative services
related to the funds pursuant to an agreement with
Kemper Distributors or one of its affiliates

o certain professionals who assist in the promotion of
Kemper Funds pursuant to personal services contracts
with Kemper Distributors, for themselves or members of
their families

o in connection with the acquisition of the assets of or
merger or consolidation with another investment company

71
<PAGE>

Class A Shares (cont.)
o 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

o any trust, pension, profit-sharing or other benefit plan
for only such persons.

o persons who purchase shares of the fund through Kemper
Distributors as part of an automated billing and wage
deduction program administered by RewardsPlus of America

o by certain investment advisers registered under the
Investment Advisers Act of 1940 and other financial
services firms, acting solely as agent for their
clients, that adhere to certain standards established by
KDI, including a requirement that such shares be
purchased for the benefit of their clients participating
in an investment advisory program or agency commission
program under which such clients pay a fee to the
investment adviser or other firm for portfolio
management or agency brokerage services.

Contingent A contingent deferred sales charge may be imposed upon
Deferred Sales redemption of Class A shares purchased under the Large Order NAV
Charge Purchase Privilege as follows: 1% if they are redeemed within
one year of purchase and .50% if redeemed during the second year
following purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The
contingent deferred sales charge will be waived in the event of:

o redemptions under a fund's Systematic Withdrawal Plan at
a maximum of 10% per year of the net asset value of the
account

o redemption of shares of a shareholder (including a
registered joint owner) who has died

o 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)

o redemptions by a participant-directed qualified
retirement plan or a participant-directed non-qualified
deferred compensation plan or a participant-directed
qualified retirement plan which is not sponsored by a
K-12 school district

o redemptions by employer sponsored employee benefit plans
using the subaccount record keeping system made
available through the Shareholder Service Agent

o redemptions of shares whose dealer of record at the time
of the investment notifies Kemper Distributors that the
dealer waives the commission applicable to such Large
Order NAV Purchase

Rule 12b-1 Fee None

Exchange Class A shares may be exchanged for each other at
Privilege their relative net asset values. Shares of Money
Market Funds and Kemper Cash Reserves Fund acquired by

72
<PAGE>

purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on
exchange

Class A shares purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of any Kemper Fund
or a Money Market Fund without paying any contingent deferred
sales charge. If the Class A shares received on exchange are
redeemed thereafter, a contingent deferred sales charge may be
imposed

73
<PAGE>

Class B Shares

Public Net asset value per share without any sales charge at the time
Offering Price of purchase

Contingent
Deferred A contingent deferred sales charge may be imposed upon Deferred
Sales Charge redemption of Class B shares. There is no such charge upon
redemption of any share appreciation or reinvested dividends.
The charge is computed at the following rates applied to the
value of the shares redeemed excluding amounts not subject to
the charge.

Year of Redemption First Second Third Fourth Fifth Sixth
After Purchase:
- --------------------------------------------------------------------------------
Contingent Deferred 4% 3% 3% 2% 2% 1%
Sales Charge:
- --------------------------------------------------------------------------------

The contingent deferred sales charge will be waived:

o for redemptions to satisfy required minimum
distributions after age 70 1/2 from an IRA account (with
the maximum amount subject to this waiver being based
only upon the shareholder's Kemper IRA accounts)

o for redemptions made pursuant to any IRA systematic
withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal
periodic payments described in Code Section
72(t)(2)(A)(iv) prior to age 59 1/2

o for redemptions made pursuant to a systematic withdrawal
plan (see "Special Features -- Systematic Withdrawal
Plan" below)

o 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

o in the event of the death of the shareholder (including
a registered joint owner)

The contingent deferred sales charge will also be waived in
connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the
Shareholder Service Agent:

o redemptions to satisfy participant loan advances (note
that loan repayments constitute new purchases for
purposes of the contingent deferred sales charge and the
conversion privilege)

o redemptions in connection with retirement distributions
(limited at any one time to 10% of the total value of
plan assets invested in a fund o redemptions in
connection with distributions qualifying under the
hardship provisions of the Code

o redemptions representing returns of excess contributions
to such plans

Rule 12b-1 Fee 0.75%

Conversion Class B shares of a fund will automatically convert to Class
Feature A shares of the same fund six years after issuance on
the basis of the relative net asset value per share. 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.

Exchange Class B shares of a fund and Class B shares of most Kemper
Privilege Funds may be exchanged for each other at their relative net
asset values without a contingent

74
<PAGE>

deferred sales charge.

75
<PAGE>

Class C Shares

Public Net asset value per share without any sales charge at the
Offering Price time of purchase

Contingent A contingent deferred sales charge of 1% may be
Deferred Sales imposed upon redemption of Class C shares redeemed within
Charge one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The
contingent deferred sales charge will be waived in the event
of:

o redemptions by a participant-directed qualified
retirement plan described in Code Section 401(a) or a
participant-directed non-qualified deferred compensation
plan described in Code Section 457

o redemptions by employer sponsored employee benefit plans
(or their participants) using the subaccount record
keeping system made available through the Shareholder
Service Agent

o redemption of shares of a shareholder (including a
registered joint owner) who has died

o redemptions under a fund's Systematic Withdrawal Plan at
a maximum of 10% per year of the net asset value of the
account

o redemption of shares by an employer sponsored employee
benefit plan that offers funds in addition to Kemper
Funds and whose dealer of record has waived the advance
of the first year administrative service and
distribution fees applicable to such shares and agrees
to receive such fees quarterly

o redemption of shares purchased through a
dealer-sponsored asset allocation program maintained on
an omnibus record-keeping system provided the dealer of
record has waived the advance of the first year
administrative services and distribution fees applicable
to such shares and has agreed to receive such fees
quarterly

Rule 12b-1 Fee 0.75%

Conversion None
Feature

Exchange Class C shares of a fund and Class C shares of
Privilege most Kemper Funds may be exchanged for each
other at their relative net asset values.
Class C shares may be exchanged without a
contingent deferred sales charge.

76
<PAGE>

Class I Shares

Public Net asset value per share without any sales
Offering charge at the time of purchase. Class I shares
Price are available for purchase exclusively by the
following investors:

o tax-exempt retirement plans of Kemper Financial
Services, Inc. and its affiliates

o the following investment advisory clients of Kemper
Financial Services, Inc and its investment advisory
affiliates (including Kemper Asset Management Company)
that invest at least $1 million in a Fund: (1)
unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and
self-directed retirement plans); (2) unaffiliated banks
and insurance companies purchasing for their own
accounts; and (3) endowment funds of unaffiliated
non-profit organizations. Class I shares currently are
available for purchase only from Kemper Distributors,
Inc., principal underwriter for the Funds, Share
certificates are not available for Class I shares.

Contingent None
Deferred
Sales Charge

Rule 12b-1 Fee None

Conversion None
Feature

Exchange Class I shares of a fund and Class I shares of
Privilege most Kemper Funds and Zurich Money Market Fund
may be exchanged for each other at their relative net asset
values. Class I shares may be exchanged without a contingent
deferred sales charge.

Selling and exchanging shares

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.

77
<PAGE>

Share certificates
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. 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.

Repurchases (confirmed redemptions)
A request for repurchase may be communicated by a shareholder through a
securities dealer or other financial services firm to Kemper Distributors, which
each fund has authorized to act as its agent. There is no charge by Kemper
Distributors with respect to repurchases; however, dealers or other firms may
charge customary commissions for their services. 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.

Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed Class A shares may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment. 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. The reinvestment privilege may be terminated or modified at any
time.

Distributions and taxes

Dividends and capital gains distributions
The funds declare daily dividends from net investment income. Net investment
income consists of all interest income earned on portfolio assets less all fund
expenses. Income dividends are distributed monthly and dividends of net realized
capital gains are distributed annually.

78
<PAGE>

Dividends are calculated in the same manner, at the same time and on the same
day for each class of shares. The level of income dividends varies from one
class to another based on the class' fees and expenses.

Income and capital gain dividends, if any, of a fund will be credited to
shareholder accounts in full and fractional shares of the same class of that
fund at net asset value on the reinvestment date, except that, upon written
request to the Shareholder Service Agent, a shareholder may select one of the
following options:

(1) To receive income and short-term capital gain dividends
in cash and long-term capital gain dividends in shares of the same class at net
asset value; or
(2) To receive income and capital gain dividends in cash.

Any dividends of a fund that are reinvested will normally be reinvested in
shares of the same class of that same fund. However, by writing to the
Shareholder Service Agent, you may choose to have dividends of a fund invested
in shares of the same class of another Kemper fund at the net asset value of
that class and fund. To use this privilege, you 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 in the
aggregate amount of $10 or less are automatically reinvested in shares of the
same fund unless you request that such policy not be applied to your account.

Taxes

Dividends representing net investment income and net short-term capital gains,
if any, are taxable to shareholders as ordinary income. Long-term capital gains
distributions, if any, are taxable to individual shareholders at a maximum 20%
or 28% capital gains rate (depending on the fund's holding period for the assets
giving rise to the gain), regardless of the length of time shareholders have
owned shares. . Shareholders of a fund may be subject to state, local and
foreign taxes on fund distributions and dispositions of fund shares. You should
consult your tax advisor regarding the particular tax consequences of an
investment in a fund.

A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, is taxable to the shareholder.

Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
are taxable as if paid on December 31 of the calendar year in which they were
declared.

79
<PAGE>

The funds send you detailed tax information about the amount and type of
distributions by January 31of the following year.

Transaction information

Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the funds as of the close of regular trading on the New York Stock Exchange
(NYSE), normally 4 p.m. eastern time, on each day the NYSE is open for trading.
Market prices, independent pricing services that use prices provided by market
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics are used to determine the
value of the funds' assets. When reliable market quotations are unavailable, a
fund may use procedures established by its Board of Trustees.

The net asset value per share of each 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 that class by the number of shares of that class
outstanding. The per share net asset value of the Class B and Class C shares of
a fund will generally be lower than that of the Class A shares of the fund
because of the higher annual expenses borne by the Class B and Class C shares.

Processing time
All requests to buy and sell shares that are received in good order by the
funds' transfer agent by the close of regular trading on the NYSE are executed
at the net asset value per share calculated at the close of trading that day
(subject to any applicable sales load or contingent deferred sales charge).
Orders received by dealers or other financial services firms prior to the
determination of net asset value and received by the funds' transfer agent prior
to the close of its business day will be confirmed at a price based on the net
asset value effective on that day. If an order is accompanied by a check drawn
on a foreign bank, funds must normally be collected before shares will be
purchased.

Payment for shares you sell will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request.
If you have share certificates, these must accompany your order in proper form
for transfer. When you place an order to sell shares for which the fund may not
yet have received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), the fund may delay transmittal of the proceeds until it
has determined that collected funds have been received for the purchase of such
shares. This may be up to 10 days from receipt by a fund of the purchase amount.
The redemption of shares within certain time periods may be subject to
contingent deferred sales charges, as noted above.

80
<PAGE>

Signature guarantees
A signature guarantee is required when you sell more than $100,000 worth of
shares. You can obtain one from most brokerage houses and financial
institutions, although not from a notary public. The funds will normally send
you the proceeds within one business day following your request, but may take up
to seven business days (or longer in the case of shares recently purchased by
check).

Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
funds and their transfer agent each reserves the right to reject purchases of
fund shares (including exchanges) for any reason, including when there is
evidence of a pattern of frequent purchases and sales made in response to
short-term fluctuations in a fund's share price. The funds reserve the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders. Also, from time to time, each fund may temporarily suspend the
offering of its shares or a class of its shares to new investors. During the
period of such suspension, persons who are already shareholders normally are
permitted to continue to purchase additional shares and to have dividends
reinvested.

Minimum balances
The minimum initial investment for each fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.

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.

Third party transactions
If you buy and sell shares of a fund through a member of the National
Association of Securities Dealers, Inc. (other than the funds' transfer agent,
Kemper Distributors), that member may charge a fee for that service. This
prospectus should be read in connection with such firms' material regarding
their fees and services.

81
<PAGE>

Redemption-in-kind
The funds reserve the right to honor any request for redemption or repurchase
order by making payment in whole or in part in readily marketable securities
("redemption in kind"). These securities will be chosen by the fund and valued
as they are for purposes of computing the fund's net asset value. A shareholder
may incur transaction expenses in converting these securities to cash.

Rule 12b-1 plan
Each fund has adopted a plan under Rule 12b-1 that provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by the
transfer agent 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 investment and may cost more than other types of
sales charges.

82
<PAGE>

Additional information about the funds may be found in the Statement of
Additional Information, the Shareholder Service Guide and in shareholder
reports. The Statement of Additional Information contains more detailed
information on fund investments and operations. The Shareholder Service Guide
contains more detailed information about purchases and sales of fund shares. The
semiannual and annual shareholder reports contain a discussion of the market
conditions and the investment strategies that significantly affected the funds'
performance during the last fiscal year, as well as a listing of portfolio
holdings and financial statements. These and other fund documents may be
obtained without charge from the following sources:

-----------------------------------------------------------------------------
By Phone: In Person:
-----------------------------------------------------------------------------
Call Kemper at: Public Reference Room
1-800-621-1048 Securities and Exchange
Commission, Washington, D.C.
(Call 1-800-SEC-0330
for more information).
-----------------------------------------------------------------------------
By Mail: By Internet:
-----------------------------------------------------------------------------
Kemper Distributors, Inc. http://www.sec.gov
222 South Riverside Plaza http://www.kemper.com
Chicago, IL 60606-5808
or
Public Reference Section,
Securities and Exchange
Commission, Washington, D.C.
20549-6009
(a duplication fee is charged)
-----------------------------------------------------------------------------

The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).

Investment Company Act file numbers:

Kemper Adjustable Rate U.S. Kemper High Yield Opportunity
Government Fund 811-XXX Fund
Kemper Diversified Income Kemper Income and Capital
Fund 811-XXX Preservation Fund
Kemper U.S. Government Securities Kemper U.S. Mortgage Fund
Fund 811-XXX
Kemper High Yield Fund 811-XXX Kemper Short-Intermediate
Government Fund

Printed with SOYINK Printed on recycled paper xx-xx-xx (codes)

83
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999

Kemper Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund")
Kemper Diversified Income Fund (the "Diversified Fund")
Kemper U.S. Government Securities Fund (the "Government Fund")
Kemper High Yield Fund (the "High Yield Fund")
Kemper High Yield Opportunity Fund (the "Opportunity Fund")
Kemper Income and Capital Preservation Fund (the "Income and Capital Fund")
Kemper U.S. Mortgage Fund (the "Mortgage Fund")
Kemper Short-Intermediate Government Fund (the "Short-Intermediate
Government Fund")

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

This Statement of Additional Information is not a prospectus. It is the
combined Statement of Additional Information for each of the funds (the "Funds")
listed above. It should be read in conjunction with the combined prospectus of
the Funds dated January 1, 1999. The prospectus may be obtained without charge
from the Funds.

TABLE OF CONTENTS

INVESTMENT RESTRICTIONS.......................................................2
INVESTMENT POLICIES AND TECHNIQUES............................................9
PORTFOLIO TRANSACTIONS.......................................................22
INVESTMENT MANAGER AND UNDERWRITER...........................................23
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES................................30
DIVIDENDS AND TAXES..........................................................41
PERFORMANCE..................................................................44
OFFICERS AND TRUSTEES........................................................62
SHAREHOLDER RIGHTS...........................................................69
REPORT OF INDEPENDENT AUDITORS...............................................70
APPENDIX -- RATINGS OF INVESTMENTS...........................................71

The financial statements appearing in each Fund's 1998 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund for which this Statement of Additional Information is requested accompanies
this document.

KFIF-13 12/98 printed on recycled paper

<PAGE>

INVESTMENT RESTRICTIONS

Each Fund has adopted certain fundamental investment restrictions which,
together with the investment objective and fundamental policies of such Fund,
cannot be changed without approval of a majority of its outstanding voting
shares. As defined in the Investment Company Act of 1940, this means the lesser
of the vote of (a) 67% of the shares of the Fund present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy or (b) more
than 50% of the outstanding shares of the Fund.

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

The Adjustable Rate Fund may not, as a fundamental policy:

1. 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.

2. 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.

3. 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.

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

5. Engage in the business of underwriting securities, except to the extent
that a Fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities.

6. 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..

7. Purchase physical commodities or contracts relating to physical
commodities.

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. [TO BE
UPDATED: The Fund did not borrow money as permitted by investment restriction
number 4 in the latest fiscal year and it has no present intention of borrowing
during the current year.] The Fund has adopted the following non-fundamental
restrictions, which may be changed by the Board of Trustees without shareholder
approval. The Adjustable Rate Fund may not:

i. Invest for the purpose of exercising control or management of
another issuer.

ii. Invest more than 15% of its net assets in illiquid securities.

iii. Purchase securities on margin, except to obtain such short-term
credits as may be necessary for the clearance of transactions;
however, the Fund may make margin deposits in connection with
options and financial futures transactions.

iv. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is
open it owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal
in amount to, the securities sold short and unless not more than 10%
of the Fund's total assets is held as collateral for such sales at
any one time.

v. Pledge, hypothecate, mortgage or otherwise encumber more than 15% of
its total assets and then only to secure borrowings permitted by
restriction 4 above. (The collateral arrangements with respect to
options, financial futures and delayed delivery transactions and any
margin payments in connection therewith are not deemed to be pledges
or other encumbrances.)

vi. Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Fund's net assets; nor may the Fund
purchase put or call options if more than 5% of the Fund's net
assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Fund may buy
or sell options on financial futures contracts.

vii. Purchase more than 10% of any class of voting securities of any
issuer.

2
<PAGE>

The Diversified Fund may not, as a fundamental policy:

1. 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.

2. 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.

4. Purchase physical commodities or contracts relating to physical
commodities.

5. 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.

6. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities.

7. 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.

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. [TO BE
UPDATED: The Fund did not borrow money as permitted by investment restriction
number 3 in the latest fiscal year, though it may borrow in the future as
permitted by that investment restriction.] The Fund has adopted the following
non-fundamental restrictions, which may be changed by the Board of Trustees
without shareholder approval. The Diversified Fund may not:

i. Invest for the purpose of exercising control or management of
another issuer.

ii. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets, unless immediately thereafter not more than
(i) 3% of the total outstanding voting stock of such company would
be owned by the Fund, (ii) 5% of the Fund's total assets would be
invested in any one such company, and (iii) 10% of the Fund's total
assets would be invested in such securities.

iii. Invest more than 15% of its net assets in illiquid securities.

iv. Pledge the Fund's securities or receivables or transfer or assign or
otherwise encumber them in an amount exceeding the amount of the
borrowing secured thereby.

v. Engage in margin purchases except to obtain such short-term credits
as may be necessary for the clearance of transactions; however, the
Fund may make margin deposits in connection with financial futures
and options transactions; nor may the Fund make short sales of
securities or maintain a short position unless, at all times when a
short position is open, the Fund owns an equal amount of such
securities or securities convertible into or exchangeable for
securities, without payment of additional consideration, which are
equal in amount to and of the same issue as the securities sold
short and such securities are not subject to outstanding call
options, and unless not more than 10% of the Fund's net assets is
held as collateral for such sales at any one time. (Management does
not intend to make such sales except for the purpose of deferring
realization of gain or loss for federal income tax purposes.)

vi. Write (sell) put or call options, combinations thereof or similar
options; nor may it purchase put or call options if more than 5% of
the Fund's net assets would be invested in premiums on the purchase
of put and call options, combinations thereof or similar options;
except that the Fund may write covered call options with respect to
its portfolio securities or securities indices, or write secured put
options; and the Fund may enter into closing transactions with
respect to such options, and may buy or sell options on financial
futures contracts.

The Government Fund may not, as a fundamental policy:

1. Purchase physical commodities or contracts relating to physical commodities.

3
<PAGE>

2. 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.

3. 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.

4. 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.

5. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities.

6. 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.

7. 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.

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. [TO BE
UPDATED: The Fund did not borrow money as permitted by investment restriction
number 5 in the latest fiscal year and it has no present intention of borrowing
during the current year.] The Government Fund has adopted the following
non-fundamental restrictions which may be changed by the Board of Trustees
without shareholder approval. The Government Fund may not:

i. Invest more than 15% of its net assets in illiquid securities.

ii. Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Fund's net assets; nor may it
purchase put or call options if more than 5% of the Fund's net
assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Fund may buy
or sell options on financial futures contracts.

iii. Mortgage, pledge or hypothecate any assets except in connection with
any such borrowing and in amounts not in excess of 7 1/2% of the
value of the Fund's assets at the time of such borrowing.

The High Yield Fund may not, as a fundamental policy:

1. 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.

2. 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.

4. Purchase physical commodities or contracts relating to physical
commodities.

6. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities.

7. 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.

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. [TO BE
UPDATED: The Fund did not borrow money as permitted by investment restriction
number 3 in the latest fiscal year; though it may borrow in the future as
permitted by that investment restriction.] The Fund has adopted the following
non-fundamental restrictions, which may be changed by the Board of Trustees
without shareholder approval. The High Yield Fund may not:

4
<PAGE>

i. Invest for the purpose of exercising control or management of
another issuer.

iii. Invest more than 15% of its net assets in illiquid securities.

iv. Invest more than 25% of the Fund's total assets in fixed income
securities which are payable in currencies other than United States
Dollars. (Investments in such securities may involve risks which
differ from investments in securities of U.S. issuers, such as
future political and economic developments, the possible imposition
of governmental restrictions and taxes, as well as currency
fluctuation.)

v. Pledge the Fund's securities or receivables or transfer or assign or
otherwise encumber them in an amount exceeding the amount of the
borrowing secured thereby.

vi. Engage in margin purchases except to obtain such short-term credits
as may be necessary for the clearance of transactions; however, the
Fund may make margin deposits in connection with financial futures
and options transactions; nor may the Fund make short sales of
securities or maintain a short position unless, at all times when a
short position is open, the Fund owns an equal amount of such
securities or securities convertible into or exchangeable for
securities, without payment of additional consideration, which are
equal in amount to and of the same issue as the securities sold
short and such securities are not subject to outstanding call
options, and unless not more than 10% of the Fund's net assets is
held as collateral for such sales at any one time. (Management does
not intend to make such sales except for the purpose of deferring
realization of gain or loss for federal income tax purposes.)

vii. Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Fund's net assets; nor may it
purchase put or call options if more than 5% of the Fund's net
assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Fund may buy
or sell options on financial futures contracts.

The Income and Capital Fund may not, as a fundamental policy:

1. 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.

2. 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.

4. Purchase physical commodities or contracts relating to physical
commodities.

6. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities.

7. 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.

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. [TO BE
UPDATED: The Fund did not borrow money as permitted by investment restriction
number 5 in the latest fiscal year and it has no present intention of borrowing
during the current year.] The Fund has adopted the following non-fundamental
restrictions, which may be changed by the Board of Trustees without shareholder
approval. The Income and Capital Fund may not:

i. Invest for the purpose of exercising control or management of
another issuer.

5
<PAGE>

ii. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets.

iii. Invest more than 15% of its net assets in illiquid securities.

iv. Invest in securities other than those specified under "Investment
Objectives, Policies and Risk Factors" in the prospectus. This
restriction does not prevent the Fund from holding common stocks or
other corporate securities not qualifying as debt obligations if
such securities are acquired through conversion provisions of debt
securities or from corporate reorganizations. Nor does it prevent
the holding of debt securities whose quality rating is reduced by
the rating services below those specified under "Investment
Objectives, Policies and Risk Factors" after purchase by the Fund.

v. Purchase more than 10% of any class of securities of any issuer. All
debt securities and all preferred stocks are each considered as one
class.

vi. Pledge the Fund's securities or receivables or transfer or assign or
otherwise encumber them in an amount exceeding the amount of the
borrowing secured thereby.

vii. Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, the Fund may make margin
deposits in connection with financial futures and options
transactions.

viii. Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Fund's net assets; nor may it
purchase put or call options if more than 5% of the Fund's net
assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Fund may buy
or sell options on financial futures contracts.

The Mortgage Fund may not, as a fundamental policy:

1. 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.

2. 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.

4. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities.

5. 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.

6. Purchase physical commodities or contracts relating to physical
commodities.

7. 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.

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 total assets will not be considered a violation. [TO BE
UPDATED: The Fund did not borrow money as permitted by investment restriction
number 7 in the latest fiscal year, and it has no present intention of borrowing
during the current year.] The Fund has adopted the following non-fundamental
restrictions, which may be changed by the Board of Trustees without shareholder
approval. The Mortgage Fund may not:

i. Purchase securities or make investments other than in accordance
with its investment objective and policies.

ii. Invest more than 5% of the Fund's total assets in securities of
issuers (other than obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities) which with their
predecessors have a record of less than three years continuous
operation, except that all or substantially all of the assets of the
Fund may be invested in another registered investment company having
the same investment objective and substantially similar investment
policies as the Fund.

6
<PAGE>

iii. Enter into repurchase agreements if more than 10% of the Fund's net
assets valued at the time of the transaction would be subject to
repurchase agreements maturing in more than seven days.

iv. Purchase more than 10% of any class of securities of any issuer. All
debt securities and all preferred stocks are each considered as one
class.

v. Invest more than 5% of the Fund's total assets in securities
restricted as to disposition under the federal securities laws
(except commercial paper issued under Section 4(2) of the Securities
Act of 1933) and no more than 10% of its assets will be invested in
securities which are considered illiquid, except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the Fund.
(Repurchase agreements maturing in more than 7 days are considered
illiquid for purposes of this restriction.)

vi. Invest for the purpose of exercising control or management of
another issuer.

vii. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of
issuers which invest in or sponsor such programs.

viii. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets, except that all or substantially all of the
assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.

ix. Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, the Fund may make margin
deposits in connection with financial futures and option
transactions.

x. Write (sell) put or call options, combinations thereof or similar
options except that the Fund may write covered call options on up to
100% of the Fund's net assets and may write secured put options on
up to 50% of the Fund's net assets; nor may the Fund purchase put or
call options if more than 5% of the Fund's net assets would be
invested in premiums on put and call options, combinations thereof
or similar options; however, the Fund may buy or sell options on
financial futures contracts.

xi. Purchase or retain the securities of any issuer if any of the
officers, trustees or directors of Kemper Portfolios or its
investment adviser owns beneficially more than 1/2 of 1% of the
securities of such issuer and together they own more than 5% of the
securities of such issuer, except that all or substantially all of
the assets of the Fund may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund.

The Opportunity Fund may not, as a fundamental policy:

1. 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.

2. 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.

4. Purchase physical commodities or contracts relating to physical
commodities.

6. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities..

7. 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.

7
<PAGE>

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 except as
otherwise provided for in restriction number (3) above. The Fund has adopted the
following non-fundamental restrictions, which may be changed by the Board of
Trustees without shareholder approval. The Opportunity Fund may not:

i. Invest for the purpose of exercising control or management of
another issuer.

iii. Invest more than 15% of its net assets in illiquid securities.

iv. Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Fund's net assets; nor may it
purchase put or call options if more than 5% of the Fund's net
assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Fund may buy
or sell options on financial futures contracts.

The Short-Intermediate Government Fund may not, as a fundamental policy:

1. Purchase securities or make investments other than in accordance with its
investment objective and policies, except that all or substantially all of
the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund.

2. Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a
result, more than 5% of the value of the Fund's net assets would be
invested in securities of that issuer, except that all or substantially all
of the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund.

3. Purchase more than 10% of any class of securities of any issuer, except
that all or substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment objective
and substantially similar investment policies as the Fund. All debt
securities and all preferred stocks are each considered as one class.

4. Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance
with its investment objective and policies).

5. Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its
total assets (any such borrowings under this section will not be
collateralized). If, for any reason, the current value of the Fund's total
assets falls below an amount equal to three times the amount of its
indebtedness from money borrowed, the Fund will, within three business
days, reduce its indebtedness to the extent necessary. (The Fund will not
borrow for leverage purposes, and while borrowings are outstanding
securities will not be purchased.)

6. Concentrate more than 10% of the Fund's net assets in any one industry,
except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same
investment objective and substantially similar investment policies as the
Fund.

7. Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities, except that all or
substantially all of

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the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund.

8. Issue senior securities except as permitted under the Investment Company
Act of 1940.

9. Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, the Fund may make margin deposits in
connection with financial futures and option transactions.

10. Engage in put or call option transactions; however, the Fund may write
(sell) put or call options on up to 25% of its net assets and may purchase
put or call options if no more than 5% of its net assets would be invested
in premiums on put and call options, combinations thereof or similar
options; and the Fund may buy and sell options on financial futures
contracts.

11. Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts; or in
real estate, although it may invest in securities which are secured by
real estate and securities of issuers which invest or deal in real estate.

If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 5 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The
Short-Intermediate Government Fund may not:

i. Invest for the purpose of exercising control or management of
another issuer.

ii. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets. This restriction does not apply to the Fund
to the extent that certain collateralized obligations may be
considered to be issued by an "investment company" (see "Investment
Policies and Techniques -- Collateralized Obligations").

iii. Invest more than 15% of its net assets in illiquid securities.

Master/feeder fund structure. At special meetings of shareholders, a majority of
the shareholders of the Funds approved a proposal which gives the Trust's Board
of Trustees the discretion to retain the current distribution arrangement for a
Fund while investing in a master fund in a master/feeder fund structure as
described below.

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

INVESTMENT POLICIES AND TECHNIQUES

General. Each Fund may engage in options and financial futures and other
derivatives transactions in accordance with its respective investment objectives
and policies. Each such Fund intends to engage in such transactions if it
appears to the investment manager to be advantageous to do so in order to pursue
its investment objective and also to hedge against the effects of market risks
but not for speculative purposes. The use of futures and options, and possible
benefits and attendant risks, are discussed below along with information
concerning other investment policies and techniques.

U.S. Government Securities. There are two broad categories of U.S.
Government-related debt instruments: (a) direct obligations of the U.S.
Treasury, and (b) securities issued or guaranteed by U.S. Government agencies.
Examples of direct obligations of the U.S. Treasury are Treasury Bills, Notes,
Bonds and other debt securities issued by the U.S. Treasury. These instruments
are backed by the "full faith and credit" of the United States. They differ
primarily in interest rates, the length of maturities and the dates of issuance.
Some obligations issued or guaranteed by agencies of the U.S. Government are
backed by the full faith and credit of the United States (such as Maritime
Administration Title XI Ship Financing Bonds and Agency for International
Development Housing Guarantee Program Bonds) and others are backed only by the
rights of the issuer to borrow from the U.S. Treasury (such as Federal Home

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<PAGE>

Loan Bank Bonds and Federal National Mortgage Association Bonds). With respect
to securities supported only by the credit of the issuing agency or by an
additional line of credit with the U.S. Treasury, there is no guarantee that the
U.S. Government will provide support to such agencies and such securities may
involve risk of loss of principal and interest. U.S. Government Securities may
include "zero coupon" securities that have been stripped by the U.S. Government
of their unmatured interest coupons (see "Zero Coupon Government Securities"
below for a discussion of their features and risks) and collateralized
obligations issued or guaranteed by a U.S. Government agency or instrumentality
(see "Collateralized Obligations" below).

U.S. Government Securities of the type in which the Funds may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the U.S. Government Securities in the Fund's portfolio,
however, does not guarantee the net asset value of the shares of the Fund. There
are market risks inherent in all investments in securities and the value of an
investment in the Fund will fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. For example,
as interest rates rise the value of the Fund's investments will tend to decline,
and as interest rates fall the value of the Fund's investments will tend to
increase. In addition, the potential for appreciation in the event of a decline
in interest rates may be limited or negated by increased principal prepayments
in respect to certain Mortgage-Backed Securities, such as GNMA Certificates.
Prepayments of high interest rate Mortgage-Backed Securities during times of
declining interest rates will tend to lower the return of the Fund and may even
result in losses to the Fund if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of
Mortgage-Backed Securities may decline, resulting in the extension of the Fund's
average portfolio maturity. As a result, the Fund's portfolio may experience
greater volatility during periods of rising interest rates than under normal
market conditions. With respect to U.S. Government Securities supported only by
the credit of the issuing agency or by an additional line of credit with the
U.S. Treasury, there is no guarantee that the U.S. Government will provide
support to such agencies and such securities may involve risk of loss of
principal and interest. The Fund will not invest in Mortgage-Backed Securities
issued by private issuers.

The Fund may also write (sell) and purchase options on securities, index
options, financial futures contracts and options on financial futures contracts
in connection with attempts to hedge its portfolio investments and not for
speculation. See "Additional Investment Information" below.

Collateralized Obligations. Subject to its investment objective and policies, a
Fund may purchase collateralized obligations, including interest only ("IO") and
principal only ("PO") securities. A collateralized obligation is a debt security
issued by a corporation, trust or custodian, or by a U.S. Government agency or
instrumentality, that is collateralized by a portfolio or pool of mortgages,
Mortgage-Backed Securities, U.S. Government Securities or other assets. The
issuer's obligation to make interest and principal payments is secured by the
underlying pool or portfolio of securities. Collateralized obligations issued or
guaranteed by a U.S. Government agency or instrumentality, such as the Federal
Home Loan Mortgage Corporation, are considered U.S. Government Securities for
purposes of this Statement of Additional Information. Privately-issued
collateralized obligations collateralized by a portfolio of U.S. Government
Securities are not direct obligations of the U.S. Government or any of its
agencies or instrumentalities and are not considered U.S. Government Securities
for purposes of this Statement of Additional Information. A variety of types of
collateralized obligations are available currently and others may become
available in the future. Since the collateralized obligations may be issued in
classes with varying maturities and interest rates, the investor may obtain
greater predictability of maturity than with direct investments in
mortgage-backed securities. Classes with shorter maturities may have lower
volatility and lower yield while those with longer maturities may have higher
volatility and higher yield. This provides the investor with greater control
over the characteristics of the investment in a changing interest rate
environment. With respect to interest only and principal only securities, an
investor has the option to select from a pool of underlying collateral the
portion of the cash flows that most closely corresponds to the investor's
forecast of interest rate movements. These instruments tend to be highly
sensitive to prepayment rates on the underlying collateral and thus place a
premium on accurate prepayment projections by the investor.

A Fund may invest in collateralized obligations whose yield floats inversely
against a specified index rate. These "inverse floaters" are more volatile than
conventional fixed or floating rate collateralized obligations and the yield
thereon, as well as the value thereof, will fluctuate in inverse proportion to
changes in the index upon which interest rate adjustments are based. As a
result, the yield on an inverse floater will generally increase when market
yields (as reflected by the index) decrease and decrease when market yields
increase. The extent of the volatility of inverse floaters depends on the extent
of anticipated changes in market rates of interest. Generally, inverse floaters
provide for interest rate adjustments based upon a multiple of the specified
interest index, which further increases their volatility. The degree of
additional volatility will be directly proportional to the size of the multiple
used in determining interest rate adjustments.

A Fund will currently invest in only those collateralized obligations that are
fully collateralized and that meet the quality standards otherwise applicable to
the Fund's investments. Fully collateralized means that the collateral will
generate cash flows sufficient to meet obligations to holders of the
collateralized obligations under even the most conservative prepayment and
interest rate projections. Thus, the collateralized obligations are structured
to anticipate a worst case prepayment condition and to minimize the reinvestment
rate risk for cash flows between coupon dates for the collateralized
obligations. A worst case prepayment condition

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<PAGE>

generally assumes immediate prepayment of all securities purchased at a premium
and zero prepayment of all securities purchased at a discount. Reinvestment rate
risk may be minimized by assuming very conservative reinvestment rates and by
other means such as by maintaining the flexibility to increase principal
distributions in a low interest rate environment. The effective credit quality
of the collateralized obligations in such instances is the credit quality of the
issuer of the collateral. The requirements as to collateralization are
determined by the issuer or sponsor of the collateralized obligation in order to
satisfy rating agencies, if rated. No Fund currently intends to invest more than
5% of its total assets in collateralized obligations that are collateralized by
a pool of credit card or automobile receivables or other types of assets rather
than a pool of mortgages, Mortgage-Backed Securities or U.S. Government
Securities. Currently, none of the Funds intends to invest more than 10% of its
total assets in inverse floaters.

Payments of principal and interest on the underlying collateral securities are
not passed through directly to the holders of the collateralized obligations as
such. Collateralized obligations often are issued in two or more classes with
varying maturities and stated rates of interest. Because interest and principal
payments on the underlying securities are not passed through directly to holders
of collateralized obligations, such obligations of varying maturities may be
secured by a single portfolio or pool of securities, the payments on which are
used to pay interest on each class and to retire successive maturities in
sequence. These relationships may in effect "strip" the interest payments from
principal payments of the underlying securities and allow for the separate
purchase of either the interest or the principal payments, sometimes called
interest only (IO) and principal only (PO) securities. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 10% of a Fund's total assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Fund's limitation on illiquid securities, however, the Board of Trustees of a
Fund may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.

Zero Coupon Government Securities. Subject to its investment objective and
policies, a Fund may invest in zero coupon U.S. Government Securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities may
include those created directly by the U.S. Treasury and those created as
collateralized obligations through various proprietary custodial, trust or other
relationships. The effect of owning instruments which do not make current
interest payments is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount accretion during the life of the
obligation. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest distributions at a rate as high as the
implicit yield on the zero coupon bond, but at the same time eliminates any
opportunity to reinvest earnings at higher rates. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations during periods of
changing market interest rates than those of comparable securities that pay
interest currently, which fluctuation is greater as the period to maturity is
longer. Zero coupon bonds created as collateralized obligations are similar to
those created through the U.S. Treasury, but the former investments do not
provide absolute certainty of maturity or of cash flows after prior classes of
the collateralized obligations are retired. No Fund currently intends to invest
more than 5% of its net assets in zero coupon U.S. Government Securities during
the current year.

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

Current federal income tax law requires the holder of a zero coupon security or
of certain pay-in-kind bonds (bonds which pay interest through the issuance of
additional bonds) to accrue income with respect to these securities prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability for federal income and excise taxes, a
Fund will be required to distribute income accrued with respect to these
securities and may be required to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.

High Yield (High Risk) Bonds. The Diversified Fund may, and the High Yield and
Opportunity Funds do, invest a substantial portion of their assets in fixed
income securities offering high current income. Subject to its specific
investment objective and policies, the Income and Capital Fund may invest up to
10% of its assets in such securities. Such high yield (high risk), fixed income
securities ordinarily will be in the lower rating categories (securities rated
below the fourth category) of recognized rating agencies or will be non-rated.
Lower-rated and non-rated securities, which are commonly referred to as "junk
bonds," have widely varying characteristics and quality. These lower rated and
non-rated fixed income securities are considered, on balance, as predominantly

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<PAGE>

speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and generally will involve more
credit risk than securities in the higher rating categories. Accordingly, an
investment in the Diversified, High Yield or Opportunity Funds may not
constitute a complete investment program and may not be appropriate for all
investors.

The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also are more sensitive to economic conditions than are
higher rated securities. Adverse publicity and investor perceptions regarding
lower rated bonds, whether or not based on fundamental analysis, may depress the
prices for such securities. These and other factors adversely affecting the
market value of high yield securities will adversely affect each Fund's net
asset value.

The investment philosophy of the Diversified, High Yield and Opportunity Funds
with respect to high yield (high risk) bonds is based upon the premise that over
the long term a broadly diversified portfolio of high yield fixed income
securities should, even taking into account possible losses, provide a higher
net return than that achievable on a portfolio of higher rated securities. The
Funds seek to achieve the highest yields possible while reducing relative risk
through (a) broad diversification, (b) credit analysis by the investment manager
of the issuers in which the Funds invest, (c) purchase of high yield securities
at discounts from par or stated value when practicable and (d) monitoring and
seeking to anticipate changes and trends in the economy and financial markets
that might affect the prices of portfolio securities. The investment manager's
judgment as to the "reasonableness"' of the risk involved in any particular
investment will be a function of its experience in managing fixed income
investments and its evaluation of general economic and financial conditions, a
specific issuer's business and management, cash flow, earnings coverage of
interest and dividends, ability to operate under adverse economic conditions,
and fair market value of assets, and of such other considerations as the
investment manager may deem appropriate. The investment manager, while seeking
maximum current yield, will monitor current corporate developments with respect
to portfolio securities and potential investments and to broad trends in the
economy. In some circumstances, defensive strategies may be implemented to
preserve or enhance capital even at the sacrifice of current yield. Defensive
strategies, which may be used singly or in any combination, may include, but are
not limited to, investments in discount securities or investments in money
market instruments as well as futures and options strategies.

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

A 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 Funds anticipate 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 a Fund's ability to dispose of particular issues and may
also make it more difficult for a 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.

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

The Mortgage-Backed Securities either issued or guaranteed by GNMA, FHLMC or
FNMA ("Certificates") are called pass-through Certificates because a pro rata
share of both regular interest and principal payments (less GNMA's FHLMC's or
FNMA's fees and

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<PAGE>

any applicable loan servicing fees), as well as unscheduled early prepayments on
the underlying mortgage pool, are passed through monthly to the holder of the
Certificate (i.e., the Fund). The principal and interest on GNMA securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA guarantees full and timely payment of all interest and
principal, while FHLMC guarantees timely payment of interest and ultimate
collection of principal. Mortgage-Backed Securities from FNMA and FHLMC are not
backed by the full faith and credit of the United States; however, they are
generally considered to offer minimal credit risks. The yields provided by these
Mortgage-Backed Securities have historically exceeded the yields on other types
of U.S. Government Securities with comparable maturities in large measure due to
the prepayment risk discussed below.

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

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

One additional difference between adjustable rate mortgages and fixed rate
mortgages is that for certain types of adjustable rate mortgage securities, the
rate of amortization of principal, as well as interest payments, can and does
change in accordance with movements in a specified, published interest rate
index. The amount of interest due to an adjustable rate mortgage security holder
is calculated by adding a specified additional amount, the "margin," to the
index, subject to limitations or "caps" on the maximum and minimum interest that
is charged to the mortgagor during the life of the mortgage or to maximum and
minimum changes to that interest rate during a given period. It is these special
characteristics that are unique to adjustable rate mortgages that the Fund
believes make them attractive investments in seeking to accomplish the
Adjustable Rate Fund's objective.

Foreign Securities. The Diversified, High Yield, Income and Capital and
Opportunity Funds have the discretion to invest a portion of their assets in
foreign securities that are traded principally in securities markets outside the
United States. These Funds currently limit investment in foreign securities not
publicly traded in the United States to 50% of total assets in the case of the
Diversified Fund and 25% of total assets in the case of the High Yield, Income
and Capital and Opportunity Funds. These Funds may also invest without limit in
U.S. Dollar denominated American Depository Receipts ("ADRs"), which are bought
and sold in the United States and are not subject to the preceding limitation.
In connection with their foreign securities investments, these Funds may, to a
limited extent, engage in foreign currency exchange, options and futures
transactions as a hedge and not for speculation. The Short-Intermediate
Government Fund may, subject to its quality standards, invest in U.S.
Dollar-denominated securities of foreign issuers.

Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.

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

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<PAGE>

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

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

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

Many of the risks described herein relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rates of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.

Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.

In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets.

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Such markets have different settlement and clearance procedures. In certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Such settlement problems may cause emerging market securities to
be illiquid. The inability of a Fund to make intended securities purchases due
to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security caused by settlement
problems could result either in losses to a Fund due to subsequent declines in
value of the portfolio security or, if a Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Certain
emerging markets may lack clearing facilities equivalent to those in developed
countries. Accordingly, settlements can pose additional risks in such markets
and ultimately can expose a Fund to the risk of losses resulting from a Fund's
inability to recover from a counterparty.

The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. A Fund's portfolio securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.

Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Fund. Emerging markets may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.

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

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

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

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

Prior to privatization, most of the state enterprises in which a Fund may invest
enjoy the protection of and receive preferential treatment from the respective
sovereigns that own or control them. After making an initial equity offering
these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
operate effectively in a competitive market and may suffer losses or experience
bankruptcy due to such competition.

Depository Receipts. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. The Funds may also
invest in securities of foreign issuers in the form of European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs") which are receipts
evidencing an arrangement with a European bank similar to that for ADRs and are
designed for use in the European and other foreign securities markets. EDRs and
GDRs are not necessarily denominated in the currency of the underlying security.

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Derivatives. In addition to options and financial futures transactions,
consistent with its objective, each Fund may invest in a broad array of
financial instruments and securities in which the value of the instrument or
security is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate or a foreign currency
("derivatives"). Derivatives are most often used to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). The types of
derivatives used by each Fund and the techniques employed by the investment
manager may change over time as new derivatives and strategies are developed or
regulatory changes occur.

Regulatory Restrictions. To the extent required to comply with applicable
regulations, when purchasing a futures contract, writing a put option or
entering into a delayed delivery purchase or a forward currency exchange
purchase, a Fund will maintain eligible securities in a segregated account. A
Fund will use cover in connection with selling a futures contract.

A Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only in an attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Fund holds or intends to purchase.

Options on Securities. A Fund may write (sell) "covered" call options on
securities as long as it owns the underlying securities subject to the option or
an option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. A Fund may write "covered" put options provided that, as long as the
Fund is obligated as a writer of a put option, the Fund will own an option to
sell the underlying securities subject to the option, having an exercise price
equal to or greater than the exercise price of the "covered" option, or it will
deposit and maintain in a segregated account eligible securities having a value
equal to or greater than the exercise price of the option. A call option gives
the purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during or at the end of the option
period. A put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying security at the exercise price during or at
the end of the option period. The premium received for writing an option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the price
volatility of the underlying security, the option period, supply and demand and
interest rates. The Funds may write or purchase spread options, which are
options for which the exercise price may be a fixed dollar spread or yield
spread between the security underlying the option and another security that is
used as a bench mark. The exercise price of an option may be below, equal to or
above the current market value of the underlying security at the time the option
is written. The buyer of a put who also owns the related security is protected
by ownership of a put option against any decline in that security's price below
the exercise price less the amount paid for the option. The ability to purchase
put options allows a Fund to protect capital gains in an appreciated security it
owns, without being required to actually sell that security. At times a Fund
would like to establish a position in a security upon which call options are
available. By purchasing a call option, a Fund is able to fix the cost of
acquiring the security, this being the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market, because a Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.

During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.

If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received.

Over-the-Counter Options. A Fund may deal in options on securities and
securities indexes, which options may be listed for trading on a national
securities exchange or traded over-the-counter ("OTC options"). OTC options
differ from exchange traded options in several respects. They are transacted
directly with dealers and not with a clearing corporation, and there is a risk
of nonperformance by the dealer as a result of the insolvency of such dealer or
otherwise, in which event a Fund may experience material losses. However, in
writing options the premium is paid in advance by the dealer. OTC options are
available for a greater variety of securities, and a wider range of expiration
dates and exercise prices, than are exchange traded options. Since there is no
exchange, pricing is normally done by reference to information from market
makers, which information is carefully monitored by the investment manager and
verified in appropriate cases.

A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a

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Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when a Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
might also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.

The Funds understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Funds have adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Funds' portfolios. A brief description of
such procedures is set forth below.

A Fund will only engage in OTC options transactions with dealers that have been
specifically approved by the investment manager pursuant to procedures adopted
by the Fund's Board of Trustees. The investment manager believes that the
approved dealers should be able to enter into closing transactions if necessary
and, therefore, present minimal credit risks to a Fund. The investment manager
will monitor the creditworthiness of the approved dealers on an ongoing basis. A
Fund currently will not engage in OTC options transactions if the amount
invested by the Fund in OTC options, plus a "liquidity charge" related to OTC
options written by the Fund, plus the amount invested by the Fund in illiquid
securities, would exceed 15% of the Fund's net assets (10% of total assets for
the Mortgage Fund). The "liquidity charge" referred to above is computed as
described below.

The Funds anticipate entering into agreements with dealers to which a Fund sells
OTC options. Under these agreements a Fund would have the absolute right to
repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to herein for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.

Options on Securities Indices. A Fund also may purchase and write call and put
options on securities indices in an attempt to hedge against market conditions
affecting the value of securities that the Fund owns or intends to purchase, and
not for speculation. Through the writing or purchase of index options, a Fund
can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index since the prices of such securities may be affected by
somewhat different factors and, therefore, the Fund bears the risk that a loss
on an index option would not be completely offset by movements in the price of
such securities.

When a Fund writes an option on a securities index, it will segregate, and
mark-to-market, eligible securities to the extent required by applicable
regulation. In addition, where the Fund writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the Fund
will segregate and mark-to-market, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.

A Fund may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on a securities index
involve risks similar to those risks relating to transactions in financial
futures contracts described below. Also, an option purchased by a Fund may
expire worthless, in which case the Fund would lose the premium paid therefor.

Financial Futures Contracts. The Funds may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or an amount of foreign currency or the cash value of a securities index. This
investment technique is designed primarily to hedge (i.e., protect) against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might affect adversely the value of securities or other assets which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities or the cash
value of an index or foreign currency called for by the contract at a specified
price during a specified delivery period. A "purchase" of a futures contract
means the undertaking of a contractual obligation to acquire the securities or
cash

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<PAGE>

value of an index or foreign currency at a specified price during a specified
delivery period. At the time of delivery, in the case of fixed income securities
pursuant to the contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate than that
specified in the contract. In some cases, securities called for by a futures
contract may not have been issued at the time the contract was written.

Although some futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery of the underlying assets by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, if effected through a member of an exchange, cancels the obligation
to make or take delivery of the underlying securities or other assets. All
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded. A
Fund will incur brokerage fees when it purchases or sells contracts, and will be
required to maintain margin deposits. At the time a Fund enters into a futures
contract, it is required to deposit with its custodian, on behalf of the broker,
a specified amount of cash or eligible securities, called "initial margin." The
initial margin required for a futures contract is set by the exchange on which
the contract is traded. Subsequent payments, called "variation margin," to and
from the broker are made on a daily basis as the market price of the futures
contract fluctuates. The costs incurred in connection with futures transactions
could reduce a Fund's return. Futures contracts entail risks. If the investment
manager's judgment about the general direction of markets or exchange rates is
wrong, the overall performance may be poorer than if no such contracts had been
entered into.

There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager may still not result in a successful hedging
transaction. If any of these events should occur, the Fund could lose money on
the financial futures contracts and also on the value of its portfolio assets.

Options on Financial Futures Contracts. A Fund may purchase and write call and
put options on financial futures contracts. 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 at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. A Fund would be required
to deposit with its custodian initial margin and maintenance margin with respect
to put and call options on futures contracts written by it. A Fund will
establish segregated accounts or will provide cover with respect to written
options on financial futures contracts in a manner similar to that described
under "Options on Securities." Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described herein. Also, an option purchased by a Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.

Delayed Delivery Transactions. The Funds may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by a Fund to purchase or sell
securities with payment and delivery to take place in the future (not to exceed
120 days from trade date for the Government Fund) in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. When the Fund enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all of the
rights and risks attendant to ownership of a security, although delivery and
payment occur at a later date. The value of fixed income securities to be
delivered in the future will fluctuate as interest rates vary. At the time a
Fund makes the commitment to purchase a security on a when-issued or delayed
delivery basis, it will record the transaction and reflect the liability for the
purchase and the value of the security in determining its net asset value.
Likewise, at the time a Fund makes the commitment to sell a security on a
delayed delivery basis, it will record the transaction and include the proceeds
to be received in determining its net asset value; accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment are
ignored in calculating net asset value so long as the commitment remains in
effect. The Fund generally has the ability to close out a purchase obligation on
or before the settlement date, rather than take delivery of the security.
Because a Fund is required to set aside cash or other liquid securities to
satisfy its commitments to purchase when-issued or delayed delivery securities,
flexibility to manage the Fund's investments may be limited if commitments to
purchase when-issued or delayed delivery securities were to exceed 25% of the
value of its assets. To the extent a Fund engages in when-issued or delayed
delivery purchases, it will do so for the purpose of acquiring portfolio
securities consistent with the Fund's investment objective and policies. A Fund
reserves the right to sell these securities before the settlement date if deemed
advisable. In when-issued or delayed delivery transactions, delivery of the
securities occurs beyond normal settlement periods, but the Fund would not pay
for such securities or start earning interest on them until they are delivered.
However, when the Fund purchases securities on a when-issued or delayed delivery
basis, it immediately assumes the risks of ownership, including the risk of
price fluctuation. Failure to deliver a security purchased on a when-issued or
delayed delivery basis may result in a loss or missed opportunity to make an

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<PAGE>

alternative investment. Depending on market conditions, the Fund's when-issued
and delayed delivery purchase commitments could cause its net asset value per
share to be more volatile, because such securities may increase the amount by
which its total assets, including the value of when-issued and delayed delivery
securities it holds, exceed its net assets.

Foreign Currency Options. The Diversified, High Yield, Income and Capital and
Opportunity Funds may engage in foreign currency options transactions. A foreign
currency option provides the option buyer with the right to buy or sell a stated
amount of foreign currency at the exercise price at a specified date or during
the option period. A call option gives its owner the right, but not the
obligation, to buy the currency, while a put option gives its owner the right,
but not the obligation, to sell the currency. The option seller (writer) is
obligated to fulfill the terms of the option sold if it is exercised. However,
either seller or buyer may close its position during the option period in the
secondary market for such options any time prior to expiration.

A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if a Fund were
holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if the Fund had
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the settlement date, the Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.

Foreign Currency Futures Transactions. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Diversified, High Yield, Income and Capital and
Opportunity Funds may use foreign currency futures contracts and options on such
futures contracts. Through the purchase or sale of such contracts, a Fund may be
able to achieve many of the same objectives as through forward foreign currency
exchange contracts more effectively and possibly at a lower cost.

Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.

Forward Foreign Currency Exchange Contracts. The Diversified, High Yield, Income
and Capital and Opportunity Funds may engage in forward foreign currency
transactions. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days ("term") from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. The investment manager believes that it is important to have
the flexibility to enter into such forward contracts when it determines that to
do so is in the best interests of a Fund. These Funds may engage in foreign
currency transactions in connection with their investments in foreign securities
but will not speculate in foreign currency exchange.

The value of the foreign securities investments of a Fund measured in U.S.
Dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. A Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers.

When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Fund is able to protect itself against a
possible loss between trade and settlement dates resulting from an adverse
change in the relationship between the U.S. Dollar and such foreign currency.
However, this tends to limit potential gains that might result from a positive
change in such currency relationships. A Fund may also hedge its foreign
currency exchange rate risk by engaging in foreign currency financial futures
and options transactions. When the investment manager believes that the currency
of a particular foreign country may suffer a substantial decline against the
U.S. Dollar, it may enter into a forward contract to sell an amount of foreign
currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency. The forecasting of short-term currency
market movement is extremely difficult and whether such a short-term hedging
strategy will be successful is highly uncertain. It is impossible to forecast
with absolute precision the market value of portfolio securities at the
expiration of a contract. Accordingly, it may be necessary for a Fund to
purchase additional currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver when a decision is made to sell the
security and make delivery of the foreign currency in settlement of a forward
contract. Conversely, it may be necessary to sell on the spot market some of the

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foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.

If a Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain that might result should the value of such currency increase. A
Fund may have to convert its holdings of foreign currencies into U.S. Dollars
from time to time in order to meet such needs as Fund expenses and redemption
requests. Although foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies.

A Fund will not enter into forward contracts or maintain a net exposure in such
contracts where the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. The Diversified, High Yield, Income and Capital
and Opportunity Funds do not intend to enter into forward contracts for the
purchase of a foreign currency if they would have more than 15% of the value of
their total assets committed to such contracts. The Funds segregate cash or
liquid securities to the extent required by applicable regulation in connection
with forward foreign currency exchange contracts entered into for the purchase
of a foreign currency. A Fund generally does not enter into a forward contract
with a term longer than one year.

Short Sales Against-the-Box. The Adjustable Rate, Diversified and Mortgage Funds
may each make short sales against-the-box. A short sale "against-the-box" is a
short sale in which the Fund owns at least an equal amount of the securities
sold short or securities convertible into or exchangeable for, without payment
of any further consideration, securities of the same issue as, and at least
equal in amount to, the securities sold short. A Fund may engage in such short
sales only to the extent that not more than 10% of the Fund's total assets
(determined at the time of the short sale) is held as collateral for such sales.
No Fund currently intends, however, to engage in such short sales to the extent
that more than 5% of its net assets will be held as collateral therefor during
the current year.

Interest Rate Swaps and Swap-Related Products. The Adjustable Rate and
Opportunity Funds may engage in interest rate swaps and other swap-related
products. Swap agreements can take many different forms and are known by a
variety of names. The Adjustable Rate and Opportunity Funds are not limited to
any particular form of swap agreement if the investment manager determines it is
consistent with a fund's investment objective and policies. Interest rate swaps
are the exchange by the Fund with another party of their respective commitments
to pay or receive interest with respect to a notional (agreed upon) principal
amount, for example, an exchange of floating rate payments for fixed rate
payments. Interest rate swaps are generally entered into to permit the party
seeking a floating or fixed rate obligation, as the case may be, the opportunity
to acquire such obligation at a lower rate than is directly available in the
credit market. The success of such a transaction depends in large part on the
availability of fixed rate obligations at a low enough coupon rate to cover the
cost involved. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor.

Each of the Adjustable Rate and Opportunity Funds usually will enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with a Fund receiving or paying, as the case may be, only the net amounts
of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlement with respect to each interest rate swap will be
accrued on a daily basis and an amount of cash or eligible securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. To the extent that a
Fund enters into interest rate swaps on other than a net basis, the amount
maintained in a segregated account will be the full amount of the Fund's
obligations, if any, with respect to such interest rate swaps, accrued on a
daily basis.

Each of the Adjustable Rate and Opportunity Funds will not enter into any swap
transaction unless the unsecured senior debt or the claims-paying ability of the
other party thereto is rated in the highest rating category for the Adjustable
Rate Fund, and, within the top three rating categories for the Opportunity Fund,
by at least one nationally recognized rating organization at the time of
entering into such transaction. If there is a default by the other party to such
a transaction, the Fund will 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 using standardized swap documents. As a result,
the swap market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documents have not yet been developed and,
accordingly, they are less liquid than swaps. It is anticipated that neither the
Adjustable Rate nor Opportunity Fund will invest more than 5% of its total
assets in interest rate caps and floors and that the aggregate notional (agreed
upon) principal amount of interest rate swaps entered into by a Fund and the
aggregate contract value of

20
<PAGE>

outstanding futures contracts of a Fund and futures contracts subject to
outstanding options written by a Fund will not exceed 50% of the Fund's total
assets.

Repurchase Agreements. Each Fund may invest in repurchase agreements, under
which it acquires ownership of a security and the broker-dealer or bank agrees
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Fund's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. In addition, the Fund must take physical possession of
the security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal Reserve Book-Entry System. Repurchase agreements
will be limited to transactions with financial institutions believed by the
investment manager to present minimal credit risk. The investment manager will
monitor on an on-going basis the creditworthiness of the broker-dealers and
banks with which the Funds may engage in repurchase agreements. Repurchase
agreements maturing in more than seven days will be considered as illiquid for
purposes of the Funds' limitations on illiquid securities.

Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Funds (other than the Government Fund) may lend securities
(principally to broker-dealers) without limit where such loans are callable at
any time and are continuously secured by segregated collateral (cash or other
liquid securities) equal to no less than the market value, determined daily, of
the securities loaned. The Funds will receive amounts equal to dividends or
interest on the securities loaned. The Funds will also earn income for having
made the loan. Any cash collateral pursuant to these loans will be invested in
short-term money market instruments. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. However, the loans would be
made only to forms deemed by the investment manager to be of good standing, and
when the investment manager believes the potential earnings to justify the
attendant risk. Management will limit such lending to not more than one-third of
the value of a Fund's total assets.

Borrowing Money. The Adjustable Rate, Mortgage and Short-Intermediate Government
Funds each may not borrow money except as a temporary measure for extraordinary
or emergency purposes and then only in an amount up to one-third of the value of
its total assets in order to meet redemption requests without immediately
selling any portfolio securities. If, for any reason, the current value of a
Fund's total assets falls below an amount equal to three times the amount of its
indebtedness from money borrowed, the Fund will, within three days (not
including Sundays and holidays), reduce its indebtedness to the extent
necessary. A Fund will not borrow for leverage purposes. The Adjustable Rate
Fund may pledge up to 15% of its total assets to secure any such borrowings. The
Diversified, Government, High Yield and Income and Capital Funds may each borrow
money only for temporary or emergency purposes and not for leverage purposes,
and then only in an amount up to 5% of its assets, in order to meet redemption
requests without immediately selling any portfolio securities or other assets.
These Funds, except for the Government Fund, may not pledge their assets in an
amount exceeding the amount of the borrowings secured by such pledge. The
Government Fund may pledge up to 7% of its assets to secure any such borrowings.

The maximum amount that the Opportunity Fund may borrow is one-third of the
value of its assets (including the amount borrowed). As a temporary measure for
extraordinary or emergency purposes, the Opportunity Fund may borrow money up to
one-third of the value of its total assets (including the amount borrowed) in
order to meet redemption requests without immediately selling any portfolio
securities. The Opportunity Fund may also borrow money up to 20% of the value of
its total assets (including the amount borrowed) for leverage purposes.

Additional Investment Information. A Fund will not normally engage in the
trading of securities for the purpose of realizing short-term profits, but will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and its investment objective. Accordingly, a Fund
may sell fixed income securities in anticipation of a rise in interest rates and
purchase such securities for inclusion in its portfolio in anticipation of a
decline in interest rates. Frequency of portfolio turnover will not be a
limiting factor should the investment manager deem it desirable to purchase or
sell securities. The portfolio turnover rates for the Funds (except the
Opportunity Fund) are listed under "Financial Highlights." It is anticipated
that, under normal circumstances, the portfolio turnover rate for the
Opportunity Fund will not exceed 300%. High portfolio turnover (over 100%)
involves correspondingly greater brokerage commissions or other transaction
costs. Higher portfolio turnover may result in the realization of greater net
short-term capital gains.

A Fund (other than the Adjustable Rate and Short-Intermediate Government Funds)
may take full advantage of the entire range of maturities of fixed income
securities and may adjust the average maturity of its portfolio from time to
time, depending upon its assessment of relative yields on securities of
different maturities and its expectations of future changes in interest rates.
Thus, the average maturity of a Fund's portfolio may be relatively short (under
5 years, for example) at some times and relatively long (over 10 years, for
example) at other times. Generally, since shorter term debt securities tend to
be more stable than longer term debt

21
<PAGE>

securities, the portfolio's average maturity will be shorter when interest rates
are expected to rise and longer when interest rates are expected to fall. The
effective Dollar-weighted average portfolio maturity of the Adjustable Rate Fund
generally will range from less than one year to five years. The effective
Dollar-weighted average portfolio maturity of the Short-Intermediate Government
Fund generally will be more than two years but less than five years.

A Fund will not purchase illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of the
Fund's net assets, valued at the time of the transaction, would be invested in
such securities, except that the Mortgage Fund may not purchase illiquid
securities if more than 10% of its total assets would be invested in such
securities. Each Fund may invest in securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933. This rule permits otherwise
restricted securities to be sold to certain institutional buyers, such as the
Funds. Such securities may be illiquid and subject to a Fund's limitation on
illiquid securities. A "Rule 144A" security may be treated as liquid, however,
if so determined pursuant to procedures adopted by the Board of Trustees.
Investing in Rule 144A securities could have the effect of increasing the level
of illiquidity in a Fund to the extent that qualified institutional buyers
become uninterested for a time in purchasing Rule 144A securities.

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

PORTFOLIO TRANSACTIONS

Scudder Kemper Investments, Inc. ("Scudder Kemper"), and its affiliates furnish
investment management services for the Kemper Funds, Zurich Money Market Funds
and other clients including affiliated insurance companies. Scudder Kemper and
its affiliates share some common research and trading facilities. At times
investment decisions may be made to purchase or sell the same investment
securities for a Fund and for one or more of the other clients managed by
Scudder Kemper or its affiliates. When two or more of such clients are
simultaneously engaged in the purchase or sale of the same security through the
same trading facility, the transactions are allocated as to amount and price in
a manner considered equitable to each.

National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits may restrict the number of options a Fund
will be able to write on a particular security.

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

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
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons.

The Funds' 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 and market statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchases 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 broker/dealers on the basis that the broker/dealer has or has not sold
shares of a Fund. In effecting transactions in over-

22
<PAGE>

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 the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.

Although certain research, market and statistical information 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.

The Trustees review from time to time whether the recapture for the benefit of a
Fund of some portion of the brokerage commissions or similar fees paid by a Fund
on portfolio transactions is legally permissible and advisable.

The table below shows total brokerage commissions paid by each Fund for the last
three fiscal years (except the Opportunity Fund which commenced operations on
October 1, 1997) and for the most recent fiscal year, the percentage thereof
that was allocated to firms based upon research information provided.

<TABLE>
<CAPTION>
Allocated to Firms
Based on Research in
Fund Fiscal 1998 Fiscal 1998 Fiscal 1997 Fiscal 1996
- ---- ----------- ----------- ----------- -----------

<S> <C> <C> <C> <C>
Adjustable Rate To Be Updated To Be Updated $8,000 $29,000
Diversified $3,860,000 $2,927,000
Government $887,000 $806,000
High Yield $43,566,000 $46,280,000
Income and Capital $2,156,000 $1,624,000
Mortgage $570,000 $545,000
Short-Intermediate $15,000 $44,000
Government
Opportunity N/A N/A
</TABLE>

+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.

The change in portfolio turnover rates during the last two fiscal years for the
Income And Capital Fund (see "Financial Highlights" in the prospectus) was due
primarily to strategies related to Government securities transactions.

INVESTMENT MANAGER AND UNDERWRITER

Investment Manager. Scudder Kemper Investments, Inc. ("Scudder Kemper" or "the
Advisor"), 345 Park Avenue, New York, New York, is each Fund's investment
manager. Scudder Kemper is approximately 70% owned by Zurich Financial Services,
a newly formed global insurance and financial services company. The balance of
the Advisor is owned by its officers and employees. Pursuant to investment
management agreements, Scudder Kemper 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 a Fund if elected to such positions. Each investment
management agreement provides that each Fund pays the charges and expenses of
its operations, including the fees and expenses of the trustees (except those
who are affiliated with Scudder Kemper), 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 Fund bears the expenses of registration of its
shares with the Securities and Exchange Commission, while Kemper Distributors,
Inc. ("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606, as principal
underwriter, pays the cost of qualifying and maintaining the qualification of
each Fund's shares for sale under the securities laws of the various states.
Scudder Kemper has agreed to reimburse the Government Fund should all operating
expenses of the Fund, including the compensation of Scudder Kemper, but
excluding taxes, interest, distribution services fee, extraordinary expenses and
brokerage commissions or transaction costs, exceed 1% of average daily net
assets of the fund on an annual basis.

The investment management agreements provide that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by a Fund
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
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.

23
<PAGE>

Each Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually by (a) a majority
of the trustees who are not parties to such agreement or interested persons of
any such party except in their capacity as trustees of the Fund and (b) by the
shareholders or the Board of Trustees of the Fund. Each Fund's investment
management agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of the Fund, and
will terminate automatically upon assignment. If additional Funds become subject
to an investment management agreement, the 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 Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by
Scudder Kemper. The investment management agreements provide that Scudder Kemper
shall act as each Fund's investment adviser, manage its investments and provide
it with various services and facilities.

On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich and the former investment manager to each Fund, and
Scudder changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owned approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.

On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.

Upon consummation of this transaction, each Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and will be submitted for shareholder
approval at a special meeting currently scheduled to conclude in December 1998.

The current investment management fee rates are payable monthly, at the annual
rates shown below.

<TABLE>
<CAPTION>
Adjustable Rate,
Income and Capital,
Mortgage and
Short-Intermediate Diversified and
Average Daily Net Assets Gov't High Yield Government Opportunity
- ------------------------ ----- ---------- ---------- -----------
<S> <C> <C> <C> <C>
$0 - $250 million .55% .58% .45% .65%
$250 million - $1 billion .52 .55 .43 .62
$1 billion - $2.5 billion .50 .53 .41 .60
$2.5 billion - $5 billion .48 .51 .40 .58
$5 billion - $7.5 billion .45 .48 .38 .55
$7.5 billion - $10 billion .43 .46 .36 .53
$10 billion - $12.5 billion .41 .44 .34 .51
Over $12.5 billion .40 .42 .32 .49
</TABLE>

The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below (except for the Opportunity Fund which commenced
operations on October 1, 1997).

Fund 1998 1997 1996
- ---- ---- ---- ----

Adjustable Rate [TO BE UPDATED] $493,000 627,000
Diversified $ 4,664,000 4,239,000
Government $15,888,000 18,159,000
High Yield $23,419,000 19,436,000
Income and Capital $3,162,000 3,194,000
Mortgage $13,793,000 16,340,000
Short-Intermediate Government $1,014,000 1,230,000
Opportunity Fund

+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.

24
<PAGE>

Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts 02110, a subsidiary of Scudder
Kemper, is responsible for determining the daily net asset value per share of
the Funds and maintaining all accounting records related thereto. Currently,
SFAC receives an annual fee of __ of 1% of average daily net assets for its
services to the Funds.

Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606, a wholly owned
subsidiary of Scudder Kemper, is the principal underwriter and distributor for
the shares of each Fund and acts as agent of each Fund in the continuous
offering of its shares. KDI bears all its expenses of providing services
pursuant to the distribution agreement, including the payment of any
commissions. Each Fund pays the cost for the prospectus and shareholder reports
to be set in type and printed for existing shareholders, and KDI, as principal
underwriter, pays for the printing and distribution of copies thereof used in
connection with the offering of shares to prospective investors. KDI also pays
for supplementary sales literature and advertising costs.

Each distribution agreement continues in effect from year to year so long as
such continuance is approved for each class at least annually by a vote of the
Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. Each agreement automatically terminates in the event of its
assignment and may be terminated for a class at any time without penalty by a
Fund or by KDI upon 60 days notice. Termination by a Fund with respect to a
class may be by vote of a majority of the Board of Trustees, or a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the agreement, or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
Investment Company Act of 1940. The agreement may not be amended for a class to
increase the fee to be paid by a Fund with respect to such class without
approval by a majority of the outstanding voting securities of such class of the
Fund and all material amendments must in any event be approved by the Board of
Trustees in the manner described above with respect to the continuation of the
agreement. The provisions concerning the continuation, amendment and termination
of the distribution agreement are on a Fund by Fund basis and for each Fund on a
class by class basis.

Class A Shares. KDI receives no compensation from the Trusts as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase,
Repurchase and Redemption of Shares," KDI retains the sales charge upon the
purchase of shares and pays or allows concessions or discounts to firms for the
sale of each Fund's shares. The following information concerns the underwriting
commissions paid in connection with the distribution of each Fund's Class A
shares for the fiscal years noted.

<TABLE>
<CAPTION>
Commissions Commissions KDI Commissions Paid to
Class A Shares Fiscal Year Retained by KDI Paid to All Firms KDI Affiliated Firms
- -------------- ----------- --------------- ----------------- --------------------

<S> <C> <C> <C> <C>
Adjustable Rate 1998 To Be Updated
1997 $8,000 58,000 0
1996 $11,000 88,000 0

Diversified 1998 To Be Updated
1997 $178,000 1,166,000 0
1996 $129,000 737,000 69,000

Government 1998 To Be Updated
1997 $221,000 1,410,000 10,000
1996 $330,000 2,024,000 91,000

High Yield 1998 To Be Updated
1997 $1,714,000 11,779,000 181,000
1996 $857,000 6,035,000 226,000

Income and Capital 1998 To Be Updated
1997 $53,000 1,283,000 0
1996 $115,000 914,000 74,000

Mortgage 1998 To Be Updated
1997 $29,000 201,000 0
1996 $38,000 226,000 11,000
</TABLE>

25
<PAGE>

Opportunity Fund 1998 To Be Updated

Short-Intermediate 1998 To Be Updated
Government 1997 $8,000 82,000 0
1996 $9,000 70,000 1,000
</TABLE>

Class B Shares and Class C Shares. Since the distribution agreement provides for
fees charged to Class B and Class C shares that are used by KDI to pay for
distribution services , the agreement (the "Plan"), is approved and renewed
separately for the Class B and Class C shares in accordance with Rule 12b-1
under the Investment Company Act of 1940, which regulates the manner in which an
investment company may, directly or indirectly, bear expenses of distributing
its shares. As of December 1997, each Fund's Rule 12b-1 Plan has been separated
from its distribution agreement.

Rule 12b-1 Plan. Since each distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares. As of December 1997, each Fund's Rule 12b-1 Plan has
been separated from its distribution agreement. The table below shows amounts
paid in connection with each Fund's Rule 12b-1 Plan during its 1998 fiscal year.

<TABLE>
<CAPTION>
Contingent Deferred Sales
Distribution Expenses Incurred by Distribution Fees Paid by Fund Charges Paid to
Underwriter to Underwriter Underwriter
----------- -------------- -----------
Fund Class B Class C Class B Class C Class B Class C
- ---- ------- ------- ------- ------- ------- -------

<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate To be Updated
Diversified
Government
High Yield
Income and Capital
Mortgage
Short-Intermediate
Government
</TABLE>

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 the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.

For its services under the distribution agreement, KDI receives a fee from each
Fund, payable monthly, at the annual rate of 0.75% of average daily net assets
of each Fund attributable to Class C shares. This fee is accrued daily as an
expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or a Fund. KDI also receives any
contingent deferred sales charges. See "Purchase, Repurchase and Redemption of
Shares- Contingent Deferred Sales Charges- Class C Shares".

Expenses of the Funds and of KDI in connection with the Rule 12b-1 plans for the
Class B and Class C shares are set forth below (except for the Opportunity Fund
which commenced operations on October 1, 1997). A portion of the marketing,
sales and operating expenses shown below could be considered overhead expense.

26
<PAGE>

<TABLE>
<CAPTION>
Other Distribution Expenses paid by KDI
---------------------------------------
Contingent Total Distribution
Deferred Distribution Paid by
Distribution Sales Fees Paid by KDI to KDI Advertising Marketing Misc.
Class B Fiscal Fees Paid by Charges KDI to Affiliated and Prospectus and Sales Operating Interest
Shares Year Fund to KDI Paid to KDI Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- ----------- ----------- ----- ----- ---------- -------- -------- -------- --------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable 1998 To be
Rate updated
1997 $51,000 31,000 112,000 0 10,000 1,000 25,000 492,000 36,000
1996 $42,000 19,000 56,000 5,000 13,000 1,000 31,000 12,000 26,000

Diversified 1998 To be
updated
1997 $2,148,000 419,000 2,911,000 0 368,000 26,000 1,018,000 121,000 640,000
1996 $1,909,000 446,000 1,739,000 54,000 409,000 33,000 871,000 165,000 468,000

Government 1998 To be
updated
1997 $528,000 234,000 665,000 0 116,000 8,000 303,000 43,000 405,000
1996 $475,000 181,000 1,206,000 34,000 336,000 27,000 690,000 135,000 308,000

High Yield 1998 To be
updated
1997 $8,925,000 1,473,000 16,578,000 0 2,127,000 153,000 5,700,000 583,000 1,500,000
1996 $7,450,000 1,324,000 7,288,000 91,000 1,549,000 119,000 3,416,000 638,000 567,000

Income and 1998 To be
Capital updated
1997 $600,000 211,000 588,000 0 97,000 7,000 254,000 39,000 378,000
1996 $572,000 146,000 1,393,000 89,000 390,000 31,000 804,000 132,000 295,000

Mortgage To be
updated
1997 $6,685,000 1,362,000 640,000 0 116,000 8,000 300,000 57,000 -0-
1996 $9,328,000 2,147,000 982,000 22,000 325,000 23,000 656,000 119,000 514,000

Opportunity 1998 To be
Fund updated

Short- 1998 To be
Intermediate updated
Government 1997 $1,071,000 327,000 335,000 0 52,000 4,000 136,000 31,000 -0-
1996 $1,403,000 486,000 378,000 2,000 111,000 9,000 235,000 44,000 -0-

<CAPTION>
Other Distribution Expenses Paid by KDI
---------------------------------------
Distribution
Distribution Contingent Total Paid by
Fees Paid Deferred Distribution KDI to KDI Advertising Marketing Misc.
Class C Fiscal by Fund to Sales KDI Fees paid by Affiliated and Prospectus and Sales Operating Interest
Shares Year KDI Charges KDI to Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- --- ------- ------------ ----- ---------- -------- -------- -------- --------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable 1998 To be
Rate updated
1997 $9,000 0 8,000 0 4,000 0 11,000 61,000 12,000
1996 $9,000 0 9,000 0 9,000 1,000 20,000 8,000 8,000

Diversified 1998 To be
updated
1997 $83,000 5,000 106,000 0 49,000 4,000 136,000 24,000 29,000
1996 $33,000 0 52,000 0 34,000 3,000 54,000 14,000 12,000

Government 1998 To be
updated
1997 $62,000 1,000 72,000 0 16,000 1,000 44,000 8,000 30,000
1996 $51,000 1,000 60,000 0 57,000 5,000 113,000 8,000 19,000
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
Other Distribution Expenses Paid by KDI
---------------------------------------
Distribution
Distribution Contingent Total Paid by
Fees Paid Deferred Distribution KDI to KDI Advertising Marketing Misc.
Class C Fiscal by Fund to Sales KDI Fees paid by Affiliated and Prospectus and Sales Operating Interest
Shares Year KDI Charges KDI to Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- --- ------- ------------ ----- ---------- -------- -------- -------- --------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield 1998 To be
updated
1997 $657,000 58,000 944,000 0 411,000 29,000 1,111,000 128,000 210,000
1996 $245,000 3,000 370,000 0 316,000 23,000 559,000 90,000 79,000

Income and 1998 To be
Capital updated
1997 $53,000 2,000 60,000 0 23,000 2,000 60,000 16,000 24,000
1996 $31,000 1,000 42,000 0 40,000 3,000 86,000 2,000 12,000

Mortgage 1998 To be
Updated
1997 $16,000 1,000 21,000 0 7,000 0 19,000 5,000 8,000
1996 $12,000 0 15,000 0 8,000 1,000 17,000 1,000 5,000

Opportunity 1998 To be
Fund updated

Short- 1998 To be
Intermediate updated
Government 1997 $34,000 3,000 42,000 0 18,000 1,000 50,000 16,000 28,000
1996 $25,000 1,000 29,000 0 36,000 3,000 76,000 12,000 17,000
</TABLE>

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 the 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 the 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 the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A shares, KDI pays each firm a service fee,
normally payable quarterly, at an annual rate of (a) up to 0.15% (0.25% for the
Mortgage and Short-Intermediate Government Funds) of the net assets in Fund
accounts that it maintains and services attributable to Class A shares acquired
prior to October 1, 1993, and (b) up to 0.25% of net assets of those accounts
that it maintains and services attributable to Class A shares acquired on or
after October 1, 1993, in each case commencing with the month after investment.
With respect to Class B shares and Class C shares, KDI currently advances to
firms the first-year service fee at a rate of up to 0.25% of the purchase price
of such shares. For periods after the first year, KDI currently intends to pay
firms a service fee at an annual rate of up to 0.25% (calculated monthly and
normally paid quarterly) of the net assets attributable to Class B and Class C
shares maintained and serviced by the firm and the fee continues until
terminated by KDI or the Fund. Firms to which service fees may be paid include
affiliates of KDI.

The following information concerns the administrative services fee paid by each
Fund to KDI for fiscal years ended 1998, 1997 and 1996(except the Opportunity
Fund which commenced operations on October 1, 1997).

<TABLE>
<CAPTION>
Administrative Service Fees Paid by Fund
----------------------------------------

Total Service Fees Service Fees Paid by KDI to
Fund Fiscal Year Class A Class B Class C Paid by KDI to Firms KDI Affiliated Firms
- ---- ----------- ------- ------- ------- -------------------- --------------------

<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate 1998 To be
updated
1997 $169,000 17,000 3,000 188,000 0
1996 $213,000 14,000 3,000 231,000 5,000
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
Administrative Service Fees Paid by Fund
----------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Diversified 1998 To be
updated
1997 $1,131,000 705,000 28,000 1,930,000 9,000
1996 $1,020,000 624,000 11,000 1,692,000 55,000

Government 1998 To be
updated
1997 $6,821,000 173,000 19,000 7,053,000 35,000
1996 $7,542,000 159,000 15,000 7,728,000 329,000

High Yield 1998 To be
updated
1997 $6,462,000 2,917,000 217,000 10,067,000 49,000
1996 $5,075,000 2,469,000 83,000 7,844,000 134,000

Income and Capital 1998 To be
updated
1997 $992,000 199,000 18,000 1,207,000 6,000
1996 $950,000 185,000 10,000 1,167,000 39,000

Mortgage 1998 To be
updated
1997 $4,354,000 2,139,000 5,000 6,503,000 73,000
1996 $4,751,000 2,978,000 4,000 7,729,000 301,000

Opportunity Fund 1998 To be
updated

Short-Intermediate 1998 To be
Government updated
1997 $88,000 345,000 12,000 450,000 0
1996 $80,000 453,000 8,000 546,000 11,000
</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, however,
the administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from a
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of a Fund while this procedure is in
effect will depend upon the proportion of Fund assets that is in accounts for
which a firm of record provides administrative services, as well as (except for
the Mortgage and Short-Intermediate Government Funds), with respect to Class A
shares, the date when shares representing such assets were purchased. The Board
of Trustees of a Fund, in its discretion, may approve basing the fee to KDI on
all Fund assets in the future.

Certain trustees or officers of the Funds are also directors or officers of
Scudder Kemper or KDI as indicated under "Officers and Trustees."

Custodian, Transfer Agent and Shareholder Service Agent. Investors Fiduciary
Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. The Chase Manhattan Bank, Chase
MetroTech Center, Brooklyn, New York 11245, as custodian, has custody of all
securities and cash of each Fund held outside of the United States. They attend
to the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by each Fund. IFTC is also each Fund's
transfer agent and dividend-paying agent. Pursuant to a services agreement with
IFTC, Kemper Service Company ("KSvC"), an affiliate of Scudder Kemper, serves as
"Shareholder Service Agent" of each Fund, and as such, performs all of IFTC's
duties as transfer agent and dividend paying agent. IFTC receives as transfer
agent, and pays to KSvC, annual account fees of $6 per account plus account set
up, transaction and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B only) and out-of-pocket expense
reimbursement. IFTC's fee is reduced by certain earnings credits in favor of the
Fund. The following shows for each Fund's 1998 fiscal year the shareholder
service fees IFTC remitted to KSvC (except for the Opportunity Fund which
commenced operations on October 1, 1997).

29
<PAGE>

Fund Fees to KSvC
- ---- ------------

Adjustable Rate To be updated
Diversified
Government
High Yield
Income and Capital
Mortgage
Opportunity Fund
Short--Intermediate Government

Independent Auditors and Reports to Shareholders. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Funds. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.

Legal Counsel. Vedder, Price, Kaufmann & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to each Fund.

PURCHASE, REPURCHASE, 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 whether the order is for Class
A, Class B, Class C or Class I shares.

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 daily net
Sales Charge assets) Other Information
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 4.5% of None Initial sales charge
the public offering price (3.5% for the waived or reduced for
Adjustable Rate and Short Intermediate certain purchases
Government Funds)

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

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

Class I None None
</TABLE>

The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion. In order to begin accruing income dividends as soon as
possible, purchasers may wire payment to United Missouri Bank of Kansas City,
N.A., 10th and Grand Avenue, Kansas City, Missouri 64106.

30
<PAGE>

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

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

Adjustable Rate and Short-Intermediate Government Funds

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

<S> <C> <C> <C>
Less than $100,000 3.50% 3.63% 3.00%

$100,000 but less than $250,000 3.00 3.09 2.50

$250,000 but less than $500,000 2.50 2.56 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.

The public offering price of Class A shares for purchasers of the Diversified,
Government, High Yield, Income and Capital, Mortgage and Opportunity Funds
choosing the initial sales charge alternative is the net asset value plus a
sales charge, as set forth below.

Diversified, Government, High Yield, Income and Capital, Mortgage and
Opportunity Funds

Less than $100,000 4.50% 4.71% 4.00%

$100,000 but less than $250,000 3.50 3.63 3.00

$250,000 but less than $500,000 2.60 2.67 2.25

$500,000 but less than $1 million 2.00 2.04 1.75

$1 million and over .00** .00** ***
</TABLE>

* Rounded to the nearest one-hundredth percent.

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

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

Each Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow 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.

31
<PAGE>

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

KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount record keeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale, 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. 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.

Effective on February 1, 1996, 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 investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Funds,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper Value Fund, Inc. ("KVF") on September 8, 1995, and have
continuously owned shares of KVF (or a Kemper Fund acquired by exchange of KVF
shares) since that date, for themselves or members of their families, and (d)
any trust or pension, profit-sharing or other benefit plan for only such
persons. 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 Class A shares may purchase
Fund shares at net asset value hereunder. Class A shares may be sold at net
asset value in any amount to unit investment trusts sponsored by Ranson &
Associates, Inc. In addition, unitholders of unit investment trusts sponsored by
Ranson & Associates, Inc. or its predecessors may purchase a Fund's Class A
shares at net asset value through reinvestment programs described in the
prospectuses of such trusts that have such programs. Class A shares of a Fund
may be sold at net asset value through certain investment advisers registered
under the Investment Advisers 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
adviser or other firm for portfolio management and other services. Such shares
are sold for investment purposes and on the condition that they will not be
resold except through redemption or repurchase by the 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

32
<PAGE>

with another investment company, or to shareholders in connection with the
investment or reinvestment of income and capital gain dividends.

Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.

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

Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of 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.

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 "Investment Manager and Underwriter."

Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. Class B shareholders of the Funds who originally acquired their
shares as Initial Shares of Kemper Portfolios, formerly known as Kemper
Investment Portfolios ("KIP"), hold them subject to the same conversion period
schedule as that of their KIP Portfolio. Class B shares originally representing
Initial Shares of a KIP Portfolio will automatically convert to Class A shares
of the applicable Fund six years after issuance of the Initial Shares for shares
issued on or after February 1, 1991 and seven years after issuance of the
Initial Shares for shares issued before February 1, 1991. The purpose of the
conversion feature is to relieve holders of Class B shares from the distribution
services fee when they have been outstanding long enough for KDI to have been
compensated for distribution related expenses. For purposes of conversion to
Class A shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's Fund
account will be converted to Class A shares on a pro rata basis.

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

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

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<PAGE>

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

As described in the Funds' prospectus, 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 of each Fund, 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 the Fund determines that it has received
payment of the proceeds of the check. The time required for such a determination
will vary and cannot be determined in advance.

Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described in the Funds' prospectus.

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

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 the 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 does not result in the 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 as described in the prospectus.

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

REPURCHASE AND REDEMPTION OF SHARES

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

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<PAGE>

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 will 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, effective January 1998,
the Funds may assess a quarterly fee of $9 on an account with a balance below
$1,000 for the quarter. The fee will not apply to accounts enrolled in an
automatic investment program, Individual Retirement Accounts or employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent.

Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, 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 and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The 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 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

35
<PAGE>

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 the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption request of $250,000 or more may be delayed by the Fund for up to
seven days if Scudder Kemper 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 the Fund were purchased.
Shares purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may
not be redeemed by wire transfer until such shares have been owned for at least
10 days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
redemption privilege. The Funds reserve the right to terminate or modify this
privilege at any time.

Contingent Deferred Sales Charge -- Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the commission applicable to such Large Order NAV Purchase.

Contingent Deferred Sales Charge -- Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.

Contingent
Deferred Sales
Year of Redemption After Purchase Charge
- --------------------------------- ------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%

Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them
subject to the same CDSC schedule that applied when those shares were purchased,
as follows:

Contingent Deferred Sales Charge

Shares Purchases
Shares on or after
Purchases on February 1, 1991 Shares Purchased
Year of Redemption or after and Before Before February 1,
After Purchase March 1, 1993 March 1, 1993 1991
- -------------- ------------- ------------- ----
First 4% 3% 5%

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<PAGE>

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

The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
- -- Systematic Withdrawal Plan" below) and (d) for redemptions made pursuant to
any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2; and (e)
for redemptions to satisfy required minimum distributions after age 70 1/2 from
an IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in a Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.

Contingent Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special Features --
Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including, but
not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
(g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly, and (f)
redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer of
record had waived the advance of the first year administrative services and
distribution fees applicable to such shares and has agreed to receive such fees
quarterly.

Contingent Deferred Sales Charge -- General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of a Fund's Class B shares and that
16 months later the value of the shares has grown by $1,000 through reinvested
dividends and by an additional $1,000 in appreciation to a total of $12,000. If
the investor were then to redeem the entire $12,000 in share value, the
contingent deferred sales charge would be payable only with respect to $10,000
because neither the $1,000 of reinvested dividends nor the $1,000 of share
appreciation is subject to the charge. The charge would be at the rate of 3%
($300) because it was in the second year after the purchase was made.

The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1998 will be eligible for the second year's charge if redeemed on or
after December 1, 1999. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. KDI receives any contingent deferred
sales charge directly.

Reinvestment Privilege. A shareholder who has redeemed Class A shares of a Fund
or any other 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 other listed Kemper Mutual Funds. A shareholder of a Fund or
other 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

37
<PAGE>

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 other 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 other
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. 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 Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper Value Fund,
Inc., Kemper Value+Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon
Fund, Kemper Europe Fund, Kemper Asian Growth Fund and Kemper Aggressive Growth
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 may include: (a) Money Market Funds as
"Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual Fund, and
(c) the value of any other plan investments, such as guaranteed investment
contracts and employer stock, maintained on such subaccount record keeping
system.

Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of a Fund are included for this privilege.

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

Class A Shares -- Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.

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<PAGE>

Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
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 the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.

Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another 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 other 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 Class B 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 other 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, they retain the cost and purchase date of the
shares that were originally purchased and exchanged.

General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). 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 of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to 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 funds that are available for sale in the shareholder's state of residence.
Currently, Tax-Exempt California Money Market Fund is available for sale only in
California and 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 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 such 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.

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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 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, investments are made automatically (minimum $50 maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination by a shareholder will become effective within thirty
days after the Shareholder Service Agent has received the request. A Fund may
immediately terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's financial institution. The Funds may terminate or modify
this privilege at any time.

Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.

Systematic Withdrawal Plan. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege and Class C shares in their first year following the
purchase) under a systematic withdrawal plan is 10% of the net asset value of
the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.

The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, 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.

Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:

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

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

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

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

ADDITIONAL TRANSACTION INFORMATION

General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to 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 KSvC in
acknowledgment of their dedication to the employee benefit plan area and (iv)
the purchase is not otherwise subject to a commission.

In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Funds. Non-cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the
Funds or other funds underwritten by KDI.

Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
See "Purchase and Redemption of Shares."

Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
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 any class
of its shares to new investors. During the period of such suspension, persons
who are already shareholders of such class of the Fund normally are permitted to
continue to purchase additional shares of such class and to have dividends
reinvested.

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Shareholders should direct their inquiries to KSvC, 811 Main Street, Kansas
City, Missouri 64105-2005 or to the firm from which they received this Statement
of Additional Information.

DIVIDENDS AND TAXES

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

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

Dividends paid by a Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.

Income dividends and capital gain dividends, if any, of a Fund will be credited
to shareholder accounts in full and fractional shares of the same class of that
Fund at net asset value, except that, upon written request to the Shareholder
Service Agent, a shareholder may select one of the following options: (1) to
receive income and short-term capital gain dividends in cash and long-term
capital gain dividends in shares of the same class at net asset value; or (2) to
receive income and capital gain dividends in cash.

Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of a Fund
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. To use this privilege of investing
dividends of a Fund in shares of another Kemper Fund, shareholders must maintain
a minimum account value of $1,000 in the Fund distributing the dividends. The
Funds reinvest dividend checks (and future dividends) in shares of that same
Fund and class if checks are returned as undeliverable. Dividends and other
distributions in the aggregate amount of $10 or less are automatically
reinvested in shares of the same Fund unless the shareholder requests that such
policy not be applied to the shareholder's account.

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. One of the
Subchapter M requirements to be satisfied is that less than 30% of a Fund's
gross income during its fiscal year must be derived from gains (not reduced by
losses) from the sale or other disposition of securities and certain other
investments held for less than three months. This requirement has been
eliminated by the Taxpayer Relief Act of 1997 for fiscal years beginning after
August 5, 1997. As long as the requirement applies a Fund may be limited in its
options, futures and foreign currency transactions in order to prevent
recognition of such gains.

A Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of the Fund's securities.

The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain or loss
recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts on foreign currency are
marked-to-market, the gain or loss is generally ordinary under Section 988 of
the Code. In addition, the straddle rules of the Code would require deferral of
certain losses realized on positions of a straddle to the extent that the Fund
had unrealized gains in offsetting positions at year end.

Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if a Fund sold a foreign bond and part of the gain or
loss on the sale was attributable to an increase or decrease in the value of a
foreign currency, then the currency gain or loss may be treated as ordinary
income or loss. If such transactions result in greater net ordinary income, the
dividends paid by the Fund will be increased; if the result of such transactions
is lower net ordinary income, a portion of dividends paid could be classified as
a return of capital.

[TO BE UPDATED]

At August 31, 1998 the Adjustable Rate Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $__, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1999 through 2004. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.

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At October 31, 1998, the Diversified Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $__, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1999 through 2003. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.

At October 31, 1998, the Government Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $__, which is available to
offset future taxable capital gains. If not applied, the carryover expires
during the period 1999 through 2004. The Fund does not intend to distribute
realized capital gains until the capital loss carryover is exhausted.

At October 31, 1998, the Income and Capital Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $__, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 2002 through 2003. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.

At September 30, 1998, the High Yield Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $__, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1999 through 2006. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.

At September 30, 1998, the Mortgage Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $__, which is available to
offset future taxable capital gains. If not applied, the carryover expires
during the period 1999 through 2006. The Fund does not intend to distribute
realized capital gains until the capital loss carryover is exhausted.

At September 30, 1998, the Short-Intermediate Government Fund had an accumulated
net realized capital loss for federal income tax purposes of approximately $__,
which is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 2002 through 2006. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.

A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of a Fund's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one-year
period ended October 31 in the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. Each Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to prevent imposition of the 4% excise tax.

A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of Fund shares held six months or less will be
treated as long-term capital loss to the extent that the shareholder has
received any long-term capital gain dividends on such shares. A shareholder who
has redeemed shares of a Fund (other than shares of the Kemper Cash Reserves
Fund not acquired by exchange from another Kemper Mutual Fund) or other Kemper
Mutual Fund listed in the prospectus under "Special Features -- Class A Shares
- -- Combined Purchases" may reinvest the amount redeemed at net asset value at
the time of the reinvestment in shares of any Fund or in shares of a Kemper
Mutual Fund within six months of the redemption as described in the prospectus
under "Purchase, Repurchase and Redemption of Shares -- Reinvestment Privilege."
If redeemed shares were purchased after October 3, 1989 and were held less than
91 days, then the lesser of (a) the sales charge waived on the reinvested
shares, or (b) the sales charge incurred on the redeemed shares, is included in
the basis of the reinvested shares and is not included in the basis of the
redeemed shares. If a shareholder realized a loss on the redemption or exchange
of a Fund's shares and reinvests in shares of the same Fund within 30 days
before or after the redemption or exchange, the transactions may be subject to
the wash sale rules resulting in a postponement of the recognition of such loss
for federal income tax purposes. An exchange of a Fund's shares for shares of
another fund is treated as a redemption and reinvestment for federal income tax
purposes upon which gain or loss may be recognized.

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

Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty. Dividends derived
from net investment income and net short-term capital gains are taxable to
shareholders as ordinary income and long-term capital gain dividends are taxable
to shareholders as long-term capital gain regardless of how long the shares have
been held and whether received in cash or shares. Long-term capital gain
dividends received by individual shareholders are taxed at a maximum rate of 20%
on gains realized by a Fund from securities held more than 18 months and at a
maximum rate of 28% on gains realized by a Fund from securities held more than
12 months but not more than 18 months. Dividends declared in October, November
or December to shareholders of record as of a date in one of those months and
paid during the following January are treated as paid on December 31 of the
calendar year declared. A portion of the dividends paid by the Diversified, High
Yield or Opportunity Funds may qualify for the dividends received deduction
available to corporate shareholders. However, it is anticipated that only a
small portion, if any, of the dividends

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<PAGE>

paid by such Funds will so qualify. No portion of the dividends paid by the
Adjustable Rate, Government, Income and Capital, Mortgage or Short-Intermediate
Government Funds will qualify for the dividends received deduction.

A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.

Fund dividends that are derived from interest on direct (but not guaranteed)
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states. In
other states, arguments can be made that such distributions should be exempt
from state and local taxes based on federal law, 31 U.S.C. Section 3124, and the
U.S. Supreme Court's interpretation of that provision in American 37 Bank and
Trust Co. v. Dallas County, 463 U.S. 855 (1983). Shareholders should consult
their tax advisers regarding the possible exclusion of such portion of their
dividends for state and local income tax purposes. Each Fund is required by law
to withhold 31% of taxable dividends and redemption proceeds paid to certain
shareholders who do not furnish a correct taxpayer identification number (in the
case of individuals, a social security number) and in certain other
circumstances. Trustees of qualified retirement plans and 403(b)(7) accounts are
required by law to withhold 20% of the taxable portion of any distribution that
is eligible to be ""rolled over.'` The 20% withholding requirement does not
apply to distributions from Individual Retirement Accounts ("IRAs'`) or any part
of a distribution that is transferred directly to another qualified retirement
plan, 403(b)(7) account, or IRA. Shareholders should consult with their tax
advisers regarding the 20% withholding requirement.

After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for income tax purposes,
including information regarding any foreign taxes and credits, will be provided
after the end of the calendar year. Shareholders are encouraged to retain copies
of their account confirmation statements or year-end statements for tax
reporting purposes, including information regarding any foreign taxes and
credits. However, those who have incomplete records may obtain historical
account transaction information at a reasonable fee.

When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.

NET ASSET VALUE

The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A shares of a Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of a Fund is computed as of the close of regular trading
(the "value time") on the New York Stock Exchange (the "Exchange") on each day
the Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.

Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.

With respect to the Funds with securities listed primarily on foreign exchanges,
such securities may trade on days when the Fund's net asset value is not
computed; and therefore, the net asset value of a Fund may be significantly
affected on days when the investor has no access to the Fund.

An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.

Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security

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<PAGE>

pursuant to these valuation methods, the value of such security is the most
recent bid quotation supplied by a bona fide marketmaker. If it is not possible
to value a particular debt security pursuant to the above methods, the
investment manager of the particular fund may calculate the price of that debt
security, subject to limitations established by the Board.

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

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

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

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

PERFORMANCE

A Fund may advertise several types of performance information for a class of
shares, including "yield" and "average annual total return" and "total return."
Performance information will be computed separately for each class. Each of
these figures is based upon historical results and is not representative of the
future performance of any class of a Fund. A Fund with fees or expenses being
waived or absorbed by Scudder Kemper may also advertise performance information
before and after the effect of the fee waiver or expense absorption.

Scudder Kemper agreed to waive its management fee and to absorb certain
operating expenses for the Adjustable Rate Fund for the periods and to the
extent specified in this Statement of Additional Information. See "Investment
Manager and Underwriter." Because of this waiver and expense absorption, the
performance results for the Adjustable Rate Fund may be shown with and without
the effect of this waiver and expense absorption. Performance results not giving
effect to waivers and expense absorptions will be lower.

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

Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a Fund
during a specified period. Average annual total return will be quoted for at
least the one-, five- and ten-year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.

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

Fund (Period Ended) Class A Shares Class B Shares Class C Shares
- ------------------- -------------- -------------- --------------

Adjustable Rate (8/31/97) To be updated
Diversified (10/31/97)
Government (10/31/97)
High Yield (9/30/97)
Income and Capital (10/31/97)

45
<PAGE>

Fund (Period Ended) Class A Shares Class B Shares Class C Shares
- ------------------- -------------- -------------- --------------

Mortgage (9/30/97)
Opportunity Fund
Short-Intermediate
Government (9/30/97)

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

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

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

In computing the foregoing yield, each Fund follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that each Fund uses to
prepare its annual and interim financial statements in conformity with generally
accepted accounting principles. Each Fund's average annual total return
quotation is computed in accordance with a standardized method prescribed by
rules of the Securities and Exchange Commission. The average annual total return
for a Fund for a specific period is found by first taking a hypothetical $1,000
investment ("initial investment") in 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 expressed as a percentage. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Average annual total return may
also be calculated without deducting the maximum sales charge.

Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of 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 a Fund's shares on the first day of the period, either
adjusting or not adjusting to deduct the maximum sales charge (in the case of
Class A shares), and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The ending value
in the case of Class B and Class C shares may or may not include the effect of
the applicable contingent deferred sales charge that may be imposed at the end
of the period. The calculation assumes that all income and capital gains
dividends paid by 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 would be
reduced if such charge were included.

A Fund's performance figures are based upon historical results and are not
representative of future performance. Each Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 4.5% of the offering price (3.5% for
the Adjustable Rate and Short-Intermediate Government Funds). Class B , Class C
and Class I shares are sold at net asset value. Redemptions of Class B shares
may be subject to a contingent deferred sales charge that is 4% in the first
year following the purchase, declines by a specified percentage each year
thereafter and becomes zero after six years. Redemption of Class C shares may be
subject to a 1% contingent deferred sales charge in the first year following
purchase. Average annual total return figures do, and total return figures may,
include the effect of the contingent deferred sales charge for the Class B
shares and Class C shares that may be imposed at the end of the period in
question. Performance figures for the Class B shares and Class C shares not
including the effect of the applicable contingent deferred sales charge would be
reduced if it were included. Returns and net asset value will fluctuate. Factors
affecting each Fund's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce the returns described in this
section. Shares of each Fund are redeemable at the then current net asset value,
which may be more or less than original cost.

A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes including, but not limited to, the Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, the Salomon Brothers Long-Term

46
<PAGE>

High Yield Index, the Salomon Brothers 30 Year GNMA Index and the Merrill Lynch
Market Weighted Index and may also be compared to the performance of other
mutual funds or mutual fund indexes with similar objectives and policies as
reported by independent mutual fund reporting services such as Lipper Analytical
Services, Inc. (""Lipper"). Lipper performance calculations are based upon
changes in net asset value with all dividends reinvested and do not include the
effect of any sales charges.

Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among other things, the BANK RATE MONITOR National Index(TM) or various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").

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

Each Fund's returns and net asset value will fluctuate and shares of a Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information about each Fund's performance also appears in its Annual Report to
Shareholders, which is available without charge from the applicable Fund.

The yield or price volatility of a Fund (particularly the Adjustable Rate Fund)
may be compared to various securities, such as U.S. Government Securities, or
indexes, such as the COFI referred to above or the constant Maturity Treasury
Index ("CMT") published by the Federal Reserve Board. A Fund may include in its
sales literature and shareholder reports a quotation of the current
"distribution rate" for the 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.

The figures below show performance information for the Funds for various
periods. Comparative information with respect to certain indices is also
included. Please note the differences and similarities between the investments
which a Fund may purchase and the investments measured by the applicable
indices. The Consumer Price Index is generally considered to be a measure of
inflation. The Lehman Brothers Adjustable Rate Index generally represents the
performance of adjustable rate mortgages during various market conditions. The
Lehman Brothers Aggregate Bond Index generally represents the performance of
intermediate and long-term government bonds and investment grade corporate debt
securities and mortgage-backed securities during various market conditions. The
Lehman Brothers Government/Corporate Bond Index generally represents the
performance of intermediate and long-term government and investment grade
corporate debt securities during various market conditions. The Merrill Lynch
Market Weighted Index generally represents the performance of short- and
intermediate-term Treasury and GNMA securities during various market conditions.
The Salomon Brothers High Grade Corporate Bond Index generally represents the
performance of high grade long-term corporate bonds during various market
conditions. The Salomon Brothers Long-Term High Yield Index generally represents
the performance of high yield debt securities during various market conditions.
The Salomon Brothers 30 Year GNMA Index generally represents the performance of
GNMA 30-year pass-through mortgages. The foregoing bond indices are unmanaged.
The market prices and yields of corporate and government bonds will fluctuate.
The net asset values and returns of each class of shares of the Funds will also
fluctuate. No adjustment has been made for taxes payable on dividends. The
period indicated was one of fluctuating securities prices and interest rates.

ADJUSTABLE RATE FUND -- AUGUST 31, 1998

<TABLE>
<CAPTION>
Capital Gain Income Percentage Percentage
TOTAL Initial $10,000 Dividends Dividends Ending Value Increase Ending Value Increase
RETURN TABLE Investment (*) Reinvested Reinvested (**) (adjusted) (*) (adjusted) (*) (Unadjusted) (*) (Unadjusted)
- ------------ -------------- ---------- --------------- -------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>

CLASS A
SHARES
</TABLE>

47
<PAGE>

Life of To be
Fund(+) updated
Five Years
One Year

CLASS B
SHARES
Life of
Fund(++)
One Year

CLASS C
SHARES
Life of
Fund(++)
One Year

CLASS I
SHARES
Life of
Fund(++)
One Year
</TABLE>

COMPARED TO

<TABLE>
<CAPTION>
Salomon Bros. Lehman Bros.
Consumer Price High Grade Govt./Corp Lehman Bros.
TOTAL RETURN TABLE Index (1) Corp. Index (2) Index (3) ARM Index (4)
- ------------------ --------- --------------- --------- -------------
<S> <C> <C> <C> <C>

Life of Fund(+) To be
updated
Life of Fund(++)
Five Years
One Year

<CAPTION>
Lehman
Salomon Bros.
AVERAGE Consumer Bros. High Govt./ Lehman
ANNUAL TOTAL Fund Class Fund Class Fund Class Fund Class Price Grade Corp. Corp. Bros. ARM
RETURN TABLE A Shares B Shares C Shares I Shares Index (1) Index (2) Index (3) Index (4)
- ------------ -------- -------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Life of Fund(+) To be
updated
Life of
Fund(++)
Five Years
One Year
</TABLE>

* Data not available or not applicable.

(+) Since September 1, 1987 for Class A Shares.

(++) Since May 31, 1994 for Class B and Class C Shares.

48
<PAGE>

DIVERSIFIED FUND -- OCTOBER 31, 1998

<TABLE>
<CAPTION>
Capital
Initial Gain Income Percentage Percentage
TOTAL $10,000 Dividend Dividends Ending Value Increase Ending Value Increase
RETURN TABLE Investment (*) Reinvested Reinvested (**) (adjusted) (*) (adjusted) (*) (unadjusted) (***) (unadjusted) (***)
- ------------ -------------- ---------- --------------- -------------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>

CLASS A
SHARES
Life of To be
Fund(+) updated
Fifteen Years
Ten Years
Since
2/1/89(+++)
Five Years
One Year

CLASS B
SHARES
Life of
Fund(++)
One Year

CLASS C
SHARES
Life of
Fund(++)
One Year

CLASS I
SHARES
One Year
Life of
Fund(++)
</TABLE>

COMPARED TO

<TABLE>
<CAPTION>
Consumer Salomon Bros. Lehman Bros. Merrill Lynch High
TOTAL RETURN Price High Grade Corp. Govt./Corp. Yield Master
TABLE Index (1) Index (2) Index (3) Index (5)
- ----- --------- ---------------- ------------ ------------------
<S> <C> <C> <C> <C>

Life of Fund(+) To be 592.3 536.1 *
updated
Life of Fund(++) 9.6 42.6 33.4 50.8
Fifteen Years 64.6 443.4 333.4 *
Ten Years 40.2 182.1 140.9 219.2
Since 2/1/89(+++) 33.4 141.5 116.6 166.7
Five Years 14.0 55.9 44.4 75.4
One Year 2.1 10.8 8.8 13.8

<CAPTION>
Lehman
Salomon Bros. Merrill Lynch
AVERAGE Consumer Bros. High Govt./ High Yield
ANNUAL TOTAL Fund Class Fund Class Fund Class Fund Class Price Grade Corp. Corp. Master
RETURN TABLE A Shares B Shares C Shares I Shares Index (1) Index (2) Index (3) Index (5)
- ------------ -------- -------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Life of Fund(+) To be
updated
Life of Fund(++)
Fifteen Years
Ten Years
Five Years
One Year
</TABLE>

* Data not available on not applicable.

(+) Since June 23, 1977 for Class A Shares. (Index begins 6/30/77)

(++) Since May 31, 1994 for Class B and Class C Shares.

(+++) The Fund's current objective became effective February 1, 1989.

49
<PAGE>

GOVERNMENT FUND -- OCTOBER 31, 1998

<TABLE>
<CAPTION>
Capital
Initial Gain Income Percentage Percentage
TOTAL $10,000 Dividends Dividends Ending Value Increase Ending Value Increase
RETURN TABLE Investment (*) Reinvested Reinvested (**) (adjusted) (*) (adjusted) (*) (unadjusted) (*) (unadjusted) (*)
- ------------ -------------- ---------- --------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>

CLASS A
SHARES
Life of To be
Fund(+) updated
Fifteen Years
Ten Years
Five Years
One Year

CLASS B
SHARES
Life of
Fund(++)
One Year

CLASS C
SHARES
Life of
Fund(++)
One Year

CLASS I
SHARES
Life of
Fund(++)
One Year
</TABLE>

COMPARED TO

<TABLE>
<CAPTION>
Salomon Bros. Lehman Bros. Salomon Bros. 30
Consumer High Grade Govt./Corp. Yr.
TOTAL RETURN TABLE Price Index(1) Corp. Index(2) Index(3) GNMA Index(6)
- ------------------ -------------- -------------- -------- -------------
<S> <C> <C> <C> <C>

Life of Fund(+) To be
updated
Life of Fund(++)
Fifteen Years
Ten Years
Five Years
One Year

<CAPTION>
Lehman
Salomon Bros.
AVERAGE Fund Fund Fund Fund Consumer Bros. High Govt./ Salomon
ANNUAL TOTAL Class A Class B Class C Class I Price Grade Corp. Corp. Bros. 30 Yr.
RETURN TABLE Shares Shares Shares Shares Index(1) Index(2) Index(3) GNMA Index(6)
- ----- ------ -------- ------ ------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of To be
Fund(+) updated
Life of
Fund(++)
Fifteen Years
Ten Years
Five Years
One Year
</TABLE>

* Data not available or not applicable.

(+) Since October 1, 1979 for Class A Shares (when ZKI assumed investment
advisory responsibilities for the Fund; prior to that date, the Fund was
managed by another investment adviser that was not affiliated with ZKI)

(++) Since May 31, 1994 for Class B and Class C Shares.

50
<PAGE>

HIGH YIELD FUND -- SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
Capital
Initial Gain Income Percentage Percentage
TOTAL $10,000 Dividends Dividends Ending Value Increase Ending Value Increase
RETURN TABLE Investment (*) Reinvested Reinvested (**) (adjusted) (*) (adjusted) (*) (unadjusted) (*) (unadjusted)
- ------------ -------------- ---------- --------------- -------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>

CLASS A SHARES
Life of To be
Fund(+) updated
Fifteen Years
Ten Years
Five Years
One Year

CLASS B SHARES
Life of
Fund(++)
One Year

CLASS C SHARES
Life of
Fund(++)
One Year

CLASS I SHARES
Life of
Fund(++)
One Year
</TABLE>

COMPARED TO
<TABLE>
<CAPTION>
Consumer Salomon Bros. Lehman Bros. Merrill Lynch High
TOTAL RETURN Price High Grade Corp. Govt./Corp. Yield Master
TABLE Index (1) Index (2) Index (3) Index (5)
- ----- --------- ---------------- ------------ ------------------
<S> <C> <C> <C> <C>

Life of Fund(+) To be
updated
Life of Fund(++)
Fifteen Years
Ten Years
Five Years
One Year

<CAPTION>
Lehman
Salomon Bros. Merrill Lynch
AVERAGE Consumer Bros. High Govt./ High Yield
ANNUAL TOTAL Fund Class Fund Class Fund Class Fund Class Price Grade Corp. Corp. Master
RETURN TABLE A Shares B Shares C Shares I Shares Index(1) Index(2) Index(3) Index(5)
- ------------ -------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Life of Fund(+) To be
updated
Life of Fund(++)
Fifteen Years
Ten Years
Five Years
One Year
</TABLE>

* Data not available or not applicable.

(+) Since January 26, 1978 for Class A Shares.

(++) Since May 31, 1994 for Class B and Class C Shares.

51
<PAGE>

INCOME AND CAPITAL FUND -- OCTOBER 31, 1998

CLASS A
SHARES
Life of To be
Fund(+) updated
Fifteen Years
Ten Years
Five Years
One Year

CLASS B
SHARES
Life of
Fund(++)
One Year

CLASS C
SHARES
Life of
Fund(++)
One Year

CLASS I
SHARES
Life of
Fund(++)
One Year
</TABLE>

COMPARED TO

<TABLE>
<CAPTION>
Salomon Bros. Lehman Bros. Lehman Bros.
Consumer Price High Grade Aggregate Bond Govt./Corp.
TOTAL RETURN TABLE Index(1) Corp. Index(2) Index(7) Index(3)
- ------------------ -------- -------------- -------- --------
<S> <C> <C> <C> <C>

Life of Fund(+) To be
updated
Life of Fund(++)
Fifteen Years
Ten Years
Five Years
One Year

<CAPTION>
Lehman
Salomon Bros.
AVERAGE Consumer Bros. High Aggregate Lehman Bros.
ANNUAL TOTAL Fund Class Fund Class Fund Class Fund Class Price Grade Corp. Bond Govt./Corp.
RETURN TABLE A Shares B Shares C Shares I Shares Index(1) Index(2) Index(7) Index(3)
- ------------ -------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) To be
updated
Life of Fund(++)
Fifteen Years
Ten Years
Five Years
One Year
</TABLE>

* Data not available or not applicable.

(+) Since April 15, 1974 for Class A Shares.

(++) Since May 31, 1994 for Class B and Class C Shares.

52
<PAGE>

MORTGAGE FUND -- SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
Capital
Initial Gain Income Percentage Percentage
TOTAL $10,000 Dividends Dividends Ending Value Increase Ending Value Increase
RETURN TABLE Investment (*) Reinvested Reinvested (**) (adjusted) (***) (adjusted) (*) (unadjusted) (*) (unadjusted) (*)
- ------------ -------------- ---------- --------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>

CLASS A
SHARES
Life of To be
Fund(+) updated
One Year
Five Years

CLASS B
SHARES
Life of
Fund(++)
Ten Years
Five Years
One Year

CLASS C
SHARES
Life of
Fund(++)
One Year

CLASS I
SHARES
Life of
Fund(+++)
One Year
</TABLE>

COMPARED TO

<TABLE>
<CAPTION>
Salomon Bros. Lehman Brothers Merrill Lynch
Consumer Price 30 Yr. GNMA Govt./Corp. Mortgage Master
TOTAL RETURN TABLE Index(1) Index(2) Index(3) Index(8)
- ------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>

Life of Fund(+) To be
updated

Life of Fund(++)
Life of Fund(+++)
Ten Years
Five Years
One Year

<CAPTION>
Lehman
Salomon Bros. Merrill Lynch
AVERAGE Consumer Bros. 30 yr. Govt./ Mortgage
ANNUAL TOTAL Fund Class Fund Class Fund Class Fund Class Price GNMA Corp. Master
RETURN TABLE A Shares B Shares C Shares I Shares Index(1) Index(6) Index(3) Index(8)
- ------------ -------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) To be
updated
Life of Fund(++)
Life of Fund(+++)
Ten Years
Five Years
One Year
</TABLE>

* Data not available or not applicable.

(+) Since January 10, 1992 for Class A Shares.

(++) Since October 26, 1984 for Class B Shares.

(+++) Since May 31, 1994 for Class C Shares.

53
<PAGE>

SHORT-INTERMEDIATE GOVERNMENT FUND -- SEPTEMBER 30, 1998

CLASS A
SHARES
Life of To be
Fund(+) updated
Five Years
One Year

CLASS B
SHARES
Life of
Fund(++)
Five Years
One Year

CLASS C
SHARES
Life of
Fund(++)
One Year

CLASS I
SHARES
Life of
Fund(+++)
One Year
</TABLE>

COMPARED TO

<TABLE>
<CAPTION>
Lehman Govt.
Salomon Bros. Lehman Brothers Bond
Consumer Price 30 Yr. GNMA Govt./Corp Intermediate
TOTAL RETURN TABLE Index(1) Index(6) Index(3) Index(9)
- ------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Life of Fund(+) To be
updated
Life of Fund(++)
Life of Fund(+++)
Five Years
One Year

<CAPTION>
Lehman
Salomon Bros. Lehman Govt.
AVERAGE Consumer Bros. 30 yr. Govt./ Bond
ANNUAL TOTAL Fund Class Fund Class Fund Class Fund Class Price GNMA Corp. Intermediate
RETURN TABLE A Shares B Shares C Shares I Shares Index(1) Index(6) Index(3) Index(9)
- ------------ -------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) To be
updated
Life of
Fund(++)
Life of
Fund(+++)
Five Years
One Year
</TABLE>

OPPORTUNITY FUND -- SEPTEMBER 30, 1998

CLASS A
SHARES
Life of To be
Fund(+) updated
Five Years
One Year

CLASS B
SHARES
</TABLE>

54
<PAGE>

Life of
Fund(++)
Five Years
One Year

CLASS C
SHARES
Life of
Fund(++)
One Year

CLASS I
SHARES
Life of
Fund(+++)
One Year

COMPARED TO

* Data not available or not applicable.

(+) Since January 10, 1992 for Class A Shares. (Index at December 31, 1991)

(++) Since February 1, 1989 for Class B Shares. (Index at January 31, 1989)

(+++) Since May 31, 1994 for Class C Shares.

FOOTNOTES FOR ALL FUNDS

* The Initial Investment and adjusted amounts for Class A shares were
adjusted for the maximum initial sales charge at the beginning of the
period, which is 4.5% for the Diversified Fund, Government Fund, High
Yield Fund, Income and Capital Fund and Mortgage Fund and 3.5% for the
Adjustable Rate Fund and Short-Intermediate Government Fund. The Initial
Investment for Class B and Class C shares was not adjusted. Amounts were
adjusted for Class B shares for the contingent deferred sales charge that
may be imposed at the end of the period based upon the schedule for shares
sold currently, see "Purchase, Repurchase and Redemption of Shares" in the
prospectus. No adjustments were made to Class C shares.

** Includes short-term capital gain dividends.

(1) The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.

(2) Salomon Brothers High Grade Corporate Bond Index is on a total return
basis with all dividends reinvested and is comprised of high grade
long-term industrial and utility bonds rated in the top two rating
categories. This index is unmanaged. Source is Towers Data Systems.

(3) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic
debt of the U.S. Government or any agency thereof, quasi-federal
corporation, or corporate debt guaranteed by the U.S. Government and all
publicly issued, fixed-rate, non-convertible, domestic debt of the three
major corporate classifications: industrial, utility, and financial. Only
notes and bonds with a minimum outstanding principal amount of $1,000,000
and a minimum of one year to maturity are included. Bonds included must
have a rating of at least Baa by Moody's Investors Service, Inc., BBB by
Standard & Poor's Corporation or in the case of bank bonds not rated by
either Moody's or S&P, BBB by Fitch Investors Service. This index is
unmanaged. Source is Towers Data Systems.

(4) The Lehman Brothers Adjustable Rate Mortgage Index is a broad market
capitalization index of the U.S. Government agency adjustable rate
mortgage market. All securities in the index have coupons that
periodically adjust based on a spread over a published index, and all are
guaranteed by an agency of the U.S. Government. This index is unmanaged.
Source is Lehman Brothers Inc.

55
<PAGE>

(5) Merrill Lynch High Yield Master Index consists of fixed-rate,
coupon-bearing bonds with an outstanding par which is greater than or
equal to $50 million, a maturity range greater than or equal to one year
and must be less than BBB/Baa3 rated but not in default.

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

(7) The Lehman Brothers Aggregate Bond Index is on a total return basis and is
comprised of intermediate and long-term government bonds, investment grade
corporate debt securities and mortgage-backed securities. This index is
unmanaged. Source is Lipper Analytical Services, Inc.

(8) Merrill Lynch Mortgage Master Index consists of fixed-rate, coupon-bearing
bonds which are comprised of generic pass-through securities which are
composed of numerous mortgage pools with various maturities. The amount
outstanding in each agency/type/coupon subdivision of the mortgage index
must be greater than or equal to $200 million. CMOs are excluded to avoid
double-counting.

(9) The Lehman Government Bond Intermediate Index is made up of the Treasury
Bond Index (all public obligations of the U.S. Treasury, excluding flower
bonds and foreign-targeted issues) and the Agency Bond Index (all publicly
issued debt of U.S. Government agencies and quasi-federal corporations,
and corporate debt guaranteed by the U.S. Government). Includes securities
with maturities between 1 and 10 years.

Investors may want to compare the performance of a Fund to that of certificates
of deposit issued by banks and other depository institutions. Certificates of
deposit represent an alternative income producing product. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution. The
shares of a Fund are not insured and net asset value as well as yield will
fluctuate. Shares of a Fund are redeemable at net asset value which may be more
or less than original cost. The bonds in which the Funds invest are generally of
longer term than most certificates of deposit and may reflect longer term market
interest rate fluctuations.

Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds because such instruments represent alternative
income producing products. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. As noted in the prospectus, the government guarantee of the bonds in
the Adjustable Rate, Government, Mortgage and Short-Intermediate Government
Funds does not guarantee the market value of their respective shares. The net
asset value of a Fund will fluctuate. Shares of a Fund are redeemable at net
asset value which may be more or less than original cost. Each Fund's yield will
also fluctuate.

From time to time, the Adjustable Rate Fund may compare its yield or price
volatility to various securities, such as U.S. Government Securities, or to
certain indices including, but not limited to, the J.P. Morgan one-, three-, and
five-year constant maturity Treasury yield indices, which are based on estimated
Treasury security yields adjusted to constant maturity and the Federal Home Loan
Bank Board 11th District Cost of Funds Index (COFI), which represents the
weighted average cost of funds for savings institutions in Arizona, California
and Nevada and is based on the one month annualized yield of savings deposits,
Federal Home Loan Advances and other borrowings, such as repurchase agreements.

The following tables illustrate an assumed $10,000 investment in Class A shares
of each Fund other than the Mortgage, Opportunity and Short-Intermediate
Government Funds, which includes the current maximum sales charge of 4.5% (3.5%
for the Adjustable Rate Fund), with income and capital gain dividends reinvested
in additional shares. The tables for the Mortgage and Short-Intermediate
Government Funds illustrate an assumed $10,000 investment in Class B shares of
these Funds, with income and capital gain dividends reinvested in additional
shares, and do not include the effect of the contingent deferred sales charge.
Each table covers the period from commencement of operations of the Fund to
December 31, 1997.

ADJUSTABLE RATE FUND (9/1/87)

Cumulative Value of
Dividends Shares Acquired
--------- ---------------
Annual
Annual Capital Reinvested
Income Gain Reinvested Capital
Year Ended Dividends Dividends Initial Income Gain Total
12/31 Reinvested* Reinvested Investment Dividends* Dividends Value
----- ----------- ---------- ---------- ---------- --------- -----

1987 $96 $0 $9,722 $96 $0 $9,818
1988 1,098 0 9,132 1,159 0 10,291
1989 1,122 10 9,185 2,294 10 11,489
1990 1,137 0 8,918 3,388 9 12,315
1991 1,222 0 9,207 4,756 10 13,973
1992 824 0 9,217 5,592 10 14,819
1993 767 0 9,196 6,341 10 15,547
1994 747 0 8,724 6,745 9 15,478
1995 948 0 8,929 7,857 9 16,795

56
<PAGE>

1996 913 0 8,864 8,716 9 17,589
1997 To be
updated

DIVERSIFIED FUND (6/23/77)

1977 $427 $0 $9,141 $427 $0 $9,567
1978 1,006 132 8,591 1,367 132 10,090
1979 1,350 18 8,898 2,787 154 11,839
1980 1,672 30 9,774 4,830 201 14,805
1981 2,052 0 8,738 6,297 179 15,214
1982 2,420 27 8,592 8,771 204 17,567
1983 2,941 0 8,577 11,697 204 20,478
1984 3,449 0 7,667 13,803 182 21,652
1985 3,604 66 7,534 17,181 248 24,963
1986 3,163 307 6,748 18,381 522 25,651
1987 3,379 367 5,412 17,484 690 23,586
1988 3,847 0 5,475 21,566 698 27,739
1989 4,603 0 5,064 24,238 646 29,948
1990 4,215 0 3,819 21,868 487 26,174
1991 4,665 0 5,050 34,010 644 39,704
1992 4,604 0 5,363 40,723 684 46,770
1993 5,096 0 5,879 49,906 749 56,534
1994 4,438 0 5,217 48,486 665 54,368
1995 5,061 0 5,734 58,572 731 65,037
1996 6,336 0 5,656 64,235 721 70,612
1997 To be
updated

GOVERNMENT FUND (10/1/79)

1979 $203 $0 $9,192 $207 $0 $9,399
1980 1,009 0 8,164 1,145 0 9,309
1981 1,197 0 7,180 2,181 0 9,361
1982 1,314 0 8,119 3,912 0 12,031
1983 1,442 0 7,878 5,225 0 13,103
1984 1,686 0 7,806 6,903 0 14,709
1985 1,925 0 8,468 9,523 0 17,991
1986 2,076 0 8,853 12,061 0 20,913
1987 2,228 0 8,173 13,301 0 21,473
1988 2,265 0 7,851 14,985 0 22,836
1989 2,454 0 8,092 17,941 0 26,033
1990 2,526 0 8,066 20,486 0 28,552
1991 2,762 0 8,629 24,849 0 33,478

57
<PAGE>

1992 2,781 0 8,341 26,780 0 35,125
1993 2,662 0 8,242 29,094 0 37,336
1994 2,684 0 7,422 28,770 0 36,192
1995 2,942 0 8,155 34,684 0 42,839
1996 3,097 0 7,797 36,255 0 44,052
1997 To be
updated

HIGH YIELD FUND (1/26/78)

1978 $826 $0 $8,950 $786 $0 $9,736
1979 1,098 0 8,227 1,744 0 9,971
1980 1,306 0 7,140 2,737 0 9,877
1981 1,515 0 6,678 4,057 0 10,735
1982 1,793 0 8,041 6,935 0 14,976
1983 2,048 0 8,365 9,254 0 17,620
1984 2,359 0 8,090 11,327 0 19,417
1985 2,684 0 8,787 15,108 0 23,895
1986 2,929 0 9,290 18,968 0 28,258
1987 3,375 1,196 8,690 20,917 1,200 30,807
1988 4,142 0 8,787 25,246 1,215 35,248
1989 4,632 0 7,635 26,155 1,055 34,845
1990 5,116 0 5,688 23,849 786 30,322
1991 5,417 0 7,262 36,262 1,003 44,527
1992 5,075 0 7,678 43,409 1,061 52,148
1993 5,492 0 8,393 53,178 1,159 62,730
1994 5,892 0 7,493 53,104 1,035 61,632
1995 6,500 0 7,994 63,314 1,104 72,412
1996 7,289 0 8,245 72,790 1,139 82,174
1997 To be
updated

INCOME AND CAPITAL FUND (4/15/74)

1974 $425 $0 $9,818 $436 $0 $10,255
1975 939 0 10,077 1,421 0 11,498
1976 955 69 10,535 2,481 72 13,088
1977 1,052 75 10,077 3,415 144 13,636
1978 1,133 0 9,580 4,365 137 14,082
1979 1,397 0 8,873 5,393 127 13,393
1980 1,701 0 7,632 6,229 109 13,970
1981 1,861 0 6,858 7,438 98 14,394
1982 2,183 0 7,994 11,122 115 19,231
1983 2,478 0 7,889 13,422 113 21,424

58
<PAGE>

1984 2,892 0 7,775 16,175 111 24,061
1985 3,191 0 8,396 20,803 120 29,319
1986 3,273 0 8,673 24,793 124 33,590
1987 3,590 0 8,042 26,474 115 34,631
1988 3,933 0 7,975 30,152 114 38,241
1989 4,207 0 7,794 33,607 112 41,513
1990 4,209 0 7,507 36,590 108 44,205
1991 4,313 0 8,080 43,926 116 52,122
1992 4,168 0 8,061 48,039 115 56,215
1993 4,029 355 8,376 53,946 476 62,798
1994 4,578 0 7,507 52,743 426 60,676
1995 4,939 0 8,462 64,690 480 73,632
1996 4,957 0 8,061 66,597 458 75,116
1997 To be
updated

MORTGAGE FUND (10/26/84)

1984 $0 $0 $10,024 $0 $0 $10,024
1985 1,028 0 10,035 1,051 0 11,086
1986 1,286 0 10,036 2,344 0 12,380
1987 1,270 0 9,212 3,389 0 12,600
1988 1,315 0 8,694 4,474 0 13,168
1989 1,326 0 8,800 5,867 0 14,667
1990 1,325 0 8,612 7,098 0 15,710
1991 1,442 0 9,235 9,149 0 18,384
1992 1,457 0 8,917 10,285 0 19,202
1993 1,381 0 8,718 11,410 0 20,128
1994 1,259 0 7,835 11,461 0 19,296
1995 1,387 0 8,576 13,988 0 22,564
1996 1,433 0 8,177 14,785 0 22,962
1997 To be
updated

59
<PAGE>

SHORT-INTERMEDIATE GOVERNMENT FUND (2/1/89)

1989 $741 $0 $10,024 $737 $0 $10,761
1990 946 0 9,847 1,679 0 11,526
1991 934 0 10,118 2,690 0 12,808
1992 795 0 10,024 3,461 0 13,485
1993 769 100 9,859 4,157 99 14,115
1994 697 0 9,197 4,555 93 13,845
1995 853 0 9,577 5,609 96 15,282
1996 888 0 9,234 6,291 93 15,618
1997 To be
updated

OPPORTUNITY FUND (1/1/97)

1997 To be
updated

* Includes short-term capital gain dividends

The following tables compare the performance of the Class A shares of the Funds
(other than the Mortgage, Opportunity and Short-Intermediate Government Funds,
for which the performance is of the Class B shares) over various periods with
that of other mutual funds within the categories described below according to
data reported by Lipper Analytical Services, Inc. ("Lipper"), New York, New
York, which is a mutual fund reporting service. Lipper performance figures are
based on changes in net asset value, with all income and capital gain dividends
reinvested. Such calculations do not include the effect of any sales charges.
Future performance cannot be guaranteed. Lipper publishes performance analyses
on a regular basis. Each category includes funds with a variety of objectives,
policies and market and credit risks that should be considered in reviewing
these rankings.

ADJUSTABLE RATE FUND

A Shares
Lipper-Fixed Income Fund
Performance Analysis
Adjustable Rate Mortgage Funds

One Year (Period ended 9/30/98) To be updated
Five Years (Period ended 9/30/98)

The Lipper Adjustable Rate Mortgage Funds category includes funds that invest at
least 65% of assets in adjustable rate mortgage securities or other securities
collateralized by or representing an interest in mortgages.

DIVERSIFIED FUND

A Shares
Lipper-Fixed Income Fund
Performance Analysis
Multi-Sector Income

One Year (Period ended 9/30/98) To be updated
Five Years (Period ended 9/30/98)
Ten Years (Period ended 9/30/98)

The Lipper Multi-Sector Income Funds Category includes funds that intend to keep
the bulk of their assets in corporate and government debt issues.

60
<PAGE>

GOVERNMENT FUND

A Shares
Lipper-Fixed Income Fund
Performance Analysis Certificate
Edition
GNMA Funds

One Year (Period ended 9/30/98) To be updated
Five Years (Period ended 9/30/98)
Ten Years (Period ended 9/30/98)

The Lipper GNMA Funds category includes funds that invest a minimum of 65% of
their portfolio in Government National Mortgage Association securities.

HIGH YIELD FUND

A Shares
Lipper-Fixed Income Fund
Performance Analysis High Current
Yield Funds GNMA Funds

One Year (Period ended 9/30/98) To be updated
Five Years (Period ended 9/30/98)
Ten Years (Period ended 9/30/98)

The Lipper High Current Yield Funds category includes funds which are managed
with an emphasis on high current (relative) yield. There are no quality or
maturity restrictions. The Fund was ranked number 222 out of 4,997, 28 out of
2,152 and 14 out of 965 funds in the Fixed Income category for the one, five and
ten year periods ended September 30, 1997 according to data reported by Lipper
in the Lipper Mutual Fund Performance Analysis. The Lipper Fixed Income category
reported in the Lipper Mutual Fund Performance Analysis includes funds which
normally have more than 75% of their assets in fixed income issues.

INCOME AND CAPITAL FUND

A Shares
Lipper-Fixed Income Fund
Performance Analysis Corporate Bond
Funds: "A" Rated

One Year (Period ended 9/30/98) To be updated
Five Years (Period ended 9/30/98)
Ten Years (Period ended 9/30/98)

The Lipper Corporate Bond Funds "A" Rated category includes funds which invest
65% of their corporate holdings in the top three grades.

MORTGAGE FUND

Lipper Performance Analysis
U.S. Mortgage Fund

One Year (Period ended 9/30/98) To be updated
Five Years (Period ended 9/30/98)
Ten Years (Period ended 9/30/98)

The Lipper U.S. Mortgage Funds category includes funds that invest at least 65%
of their assets in U.S. Mortgages/Securities issued or guaranteed as to
principal and interest by the U.S. government and certain federal agencies.

SHORT-INTERMEDIATE GOVERNMENT FUND

B Shares

Lipper Performance Analysis
Short U.S. Gov't Funds

61
<PAGE>

One Year (Period ended 9/30/98) To be updated
Five Years (Period ended 9/30/98)

The Lipper Short (1-5 year) U.S. Government Funds category includes funds that
invest at least 65% of their assets in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities with average maturities of
five years or less.

OPPORTUNITY FUND

B Shares
Lipper Performance Analysis
__ Funds

One Year (Period ended 9/30/98) To be updated
Five Years (Period ended 9/30/98)

The Lipper __ Funds category includes funds that __.

OFFICERS AND TRUSTEES

The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and KDI, are listed
below. All persons named as officers and trustees also serve in similar
capacities for other funds advised by the Adviser. :

[TO BE UPDATED]

DAVID W. BELIN (6/20/28), Trustee, 2000 Financial Center, 7th and Walnut, Des
Moines, Iowa; Member, Belin Lamson McCormick Zumbach Flynn, P.C. (attorneys).

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, 800 North Lindbergh Boulevard, St. Louis,
Missouri; 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.

DANIEL PIERCE (3/18/34), Trustee*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser.

WILLIAM P. SOMMERS (7/22/33), Trustee, 333 Ravenswood Avenue, Menlo Park,
California; 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.

EDMOND D. VILLANI (3/4/47), Trustee*, 345 Park Avenue, New York, New York;
President, Chief Executive Officer and Managing Director, Adviser.

MARK S. CASADY (9/21/60), President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser; 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,
Adviser.

JERARD K. HARTMAN, Vice President*, 345 Park Avenue, New York, New York; Senior
Vice President, Adviser.

THOMAS W. LITTAUER (4/26/55), Vice President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser; 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.

<PAGE>

ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.

ROBERT C. PECK, JR. (10/1/46), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.

KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser.

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

JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.

BRENDA LYONS, Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.

CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; 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, Adviser; 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).

ELIZABETH C. WERTH (10/1/47), Assistant Secretary*, 222 South Riverside Plaza,
Chicago, Illinois; Vice President, Adviser and KDI.

Adjustable Rate Fund:

RICHARD L. VANDENBERG (50), Vice President* (4), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, Scudder Kemper; formerly, Senior Vice
President and Portfolio Manager with an unaffiliated investment management firm.

Diversified Fund:

J. PATRICK BEIMFORD, JR. (49), Vice President* (3), 222 South Riverside Plaza,
Chicago, Illinois; Executive Vice President, Scudder Kemper.

ROBERT S. CESSINE (49), Vice President* (3), 222 South Riverside Plaza, Chicago,
Illinois; Senior Vice President, Scudder Kemper; formerly, Vice President,
Wellington Management Company.

MICHAEL A. McNAMARA (55), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, Scudder Kemper.

HARRY E. RESIS, JR. (54), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, Scudder Kemper; formerly, First Vice
President, PaineWebber Incorporated.

RICHARD L. VANDENBERG, see above*

High Yield Fund:

MICHAEL A. McNAMARA, see above.*

HARRY E. RESIS, JR., see above.*

Income and Capital Preservation Fund:

ROBERT S. CESSINE, see above.*

Mortgage and Short-Intermediate Government Funds (Kemper Portfolios):

FRANK J. RACHWALSKI, JR. (3/26/45), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, Scudder Kemper.

RICHARD L. VANDENBERG, see above,*

* Interested persons of the Fund 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 Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during the
Fund's 1998 fiscal year except that the information in the last column is for
calendar year 1997.

63
<PAGE>

<TABLE>
<CAPTION>
Aggregate Compensation From
---------------------------
Total
Compensation
Adjustable Diversified Government High Yield Income & Capital Kemper Kemper Funds Paid
Name of Trustee Rate Fund Fund Fund Series++ Fund Portfolios+ to Trustees**
- --------------- ---------- ----------- ---------- ---------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Belin* To be
updated
Lewis A. Burnham
Donald L. Dunaway*
Robert B. Hoffman
Donald R. Jones
Shirley D. Peterson
William P. Sommers
</TABLE>

+ Includes Kemper Cash Reserves Fund, Mortgage Fund and Short-Intermediate
Government Fund.

++ Includes High Yield Fund only.

* Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with Kemper Funds. Deferred amounts accrue
interest monthly at a rate equal to the yield of Zurich Money Funds--
Zurich Money Market Fund. Total deferred amounts and interest accrued
through each Fund's fiscal year are $16,900, $55,900, $106,400, $78,400,
$40,800 and $96,900 for Mr. Belin and $14,900, $30,000, $70,100, $54,700,
$27,000 and $73,900 for Mr. Dunaway for the Adjustable Rate Fund,
Diversified Fund, Government Fund, High Yield Fund, Income and Capital
Fund and Kemper Portfolios+, respectively.

** Includes compensation for service on the boards of 25 Kemper funds with 41
fund portfolios. Each trustee currently serves as a trustee of 26 Kemper
Funds with 46 fund portfolios.

[TO BE UPDATED]

As of December 15, 1998, the officers and trustees of the Funds, as a group,
owned less than __% of the then outstanding shares of each Fund, except that
officers and trustees, as a group, owned __% of Kemper Income and Capital
Preservation Fund, Class I shares and __% of Kemper High Yield Fund, Class I
shares. 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>
Fund Name and Address Class Percentage
- ---- ---------------- ----- ----------

<S> <C> <C> <C>
Adjustable Rate Prudential Securities FBO Standard To be updated
Savings Bank
228 W. Garvey Ave.
Monterey Park, CA 91754

Builders Prime Window & Supply
401K FBO Forfeiture Account
2nd & Merion Bridgeport,
PA 19405

National Financial Services Corp.
One World Financial Center
200 Liberty Street
New York, NY 10281-1003

MLPF&S
4800 Deer Lake Dr. East
Jacksonville, FL 32246

Junior Junction Inc.
1400 Noyes York
Utica, NY 13502

MLPF&S
4800 Deer Lake Dr. East
Jacksonville, FL 32246

Ameritrade Clearing
P.O. Box 2226
Omaha, NE 68103
</TABLE>

65
<PAGE>

<TABLE>
<CAPTION>
Fund Name and Address Class Percentage
- ---- ---------------- ----- ----------

<S> <C> <C> <C>
Estate of Arthur A. Ulrich
870 84th LN NW
Minneapolis, MN 55433

Income & Capital MLPF&S
4800 Deer Lake Dr. East
Jacksonville, FL 32246

BHC Securities, Inc.
Attn: Mutual Funds
One Commerce Square
Philadelphia, PA 19103

Paul K. Christoff TTEE
Lindsay Concrete Prod Inc. PSP
137 S. Main St., Suite 301
Akron, OH 44308-1136

MLPF&S
4800 Deer Lake Dr. East
Jacksonville, FL 32246

Scudder Kemper Inc.
Retirement Plan EE
811 Main Street
Kansas City, MO 64105

Scudder Kemper Inc.
Retirement Plan PS
811 Main
Kansas City, MO 64105

High Yield National Financial Service Corp.
One World Financial Center
200 Liberty Street, 4th fl.
New York, NY 10281-1003

MLPP&S FTSBO ITS Customers
4800 Deer Lake
Road Jacksonville, FL 32246

PNB Personal Trust Account
P.O. Box 7829
Philadelphia, PA 19101

Mutual Trust Life Ins. Co.
1200 Jovis Boulevard
Oak Brook, IL 60523

High Yield Opportunity James C. Calano
200 Boulder View Ln.
Boulder, CO 80304

National City Bank of PA TTEE
McKeesport Healthcare Pension
P.O. Box 94777
Cleveland, OH 44101

Alan K. Schroeder, TOD
2002 Cedar Dr.
</TABLE>

66
<PAGE>

<TABLE>
<CAPTION>
Fund Name and Address Class Percentage
- ---- ---------------- ----- ----------

<S> <C> <C> <C>
Rapid City, SD 57702

Rauscher Pierce Refsnes C/F
5945 S. Atlanta
Tulsa, OK 74105

Advest Inc.
90 State House Square
Hartford, CT 06103

Donaldson Lufkin Jenrette
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303

Khalil I. Hani
2200 Bouterse St.
Park Ridge, IL 60068

Alexander L. Abraham &
Adeline Y. Abraham Jiwros
2829 Harrison St.
Glenview, IL 60025

Stephens Inc.
111 Center St.
Little Rock, AR 72201

M. L. Stern & Co. Inc.
8350 Wilshire Blvd.
Beverly Hills, CA 90211

FBO Harper Family 1993 TR
1 Baltusrol St.
Moraga, CA 94556

Zurich Kemper Investments
222 S. Riverside Plaza
Chicago, IL 60606

BT Alex Brown Inc.
P.O. Box 1346
Baltimore, MD 21203

Melvin H. Ploeckelman
HCR 1 Box 27P
Athelstane, WI 54104

Leamon M. Fite
511 Hillyer High Rd.
Anniston, AL 36207

Karin Muchemore
3124 Quail Avenue North
Golden Valley, MN 55422

M. L. Stern & Co. Inc. (FBO)
8350 Wilshire Blvd.
Beverly Hills, CA 90211

Diversified National Financial Service Corp.
</TABLE>

66
<PAGE>

<TABLE>
<CAPTION>
Fund Name and Address Class Percentage
- ---- ---------------- ----- ----------

<S> <C> <C> <C>
One World Financial Center
200 Liberty Street
NewYork, NY 10281

National Financial Service Corp.
One World Financial Center
200 Liberty Street
NewYork, NY 10281

MLPF&S
4800 Deer Lake Dr. East
Jacksonville, FL 32246

Donaldson Lufkin Jenrette
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303

Invest Financial Corp. SSRP
FBO Ian G. Clarke-Pounder
32 Saint Laurent Dr.
Hudson, NH 03051

Invest Financial Corp. SSRP
FBO Craig B. Cacase
121 Fox Run Ct.
Newington CT, 06111

Invest Financial Corp.
FBO Alfred J. Diorio
1011 Olde Hickory Rd.
Lancaster, PA 17601

Invest Financial Corp. SSRP
FBO Sandra L. Tressler
23 Larkin Ln.
Harwich, MA 02645

Invest Financial Corp.
FBO George R. Swyoert
6316 Pine Ln.
Lakeland, FL 33813

Invest Financial Corp.
FBO Mary L. Sanders
1107 W. Charter St.
Tampa, FL 33602

Invest Financial Corp.
FBO Debra S. Harrison
4804 Ridge Point Dr.
Tampa, FL 33624

Invest Financial Corp.
FBO Ryland E. Syverson
3418 Belmont Rd.
Grand Forks, ND 58201

Government NFSC FEBO
Home Savings of America
815 E. 6th St.
</TABLE>

67
<PAGE>

<TABLE>
<CAPTION>
Fund Name and Address Class Percentage
- ---- ---------------- ----- ----------

<S> <C> <C> <C>
Ontario, CA 91764

BHC Securities Inc.
Attn: Mutual Funds Dept.
One Commerce Square
Philadelphia, PA 19103

Donald Lufkin Jenrette Securities
Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303

MLPF&S
4800 Deer Lake Dr. East
Jacksonville, FL 32246

Scudder Kemper Inc.
Retirement Plan
811 Main
Kansas City, MO 64105

Scudder Kemper Inc.
Retirement Plan PS
811 Main
Kansas City, MO 64105

Mortgage PaineWebber
P.O. Box 3321
Weehawken, NJ 07087-6727

MLPF&S
Attn. Fund Administration
4800 Deer Lake Dr. East
Jacksonville, FL 32246

Robert W. Baird & Co. Inc.
777 E. Wisconsin Ave
Milwaukee, WI 53202

Morango Bandof Mission Indians
Community Service Reserve Act11581
Portrero Rd
Banning CA 92220

Short--Intermediate Government National Financial Service Corp.
One World Financial Center
200 Liberty Street, 4th Floor
New York, NY 10281-1003

PaineWebber
P.O. Box 3321
Weehawken, NJ 07087-6727

National Financial Service Corp.
One World Financial Center
200 Liberty Street
New York, NY 10281-1003

First Trust Corp.
P.O. Box 173201
Denver, CO 80217
</TABLE>

68
<PAGE>

SHAREHOLDER RIGHTS

The Adjustable Rate, Diversified, Government, Income and Capital Funds, and High
Yield Series are open-end management investment companies, organized as separate
business trusts under the laws of Massachusetts. The Adjustable Rate Fund was
organized as a business trust under the laws of Massachusetts on May 28, 1987.
Prior to January 1, 1992, the Fund was known as "Kemper Enhanced Government
Income Fund." The Diversified Fund was organized as a business trust under the
laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Option Income Fund, Inc., a Maryland corporation organized in 1977. Prior to
February 1, 1989, the Fund was known as "Kemper Option Income Fund." The
Government Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
U.S. Government Securities Fund, Inc., a Maryland corporation (formerly known as
Kemper Fund For Government Guaranteed Securities, Inc.) organized in 1980 as
successor to a Pennsylvania business trust organized in 1977. The High Yield and
Opportunity Funds are separate series, or "Portfolios," of Kemper High Yield
Series. The High Yield Series was organized as a business trust under the laws
of Massachusetts on October 24, 1985 with a single portfolio. Effective January
31, 1986, that Trust, pursuant to a reorganization succeeded to the assets and
liabilities of Kemper High Yield Fund, Inc., a Maryland corporation organized in
1977. Prior to October 1, 1997, the Trust was known as Kemper High Yield Fund.
The Income and Capital Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Income and Capital Preservation Fund, Inc., a Maryland corporation organized in
1972. The Mortgage and Short-Intermediate Government Funds are separate series,
or "Portfolios", of Kemper Portfolios ("KP"), an open-end management investment
company organized as a business trust under the laws of Massachusetts on August
9, 1985. Effective November 20, 1987, KP pursuant to a reorganization succeeded
to the assets and liabilities of Investment Portfolios, Inc., a Maryland
corporation organized on March 26, 1982. After such reorganization, KP was known
as Investment Portfolios until February 1, 1991, and thereafter until May 28,
1994, as Kemper Investment Portfolios, when the name of KP became "Kemper
Portfolios." Until December 1, 1989, the Mortgage Fund was known as the
"Government Plus Portfolio" and prior to May 28, 1994, the Mortgage Fund was
known as the "Government Portfolio." Prior to May 28, 1994, the
Short-Intermediate Government Fund was known as the Short-Intermediate
Government Portfolio. Each Fund is a diversified, registered open-end investment
company.

Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of each
Trust may authorize the issuance of additional classes and additional Portfolios
if deemed desirable, each with its own investment objective, policies and
restrictions. Since the Trusts may offer multiple Portfolios, each is known as a
"series company." Shares of a Portfolio have equal noncumulative voting rights
and equal rights with respect to dividends, assets and liquidation of such
Portfolio and are subject to any preferences, rights or privileges of any
classes of shares of the Portfolio. Currently, each Portfolio offers four
classes of shares. These are Class A, Class B and Class C shares, as well as
Class I shares, which have different expenses, that may affect performance, and
are available for purchase exclusively by the following investors: (a)
tax-exempt retirement plans of Scudder Kemper and its affiliates; and (b) the
following investment advisory clients of Scudder Kemper and its investment
advisory affiliates that invest at least $1 million in a Portfolio: (1)
unaffiliated benefit plans, such as qualified retirement plans (other than
individual retirement accounts and self-directed retirement plans); (2)
unaffiliated banks and insurance companies purchasing for their own accounts;
and (3) endowment funds of unaffiliated non-profit organizations. Shares of each
Portfolio have equal noncumulative voting rights except that Class B and Class C
shares have separate and exclusive voting rights with respect to each
Portfolio's Rule 12b-1 Plan. Shares of each class also have equal rights with
respect to dividends, assets and liquidation subject to any preferences (such as
resulting from different Rule 12b-1 distribution fees), rights or privileges of
any classes of shares of a Portfolio. Shares of each Portfolio are fully paid
and nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. The Trusts are not required to hold annual
shareholder meetings and do not intend to do so. However, they will hold special
meetings as required or deemed desirable for such purposes as electing trustees,
changing fundamental policies or approving an investment management agreement.
Subject to the Agreement and Declaration of Trust of each Trust, shareholders
may remove trustees. If shares of more than one Portfolio for any Trust are
outstanding, shareholders will vote by Portfolio and not in the aggregate or by
class except when voting in the aggregate is required under the 1940 Act, such
as for the election of trustees, or when voting by class is appropriate.

The Funds generally are not required to hold meetings of their shareholders.
Under the Agreement and Declaration of Trust of each Fund ("Declaration of
Trust"), however, shareholder meetings will be held in connection with the
following matters: (a) the election or removal of trustees if a meeting is
called for such purpose; (b) the adoption of any contract for which shareholder
approval is required by the Investment Company Act of 1940 ("1940 Act"); (c) any
termination of the Fund or a class to the extent and as provided in the
Declaration of Trust; (d) any amendment of the Declaration of Trust (other than
amendments changing the name of the Fund, supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision thereof); (e) (with respect to the Mortgage and Short-Intermediate
Government Funds only) as to whether a court action, proceeding or claim should
or should not be brought or maintained

69
<PAGE>

derivatively or as a class on behalf of the Fund or the shareholders, to the
same extent as the stockholders of a Massachusetts business corporation; and (f)
such additional matters as may be required by law, the Declaration of Trust, the
Bylaws of the Fund, or any registration of the Fund with the Securities and
Exchange Commission or any state, or as the trustees may consider necessary or
desirable. The shareholders also would vote upon changes in fundamental
investment objectives, policies or restrictions.

Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) each Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.

Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, each
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.

Each Fund's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of a Fund
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of a Fund and certain amendments of the
Declaration of Trust, would not be effected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.

Each Fund's Declaration of Trust specifically authorizes the Board of Trustees
to terminate the Fund or any Portfolio or class by notice to the shareholders
without shareholder approval.

Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of each Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by a
Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of a Fund and each Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by Scudder Kemper remote
and not material, since it is limited to circumstances in which a disclaimer is
inoperative and such Fund itself is unable to meet its obligations.

REPORT OF INDEPENDENT AUDITORS

To be Updated

70
<PAGE>

APPENDIX -- RATINGS OF INVESTMENTS

COMMERCIAL PAPER RATINGS

Commercial paper rated by Standard & Poor's Corporation ("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.

CORPORATE BONDS

Standard & Poor's Corporation Bond Ratings

AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

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

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

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

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

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

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

Moody's Investors Service, Inc. Bond Ratings

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

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

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

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

71
<PAGE>

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.

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.

72
<PAGE>
KEMPER PORTFOLIOS:
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND

PART C
------
OTHER INFORMATION
-----------------

<TABLE>
<CAPTION>
Item 23 Exhibits
- ------- --------

<S> <C> <C>
(a) Amended and Restated Agreement and Declaration of Trust
Incorporated by reference to Post-Effective Amendment No. 25 to
Registrants Registration Statement on Form N1-A filed November 30,
1995.

(b) By-Laws
Incorporated by reference to Post-Effective Amendment No. 25 to
Registrants Registration Statement on Form N1-A filed November 30,
1995.

(d) Investment Management Agreement
Incorporated by reference to Post-Effective Amendment No. 26 to
Registrants Registration Statement on Form N1-A filed December 20,
1996.

(d)(1) Investment Management Agreements dated December 31, 1997.
To be filed by Amendment

(d)(2) Investment Management Agreements dated September 7, 1998.
To be filed by Amendment

(e) Underwriting Agreements
To be filed by Amendment.

(f) Inapplicable

(g) (g)(1)(a) Custody Agreement (Form 1)
Incorporated by reference to Post-Effective Amendment No. 25 to
Registrants Registration Statement on Form N1-A filed November 30,
1995.

(g)(1)(b) Custody Agreement (Form 2)
Incorporated by reference to Post-Effective Amendment No. 25 to
Registrants Registration Statement on Form N1-A filed November 30,
1995.

(h) (h)(1) Agency Agreement
Incorporated by reference to Post-Effective Amendment No. 25 to
Registrants Registration Statement on Form N1-A filed November 30,
1995.

4
<PAGE>

(h)(1)(a) Supplement to Agency Agreement
Incorporated by reference to Post-Effective Amendment No. 27 to
Registrants Registration Statement on Form N1-A filed December 30,
1997

(h)(2) Administrative Services Agreement
Incorporated by reference to Post-Effective Amendment No. 27 to
Registrants Registration Statement on Form N1-A filed December 30,
1997.

(i) Inapplicable

(j) Consent of Independent Accountants
To be filed by Amendment

(k) Inapplicable

(l) Inapplicable

(m) Form of Amended and Restated 12b-1 Plans (Class B and Class C
shares).
To be filed by Amendment

(n) Financial Data Schedule
To be filed by Amendment

(o) Amended and Restated Written Instrument Establishing and
Designating Separate Classes of Shares.
Incorporated by reference to Post-Effective Amendment No. 26 filed
December 20, 1996.
</TABLE>

Item 24. Persons Controlled by or Under Common Control with Registrant
- -------- -------------------------------------------------------------

Not applicable.

Item 25. Indemnification
- -------- ---------------

Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit 1 hereto, which is incorporated herein by reference) provides in effect
that the Registrant will indemnify its officers and trustees under certain
circumstances. However, in accordance with Section 17(h) and 17(i) of the
Investment Company Act of 1940 and its own terms, said Article of the Agreement
and Declaration of Trust does not protect any person against any liability to
the Registrant or its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to

5
<PAGE>

a court of appropriate jurisdiction the question as to whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding
Corp. ("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens &
Clark, Inc. ("Scudder") and the representatives of the beneficial owners of the
capital stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest, and ZKI was combined
with Scudder ("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested persons of ZKI or Scudder (the "Independent Trustees") for and
against any liability and expenses based upon any action or omission by the
Independent Trustees in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify the
Registrant and the Independent Trustees for and against any liability and
expenses based upon any misstatements or omissions by Scudder to the Independent
Trustees in connection with their consideration of the Transaction.

6
<PAGE>

Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------

Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 28.
<TABLE>
<CAPTION>

Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------

<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**

Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#

Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx

Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx

Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*

7
<PAGE>

Director, Korea Bond Fund Management Co., Ltd.+

Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**

Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg

* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
</TABLE>

Item 27. Principal Underwriters.
- -------- -----------------------

(a) Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper Funds.

(b) Information on the officers and directors of Kemper Distributors,
Inc., principal underwriter for the Registrant is set forth below. The principal
business address is 222 South Riverside Plaza, Chicago, Illinois 60606.

<TABLE>
<CAPTION>
(1) (2) (3)

Position and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------

<S> <C> <C> <C>
James L. Greenawalt President None

Thomas W. Littauer Director, Chief Executive Officer Vice President

Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer & Vice President

James J. McGovern Chief Financial Officer & Vice None
President

Linda J. Wondrack Vice President & Chief Compliance None
Officer

Paula Gaccione Vice President None

Michael E. Harrington Vice President None

8
<PAGE>

Position and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------

Robert A. Rudell Vice President None

William M. Thomas Vice President None

Elizabeth C. Werth Vice President Assistant Secretary

Todd N. Gierke Assistant Treasurer None

Philip J. Collora Assistant Secretary Vice President and
Secretary

Paul J. Elmlinger Assistant Secretary None

Diane E. Ratekin Assistant Secretary None

Daniel Pierce Director, Chairman Trustee

Mark S. Casady Director, Vice Chairman President

Stephen R. Beckwith Director None
</TABLE>

Item 28. Location of Accounts and Records
- -------- --------------------------------

Accounts, books and other documents are maintained at the offices of
the Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, Investors
Fiduciary Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri
64105 or, in the case of records concerning transfer agency functions, at the
offices of IFTC and of the shareholder service agent, Kemper Service Company,
811 Main Street, Kansas City, Missouri 64105.

Item 29. Management Services
- -------- -------------------

Not applicable.

Item 30 Undertakings
- ------- ------------

Not applicable.

9
<PAGE>

SIGNATURES
----------

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago and State of Illinois, on the 28th day
of October, 1998.

KEMPER PORTFOLIOS

By /s/Mark S. Casady
--------------------
Mark S. Casady, President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on September 30, 1998 on behalf of
the following persons in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>

/s/Daniel Pierce October 28, 1998
- --------------------------------------
Daniel Pierce* Chairman and Trustee

/s/David W. Belin October 28, 1998
- --------------------------------------
David W. Belin* Trustee

/s/Lewis A. Burnham October 28, 1998
- --------------------------------------
Lewis A. Burnham* Trustee

/s/Donald L. Dunaway October 28, 1998
- --------------------------------------
Donald L. Dunaway* Trustee

/s/Robert B. Hoffman October 28, 1998
- --------------------------------------
Robert B. Hoffman* Trustee

/s/Donald R. Jones October 28, 1998
- --------------------------------------
Donald R. Jones* Trustee

/s/ Shirley D. Peterson October 28, 1998
- --------------------------------------
Shirley D. Peterson* Trustee

/s/ William P. Sommers October 28, 1998
- --------------------------------------
William P. Sommers* Trustee

<PAGE>

SIGNATURE TITLE DATE
- --------- ----- ----

/s/Edmond D. Villani October 28, 1998
- --------------------------------------
Edmond D. Villani* Trustee

/s/John R. Hebble October 28, 1998
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and
Accounting Officer)
</TABLE>

*By: /s/Philip J. Collora
------------------------
Philip J. Collora**

** Philip J. Collora
signs this document
pursuant to powers
of attorney filed
herewith.

2
<PAGE>

POWER OF ATTORNEY

The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may act
without the joinder of the others, as such person's attorney-in-fact to sign and
file on such person's behalf individually and in the capacity stated below such
registration statements, amendments, post-effective amendments, exhibits,
applications and other documents with the Securities and Exchange Commission or
any other regulatory authority as may be desirable or necessary in connection
with the public offering of shares of Kemper Portfolios, Kemper Adjustable Rate
U.S. Government Fund, Kemper U.S. Government Securities Fund, Kemper Income and
Capital Preservation Fund, Diversified Income Fund or Kemper High Yield Series.

Signature Title Date

/s/ David W. Belin Trustee July 21, 1998

<PAGE>

POWER OF ATTORNEY
-----------------

Signature Title Date

/s/ Lewis A. Burnham Trustee July 21, 1998

<PAGE>

POWER OF ATTORNEY
-----------------

Signature Title Date

/s/ Donald L. Dunaway Trustee July 21, 1998

<PAGE>

POWER OF ATTORNEY
-----------------

Signature Title Date

/s/ Robert B. Hoffman Trustee July 21, 1998

<PAGE>

POWER OF ATTORNEY
-----------------

Signature Title Date

/s/ Donald R. Jones Trustee July 21, 1998

<PAGE>

POWER OF ATTORNEY
-----------------

Signature Title Date

/s/ Shirley D. Peterson Trustee July 21, 1998

<PAGE>

POWER OF ATTORNEY
-----------------

Signature Title Date

/s/ Daniel Pierce Trustee July 21, 1998

<PAGE>

POWER OF ATTORNEY
-----------------

Signature Title Date

/s/ William P. Sommers Trustee July 21, 1998

<PAGE>

POWER OF ATTORNEY
-----------------

Signature Title Date

/s/ Edmond D. Villani Trustee July 21, 1998

<PAGE>
File No. 2-76806
File No. 811-3440

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

EXHIBITS

FORM N-1A

POST-EFFECTIVE AMENDMENT NO. 28

TO REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

AND

AMENDMENT NO. 30

TO REGISTRATION STATEMENT

UNDER

THE INVESTMENT COMPANY ACT OF 1940

KEMPER PORTFOLIOS

10
<PAGE>

KEMPER PORTFOLIOS

EXHIBIT INDEX