AARP CASH INVESTMENT FUNDS, N-30D, 1997-12-04

AARP CASH INVESTMENT FUNDS
N-30D, 1997-12-04

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AARP Investment Program
from SCUDDER

--------
REACHING
YOUR
GOALS
--------

ANNUAL REPORT
-------------
TO SHAREHOLDERS
---------------

September 1997

<PAGE>

TABLE OF CONTENTS

Annual Review 1
Special Section 6
Message from the Portfolio Managers 11

Money Market Funds
AARP High Quality Money Fund 12
AARP High Quality Tax Free Money Fund 13

Income Funds
AARP GNMA and U.S. Treasury Fund 14
AARP High Quality Bond Fund 16
AARP Insured Tax Free General Bond Fund 18
AARP Bond Fund for Income 20

Growth and Income Funds
AARP Balanced Stock and Bond Fund 22
AARP Growth and Income Fund 24
AARP U.S. Stock Index Fund 26

U.S. Growth Fund
AARP Capital Growth Fund 28
AARP Small Company Stock Fund 30

Worldwide Growth Funds
AARP Global Growth Fund 32
AARP International Stock Fund 34

Asset Allocation Funds
AARP Managed Investment Portfolios 36

AARP Funds' Investment Portfolios 39
Financial Statements 119
Financial Highlights 135
Notes to Financial Statements 145
Report of Independent Accountants 154
Officers and Trustees 155
Service Information 158
Tax Information 159
Glossary 160

<PAGE>

AARP Investment Program
from SCUDDER

SIDEBAR TEXT:

TAKE ADVANTAGE OF DOLLAR COST AVERAGING

Dollar cost averaging is a simple systematic approach to managing risk. You
invest a specific amount of money on a regular basis -- usually monthly -- to
reduce the average price you pay over time for mutual fund shares. You will
automatically buy shares at different prices: more shares when the prices are
down, and fewer shares when the prices are up. Because you buy more shares when
prices are low, the average price you pay per share may be lower than the actual
average share price during the same period. While there are no assurances, over
time, dollar cost averaging can offer the potential of greater returns and
greater protection from market volatility. You can invest as little as $50 per
month through the AARP Investment Program's Automatic Investment Plan. It is
simple and hassle free. Call us at 1-800-253-2277 for details.

Annual Review

This Annual Report covers the period from October 1, 1996, through
September 30, 1997. During this time many positive changes took place in the
AARP Investment Program. Most significant was the introduction of six new funds
to the family in February. Together, the 15 AARP Mutual Funds offer you a choice
of uniquely managed investments, whose goal is to provide competitive returns,
but with less share price fluctuation than similar funds. More recently,
Scudder, Stevens & Clark, Inc. reached an agreement to form an alliance with the
Zurich Group, a worldwide provider of insurance services. These exciting
developments are described later in this review.

First, let us turn to the favorable performance of the AARP Mutual Funds
over the year, which in part reflected the overall strength of the U.S. stock
market and declining long-term interest rates. We are pleased to report that as
of September 30, 1997, several of the AARP Mutual Funds were highly rated by
Morningstar, which ranks the relative risk versus returns of comparable funds.
Detailed reviews of the performance of each of the Funds begin after page 11.

CALLOUT:

Several AARP Mutual Funds are highly rated by Morningstar. Read further in
A Message from the Portfolio Managers on page 11.

The Stock Market

The upward pace of the U.S. stock market continued during the past 12
months as inflation remained benign and unemployment sank to the lowest level in
more than 20 years. In addition, positive corporate profits, a strengthening
dollar, the recent tax legislation, and the shrinking deficit combined to create
a healthy environment for both large- and small-cap U.S. stocks. Large-cap
stocks, as measured by the unmanaged Standard & Poor's Composite Index of 500
Stocks (S&P 500), returned 40.46%, and small-cap stocks, as measured by the
Russell 2000 Index, returned 33.20% in the 12 months ending September 30, 1997.
This environment prompted Federal Reserve Chairman Alan Greenspan to remark in
July that the current state of the economy was "exceptional." These positive
forces extended to most foreign

1
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THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART TITLE:

THE STOCK MARKET

CHART PERIOD:

1992 - 1997

CHART DATA:

MSCI EAFE Russell 2000 S&P 500
--------- ------------ -------

1992-1993 26.35 33.19 13.00

1993-1994 9.83 2.62 3.69

1994-1995 5.79 23.40 29.75

1995-1996 8.61 13.13 20.34

1996-1997 12.18 33.20 40.46

CAPTION TO PRECEDING CHART:

The stock market total return for the annual period September 30 to
September 30, as measured by the Morgan Stanley Capital International EAFE
Index, the Russell 2000 Index, and the S&P 500 Index.

-------

markets as well, although at a more modest pace. The Morgan Stanley Capital
International Index (MSCI), an unmanaged market- value-weighted measure of
non-U.S. stock markets, rose 12.18% over the period covered by this Report.

It is important to note that while the U.S. stock market has been on an
upward trend, the swings along the way were often quite significant. One of
several examples included the 247-point drop of the Dow Jones Industrial Average
(the Dow) on August 15, 1997. This decline, which represented a 3.1% decline in
the value of the thirty companies included in the Dow, and 2.6% of the S&P 500,
capped a week of declining prices. However, by the following week, stock prices
more than made up for the loss.

THE BOND MARKET

After a strong fourth quarter of 1996 for the bond market, healthy economic
news and fears of potential inflationary pressure caused the bond market to
decline in the first quarter of 1997. In recent months, however, bonds rallied
and more than recovered from these losses. Low inflation, a shrinking federal
deficit, a budget agreement, and reduced government borrowing all had a positive
impact on the bond market. Long-term interest rates, as measured by the 30-year
U.S. Treasury Bond, declined from 6.92% on September 30, 1996, to 6.40% on
September 30, 1997. Short-term rates, as measured by the three-month Treasury
bill, declined from 5.01% to 4.95% over the same period. Bond prices, and
therefore the value of your bond investments, rose.

SIDEBAR TEXT:

A Reminder for Investors -- Have a Long-Term Perspective

While you may be surprised, if not unnerved, by day-to-day swings in the
financial markets, history tells us that long-term investors are best served by
keeping the inevitable volatility of the markets in proper perspective. If you
can accept that both the bond and stock markets will experience volatility, the
downturns in the markets should not be cause for alarm. In fact, these downturns
may provide buying opportunities for some investors.

It is also important to keep the absolute amounts of changes in the markets in
perspective. The Dow Jones Industrial Average has tripled in value over the past
ten years. For example, the 508-point drop in 1987 represented a 22.6% decline
of the market. That same decline would have represented only 6.4% of the market
as of September 30, 1997.

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THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART TITLE:

THE U.S. BOND MARKET

CHART PERIOD:

1992 - 1997

CHART DATA:

3-Month Treasury 30-Year
Bill Treasury Bond
---------------- -------------

1992-1993 2.98 6.02

1993-1994 4.77 7.82

1994-1995 5.41 6.50

1995-1996 5.03 6.92

1997-1997 4.95 6.40

CAPTION TO PRECEDING CHART:

The U.S. Bond market yield for the annual period September 30 to September
30, as measured by the 3-month Treasury Bill and the 30-year Treasury Bond.

Looking Ahead

As we look toward the end of 1997 into early 1998, it is difficult to
predict how the stock and bond markets will fare. While there are no guarantees
when investing, we continue to believe there is long-term opportunity in both
the stock and bond markets. This should benefit long-term investors (those
willing to invest for five years or more). However, due to the perceived high
value of the U.S. stock market, we maintain a somewhat cautious outlook over the
short term. As always, we encourage diversification among U.S. large- and
small-company equity holdings, international equity holdings, and the fixed
income sector. This serves as protection against a downturn in any one area of
the market.

Reflecting on Important Program Developments

The past year has brought many exciting changes to the AARP Investment
Program. Many of our shareholders, and other AARP members, have expressed a high
level of interest in a greater choice of mutual funds and in taking somewhat
more risk with a portion of their total investment portfolio. In response to
your feedback, we introduced six new funds to the family in February of this
year -- the AARP Bond Fund for Income, the AARP U.S. Stock Index Fund, the AARP
Small Company Stock Fund, the AARP International Stock Fund, and the AARP
Managed Investment Portfolios.

SIDEBAR TEXT:

The AARP Lump Sum Service

For many, receiving a lump sum payout is a significant, if not a
once-in-a-lifetime, event. The process of deciding how best to reinvest this
money can be complex and even intimidating. In fact, many of you have told us
that you need help in making decisions about how to invest your proceeds when
you have received a large lump sum or one-time distribution, such as from a
retirement plan.

In response to your feedback, we have introduced the AARP Lump Sum Service.
You can now work with a specially trained AARP Investment Program retirement
plan specialist who can help you understand tax implications and your investment
options. Our specialists can also assist you in working through the "red tape"
that is sometimes involved with a lump sum distribution.

Taking advantage of the AARP Lump Sum Service can make investment
decision-making easier and the implementation of your decisions hassle free.
Call us at 1-800-253-2277 to find out more about this free service.

3
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While most of the Funds offer the potential of higher returns (and
therefore higher risk) than the existing AARP Mutual Funds, you told us that you
were hopeful that we could manage these Funds for the potential of less downside
risk than comparable funds. The Funds were therefore developed and are managed
to do just that. Their portfolio management teams seek competitive -- but not
the highest -- returns, but with less risk than comparable funds. Designed
specially to meet the needs of AARP members, we know of no other family of funds
that includes a similar risk management mandate for all of its funds. Of course,
while the AARP Mutual Funds are actively managed to reduce share price
fluctuation, remember that your principal is never insured or guaranteed, and
that the value of your investment and your return will move up and down as
market conditions change.

Having launched the six new funds in February, we spent much of the balance
of the year developing a tool that will allow you to actually "pinpoint" how the
AARP Mutual Funds are performing compared to similar mutual funds, from a total
return and risk management standpoint. This new performance measurement system
is being introduced with this Report. We plan to communicate extensively about
it in the future to help you to become more comfortable with the performance
measurement system and to encourage you to use it. Please refer to the special
section of this Report, which describes the system in more detail.

CALLOUT:

The six new AARP Mutual Funds, introduced in February 1997, have been well
received by AARP member investors, having grown to more than 24,000 accounts
with over $271 million in assets as of September 30, 1997.

We were also pleased to announce that Scudder has reached an agreement to
form an alliance with The Zurich Group. Scudder will represent Zurich's core
investment management capability. Zurich, a 125-year-old financial services
company, has a heritage of innovative and customized problem-solving that takes
the form of a disciplined, conservative, and personal approach to risk
management. This is a philosophy that mirrors Scudder's approach to asset
management. As part of the new relationship, Scudder will be combined with
Zurich Kemper Investments, Inc., an investment management company now owned by
Zurich. The new company will be named Scudder Kemper Investments, Inc.

SIDEBAR TEXT:

New Web Site

The AARP Investment Program's Web site is located at:

http://aarp.scudder.com.

This dynamic electronic connection to the Program provides visitors easy
access to a broad range of information, including the AARP Mutual Funds
performance, which is updated daily, and the complete prospectus.

Our Web site also offers News Stories featuring important information about the
markets and investing. The Learning Center offers an investor education overview
through Quick Concepts, and several investment guides, Planning for Retirement
and Managing Your Money In Retirement. The Archives offers newsletter back
issues, while the Resources for Investors offers a Glossary and Lists of
Associations and Publications.

The Program's site allows you to communicate your questions and comments
directly to us and to request informative how-to literature about investing,
published by the AARP Investment Program from Scudder. Visit us often, as
content is regularly updated.

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SIDEBAR TEXT:

A Note About the Expense of
Publishing This Report

Some shareholders have appropriately asked about the expense of publishing this
SEC-required Report. Our goal is to provide information about the performance of
the Funds, current investment strategies, and details about the expenses of the
Funds. We also review certain developments in the Program that you should be
aware of as a shareholder.

Further, we go to great lengths to assure easy reading, utilizing larger
typeface and the liberal use of white space. Our challenge is to accomplish all
of this as cost-effectively as possible. So, for example, in addition to sending
only one copy of the Annual Report to every shareholder's home, we use
lower-quality, less-expensive paper.

We have also determined that our consolidated Report, featuring all 15 Funds, is
a less expensive means of communicating Fund information to you than publishing
and mailing individual Fund Reports, as do other mutual fund companies. This
year's Report cost approximately 85 cents per copy to produce. This compares to
the cost of last year's Report at 78 cents per copy. We are comfortable with
this modest increase given the Report's expansion to include the six new AARP
Mutual Funds.

Viewed from the standpoint of expense ratios, the total publication cost is
approximately 1/24th of 1 basis point for the AARP family of fifteen mutual
funds with average expenses of 95 basis points, which compares favorably to the
Lipper average fund expenses of 135 basis points.*

If you require additional copies of the Report, please call 1-800-253-2277.

* Lipper Analytical Services, Inc. is the source for the average expenses of
similar mutual funds.

The Program's core commitment to risk managed investment performance and
the delivery of the highest service levels will not change as a result of the
alliance. In fact, we expect that this new alliance will offer significant
benefits over time resulting from the Program's access to greater resources --
human and capital -- that will take the form of greater investment expertise and
enhanced services.

All of us at the AARP Investment Program from Scudder are excited about the
future and about working with you to make informed investment decisions that
lead to financial security and independence as you plan for and live in
retirement. Please do not hesitate to contact us with any questions you may have
at 1-800-253-2277.

Our best,

/s/Linda C. Coughlin /s/Cornelia Small

Linda C. Coughlin Cornelia Small
Chairperson President and
Investment Director

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Special Section:

Measuring the Performance of
The AARP Mutual Funds

The past year has been an exciting one for the AARP Investment Program from
Scudder, due in large part to the addition of six new funds to the family.
Together, the 15 AARP Mutual Funds offer you a choice of uniquely managed
investments, whose goal is to provide competitive returns but with less share
price volatility than similar funds. The addition of the new funds offers you a
significantly greater opportunity to be well diversified in keeping with your
individual circumstances and investment objectives. The family of AARP Mutual
Funds addresses four major investment needs: stability of principal, income,
tax-free income, and growth.

CALLOUT:

We provide these market index comparisons in accordance with the Securities and
Exchange Commission's (SEC) disclosure requirements. Under these requirements,
all mutual funds (except money funds) are required to compare their performance
over the past ten years (or life of the fund) to that of a broad-based
securities market index.

Assessing the risk and return potential of the vast array of mutual funds
available today can be an overwhelming task. Measuring and evaluating the
performance of the AARP Mutual Funds presents a further challenge for investors
because of the emphasis our portfolio managers put on the active management of
risk as they strive to produce competitive returns. As you read through the
individual fund summaries that follow this section, you will note that all of
the AARP Mutual Funds except the AARP Money Funds have been compared to market
indices.

The problem with these comparisons is that the performance of indices may
vary significantly from the performance of actual mutual funds. The reason is
that indices are unmanaged baskets of securities, and do not include the
expenses of operating a fund, such as advisory fees and portfolio transaction
costs. Due to these factors, even index funds such as the AARP U.S. Stock Index
Fund tend to underperform the market indices. Indices, therefore, do not provide
a complete picture. This is important to remember when comparing the performance
of any mutual fund to the performance of a market index.

With this in mind, we have devoted this special section to an explanation
of a new performance measurement system. It is proving to be a valuable tool for
those of us at Scudder and AARP who have responsibility for overseeing the
performance of your funds. It can be helpful to you as well. Your understanding
of the process will make it easier for you to select from the expanded choices
of AARP Mutual Funds.

6
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Our plans are to continue to communicate with you about this new
performance system to help you evaluate investment performance of the AARP
Mutual Funds, not just as it relates to total return but also to the management
of risk. Our goal has been to create an easy-to-understand approach that will
permit you to fairly and objectively assess:

o the total return of the AARP Mutual Funds;

o the downside risk of the AARP Mutual Funds, measured by the
frequency and amount by which the total return fluctuates
downward; and

o the total return and downside risk of the AARP Mutual Funds
relative to similar mutual funds.

Creating a Performance Measurement System:
Four Principles to Remember

We have been guided by four principles that are important to remember as
you familiarize yourself with the performance measurement system.

1) A single performance measure does not necessarily tell the whole story
-- particularly in the case of your AARP Mutual Funds, which put
significant emphasis on the active management of risk. As you will see
in the graphs provided later in this Report, we measure the
performance of your Funds in terms of total return and downside risk.

2) We measure downside risk because most investors view risk as related
to the chances of a loss and the likely size of that loss. We have
therefore chosen to track, measure, and evaluate the frequency and
amount by which each fund's total return fluctuates downward --
absolutely and compared to groups of similar mutual funds.

3) One-year performance is not a strong indicator because of its
variability -- produced by frequent and large swings in the markets.
Of greater significance, however, is the fact that most investors have
an investment horizon of more than one year. Indeed, a recent study
conducted by the Investment Company Institute (ICI) showed that only
4% of investors have a time horizon of less than one year, and that
the median investment time horizon was eight years. We therefore focus
our evaluation of performance over three-year time periods or more,
although we monitor shorter-term performance to identify emerging
trends affecting the longer-term performance of the AARP Mutual Funds.

4) Benchmarks such as the S&P 500 and the various bond market indices may
be of limited use in evaluating performance, as previously mentioned.
Mutual fund investors like you care increasingly about how your funds
are performing compared to similar mutual funds you could have
purchased. We have therefore made a good faith effort to create peer
universes of similar mutual funds

7
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against which you can assess risk and return for each of your AARP
Mutual Funds. We have selected funds from the larger universe of funds
tracked by Lipper Analytical Services, Inc. We included any fund with
at least $100 million in assets, and with a three-year track record.
The universes will be updated periodically as new funds meet the
criteria.

Pinpointing the Tradeoff Between Risk and Return
of the AARP Funds

All of the AARP Mutual Funds with share price volatility (i.e., all except
AARP Money Funds) that have been in existence for three years or more are
represented on risk/return graphs in their individual sections of this Report.
They are the:

o AARP GNMA and U.S. Treasury Fund o AARP Balanced Stock and Bond Fund
o AARP High Quality Bond Fund o AARP Growth and Income Fund
o AARP Insured Tax Free General Bond Fund o AARP Capital Growth Fund

The AARP Bond Fund for Income, AARP Global Growth Fund, AARP U.S. Stock
Index Fund, AARP Small Company Stock Fund, AARP International Stock Fund, and
the two AARP Managed Investment Portfolios have been in existence for less than
three years. Therefore, we have not included them in this analysis. We will be
providing their risk-managed performance information in upcoming AARP Investment
Program communications.

How to Read the Performance Graphs

First, and most important, be patient. While we are confident that the
performance measurement system has great value in helping you to assess the
investment performance of your Funds, it may take more than one review of the
graphs for you to feel comfortable with them.

Here's how to read them:

o The vertical (y) axis represents the percentage of average monthly
return.

o The horizontal (x) axis represents the combination of the frequency
and amount by which monthly total return has fluctuated downward,
expressed in percentage terms. Unlike total return, the lower the risk
percentage, the better we are doing at controlling downside
fluctuation of total return.

o Two dotted lines divide the graph into four sections or quadrants. The
point where the two dotted lines meet represents the median risk and
median return of the peer universe of similar funds.

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Our goal is for the AARP Mutual Funds to perform in the upper-left
quadrant. If that cannot be achieved (it is not possible all the time), then our
goal is for the Funds to perform in the lower-left quadrant. This reflects the
priority we put on the management of risk in response to your feedback. You have
told us that the achievement of competitive returns is important, but that you
do not necessarily expect your investments to achieve the highest total returns
if we can provide less downside risk. You know that in general the achievement
of the highest levels of return involves the acceptance of a potentially and
perhaps uncomfortably high level of risk (funds in the upper and lower-right
quadrants).

The graph below pinpoints the performance of the AARP Growth and Income
Fund in terms of average monthly return and average monthly downside risk for
the three years ending September 30, 1997. The result is shown in relation to
the the median performance of its peer universe of other growth and income
funds. The Fund's total return was slightly better than the average of its peers
as represented by its location slightly above the horizontal axis. The Fund is
shown to the left of the vertical axis which means the frequency and magnitude
with which the Fund's total return has declined is less during this period than
the average of the peer mutual fund universe.

A DESCRIPTIVE DIAGRAM EXPLAINING THE REPORT'S SCATTER CHARTS APPEARS HERE

A fund in the upper-left quadrant has better-than-median return and
lower-than-median risk as defined by the frequency of down months and amount by
which total return declines in those months. Such a fund has better overall
performance than the typical peer fund. This is the best combination of results
- -- less risk with more return.

A fund in the upper-right quadrant has better-than-median return but
higher-than-median risk.

AARP Growth and Income Fund Three-Year Risk/Return Performance

Average Monthly Return Monthly Downside Risk
---------------------- ---------------------

AARP Growth and 2.00 1.26
Income Fund

Peer Funds 1.97 1.52
Average

(Data represented from October 1, 1994 through September 30, 1997 for 269
similar funds.)

A fund in the lower- left quadrant has lower-than-median return but
lower-than- median risk.

A fund in the lower-right quadrant has lower- than-median returns and
higher-than-median risk. Such a fund has worse overall performance than the
typical peer fund. This is the worst combination of results -- more risk with
less return.

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Working with Us to Assess Fund Performance

Your frank and honest views about your investment needs and performance
expectations, especially as they relate to your willingness to trade off risk
for return, have been invaluable in helping us to develop the new AARP Mutual
Funds and to refine the investment goals and strategies of the existing AARP
Mutual Funds. More recently your perspectives have greatly informed the
development of a process by which we and you can measure performance of your
funds. As we introduce and refine our new performance measurement system, we
hope you will continue to provide us with your reactions, questions, and
concerns.

Most importantly, we encourage you to get comfortable with and use this
tool. It will help you feel confident with the investment decisions you have
made and continue to make as you plan for, and during, your all-important
retirement years.

If you have any questions about the Program's performance measurement
system, this Annual Report in general, or on how to diversify your portfolio to
achieve competitive returns and protection against the volatility of the
financial markets, please do not hesitate to call one of our AARP Mutual Fund
Representatives, toll free, at 1-800-253-2277, 8:00 a.m. to 8:00 p.m., eastern
time. They can help you to evaluate, if not enhance, the appropriateness of your
investment portfolio based on your risk tolerance, time horizon, and specific
investment objectives -- whether or not your portfolio includes AARP Mutual
Funds.

Remember, we are here to help.

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A Message from the Portfolio Managers

On the following pages you will find our reviews of the investment
performance of the individual AARP Mutual Funds for the period October 1, 1996
to September 30, 1997.

The year has been exciting, challenging and rewarding, as we have worked
to:

o integrate the six new AARP Mutual Funds into the family consistent
with our unique mandate to provide competitive returns but with less
downside share price volatility than similar funds;

o deliver on this commitment during a period of considerable market
volatility; and

o develop an easy-to-understand approach that will help you evaluate the
investment performance of your funds -- not just as it relates to
total return, but also to the management of risk.

CALLOUT:

Current performance information for all of your Funds is available through the
Easy Access Line at 1-800-631-4636 or by calling a Mutual Fund Representative at
1-800-253-2277.

The summaries of most funds include the one-, five-, and ten-year total
return or, as in the case of those funds with less than ten years, life of fund
total return. Remember that one-year returns can be extremely high or low due to
market conditions, therefore it is important to evaluate twelve-month returns in
relation to five-year and ten-year returns. You will see that where appropriate,
a one-year total return is expressed in terms of its two components: distributed
income, which includes reinvested dividends; and capital change, defined as the
change in the price per share and includes reinvested capital gains
distributions.

Finally, we have worked to strengthen the quality of our individual
portfolio reviews with the inclusion of more relevant information about the:

o performance of the funds over longer periods of time compared to
various market indices, and

o risk-managed performance of your funds compared to similar mutual
funds. If you have not done so already, read more about our new
performance measurement system in the Special Section that begins on
page 6.

We hope this information helps you to make informed investment decisions
and that you feel confident and comfortable in the process.

SIDE BAR TEXT:

The AARP Mutual Fund family was recently awarded a Five-Star Rating from Mutual
Funds Magazine,* based on its independent evaluations of 210 fund families'
risk-adjusted returns over the last two to ten years. Family ratings are on a
Five-Star to One-Star scale, where the top fifth of all families receive five
stars; the next fifth, four-stars; the middle fifth, three stars; the
next-to-lowest fifth, two stars, and the bottom fifth, just one star.

*1997 edition of Mutual Funds Magazine

Six of the AARP Mutual Funds are rated by Morningstar* and received the
following 3-year ratings as of 9/30/97.

AARP Growth and Income Fund 4 Star

AARP GNMA and
U.S. Treasury Fund 4 Star

AARP Balanced Stock and
Bond Fund 4 Star

AARP Capital Growth Fund 4 Star

AARP High Quality Bond Fund 3 Star

AARP Insured Tax Free
General Bond Fund 3 Star

* Morningstar proprietary rankings reflect historical risk-adjusted
performance and are calculated as of 9/30/97. 2143, 1187, and 638
Equity Funds, 1309, 713 and 301 Taxable Bond Funds and 1374, 668, and
326 Municipal Bond Funds were rated for the 3-, 5-, and 10-year
periods, respectively. The ratings are subject to change each month.
Morningstar ratings are calculated from the Funds' 3-, 5-, and 10-year
average annualized total returns in excess of 90-day T-Bill returns,
with appropriate adjustments and a risk factor that reflects fund
performance below 90-day T-Bill returns. The Funds' 3-, 5-, and
10-year ratings are 5, 5, and 4 Stars, respectively. Those funds
receiving 5 Stars are in the top 10% of their investment category,
while the top 22.5% of funds that Morningstar evaluates receive 4
Stars, and 35% of the funds receive 3 Stars. Past performance is not a
guarantee of future results.

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AARP HIGH QUALITY MONEY FUND
----------------------------

FUND OVERVIEW

The AARP High Quality Money Fund is designed to maintain stability and safety of
your principal while providing current income. The Fund has quality standards
high enough to have secured an AAAm rating from Standard & Poor's Corp.,* a
leading national independent rating firm. The Fund seeks to maintain a $1.00
share price, although there may be circumstances under which this goal cannot be
achieved. It is important to note that, unlike bank savings accounts, the Fund
is not insured or guaranteed by the U.S. government and the yield of the Fund
will fluctuate.

FOR WHOM THE
FUND IS DESIGNED

The Fund may be appropriate for investors who have short-term needs or those who
do not want the risks associated with investing in stocks or bonds. These
investors include those requiring current income for day-to-day expenses,
immediate access to their assets through free checkwriting, and investment
diversification with a degree of safety and stability; and those seeking a
short-term investment prior to making long-term investment choices.

PORTFOLIO
MANAGEMENT TEAM

David Wines
Lead Portfolio Manager

K. Sue Cote

Debra A. Hanson
Portfolio Managers

- ----------
* The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.

THE FUND'S INVESTMENT STRATEGY

As with most money funds, the performance of the AARP High Quality Money
Fund mirrored the movement of short-term interest rates during the period
covered by this Report. Short-term interest rates, as measured by the
three-month U.S. Treasury Bill, declined from 5.01% on September 30, 1996 to
4.95% on September 30, 1997. In this environment, our aim was to keep a long
average maturity in the Fund. We were able to provide you with a competitive
yield compared to other money funds by lengthening its average maturity from 46
days on September 30, 1996 to 55 days on September 30, 1997.

In keeping with your Fund's objective, all securities we bought over the
past 12 months were rated within the two highest quality rating categories of
one or more rating agencies such as Moody's Investors Service, Inc., Standard &
Poor's Corporation, and Fitch Investors Service, Inc. In addition, we complied
with the guidelines established by S&P, which are more stringent than the
guidelines most money funds utilize. This enabled us to retain our AAAm rating
from S&P, the highest rating available.

Since we do not anticipate interest rates rising significantly over the
next several months, we expect your Fund's average maturity to remain within the
45- to 55-day range. If interest rates rise, we will shorten its average
maturity by purchasing shorter-maturity securities. We believe our overall
strategy will provide competitive income while maintaining stability and
liquidity.

PORTFOLIO STATISTICS
--------------------

Number of Issues 32

7-Day Current Yield 4.64%

Average Maturity 55 days

Average Quality AAAm

PORTFOLIO RETURNS
-----------------

One-Year Cumulative
Total Return 4.72%

Five-Year Average
Annualized Total Return 3.85%

Ten-Year Average
Annualized Total Return 5.15%

Five-Year Cumulative
Total Return 20.82%

Ten-Year Cumulative
Total Return 65.27%

12
<PAGE>

AARP HIGH QUALITY TAX FREE MONEY FUND
-------------------------------------

FUND OVERVIEW

The AARP High Quality Tax Free Money Fund is designed to offer you stability and
safety of principal, along with current income free from federal income taxes.^1
The quality of the Fund is high enough to have secured an AAAm rating from
Standard & Poor's (S&P).^2 The AARP High Quality Tax Free Money Fund is designed
to maintain a $1.00 share price, although there may be circumstances under which
this goal cannot be achieved. It is important to note that, unlike bank savings
accounts, the Fund is not insured or guaranteed by the U.S. government, and
yield will fluctuate.

FOR WHOM THE
FUND IS DESIGNED

This Fund may be appropriate for investors in high tax brackets or those who do
not want the risks associated with investing in stocks or bonds. These investors
include those seeking money market income to meet regular day-to-day expenses,
those needing immediate access to their assets through free checkwriting, those
creating a diversified portfolio who want a portion of their assets in an
investment designed to offer stability, and those seeking a short-term
investment prior to making long-term investment choices.

PORTFOLIO
MANAGEMENT TEAM

K. Sue Cote
Lead Portfolio Manager

Donald C. Carleton

Rebecca L. Wilson
Portfolio Managers

- ----------
^1 It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Capital gains may be
subject to taxes as well.

^2 The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.

THE FUND'S INVESTMENT STRATEGY

As short-term interest rates in general declined over the period
covered by this Report, our aim was to purchase securities with a one-year
maturity. Recently, securities with a one-year maturity have provided
above-average value. We combined these purchases with short variable rate notes
to create what we think is the best mix of yield and stability. As of September
30, 1997, the average maturity of your Fund was 51 days, which is longer than
the 49-day average maturity of the Fund back on September 30, 1996. Standard &
Poor's Corp. limits the average maturity of all its AAA-rated money funds to 60
days.

As always, all securities we bought over the past 12 months were rated
within the two highest quality ratings of at least one of the three leading
national independent rating firms: Fitch Investors Service, Inc., Moody's
Investors Service, Inc., or S&P. The AARP High Quality Tax Free Money Fund is
rated AAAm by S&P, their highest rating. As a result, there are particular
guidelines with which we must comply in order to maintain our AAAm rating. In
addition, within the universe of securities that fit the S&P criteria, Scudder
credit analysts approve only a small percentage. Therefore, the number of
securities that we have to choose from is much smaller and in most cases of
better quality than other tax-free money funds.

We do not expect short-term interest rates to rise dramatically over
the next few months. Therefore, we intend to maintain a slightly above-average
maturity of the Fund. By doing so, we hope to provide you with price stability
and competitive tax-free income.

PORTFOLIO STATISTICS
--------------------

Number of Issues 54

7-Day Current Yield 3.16%

Average Maturity 51 Days

Average Quality AAAm

PORTFOLIO RETURNS
-----------------

One-Year Cumulative
Total Return 2.80%

Five-Year Average
Annualized Total Return 2.39%

Ten-Year Average
Annualized Total Return 3.81%

Five-Year Cumulative
Total Return 12.55%

Ten-Year Cumulative
Total Return 45.40%

13
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
--------------------------------

FUND OVERVIEW

The AARP GNMA and U.S. Treasury Fund seeks to produce a high level of current
income from a conservatively managed government fixed-income portfolio. Although
your principal is not guaranteed as it is with an insured fixed-rate certificate
of deposit (CD) or savings account, the Fund is managed to have less share price
volatility than other GNMA funds. While the securities in the Fund are
guaranteed as to the timely payment of principal and interest, the guarantee is
not related to the Fund's yield or share price, both of which will fluctuate
daily.

PORTFOLIO
MANAGEMENT TEAM

Thomas M. Poor
Lead Portfolio Manager

Mark S. Boyadjian

Scott E. Dolan

David H. Glen
Portfolio Managers

Total Return
------------
CUMULATIVE

FUND INDEX+
- -------------------------

1 yr. 8.49% 10.27%

5 yr. 30.26% 40.24%

10 yr. 116.18% 155.38%

AVERAGE ANNUAL

FUND INDEX+
-------------------------

1 yr. 8.49% 10.27%

5 yr. 5.43% 6.99%

10 yr. 8.01% 9.82%

HOW THE FUND HAS PERFORMED

The AARP GNMA and U.S. Treasury Fund provided a 6.35% 30-day SEC yield as
of September 30, 1997. The Fund was actively managed to protect you from some of
the share price volatility caused by rising interest rates early in the year.
However, during times of declining interest rates such as that of more recent
months, your Fund will often lag behind other GNMA funds and its comparative
index due to its U.S. Treasury holdings. The Annual Investment Returns chart
below shows that the AARP GNMA and U.S. Treasury Fund's one-year total return of
8.49% (representing 6.81% in distribution of income and 1.68% in capital change)
underperformed the unmanaged Lehman Brothers Mortgage GNMA Index of 10.27%. It
is important to remember that the index return does not reflect investment in
cash or short-term Treasury securities like those held in the Fund; nor does the
index reflect the impact of servicing, investment management, or administrative
expenses that a mutual fund incurs. The Fund's underperformance was due in part
to its holdings of investments in lower yielding U.S. Treasuries and other
short-term instruments in keeping with its discipline to reduce share price
volatility. Secondly, mortgages as a class performed exceptionally well over the
past several months. Therefore, comparable funds that were almost entirely
invested in mortgages performed better than the AARP GNMA and U.S. Treasury
Fund.

Twelve-month returns for the Fund will vary. By maintaining a long-term
focus and staying invested through periods of rising and declining interest
rates, you have the opportunity to earn high monthly income. The graph above
right shows how $10,000 invested in the Fund on September 30, 1987 would have
grown by September 30, 1997, assuming all distributions were reinvested.

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Yearly Periods ended September 30

CHART DATA:

AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- ---------------------

1987 $10000 $10000

1988 11107 11506

1989 12014 12807

1990 13079 14016

1991 14925 16343

1992 16595 18210

1993 17572 19411

1994 17238 19176

1995 19016 21873

1996 19926 23159

1997 21618 25538

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Yearly Periods ended September 30
(Total Return %)

CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- --------------------

1993 5.89% 6.59%

1994 -1.9 -1.22

1995 10.31 14.07

1996 4.79 5.88

1997 8.49 10.27

- ----------
^+ The unmanaged Lehman Brothers Mortgage GNMA Index is a market-value-weighted
measure of all fixed-rate securities backed by mortgage pools of GNMA. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.

All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.

14
<PAGE>

THE FUND'S INVESTMENT STRATEGY

In keeping with our strategy to produce monthly income from a
conservatively managed government portfolio, we used shorter term U.S. Treasury
securities (20% of the portfolio as of September 30, 1997) to reduce share price
volatility while using high-yielding GNMA securities (76% as of September 30,
1997) for income. We increased our position in GNMA securities to approximately
76% as of September 30, 1997 from 66% on September 30, 1996 for two reasons: we
believed that mortgages were an attractive category relative to Treasuries and
we didn't anticipate a major rise in interest rates. Within the GNMA universe,
we invested across a variety of maturities with interest rate coupons ranging
from 6.5% to 16%. To dampen the share price volatility during this period, the
remainder of the portfolio was invested in shorter term U.S. Treasury
obligations and cash equivalents with maturities of three years or less.

CALLOUT:

This is a unique Fund because it is designed for older Americans who seek more
income from conservative investments. The Fund generally has at least 20% of its
assets in securities such as short-term Treasuries, to cushion it from too much
share price fluctuation.

We believe that the current blend of GNMA securities will continue to
provide a competitive stream of income, while the shorter term Treasury
securities and cash equivalents will continue to help dampen share price
volatility.

The following graph shows your Fund's monthly downside risk and average
monthly return for the last three years compared to its peer group. The dotted
lines divide the graph into four sections or quadrants. The point where they
intersect represents the median risk and the median return for the peer group of
funds. Our goal is for this Fund to place in the upper-left quadrant, otherwise
the lower-left quadrant. See page 6 for a complete description of our
performance measurement system.

A SCATTER CHART APPEARS HERE

SCATTER CHART TITLE:

AARP GNMA and U.S. Treasury Fund Three-Year Risk/Return Performance

Average Monthly Return Monthly Downside Risk
---------------------- ---------------------

AARP GNMA and U.S.
Treasury Fund .63% .21%

Peer Funds
Average .72% .35%

(Data represented from October 1994 through September 1997 for 20 similar
funds.)

Your Fund is located in the lower-left quadrant. Its return was slightly less
than the median return of its Lipper* GNMA fund peer group. However, it had the
second lowest risk in the universe of 20 similar mutual funds.

- ----------
*Lipper Analytical Services, Inc. is the source for the peer group information.

FOR WHOM THE
FUND IS DESIGNED

The Fund is designed for conservative investors who want relatively high current
income but some protection from bond market fluctuation. As an investor, you
should be investing for the longer term (three years or more) and be comfortable
with fluctuation in the value of your principal and yield.

PORTFOLIO DIVERSIFICATION
-------------------------
As of September 30, 1997

Government National
Mortgage Association 76%
U.S. Treasury Obligations 20%
Cash Equivalents 4%
----
100%
====

PORTFOLIO STATISTICS
--------------------

Number of Issues 2112
30-Day Yield 6.35%
Average Coupon 7.44%
Yield to Maturity 6.60%
Average Maturity 5.33 Years
Average Duration 2.59 Years
Average Quality AAA

15
<PAGE>

AARP HIGH QUALITY BOND FUND
---------------------------

FUND OVERVIEW

To help achieve a high level of income compared to similar bond funds, the AARP
High Quality Bond Fund invests in a range of investment-grade bonds. The Fund
maintains quality standards that are among the highest of any general bond fund
currently available, with at least 65% of the Fund's assets invested in
securities rated in the two highest rating categories by Moody's and Standard &
Poor's. The Fund may also invest up to 20% of its assets in bonds rated Baa by
Moody's or rated BBB by S&P. The Fund is also managed to have less share price
volatility than other high quality bond funds.

PORTFOLIO
MANAGEMENT TEAM

William M. Hutchinson
Lead Portfolio Manager

Scott E. Dolan

David H. Glen
Portfolio Managers

Total Return
------------
CUMULATIVE

FUND INDEX^+
- -------------------------
1 yr. 8.15% 9.73%

5 yr. 35.05% 39.70%

10 yr. 126.98% 147.26%

AVERAGE ANNUAL

FUND INDEX^+
- -------------------------
1 yr. 8.15% 9.73%

5 yr. 6.19% 6.91%

10 yr. 8.54% 9.47%

HOW THE FUND HAS PERFORMED

The AARP High Quality Bond Fund's one-year total return of 8.15%
(representing 6.13% in distribution of income and 2.02% in capital change)
underperformed the unmanaged Lehman Brothers Aggregate Bond Index of 9.73%.
Because your Fund attempts to reduce share price volatility, it will often
underperform the index when long-term interest rates decline, as they have over
much of the period covered by this Report. Long-term interest rates, as measured
by the 30-year Treasury Bond, declined from 6.92% to 6.39% for the same period.
It is important to remember that the index return does not reflect investment in
cash or short-term securities like those held in the Fund; nor does the index
reflect the impact of servicing, investment management, or administrative
expenses that a mutual fund incurs.

The Fund's return will vary from year to year, however, by maintaining
a long-term focus and staying invested through periods of rising and declining
interest rates, you increase the chances of achieving your long-term objective.
The graph to the right shows how $10,000 invested in the Fund on September 30,
1987 would have grown as of September 30, 1997, assuming all distributions were
reinvested.

THE FUND'S INVESTMENT STRATEGY

Over the past 12 months we focused our efforts on implementing our
diversification strategy by investing across a range of maturities, quality
ratings, and industries. Your Fund continued to be well diversified in
high-quality securities. As of September 30, 1997, 66% of the portfolio was
invested in government, AAA-rated, or AA-rated securities; 12% of the Fund was
invested in A-rated bonds; 16% was invested

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Yearly Periods ended September 30

CHART DATA:

AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
--------- ---------------------

1987 $10000 $10000

1988 11238 11330

1989 12404 12606

1990 13051 13556

1991 15066 15724

1992 16807 17699

1993 18804 19464

1994 17761 18835

1995 20066 21485

1996 20988 22533

1997 22698 24726

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Yearly Periods ended September 30
Total Return %

CHART DATA:

AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
--------- ---------------------

1993 11.88% 9.98%

1994 -5.54 -3.22

1995 12.98 14.06

1996 4.59 4.90

1997 8.15 9.73

- ----------
^+ The unmanaged Lehman Brothers Aggregate Bond Index is a market-value-weighted
measure of Treasury issues, agency issues, corporate bond issues, and
mortgage securities. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not reflect
any fees or expenses.

16
<PAGE>

in BBB securities; and 6% was invested in cash equivalents. We favored
attractively priced mortgage-backed securities, with an allocation of
approximately 25% of the portfolio's assets, because of their high quality and
income potential. We also continued to invest in a broad range of corporate
securities such as those in financial, transportation, and consumer staples
companies. Utilizing an investment provision implemented in February of this
year, we invested 16% of the portfolio assets in BBB-rated securities. This
helped provide you with a 30-day SEC yield of 5.83% as of September 30, 1997.

Overall, we maintained a barbell maturity strategy with 18% of the
portfolio invested in securities that mature in under one year and 24% of the
portfolio invested in securities maturing in more than ten years.

CALLOUT:

The Fund attempts to reduce share price fluctuation by investing in a variety of
different economic sectors.

The following graph shows the Fund's monthly downside risk and average
monthly return for the last three years compared to its peer group. The dotted
lines divide the graph into four sections or quadrants. The point where they
intersect represents the median risk and the median return for the peer group of
funds. Our goal is for this Fund to place in the upper-left quadrant, otherwise
in the lower-left quadrant. See the special section on page 6 for a complete
description of our performance measurement system.

A SCATTER CHART APPEARS HERE

SCATTER CHART TITLE:
AARP High Quality Bond Fund Three-Year Risk/Return Performance

SCATTER CHART TITLE:

Average Monthly Return Monthly Downside Risk
---------------------- ---------------------

AARP High Quality 0.68% 0.46%
Bond Fund

Peer Funds 0.76% 0.53%
Average

(Data represented from October 1994 through September 1997 for 44 similar
funds.)

Your Fund is located in the lower-left quadrant. Its return was slightly less
than the median return of its Lipper* "Corporate Rated A" fund peer group.
However, it had the 12th lowest risk in this universe of 44 similar mutual
funds.

- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.

FOR WHOM THE
FUND IS DESIGNED

The Fund is designed for investors who want competitive returns from a portfolio
of high credit quality. Investors should be seeking to invest for the longer
term (at least three years or more) and be comfortable with fluctuation in the
value of their principal and yield.

PORTFOLIO DIVERSIFICATION
-------------------------
As of September 30, 1997

Corporate Bonds 33%
U.S. Treasury Obligation 21%
Government National
Mortgage Association 14%
Asset Backed 13%
U.S. Government Agency
Pass-Throughs 11%
Cash Equivalents 6%
Foreign Bonds--U.S. $
Denominated 2%
----
100%
====

PORTFOLIO STATISTICS
--------------------

Number of Issues 52
30-Day SEC Yield 5.83%
Average Coupon 7.19%
Yield to Maturity 5.31%
Average Maturity 9.08 Years
Average Duration 4.35 Years
Average Quality AA

17
<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND
---------------------------------------

FUND OVERVIEW

The AARP Insured Tax Free General Bond Fund seeks to pay high monthly income
that is free from federal income taxes.* The Fund invests in a portfolio
consisting primarily of high-grade municipal securities that are insured against
default. This insurance does not apply to the value of your shares or the yield
of the Fund, both of which will fluctuate daily. The Fund is also managed to
have less share price volatility than other tax-free bond funds.

PORTFOLIO
MANAGEMENT TEAM

Donald C. Carleton
Lead Portfolio Manager

Philip G. Condon
Portfolio Manager

Total Return
------------
CUMULATIVE

FUND INDEX+
- -------------------------

1 yr. 8.57% 9.04%

5 yr. 38.36% 41.40%

10 yr. 130.07% 131.82%

AVERAGE ANNUAL

FUND INDEX+
- -------------------------

1 yr. 8.57% 9.04%

5 yr. 6.71% 7.17%

10 yr. 8.69% 8.76%

- ----------
* It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Gains on sales of Fund
shares and distributions of capital gains generally will be subject to
federal, state, and local taxes.

HOW THE FUND HAS PERFORMED

The AARP Insured Tax Free General Bond Fund provided you with a competitive
return and high, tax-exempt income over the past 12 months. Your Fund's one-year
total return was 8.57% (representing 5.15% in income distributions and 3.42% in
capital change); its 30-day SEC yield as of September 30, 1997 was 4.31%. This
is a taxable equivalent yield of 7.14% for shareholders in the 39.6% tax
bracket.

The AARP Insured Tax Free General Bond Fund's one-year return
underperformed the unmanaged Lehman Brothers Municipal Bond Index's return of
9.04%. It is important to note that due to the Fund's investment strategy to
moderate share price volatility, the Fund will often underperform versus similar
funds and the index. Also, the index return does not reflect investment in cash
or the deduction of any servicing, investment management, or administrative
expenses as a mutual fund does.

By maintaining a long-term focus and staying invested through strong and
weak markets, your investment has the opportunity to grow over time. The graph
to the right shows how $10,000 invested in the Fund on September 30, 1987 would
have grown by September 30, 1997, assuming all distributions were reinvested.

THE FUND'S INVESTMENT STRATEGY

In keeping with your Fund's objective to reduce share price volatility,
purchasing bonds with call protection remained a fundamental part of the Fund's
investment strategy over the past 12 months. Generally, a bond is called by the
issuer so that it can be refinanced at a lower interest

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Yearly Periods ended September 30

HART DATA:
AARP Insured Tax Free Lehman Brothers
General Bond Fund Municipal Bond Index^+
----------------- ---------------------

1987 10000 10000

1988 11439 11296

1989 12658 12277

1990 13276 13113

1991 15115 14842

1992 16628 16395

1993 19009 18484

1994 18158 18033

1995 20012 20051

1996 21190 21260

1997 23007 23182

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Yearly Periods ended September 30
Total Return %

CHART DATA:

AARP Insured Tax Free Lehman Brothers
General Bond Fund Municipal Bond Index^+
----------------- ---------------------

1993 14.31% 12.74%

1994 -4.47 -2.44

1995 10.21 11.18

1996 5.88 6.04

1997 8.57 9.04

- ----------
^+ The unmanaged Lehman Brothers Municipal Bond Index is a market-value-weighted
measure of municipal bonds with a maturity of at least two years. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.

<PAGE>

rate. Our call-protection strategy provided a more reliable income stream than
would have existed if the Fund held a significant amount of bonds that could be
called in by the issuer before their stated maturity. As of September 30, 1997,
85% of the portfolio was invested in non-callable bonds.

CALLOUT:

Investing in securities of varying maturities helps reduce the share price
volatility of this Fund.

The maturity structure of the portfolio was not significantly altered
during the past twelve months. We still prefer bonds from the 5- to 15-year
range of the market, which accounted for approximately 69% of the Fund's assets
as of September 30, 1997. The remaining 31% of the portfolio was divided equally
between short-term securities and bonds maturing in more than 15 years.

In addition, as of September 30, 1997, 95% of the portfolio was invested in
insured securities (or securities with escrowed U.S. Treasuries which provide
the backing of the U.S. government). Remember that this insurance protects the
bond from default but does not apply to the value of your shares or to the yield
of the Fund, both of which will fluctuate daily.

We believe that our strategy of maintaining a moderate duration (see
Glossary on page 160 for a definition of the word "duration"), presently of 7.39
years, will continue to serve you well. We seek to provide you with high income
free from federal income taxes and to keep your Fund's share price more stable
than that of a long-term municipal bond fund.

The following graph shows your Fund's monthly downside risk and average
monthly return performance for the last three years compared to its peer group.
The dotted lines divide the graph into four sections or quadrants. The point
where they intersect represents the median risk and the median return for the
peer group of funds. Our goal is for this Fund to place in the upper-left
quadrant, otherwise the lower- left quadrant.

A SCATTER CHART APPEARS HERE

SCATTER CHART TITLE:

AARP Insured Tax Free General Bond Fund Three-Year Risk/Return Performance

SCATTER CHART DATA:

Average Monthly Return Monthly Downside Risk
---------------------- ---------------------

AARP Tax Free 0.66% 0.68%
General Bond Fund

Peer Funds 0.65% 0.78%
Average

(Data represented from October 1994 through September 1997 for 16 similar
funds.)

Your Fund is located at the intersection of the upper- and lower-left quadrants.
Its return was the same as the median return of its Lipper* Insured Muni Bond
fund peer group. The Fund had the third lowest risk in this universe of 16
similar mutual funds.

- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.

FOR WHOM THE
FUND IS DESIGNED

The Fund is designed for investors in higher tax brackets who want income that
is free from federal income taxes. Investors should be seeking to invest for the
long term (at least three years or more) and be comfortable with fluctuation in
the value of their principal and yield.

MUNICIPAL BOND EFFECTIVE
MATURITIES ALLOCATION
---------------------
As of September 30, 1997

Less than 1 year 3%
1 to less than 5 years 11%
5 to less than 10 years 28%
10 to less than 15 years 41%
Greater than 15 years 17%
----
100%
====

PORTFOLIO STATISTICS
--------------------

Number of Issues 368
30-Day SEC Yield 4.31%
Average Coupon 4.79%
Average Maturity 10.8 Years
Effective Duration 7.39 Years
Average Quality AAA

19
<PAGE>

AARP BOND FUND FOR INCOME
-------------------------

FUND OVERVIEW

The AARP Bond Fund for Income is designed to provide the highest level of
monthly income of any AARP Fund by investing primarily in investment- grade
bonds. The Fund can invest up to 35% in below-investment-grade bonds (at least
25% of which must be BB or Ba and no more than 10% of which may be B). The AARP
Bond Fund for Income is also managed to have less share price volatility than
other investment-grade long-term bond funds.

PORTFOLIO
MANAGEMENT TEAM

William M. Hutchinson
Lead Portfolio Manager

Kelly D. Babson

David H. Glen
Portfolio Managers

Total Return
------------
CUMULATIVE

FUND INDEX^+
- -------------------------
Life of
Fund* 6.06% 6.21%

HOW THE FUND HAS PERFORMED

The AARP Bond Fund for Income has performed close to its index since it was
introduced on February 1, 1997. For the life of the Fund (February 1, 1997
through September 30, 1997), the total return of 6.06% (not annualized) slightly
underperformed the Lehman Brothers Aggregate Bond Index's return of 6.21% for
the same period. It is important to note that due to the Fund's investment
strategy to moderate share price volatility, the Fund will often underperform
versus similar funds and the index. Also, the index return does not reflect
investment in cash or the deduction of any servicing, investment management, or
administrative expenses that a mutual fund has.

CALLOUT:

In pursuit of the highest level of income of any AARP Mutual Fund, the Fund has
the flexibility to invest in a full array of maturities and credit quality.

THE FUND'S INVESTMENT STRATEGY

Your Fund must invest at least 65% of its assets in investment-grade bonds.
The Fund also invests a portion of its assets in lower-grade bonds. Our
investment orientation is towards the "upper end" -- or high-quality end -- of
the low-grade market, primarily BB-quality securities. We anticipate that
investing in these lower-grade securities will produce a higher yield and more
share price appreciation than the other income funds offered by the Program,
although the investment risk is somewhat higher. As of September 30, 1997, 78%
was invested in investment-grade bonds of BBB or higher, 14% in BB bonds, and 8%
in B bonds.

We also chose to keep the Fund richly diversified, utilizing a full array
of maturities and

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997

CHART DATA:
AARP Bond Fund Lehman Brothers
for Income Aggregate Bond Index^+
-------------- ---------------------

2/1/97 10000 10000

10039 10025

3/31/97 9921 9914

10004 10062

10139 10158

6/30/97 10266 10279

10567 10556

10457 10467

9/30/97 10606 10621

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Period ended September 30
Total Return %

CHART DATA:
AARP Bond Fund Lehman Brothers
for Income Aggregate Bond Index^+
-------------- ---------------------

2/1/97* - 6.06% 6.21%
9/30/97

- ----------
^+ The unmanaged Lehman Brothers Aggregate Bond Index is a market-value-weighted
measure of Treasury issues, agency issues, corporate bond issues, and
mortgage securities. Index returns are calculated monthly and assume
reinvestment of dividends.
Unlike Fund returns, Index returns do not reflect any fees or expenses.

* The Fund commenced operations on February 1, 1997.

20
<PAGE>

credit quality. As of September 30, 1997, 53% of the portfolio was invested in
the corporate sector, 6% in mortgage-backed securities, 9% in asset-backed
securities, and 32% in cash and U.S. government securities (due to the large
inflow of cash into this new fund). In the corporate sector, we were invested
32% in industrials, 16% in financials, and 5% in utilities. We also maintained a
barbell strategy where 29% of the portfolio is invested in bonds maturing in ten
years or more and 30% is invested in bonds maturing in under one year.

We will continue to manage the AARP Bond Fund for Income for higher yields
than other AARP Income Funds, but to have less downside share price volatility
than other investment-grade bond funds. In turn, it is important to remember
that this Fund will likely experience more volatility than the AARP GNMA and
U.S. Treasury Fund or the AARP High Quality Bond Fund. Investors in this Fund
must therefore be in a position to tolerate greater risk to the value of their
investment for the potential of greater returns over the long term.

FOR WHOM THE
FUND IS DESIGNED

The Fund is designed for investors who seek high monthly income from a
diversified portfolio of largely investment-grade bonds, but who are willing to
accept the additional risk of a portfolio with some investment in lower-quality
bonds. Investors should be prepared to invest for the long term (at least three
years or more) and be comfortable with fluctuation in the value of their
principal. The AARP Bond Fund for Income could serve as a core bond investment
in most investors' portfolios because it offers the potential for high yields,
competitive total returns, and less share price fluctuation than other
investment-grade bond funds.

PORTFOLIO ALLOCATION
--------------------
As of September 30, 1997

Corporate Bonds 50%
Cash Equivalents 31%
Asset-Backed Securities 9%
Government National
Mortgage Association 4%
Foreign Bonds -- U.S. $
Denominated 3%
U.S. Government Agency
Pass-Throughs 2%
U.S. Treasury Obligations 1%
----
100%
====

PORTFOLIO STATISTICS
--------------------

Number of Issues 67
30-Day SEC Yield 6.92%
Average Coupon 7.85%
Yield to Maturity 5.05%
Average Maturity 9.85 Years
Average Duration 4.96 Years
Average Quality A

21
<PAGE>

AARP BALANCED STOCK AND BOND FUND
---------------------------------

FUND OVERVIEW

By investing in a combination of stocks, bonds, and cash reserves, the AARP
Balanced Stock and Bond Fund seeks to offer you long-term growth of capital and
quarterly income. The Fund attempts to keep the value of its shares more stable
than other balanced funds. The Fund is also managed to have less share price
volatility than other balanced funds.

PORTFOLIO
MANAGEMENT TEAM

Robert T. Hoffman
Lead Portfolio Manager

William M. Hutchinson

Benjamin W. Thorndike
Portfolio Managers

Total Return
------------
CUMULATIVE

BLENDED
FUND INDEX+
- -------------------------
1 yr. 27.34% 23.96%

Life of
Fund* 66.87% 64.21%

AVERAGE ANNUAL

BLENDED
FUND INDEX+
- -------------------------
1 yr. 27.34% 23.96%

Life of
Fund* 15.00% 14.49%

HOW THE FUND HAS PERFORMED

The AARP Balanced Stock and Bond Fund's one-year total return of 27.34%
(representing 4.57% in income distributions and 22.77% in capital change)
outperformed the blended index's return of 23.96%. The blended index is made up
of the unmanaged Standard & Poor's Composite Index of 500 Stocks (50%), the
unmanaged Lehman Brothers Aggregate Bond Index (40%), and the three-month
Treasury Bill Index (10%). (Please note that the Fund was introduced on February
1, 1994; therefore, five-year and ten-year data are not available.)

By maintaining a long-term focus and staying invested through good and bad
times, your investment has the opportunity to grow significantly over time. The
graph to the right shows how a $10,000 investment in the Fund would have grown
if you invested in the Fund on February 1, 1994, assuming all distributions were
reinvested.

THE FUND'S INVESTMENT STRATEGY

In general, the stock portion of your Fund (representing 61% of the
portfolio as of September 30, 1997) uses an approach similar to the AARP Growth
and Income Fund. We invest in stocks that are believed to have favorable
long-term capital appreciation outlooks and above-average dividend yields. Since
the stock portion of the Fund is managed by the same team and with the same
strategy as the AARP Growth and Income Fund, please refer to the AARP Growth

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Semiannual Periods from February 1, 1994*
to September 30, 1997

CHART DATA:

AARP Balanced Standard & Poor's Lehman Brothers
Stock and Bond 500 Stock Price Aggregate Bond Blended
Fund Index Index Index^+
---- ----- ----- -----

2/94* $10000 $10000 $10000 $10000

3/94 10154 9305 9583 9490

9/94 10584 9800 9543 9747

3/95 11024 10752 10062 10461

9/95 12361 12715 10885 11776

3/96 13343 14203 11146 12602

9/96 13978 15299 11416 13247

3/97 15007 17019 11694 14157

9/97 17800 21489 12527 16421

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Yearly Periods ended September 30
Total Return %

CHART DATA:

AARP Balanced Blended
Stock and Bond Fund Index^+
------------------- -----
2/1/94* -
9/30/94 -0.78% -3.83%

1995 16.80 20.43

1996 13.08 14.50

1997 27.34 23.96

- ----------
^+ The performance of the blended benchmark is a weighting comprised of 50%
Standard & Poor's 500 Stock Price Index (S&P), 40% Lehman Brothers
Aggregate Bond Index (LBAB), and the 3-Month Treasury Bill Index (10%). The
50/40/10 measure is meant to reflect the anticipated long range asset mix
of the Fund, which may change over time. The unmanaged Standard & Poor's
500 Stock Price Index is a market-value-weighted measure of 500 widely held
common stocks listed on the New York Stock Exchange, American Stock
Exchange, and Over-the-Counter market. The unmanaged Lehman Brothers
Aggregate Bond Index is a market-value-weighted measure of Treasury issues,
agency issues, corporate bond issues, and mortgage securities. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.

* The Fund commenced operations on February 1, 1994.

22
<PAGE>

and Income Fund Report on page for details on specific stock selection. (The
Fund may invest up to 70% of its assets in stocks.)

The portion of the Fund invested in bonds (representing 31% of the
portfolio as of September 30, 1997) must include investment-grade securities --
those rated Baa or higher by Moody's or BBB or higher by Standard & Poor's, both
independent ratings organizations. At least 75% of these securities must be
rated within the three highest quality ratings (AAA, AA, and A) by Moody's or
S&P. (At all times, at least 30% of your Fund's assets will be a combination of
investment-grade bonds and cash equivalents.) We moved from intermediate bonds
over the past 12 months to a barbell strategy (with an emphasis on short and
long maturities) in anticipation of a flattening yield curve (short-term yields
rising faster than long-term yields). The remaining 8% of the Fund's assets were
invested in cash equivalents.

ASSET ALLOCATION
----------------
As of September 30, 1997

Stocks 61%
Bonds 31%
Cash Equivalents 8%
----
100%
====

We continue to believe that stocks will outperform bonds and cash over the
longer term; therefore, a majority of the portfolio will continue to be invested
in stocks. While we are comfortable with our current asset allocation of 61%
stocks, 31% bonds, and 8% cash equivalents, this allocation may be gradually
changed depending upon our expectations for the financial markets.

A SCATTER CHART APPEARS HERE

SCATTER CHART TITLE:

AARP Balanced Stock and Bond Fund Three-Year Risk/Return Performance

SCATTER CHART DATA:

Average Monthly Return Monthly Downside Risk
---------------------- ---------------------

AARP Balanced 1.46% 0.76%
Fund

Peer Funds 1.46% 0.93%
Average

(Data represented from October 1994 through September 1997 for 85 similar
funds.)

Your Fund is located at the intersection of the upper- and lower-left quadrants.
Its return was the same as the median return of its Lipper* Balanced fund peer
group. The Fund had the 12th lowest risk in this universe of 85 similar mutual
funds.

- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.

FOR WHOM THE
FUND IS DESIGNED

This Fund is designed for investors who are seeking long-term growth of their
assets, but who seek less risk than an investment solely in stocks. Investors
should be able to invest for the long term (at least three years or more) and be
comfortable with the value of their principal fluctuating up and down.

STOCK ALLOCATION
----------------
As of September 30, 1997

Financial 24%
Manufacturing 17%
Energy 8%
Consumer Staples 8%
Communications 7%
Utilities 7%
Durables 6%
Health 6%
Consumer Discretionary 6%
Other 11%
----
100%
====

BOND ALLOCATION
---------------
As of September 30, 1997

Corporate Bonds 41%
U.S. Treasury Obligations 22%
U.S. Gov't. Agency
Pass-Throughs 20%
Asset-Backed Securities 7%
Gov't. National Mortgage
Association 5%
Foreign Bonds-U.S. $
Denominated 5%
----
100%
====

23
<PAGE>

AARP GROWTH AND INCOME FUND
---------------------------

FUND OVERVIEW

The AARP Growth and Income Fund is a conservatively managed equity fund that
provides the potential for long-term growth and quarterly income. It invests in
above-average, dividend-yielding stocks that may offer the opportunity for
long-term growth of capital. The AARP Growth and Income Fund is also managed to
have less share price volatility than other growth and income funds.

PORTFOLIO
MANAGEMENT TEAM

Robert T. Hoffman
Lead Portfolio Manager

Lori J. Ensinger

Deborah A. Chaplin

Kathleen T. Millard

Benjamin W. Thorndike
Portfolio Managers

Total Return
------------
CUMULATIVE

FUND INDEX+
- ------------------------
1 yr. 40.70% 40.46%

5 yr. 162.57% 156.92%

10 yr. 289.67% 295.87%

AVERAGE ANNUAL

FUND INDEX+
- ------------------------
1 yr. 40.70% 40.46%

5 yr. 21.30% 20.76%

10 yr. 14.57% 14.74%

HOW THE FUND HAS PERFORMED

The AARP Growth and Income Fund performed well over the past 12 months. Its
one-year total return of 40.70% (representing 3.22% in distributions of income
and 37.48% in capital change) outperformed the unmanaged Standard & Poor's
Composite Index of 500 Stocks' return of 40.46%. This performance was due to the
strong appreciation of the Fund's largest holdings.

Of course, the returns for your Fund will vary from year to year, however,
by maintaining a long-term focus and avoiding overreaction to short-term market
volatility, your investment has the opportunity to grow significantly over time.
The graph to the lower right shows what $10,000 invested in the Fund on
September 30, 1987 would be worth on September 30, 1997, assuming all
distributions were reinvested.

THE FUND'S INVESTMENT STRATEGY

We continued to focus on investing in undervalued securities with
above-average relative dividend yields. The manufacturing sector contributed
significantly to the favorable performance over the past 12 months. For example,
Xerox, our largest holding, returned 59.3% for the period. This was due to key,
company-specific events, namely a new product introduction in modular-based
digital office copiers, and an announcement that the company was acquiring the
remaining 20% interest in Rank Xerox, a cornerstone of Xerox's European
strategy. Another manufacturing stock, Philips Electronics, returned 136.1% for
the period, based in part on the success of internal asset restructuring and
news it had

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Yearly Periods ended September 30

CHART DATA:

AARP Growth and Standard & Poor's
Income Fund 500 Stock Price Index^+
----------- -----------------------

1987 $10000 $10000

1988 8922 8763

1989 11644 11653

1990 10457 10577

1991 13300 13873

1992 14841 15408

1993 17717 17411

1994 19132 18053

1995 23041 23423

1996 27696 28183

1997 38967 39587

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Yearly Periods ended September 30
Total Return %

CHART DATA:

AARP Growth and Income Standard & Poor's 500
Fund Stock Price Index+
---- ------------------

1993 19.38% 12.97%

1994 7.99 3.68

1995 20.43 29.75

1996 20.20 20.34

1997 40.70 40.46

- ----------
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a market value
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and traded on the Over-the-Counter
market. Index returns are calculated monthly and assume reinvestment of
dividends. Unlike Fund returns, Index returns do not reflect any fees or
expenses.

24
<PAGE>

entered into a joint venture with Lucent, a consumer communications company.

CALLOUT:

The Fund focuses on stocks with above-average dividends and sound fundamentals
to help reduce share price volatility.

The Fund's health care weighting, concentrated in pharmaceuticals, also
helped the Fund's favorable performance. Earnings acceleration from new product
introductions and favorable long-term demographic trends have made this group
one of the strongest performing market sectors over the last few years. Holdings
such as Warner Lambert and Bristol Myers performed extremely well over this
period. This kind of dramatic outperformance always forces one to ask how much
higher the stocks can rise and whether their current levels are sustainable. As
pharmaceutical stocks have become more fully valued, we have been gradually
reducing our holdings.

There were mixed results in the financial sector over this period. Our real
estate investment trust (REIT) holdings, despite strong absolute returns,
continued to lag banking and insurance stocks. During the past several months,
we scaled back REITs that have posted strong gains, such as Equity Residential
Properties and Developing Diversified Realty. We did, however, experience solid
total returns with our finance holdings, led by EXEL Limited and Lincoln
National, as well as SLM Holding Corp. (Please note that portfolio changes
should not be considered recommendations for action by individual investors.)

A SCATTER CHART APPEARS HERE

SCATTER CHART TITLE:
AARP Growth and Income Fund Three-Year Risk/Return Performance

SCATTER CHART DATA:

Average Monthly Return Monthly Downside Risk
---------------------- ---------------------

AARP Growth and 2.00% 1.26%
Income Fund

Peer Funds 1.97% 1.52%
Average

(Data represented from October 1994 through September 1997 for 269 similar
funds.)

Your Fund is located in the upper-left quadrant. Its return was slightly
better than the median return of its Lipper* Growth and Income peer group. The
Fund also had the 30th lowest risk in this universe of 269 similar mutual funds,
putting it in the top 11% for lowest risk.

- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.

FOR WHOM THE
FUND IS DESIGNED

The Fund is suitable for investors who are seeking long-term growth of their
assets and the opportunity to keep ahead of inflation. Investors should be able
to invest for at least five years or more and be comfortable with fluctuation in
the value of their principal that is associated with investing in stocks.

SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997

Financial 22%
Manufacturing 20%
Consumer Staples 9%
Energy 8%
Communications 7%
Durables 7%
Utilities 7%
Consumer Discretionary 6%
Health 6%
Other 8%
----
100%
====

ASSET ALLOCATION
----------------
As of September 30, 1997

Stock Holdings 97%
Cash Equivalents 3%
----
100%
====

25
<PAGE>

AARP U.S. STOCK INDEX FUND
--------------------------

FUND OVERVIEW

The AARP U.S. Stock Index Fund uses the S&P 500 Index as a benchmark, but holds
securities in S&P 500 companies with higher yields. Standard & Poor's Index is
an unmanaged broad market index of 500 large "blue chip" companies. The Fund is
managed to have less share price volatility than other stock index funds and the
unmanaged S&P 500 Index.

PORTFOLIO
MANAGEMENT TEAM

Philip S. Fortuna
Lead Portfolio Manager

James M. Eysenbach
Portfolio Manager

NOTE:

Bankers Trust Company has been retained as Subadvisor to the Fund. The
Subadvisor handles the day-to-day investment and trading functions. The
Portfolio Managers are in regular contact with the Subadvisor, receive records
of daily transactions, monitor returns and relative risk, and scrutinize
portfolio activity.

Total Return
------------
CUMULATIVE

FUND INDEX+
-------------------------

Life of
Fund* 21.22% 22.02%

HOW THE FUND HAS PERFORMED

The AARP U.S. Stock Index Fund was introduced on February 1, 1997.
Since inception (February 1, 1997 through September 30, 1997), your Fund
provided a total return of 21.22% (not annualized) vs. 22.02% for Standard &
Poor's Index of 500 Stocks. Consistent with its strategy, the Fund has exhibited
slightly lower day-to-day volatility than the S&P 500 Index and outperformed the
index on 61% of the down days.

CALLOUT:

The AARP U.S. Stock Index Fund strives to reduce share price fluctuation by
favoring dividend-paying S&P 500 stocks. Stocks of this type historically have
been more stable, especially in periods of decline.

THE FUND'S INVESTMENT STRATEGY

Our investment strategy is to invest in a broadly diversified portfolio
consisting of more than 400 S&P 500 companies as of the end of September 1997.
Using a technique referred to as "sampling," the portfolio is tilted towards
those common stocks of S&P 500 companies that are expected to pay higher
dividends than S&P 500 companies in the aggregate. By managing the Fund in this
way, we expect performance to be less volatile than the S&P 500 over time. We
also seek to offer shareholders a competitive return with a higher dividend
yield than comparable index funds.

The AARP U.S. Stock Index Fund offers a low-cost way of investing in a
diversified stock portfolio that provides a high degree of performance
similarity to the S&P 500.

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997

CHART DATA:

AARP U.S. Standard &
Stock Index Poor's 500 Stock
Fund Price Index^+
---- ------------

2/1/97* $10000 $10000

10073 10078

3/31/97 9659 9664

10207 10241

10802 10864

6/30/97 11293 11352

12146 12255

11508 11568

9/30/97 12122 12202

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Period ended September 30
Total Return %

CHART DATA:

AARP U.S. Standard &
Stock Index Poor's 500 Stock
Fund Price Index^+
---- ------------
2/1/97* -
9/30/97 21.22% 22.02%

----------
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a
market-value-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange, American Stock Exchange, and traded on the
Over-the-Counter market. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not reflect
any fees or expenses.

* The Fund commenced operations on February 1, 1997.

26
<PAGE>

The sector diversification, excluding cash equivalents as of September 30, 1997:

Financial 14%
Technology 13%
Health 11%
Manufacturing 11%
Consumer Staples 10%
Energy 9%
Communications 7%
Utilities 6%
Durables 6%
Other 13%

Asset Allocation
----------------
As of September 30, 1997

Stock Holdings 97%
Cash Equivalents 3%
----
100%
===

FOR WHOM THE
FUND IS DESIGNED

The Fund is suitable for investors seeking long-term growth of their investment
and who prefer a more "passive" approach to stock market investing. It is
appropriate for more conservative investors who are seeking higher dividend
income and somewhat lower than average volatility than a similar S&P 500 Index
Fund. Investors should invest for the long term (at least five years or more)
and be comfortable with the value of their principal moving up and down.

27
<PAGE>

AARP CAPITAL GROWTH FUND
------------------------

FUND OVERVIEW

The AARP Capital Growth Fund is designed to help investors take advantage of the
high growth potential of stocks. It is managed to have less share price
volatility than other growth funds.

PORTFOLIO
MANAGEMENT TEAM

William F. Gadsden
Lead Portfolio Manager

Bruce F. Beaty
Portfolio Manager

Total Return
------------
CUMULATIVE

FUND INDEX+
-------------------------
1 yr. 46.72% 40.46%

5 yr. 149.33% 156.92%

10 yr. 266.94% 295.87%

AVERAGE ANNUAL

FUND INDEX+
-------------------------
1 yr. 46.72% 40.46%

5 yr. 20.05% 20.76%

10 yr 13.88% 14.74%

HOW THE FUND HAS PERFORMED

The AARP Capital Growth Fund performed exceptionally well over the past
year, providing shareholders in the Fund with a one-year total return of 46.72%
(representing 1.27% in distributions of income and 45.45% in capital change).
This return outperformed the Standard & Poor's 500 return of 40.46%. Your Fund's
favorable performance over this period can be attributed to the overall strength
of the U.S. stock market, and to our overweighted position in selected
technology and finance issues -- two strongly performing stock sectors during
this period. We are pleased that our valuation disciplines and diversification,
which we instituted in late 1994 to reposition the Fund within the growth fund
category, lead to competitive returns with less share price volatility.

Remember that returns for the Fund will vary from year to year, however, by
maintaining a long-term focus and staying invested through the ups and downs of
the market, we believe your investment has the opportunity to grow significantly
over time. The graph to the right shows how a $10,000 investment in the Fund on
September 30, 1987 would have grown by September 30, 1997, assuming all
dividends were reinvested.

THE FUND'S INVESTMENT STRATEGY

We have maintained a consistent investment strategy, which resulted in only
a few portfolio changes. The two top performing sectors of the market continued
to be technology and finance. In the technology sector, several of our holdings
experienced spectacular returns. The financial sector rose on the long-term
trends of restructuring and consolidation in the banking industry. Financial
stocks were

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Yearly Periods ended September 30

CHART DATA:

AARP Capital Standard &
Growth Poor's 500 Stock
Fund Price Index^+
---- ------------

87 $10000 $10000

88 9452 8763

89 13575 11653

90 9915 10577

91 14159 13873

92 14717 15408

93 18327 17411

94 17466 18053

95 21565 23423

96 25009 28183

97 36694 39587

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Yearly Periods ended September 30
Total Return %

CHART DATA:

AARP Capital Standard &
Growth Poor's 500 Stock
Fund Price Index^+
---- ------------
1993 24.53% 12.97%

1994 -4.70 3.68

1995 23.47 29.75

1996 15.97 20.34

1997 46.72 40.46

- ----------
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a
market-value-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange, American Stock Exchange, and traded on the
Over-the-Counter market. Index returns are calculated monthly and assume
reinvestment of dividends. Unlike Fund returns, Index returns do not reflect
any fees or expenses.

28
<PAGE>

well represented in your Fund's top ten holdings, including American Express,
EXEL, and Franklin Resources.

CALLOUT:

Through a broadly diversified portfolio consisting primarily of high-quality,
medium- to large-sized companies with strong competitive positions in their
industries, the Fund seeks to offer less share price volatility than other
growth funds.

We recently began investing in oil field services companies. This is one of
the few industries where we see competitive pricing and strong demand for
services. After a decade of attrition, downsizing, and restructuring, we expect
oil field service companies to exhibit strong earnings as worldwide oil demand
remains firm. For example, oil companies are now able to drill wells with a
higher success rate because of the improved technology provided by oil field
services companies. This is significant for oil companies because it has
effectively lowered the high cost of drilling deep wells. At the end of
September 1997, the Fund had oil field service holdings in Schlumberger and
Sante Fe International.

While we avoid making predictions about the market and prefer to focus on
picking quality stocks that meet our investment requirements, we think the
favorable investment environment of 1997 should continue into 1998. Company
fundamentals remain positive: growth is strong, inflation is low, and
productivity continues to improve at many companies. We believe that leading
American companies -- the primary focus of your Fund's investment -- will
continue to provide some of the best opportunities in this environment.

A SCATTER CHART APPEARS HERE

SCATTER CHART TITLE:

AARP Capital Growth Fund Three-Year Risk/Return Performance

SCATTER CHART DATA:

Average Monthly Return Monthly Downside Risk
---------------------- ---------------------

AARP Capital 2.10% 1.54%
Growth Fund

Peer Funds 2.01& 1.92%
Average

(Data represented from October 1994 through September 1997 for 74 similar
funds.)

Your Fund is located in the upper-left quadrant. Its return was better than the
median return of its Lipper* Growth fund peer group. The Fund had the fifth
lowest risk in this universe of 74 similar mutual funds, with almost half the
downside risk of the riskiest fund.

- ----------
* Lipper Analytical Services, Inc. is the source for the peer group information.

FOR WHOM THE
FUND IS DESIGNED

The Fund is designed for investors seeking long-term growth of their principal.
Investors should be able to invest for the long term (at least five years or
more) and be comfortable with the short-term fluctuation of their principal that
is associated with investing in stocks.

SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997

Financial 21%
Technology 17%
Energy 14%
Manufacturing 13%
Consumer Discretionary 9%
Health 9%
Service Industries 5%
Durables 4%
Consumer Staples 4%
Other 4%
----
100%
====

ASSET ALLOCATION
----------------
As of September 30, 1997

Stock Holdings 95%
Cash Equivalents 5%
----
100%
====

29
<PAGE>
AARP SMALL COMPANY STOCK FUND
-----------------------------

FUND OVERVIEW

From investment primarily in the stocks of small U.S. companies, the Fund seeks
to provide long-term capital growth. It is also managed to have less share price
volatility than similar small company stock funds.

PORTFOLIO
MANAGEMENT TEAM

James M. Eysenbach
Lead Portfolio Manager

Philip S. Fortuna
Portfolio Manager

Total Return
------------
CUMULATIVE

FUND INDEX+
- -------------------------
Life of
Fund* 33.53% 24.13%

HOW THE FUND HAS PERFORMED

The AARP Small Company Stock Fund was introduced to shareholders on
February 1, 1997. Since inception, (February 1, 1997 through September 30,
1997), your Fund's total return of 33.53% (not annualized) outperformed the
Russell 2000 Index's return of 24.13% for the same period. Consistent with its
risk management mandate, your Fund has exhibited lower volatility than the
Russell 2000 Index of small companies and outperformed the Index on 88% of the
down days.

CALLOUT:

The Fund seeks to be more stable than other small company stock funds by
targeting undervalued small companies which, as a group, typically pay
above-average dividends.

THE FUND'S INVESTMENT STRATEGY

In pursuing capital appreciation from small company stocks, we utilize
a disciplined approach to uncover undervalued stocks within a broad universe of
small companies. First, we conduct a quantitative evaluation of approximately
2,000 small U.S. stocks, analyzing valuations, sales and earnings growth rates,
price momentum, and risk characteristics. We focus on companies selling at
prices that we believe do not reflect their underlying value. We emphasize those
companies with stable or improving sales and earnings growth or other
characteristics indicating that the undervaluation will be recognized in the
future. Then we build a diversified portfolio by assessing the risk/return
tradeoff of various combinations of attractively rated companies, with an
objective of maintaining an overall risk profile that is approximately 10% to
20% below that of the Russell 2000 Index. An important element of

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD:
Monthly Periods from February 1, 1997*
to September 30, 1997

CHART DATA:

AARP Small
Company Russell
Stock Fund 2000 Index^+
----------- ------------

2/1/97* $10000 $10000
10120 9758
3/31/97 9940 9297
9933 9323
11033 10360
6/30/97 11660 10805
12273 11307
12513 11566
9/30/97 13353 12413

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Period ended September 30
Total Return %
CHART DATA:
AARP Small
Company Russell
Stock Fund 2000 Index^+
----------- ------------

2/1/97* -
9/30/97 33.53% 24.13%

- ----------
^+ The Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks.

* The Fund commenced operations on February 1, 1997.

30
<PAGE>

this strategy, given the potential cost of trading small stocks, is working with
our experienced team of traders to ensure the most efficient means of executing
our purchase and sale decisions.

The emphasis on valuation is reflected in the resulting portfolio, which
has an average price-to-earnings ratio of about one-half of the Russell 2000
Index of small companies. (The price-to-earnings [P/E] ratio gives you an idea
of how much you are paying for a company's earning power. The lower the P/E, the
less you are paying for a dollar of earnings. While a high P/E may be an
indication of higher expected earnings growth, high-P/E stocks are typically
riskier.) Many of the lower-P/E stocks are found in the manufacturing sector of
the market. These small U.S. manufacturing firms currently represent the
portfolio's largest sector weighting. Meanwhile, we are finding relatively few
stocks meeting our valuation criteria within the health care sector. In terms of
size, a typical holding in the Fund has a market capitalization (price times
shares outstanding) of $480 million. By comparison, the typical S&P 500 company
has a market capitalization of $5 billion.

As of September 30, 1997, your Fund was well diversified, with 149 stocks
selected from the Russell 2000 Index of small companies. As you may know, the
risk of holding individual small company stocks can be high because small
companies generally have higher business risks than more established companies.
This is because small companies may have untested management, less diversified
product lines, and limited financial resources. This makes small companies more
vulnerable to adverse business developments than larger companies. We attempted
to control these risks by holding a relatively large number of securities in the
portfolio in addition to maintaining an overall above-average dividend yield. As
a direct result, your Fund has experienced lower than average small stock
volatility since inception compared to similar funds.

Going forward, we will continue to apply our disciplined, value- oriented
approach to selecting small company stocks in accordance with your Fund's
objective of seeking long-term capital appreciation with less share price
volatility than other small company stock funds. We believe that the AARP Small
Company Stock Fund continues to be appropriate for investors seeking
diversification and exposure to the small company sector of the stock market as
part of a well-rounded portfolio.

FOR WHOM THE
FUND IS DESIGNED

The AARP Small Company Stock Fund is suitable for investors seeking long-term
growth of their investment. Investors should invest for the long term (at least
five years or more) and be comfortable with the value of their principal
fluctuating up and down.

SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997

Manufacturing 25%
Financial 18%
Technology 10%
Consumer Discretionary 8%
Service Industries 7%
Construction 6%
Utilities 5%
Durables 5%
Metals & Minerals 5%
Other 11%
----
100%
====

ASSET ALLOCATION
----------------
As of September 30, 1997

Stock Holdings 94%
Cash Equivalents 6%
----
100%
====

<PAGE>

AARP GLOBAL GROWTH FUND
-----------------------

FUND OVERVIEW

The AARP Global Growth Fund seeks to offer long-term capital growth in a
globally diversified portfolio. It is also managed to have less share price
volatility than other global growth funds. Because the Fund invests globally, it
will be affected by up-and-down movements in U.S. and international stock
markets. The Fund will also be subject to international investment risks such as
currency exchange risk.

PORTFOLIO
MANAGEMENT TEAM

William E. Holzer
Lead Portfolio Manager

Diego Espinosa

Nicholas Bratt
Portfolio Managers

Total Return
------------
CUMULATIVE

FUND INDEX+
-------------------------
1 yr. 24.67% 24.11%

Life of
Fund* 28.74% 32.31%

AVERAGE ANNUAL

FUND INDEX+
-------------------------
1 yr. 24.67% 24.11%

Life of
Fund* 16.41% 18.30%

HOW THE FUND HAS PERFORMED

The AARP Global Growth Fund performed well returning 24.67% (.46% in income
distributions and 24.21% in capital change) for the one-year period ended
September 30, 1997. Your fund outperformed the unmanaged Morgan Stanley Capital
International (MSCI) World Index's return of 24.11%. Its outperformance was due
in part to the strong performance of many of our top holdings and the favorable
global investment environment.

THE FUND'S INVESTMENT STRATEGY

Our approach to investing in the global equity markets focuses first on
identifying long-term growth trends of the world economy and capital markets,
and then identifying the companies with appropriate stock values that are best
positioned to take advantage of these opportunities. This strategy results in a
well-diversified portfolio of approximately 120 issues across many countries. We
do not try to pick the best country or the best currency. Rather, we focus on
picking the best individual companies.

We continued to expand your Fund's holdings of companies that share two
characteristics we believe will provide an increasingly important advantage in
the new global environment: dominant worldwide market share and declining
production costs.

Over the past 12 months, we looked to companies in previously regulated
economies or industries that are restructuring. We already have seen
considerable restructuring in Europe --

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD:
Quarterly Periods from February 1, 1996*
to September 30, 1997

CHART DATA:

AARP Global
Growth Fund MSCI World Index^+
----------- ------------------

2/1/96* $10000 $10000

3/96 10180 10224

6/96 10280 10521

9/96 10327 10661

12/96 10907 11149

3/97 11141 11181

6/97 12399 12863

9/97 12874 13231

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Periods ended September 30
Total Return %

CHART DATA:

AARP Global
Growth Fund MSCI World Index^+
----------- ------------------

2/1/96*
3/31/97 3.27% 6.60%

9/30/97 24.67% 24.11%

- ----------
^+ The MSCI (Morgan Stanley Capital International) World Index is an unmanaged
capitalization-weighted measure of global stock markets, including the U.S.,
Canada, Europe, Australia, and the Far East. Index returns assume dividends
reinvested net of withholding tax and, unlike Fund returns, do not reflect
any fees or expenses.

* The Fund commenced operations on February 1, 1996.

32
<PAGE>

primarily Germany and France -- in the chemicals and pharmaceutical industries.
Many industries, such as insurance, utilities, and banks, are still in the early
stages of restructuring. Stocks such as Daimler-Benz, Mannesmann, and Siemens,
all in Germany, contributed to the Fund's favorable performance. We also began
to turn our attention to Japan, where there are early indications that the first
wave of restructuring is beginning. As a result, we have added Nomura, a
Japanese financial services company to the portfolio.

We have favored companies that have completed the restructuring process and
are becoming industry leaders. The tire industry is a good example where
Bridgestone (Japan), and Michelin (France) in particular have been strong
performers.

CALLOUT:

The Fund seeks to offer less share price volatility than other global growth
funds by maintaining core holdings in well-established companies of developed
countries.

Another theme focuses on the world's demographics. Due to an aging
population, we believe pharmaceutical products and health providers, such as
Astra (Sweden), Biogen (U.S.), and Novartis (Switzerland) will continue to
thrive. In addition, many retirees are looking for both a healthy and a wealthy
retirement. Therefore we believe financial companies should also benefit.
Insurance companies such as AEGON (the Netherlands) and Skandia (Sweden) are
examples of companies that fit this theme. (Please note that portfolio changes
should not be considered recommendations for action by individual investors.)

We have recently taken a more cautious approach toward equities, adding to
both cash and bonds. While we remain optimistic about our equity holdings, we
recognize that rising valuations, particularly in the U.S., have increased the
risk of equity ownership. However, we continue to search for outstanding
investment opportunities in individual stocks.

PIE CHART TITLE:

Geographical Diversification -- Excludes Cash Equivalents
As of September 30, 1997
CHART PERIOD:

CHART DATA:

Europe 56%
U.S. & Canada 23%
Japan 10%
Pacific Basin 5%
Latin America 4%
Africa 2%
----
100%
====

FOR WHOM THE
FUND IS DESIGNED

The AARP Global Growth Fund is suitable for investors who want to add worldwide
stock opportunities to their portfolio. Investors should invest for the long
term (at least five years or more) and be comfortable with the value of their
principal fluctuating up-and-down.

SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997

Financial 24%
Manufacturing 22%
Technology 8%
Metals and Minerals 7%
Durables 5%
Health 5%
Consumer Staples 4%
Service Industries 4%
Energy 4%
Other 17%
----
100%
====

ASSET ALLOCATION
----------------
As of September 30, 1997

Stock Holdings 83%
Cash Equivalents 11%
Bond Holdings 6%
----
100%
====

33
<PAGE>

AARP INTERNATIONAL STOCK FUND
-----------------------------

FUND OVERVIEW

The AARP International Stock Fund seeks to offer long-term capital growth and
income from a diversified portfolio of foreign securities. It is managed to have
less share price volatility than other international equity funds. Because the
Fund invests internationally, it will be affected by up-and-down movements in
international stock markets. The Fund will also be subject to international
investment risks such as currency exchange risk.

PORTFOLIO
MANAGEMENT TEAM

Sheridan Reilly
Lead Portfolio Manager

Irene Cheng

Marc Joseph
Portfolio Managers

Total Return
------------
CUMULATIVE

FUND INDEX+
-------------------------
Life of
Fund* 15.73% 14.43%

HOW THE FUND HAS PERFORMED

The AARP International Stock Fund performed well over the period covered by
this Report, with a total return of 15.73% (not annualized) for the period
February 1, 1997 to September 30, 1997. Your Fund outperformed the Morgan
Stanley Capital International (MSCI) EAFE Index return of 14.43%. This was due
in part to the Fund's geographic distribution. We were heavily weighted in
Europe, at roughly 77% of the portfolio. Europe not only displayed strong
performance in the earlier part of the year, but also weathered the August
decline quite well when foreign markets fell significantly. Southeast Asia was
hit hard in August, causing considerable market declines in this region. Our
underweighting in Southeast Asia, reflecting less than 10% of the portfolio,
helped us weather these turbulent times. In fact, over the past three months,
when the MSCI EAFE provided a return of -0.71%, the AARP International Stock
Fund provided shareholders a positive return of 5.60%.

THE FUND'S INVESTMENT STRATEGY

Since the Fund was introduced in February 1997, our priority has been to
make this a well-diversified portfolio in keeping with our strategy to
concentrate on individual stocks of well-established companies in developed
overseas markets. As of September 30, 1997, your Fund was diversified among 17
countries, including Germany, the United Kingdom, France, and Japan. As stated
in the section above, our geographic distribution contributed to the Fund's
favorable performance over this period.

On an industry and sector level, the Fund had significant weightings in
banks and insurers, manufacturers, and consumer goods companies, all of which

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT

CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997

CHART DATA:

AARP
International
Stock Fund MSCI EAFE Index^+
----------- -----------------

2/1/97* $10000 $10000

10053 10164

3/31/97 10140 10201

10007 10255

10507 10922

6/30/97 10960 11524

11287 11711

10833 10836

9/30/97 11573 11443

BAR CHART TITLE: ANNUAL INVESTMENT RETURNS

CHART PERIOD: Yearly Periods ended September 30
Total Return %
CHART DATA:

AARP
International
Stock Fund MSCI EAFE Index^+
----------- -----------------
2/1/97 -
9/30/97 15.73% 14.43%

- ----------
^+ The MSCI (Morgan Stanley Capital International) EAFE Index is an unmanaged
capitalization-weighted measure of global stock markets, including Europe,
Australia, and the Far East. Index returns assume dividends reinvested net of
withholding tax and, unlike Fund returns, do not reflect any fees or
expenses.

* The Fund commenced operations on February 1, 1997.

34
<PAGE>

held up better than the overall market. We identify companies within these
sectors through a "relative yield" investment approach. This means we target
stocks that have high dividend yields relative to the median of the market --
typically 25% or higher. Reflective of this strategy was our investment in Bank
of Austria, Dorling Kindersley (a U.K. publisher), Elf Aquitane (a French oil
company), and Winterthur (a Swiss insurer). Bank of Austria has a dividend yield
approximately 50% higher than the local market and was priced well below the
book value of the company. At the time we purchased Dorling Kindersley, the
company's dividend yield was double its historical level.

CALLOUT:

By primarily targeting well-managed, dividend-paying companies in established
markets other than the United States, the Fund seeks long-term growth with less
downside share price fluctuation than other international stock funds.

We also sold some stocks that were extremely profitable to the Fund and
used these profits to make some of the investments mentioned above. We sold our
positions in Shishedo (a Japanese cosmetics company) and Chubb Securities (an
insurance company based in the U.K.). (Please note that portfolio changes should
not be considered recommendations for action by individual investors.)

Since the Fund's inception, we have seen increased volatility in the
foreign markets, with steep highs and lows. We believe that this was ideal
ground for testing the Fund's strategy. We were able to offer competitive
returns during market rallies, while offering protection from severe share price
declines when the market declined. We are confident that our emphasis on value
will continue to be appropriate for investors who wish to allocate assets
overseas in a relatively conservative fashion, and for investors seeking to add
balance to other more aggressive international investments.

PIE CHART TITLE:

Geographical Diversification -- Excludes Cash Equivalents
As of September 30, 1997
CHART PERIOD:

CHART DATA:

Europe 77%
Japan 11%
Pacific Basin 8%
Canada 4%
----
100%
====

FOR WHOM THE
FUND IS DESIGNED

The Fund is suitable for investors seeking long-term growth of their principal
who want to add international stock market opportunities to their portfolio.
Investors in this Fund should have an investment time horizon of at least five
years or more, and be comfortable with the value of their principal fluctuating
up and down.

SECTOR DIVERSIFICATION --
EXCLUDES CASH EQUIVALENTS
-------------------------
As of September 30, 1997

Financial 24%
Manufacturing 22%
Consumer Staples 8%
Transportation 8%
Consumer Discretionary 7%
Communications 7%
Durables 6%
Construction 4%
Energy 3%
Other 11%
----
100%
====

ASSET ALLOCATION
----------------
As of September 30, 1997

Stock Holdings 93%
Cash Equivalents 7%
----
100%
====

35
<PAGE>

AARP MANAGED INVESTMENT PORTFOLIOS:
-----------------------------------

AARP DIVERSIFIED INCOME PORTFOLIO
AARP DIVERSIFIED GROWTH PORTFOLIO

PORTFOLIO OVERVIEWS

The AARP Managed Investment Portfolios are conservatively managed "funds of
funds" -- portfolios that invest exclusively in other AARP Mutual Funds. Two
portfolios are offered.

o The AARP Diversified Income Portfolio seeks current income with modest
long-term appreciation. It invests 60% to 80% of its assets in the AARP Bond
Mutual Funds and AARP Money Mutual Funds.

o The AARP Diversified Growth Portfolio seeks long-term growth of capital by
investing 60% to 80% of its assets in the AARP Stock Mutual Funds.

The investment mix in both portfolios may change when certain asset classes
appreciate or depreciate significantly as economic conditions change.

PORTFOLIO
MANAGEMENT TEAM

Philip S. Fortuna
Lead Portfolio Manager

Salvatore J. Bruno

Shahram Tajbakhsh
Portfolio Managers

TOTAL RETURN
DIVERSIFIED INCOME PORTFOLIO
- ----------------------------

CUMULATIVE

FUND INDEX+
-------------------------
Life of
Fund* 9.35% 10.87%

TOTAL RETURN
DIVERSIFIED GROWTH PORTFOLIO
- ----------------------------
CUMULATIVE

FUND INDEX+
-------------------------
Life of
Fund* 16.00% 17.20%

HOW THE PORTFOLIOS HAVE PERFORMED

The AARP Managed Investment Portfolios performed well since their inception
in February. The Diversified Income Portfolio provided a total return of 9.35%
(not annualized) vs. the blended index's total return of 10.87% for the same
period. The blended index is made up of the unmanaged Standard & Poor's 500
Index (30%) and the Lehman Brothers Aggregate Bond Index (70%). The Diversified
Growth Portfolio provided shareholders with a total return of 16.00% (not
annualized) vs. the blended index's total return of 17.20% for the same period.
The blended index is made up of the unmanaged Standard & Poor's 500 Index (70%)
and the Lehman Brothers Aggregate Bond Index (30%).

THE PORTFOLIOS' INVESTMENT STRATEGIES

Since the Portfolios were introduced in early February, we have been
implementing an investment process that applies our global perspective and
judgment of capital markets, combined with sophisticated quantitative risk
management techniques, to investing in a mix of AARP Mutual Funds. Each
underlying Fund is also managed to reduce risk of loss to the Portfolio.

LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
DIVERSIFIED INCOME PORTFOLIO

CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997

CHART DATA:

AARP Standard & Lehman
Diversified Poor's 500 Brothers
Income Stock Price Aggregate Blended
Portfolio Index Bond Index Index+
----------- ----------- ---------- -------

2/1/97* $10000 $10000 $10000 $10000

10090 10078 10025 10041

3/31/97 9987 9664 9914 9839

10127 10241 10062 10119

10339 10864 10158 10371

6/30/97 10548 11352 10279 10597

10849 12255 10556 11050

10689 11568 10467 10798

9/30/97 10935 12202 10621 11087

BAR CHART TITLE: GROWTH OF A $10,000 INVESTMENT
DIVERSIFIED GROWTH PORTFOLIO

CHART PERIOD: Monthly Periods from February 1, 1997*
to September 30, 1997

CHART DATA:

AARP Standard & Lehman
Diversified Poor's 500 Brothers
Growth Stock Price Aggregate Blended
Portfolio Index Bond Index Index+
----------- ----------- ---------- -------

2/1/97* $10000 $10000 $10000 $10000

10113 10078 10025 10062

3/31/97 9973 9664 9914 9739

10133 10241 10062 10190

10560 10864 10158 10653

6/30/97 10927 11352 10279 11026

11413 12255 10556 11729

11127 11568 10467 11239

9/30/97 11600 12202 10621 11720

- ----------
^+ The performance of the blended benchmark is a weighting comprised of the
Standard & Poor's 500 Stock Price Index (S&P), and the Lehman Brothers
Aggregate Bond Index (LBAB). The 30/70 measure of the Diversified Income
Portfolio and 70/30 measure of the Diversified Growth Portfolio is meant to
reflect the anticipated long-range asset mix of the Fund, which may change
over time. The unmanaged Standard & Poor's 500 Stock Price Index is a
market-value-weighted measure of 500 widely held common stocks listed on
the New York Stock Exchange, American Stock Exchange, and Over-the-Counter
market. The unmanaged Lehman Brothers Aggregate Bond Index is a
market-value-weighted measure of Treasury issues, agency issues, corporate
bond issues, and mortgage securities. Index returns are calculated monthly
and assume reinvestment of dividends. Unlike Fund returns, Index returns do
not reflect any fees or expenses.

* These Funds commenced operations on February 1, 1997.

36
<PAGE>

We began by deciding which asset classes we expected to outperform and
compared that to historical trends. We then used this data to allocate the
Portfolios as follows: The Diversified Income Portfolio allocation as of
September 30, 1997:

AARP High Quality Money Fund 14%
AARP Bond Fund for Income 30%
AARP GNMA and U.S. Treasury Fund 31%
AARP Growth and Income Fund 11%
AARP U.S. Stock Index Fund 5%
AARP Global Growth Fund 9%

The Diversified Growth Portfolio allocation as of September 30, 1997:

AARP High Quality Money Fund 1%
AARP GNMA and U.S. Treasury Fund 18%
AARP Bond Fund for Income 18%
AARP U.S. Stock Index Fund 11%
AARP Growth and Income Fund 24%
AARP Global Growth Fund 10%
AARP International Stock Fund 7%
AARP Small Company Stock Fund 7%
AARP Capital Growth Fund 4%

As you can see by these breakdowns, both Portfolios were well diversified
among the AARP Mutual Funds. We believe the current mix of investments in the
Diversified Income Portfolio provide a competitive yield from its bond
investments and the potential for growth through its stock exposure. For the
Diversified Growth Portfolio, we believe that the 35% investment in fixed-income
securities will help protect the Fund from share price volatility. We also
included some international exposure for further diversification.

The AARP Managed Investment Portfolios offer shareholders a simplified,
all-in-one approach to diversification. Moreover, investors also benefit from
the professional investment management and strong risk control disciplines of
each AARP Mutual Fund in which the Portfolios invest.

FOR WHOM THE
PORTFOLIOS ARE DESIGNED

The AARP Managed Investment Portfolios are for investors who don't have time or
are less confident in making the all-important asset allocation decisions. They
in turn prefer to entrust the selection of their portfolios of mutual funds to
professional money managers. These portfolios offer a simple, inexpensive (among
the lowest management fees for this type of fund), one-step approach to
investing all or a portion of an individual's assets.

The AARP Managed Investment Portfolios are appropriate for investors seeking to
create an investment plan during pre- and post-retirement. The AARP Diversified
Income Portfolio may be appropriate for investors in retirement with an
investment time horizon of three to five years. The AARP Diversified Growth
Portfolio is designed for investors with an investment time horizon of more than
five years.

ASSET ALLOCATION
AARP DIVERSIFIED
INCOME PORTFOLIO
----------------
As of September 30, 1997

Stock Holdings 25%
Bond Holdings 61%
Cash Equivalents 14%
----
100%
====

ASSET ALLOCATION
AARP DIVERSIFIED
GROWTH PORTFOLIO
----------------
As of September 30, 1997

Stock Holdings 64%
Bond Holdings 35%
Cash Equivalents 1%
----
100%
====

37
<PAGE>

This page
intentionally
left blank.

<PAGE>

A A R P F U N D S
I N V E S T M E N T P O R T F O L I O S

List of investments as of September 30: A detailed
breakdown of the investments in each AARP Mutual Fund's
portfolio at the close of the fiscal year.

Principal amount/shares: The face value of a bond or the
shares held by an AARP Mutual Fund.

Cost: The amount the AARP Mutual Fund actually paid for
the listed securities.

In addition, the tax-free AARP Funds list the credit
ratings for each of their bond holdings. Moody's
Investors Service, Inc., Fitch Investors Service, Inc.,
and Standard & Poor's Corporation -- three independent
rating services -- have developed credit rating systems
that are designed to indicate a bond issuer's ability to
meet its obligations. For example, bonds with the lowest
risk of default receive a rating of "AAA," while bonds
involving greater risk receive progressively lower
ratings. Bonds rated "BBB" or better are considered
investment grade ("AAA" ratings are assigned only to
bonds with the highest credit quality). The Portfolios
also shows the coupon rates and maturity dates of the
AARP Funds' bond holdings. The coupon rate is the
interest rate on a debt security the bond issuer
promises to pay to the bond holder until maturity. The
maturity date is the date on which a bond issuer is
scheduled to repay the principal to the bond holder.

Market value: The current value of the securities held
in a fund's portfolio.

39
<PAGE>

This page
intentionally
left blank.

40
<PAGE>

AARP HIGH QUALITY MONEY FUND

- --------------------------------------------------------------------------------
LIST OF INVESTMENTS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 9.9%
- -------------------------------------------------------------------------------------------------------------------------------

41,334,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125%
to be repurchased at $41,341,033 on 10/01/97 collateralized by a $35,110,000
U.S. Treasury Bond, 8.125%, 8/15/19 ................................................... 41,334,000
5,379,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $5,379,897 on 10/01/97 collateralized by a
$5,475,000 U.S. Treasury Note, 6.125%, 3/31/98 ........................................ 5,379,000
-----------
Total Repurchase Agreements (Cost $46,713,000) ........................................... 46,713,000
-----------

- -------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 50.0%
- -------------------------------------------------------------------------------------------------------------------------------

Consumer Staples 3.1%
Food & Beverage
15,000,000 Campbell Soup Company, 5.51%, 3/04/98** .................................................... 14,642,854
-----------
Financial 37.4%
Business Finance 4.2%
20,000,000 New Center Asset Trust Discount Note, 5.55%, 10/10/97** .................................... 19,969,444
-----------
Other Financial Companies 33.2%
20,000,000 AVCO Financial Services, 5.668%, 12/12/97** ................................................ 19,775,728
23,000,000 Associates Corp. of North America, 5.51%, 3/03/98** ........................................ 22,455,909
15,000,000 CSW Credit, Inc., 5.52%, 11/18/97** ........................................................ 14,887,503
20,000,000 Ciesco, L.P., 5.51%, 10/30/97** ............................................................ 19,911,228
20,000,000 General Electric Capital Corp., 5.5%, 10/15/97** ........................................... 19,954,166
17,000,000 Household Finance Co., 5.53%, 11/05/97** ................................................... 16,906,159
11,000,000 Matterhorn Capital Corp., 5.53%, 10/02/97** ................................................ 10,998,310
20,000,000 Norwest Corp., 5.49%, 10/20/97** ........................................................... 19,938,888
12,000,000 Prudential Funding Corp., 5.764%, 3/26/98** ................................................ 11,673,730
-----------
156,501,621
-----------
Manufacturing 4.2%
Chemicals
20,000,000 E.I. du Pont de Nemours & Co., 5.47%, 2/17/98** ............................................ 19,569,889
-----------
Energy 2.1%
Oil & Gas Production
10,000,000 Elf Aquitaine Finance S.A. Discount Note, 5.73%, 10/27/97** ................................ 9,958,599
-----------
Utilities 3.2%
Electric Utilities
15,000,000 Virginia Electric Power Corp., 5.51%, 10/09/97** ........................................... 14,979,375
-----------
Total Commercial Paper (Cost $235,659,919) ................................................. 235,621,782
-----------

- -------------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 12.7%
- -------------------------------------------------------------------------------------------------------------------------------

10,000,000 Abbey National North America, 5.5%, 11/26/97 ............................................... 9,995,664
20,000,000 Chase Bank Delaware, 5.81%, 12/05/97 ....................................................... 20,001,565
10,000,000 Federal Farm Credit Bank, 5.6%, 11/03/97 ................................................... 10,001,727
10,000,000 Lasalle National Bank, 5.91%, 8/12/98 ...................................................... 10,012,035
5,000,000 Morgan Guaranty Trust Company, 5.71%, 1/06/98 .............................................. 4,996,619
</TABLE>

The accompanying notes are an integral part of the financial statements

41
<PAGE>

AARP HIGH QUALITY MONEY FUND

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

<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
<C> <S> <C>
5,000,000 National Bank of Detriot, 5.76%, 2/03/98 ................................................... 4,996,934
-----------
Total Certificates Of Deposit (Cost $59,998,768) ........................................... 60,004,544
-----------

- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS 9.0%
- -------------------------------------------------------------------------------------------------------------------------------

17,000,000 Federal National Mortgage Association, 5.29%, 7/14/99* ..................................... 16,911,260
10,000,000 Student Loan Marketing Association, 5.41%, 10/30/97* ....................................... 10,004,623
15,500,000 Student Loan Marketing Association, 5.29%, 7/12/99* ........................................ 15,475,200
-----------
Total U. S. Government Agency Obligations (Cost $42,500,000) ............................... 42,391,083
-----------

- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 18.1%
- -------------------------------------------------------------------------------------------------------------------------------

Financial
10,000,000 American Express Centurion Bank, 5.626%, 4/24/98* .......................................... 9,998,200
15,000,000 Bank One, Columbus, N.A., 5.52%, 6/10/98* .................................................. 15,015,600
10,000,000 Bank of America Illinois, 6.15%, 5/05/98 ................................................... 10,016,629
20,000,000 Bankers Trust Co., Medium-Term Note, 5.71%, 4/14/98* ....................................... 20,000,000
5,000,000 FCC National Bank Note, 5.725%, 1/07/98 .................................................... 4,996,792
10,000,000 FCC National Bank Note, 5.59%, 11/07/97 .................................................... 9,997,021
15,000,000 First Bank Minnesota Corp., 5.616%, 11/19/97* .............................................. 15,001,720
-----------
Total Short-Term Notes (Cost $85,005,147) .................................................. 85,025,962
-----------

<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Total Investment Portfolio (Cost $469,876,834) (a) .................... 99.7 469,756,371
Other Assets and Liabilities, Net ..................................... 0.3 1,554,496
----- -----------
Net Assets ............................................................ 100.0 471,310,867
===== ===========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Floating rate notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon equivalent of
the U.S. Treasury bill rate. These securities are shown at their rate as
of September 30, 1997.

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

(a) At September 30, 1997, the net unrealized depreciation on investments
based on cost for federal income tax purposes of $469,876,834 was as
follows:

Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 45,640

Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (166,103)
---------

Net unrealized depreciation $(120,463)
=========
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $132,230, of which $74,841
expires September 30, 2004, and $57,389 expires September 30, 2005. In
addition, from November 1, 1996 through September 30, 1997, the Fund
incurred approximately $3,906 of net realized capital losses which the
Fund intends to elect to defer and treat as arising in the fiscal year
ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

42
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND

<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INVESTMENTS 101.0%
- -----------------------------------------------------------------------------------------------------------------------------

ALASKA
Alaska Housing Finance Corp., General Mortgage Revenue,
Series 1991-A, Weekly Demand Note, 4%, 6/01/26* ............................ 3,000,000 A1+ 3,000,000
ARIZONA
Apache County, AZ, Industrial Development Authority, Tucson Electric
Power Co., 1983 Series C, Weekly Demand Note, 4.15%, 12/15/18* ............. 1,000,000 A1 1,000,000
Maricopa County, AZ, Pollution Control Revenue:
Palos Verde Project, Series 1985F, Tax Exempt Commercial Paper,
3.7%, 1/20/98 ........................................................... 1,500,000 A1 1,500,000
Public Service of New Mexico, Weekly Demand Note, 4%, 11/01/22* ............ 4,000,000 A1+ 4,000,000
Pima County, AZ, Industrial Development Authority,
Tucson Electric Power Co.:
Series 1982, Weekly Demand Note, 4.15%, 10/01/22* ....................... 3,900,000 A1+ 3,900,000
Series 1992 A, Weekly Demand Note, 4.15%, 7/01/22* ...................... 1,000,000 A1+ 1,000,000
Pinal County, AZ, Pollution Control Revenue, Magma Copper, Weekly
Demand Note, 4.15%, 12/01/11* .............................................. 1,900,000 A1 1,900,000
CALIFORNIA
Los Angeles County, CA, Tax and Revenue Anticipation Notes,
Series 1997 A, 4.5%, 6/30/98 ............................................... 2,000,000 SP1+ 2,009,326
COLORADO
Clear Creek County, CO, Colorado Counties Financing Program,
Series 1988, Weekly Demand Note, 4.1%, 6/01/98* ............................ 55,000 A1+ 55,000
Colorado Health Facilities Authority, Composite Issue for Kaiser
Permanente, 1995 Series A, Weekly Demand Note, 4%, 8/01/15* ................ 3,000,000 A1+ 3,000,000
DISTRICT OF COLUMBIA
District of Columbia, Tax and Revenue Anticipation Note, Series 1997B,
4.5%, 9/30/98 .............................................................. 1,500,000 SP1+ 1,509,060
FLORIDA
City of Gainesville, FL, Utilities System, Series C, Tax Exempt
Commercial Paper, 3.7%, 11/14/97 ........................................... 1,000,000 A1+ 1,000,000
Dade County, FL, Industrial Development Authority Revenue,
Dolphins Stadium Project:
Series C, Weekly Demand Note, 4.1%, 1/01/16* ............................ 1,000,000 A1+ 1,000,000
Series D, Weekly Demand Note, 4.1%, 1/01/16* ............................ 1,300,000 A1+ 1,300,000
Palm Beach County, FL, Tax Exempt Commercial Paper,
3.7%, 1/12/98 (c) .......................................................... 2,000,000 AAA 2,000,000
Putnam County, FL, Pollution Control Revenue, Seminole Electric
Cooperative Finance Corp., 1984 Series H-1, Weekly Demand Note,
4.1%, 3/15/14* ............................................................. 4,150,000 A1+ 4,150,000
INDIANA
City of Sullivan, IN, National Rural Utilities Cooperative Finance Corp.,
Hoosier Energy Rural Electric, Tax Exempt Commercial Paper,
3.75%, 12/11/97 ............................................................ 1,790,000 A1+ 1,790,000
Indiana Bond Bank, Advance Funding Notes, Series 1997 A-2,
4.25%, 1/21/98 ............................................................. 3,000,000 MIG1 3,004,892

</TABLE>
The accompanying notes are an integral part of the financial statements

43
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND

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

<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jasper County, IN, Pollution Control Revenue, Series 88C, Tax Exempt
Commercial Paper, 3.75%, 1/13/98 ........................................... 1,000,000 A1+ 1,000,000
IOWA
Iowa Schools Cash Anticipation Program, Series 1997 A, 4.5%,
6/26/98 (c) ................................................................ 1,000,000 SP1+ 1,004,948
West Des Moines, IA, Commercial Development Revenue, Greyhound
Lines, Weekly Demand Note, 4.05%, 12/01/14* ................................ 6,400,000 A1+ 6,400,000
KENTUCKY
Kentucky Development Finance Authority, Healthcare System,
Appalachian Regional Health Care, Series 1991, Weekly Demand Note,
4.1%, 9/01/06* ............................................................. 6,300,000 VMIG1 6,300,000
MARYLAND
Anne Arundel County, MD, Baltimore Electric & Gas Company,
Tax Exempt Commercial Paper, 3.85%, 11/14/97 ............................... 800,000 A1 800,000
MASSACHUSETTS
Massachusetts Bay Transportation Authority, Series 1997B, 4.25%,
9/04/98 .................................................................... 1,000,000 SP1 1,005,612
MINNESOTA
Cottage Grove, MN, Minnesota Mining and Manufacturing, Series 1982,
Weekly Demand Note, 4.071%, 8/01/12* ....................................... 300,000 AAA 300,000
Southern Minnesota Municipal Power Agency, Power Supply System,
Series B, Tax Exempt Commercial Paper, 3.75%, 11/21/97 ..................... 1,300,000 P1 1,300,000
MISSOURI
Missouri Health & Educational Facilities Authority Revenue,
Washington University, Series 1996 C, Variable Rate Demand Note,
3.85%, 9/01/30* ............................................................ 1,000,000 VMIG1 1,000,000
NEVADA
Clark County, NV, Airport System, McCarran International Airport,
Series A, Weekly Demand Note, 4.1%, 7/01/12 (c)* ........................... 5,100,000 A1+ 5,100,000
NEW HAMPSHIRE
New Hampshire Business Finance Authority, Connecticut Light & Power,
Weekly Demand Note, 4.15%, 12/01/22* ....................................... 1,700,000 A1+ 1,700,000
NEW MEXICO
Albuquerque, NM, Gross Receipts/Lodgers Tax, Series 1991,
Weekly Demand Note, 4.15%, 7/01/22* ........................................ 2,000,000 A1+ 2,000,000
NEW YORK
New York City, NY, General Obligation, Series A-4, Daily Demand
Note, 3.8%, 8/01/22* ....................................................... 1,100,000 VMIG1 1,100,000
State of New York, General Obligation, Bond Anticipation Note, Series T,
Tax Exempt Commercial Paper, 3.6%, 11/06/97 ................................ 1,500,000 A1 1,500,000
OHIO
Hamilton County, OH, Franciscan Sisters of the Poor Health System,
Series A, Daily Demand Note, 3.95%, 3/01/17* ............................... 300,000 VMIG1 300,000
</TABLE>
The accompanying notes are an integral part of the financial statements

44
<PAGE>

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

<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PENNSYLVANIA
Emmaus, PA, General Authority, Local Government Revenue Bond
Pool Program:
1989 Series E, Weekly Demand Note, 4.2%, 3/01/24* ....................... 1,800,000 A1 1,800,000
1989 Series E-6, Weekly Demand Note, 4.15%, 3/01/24* .................... 2,000,000 A1+ 2,000,000
1989 Series E-8, Weekly Demand Note, 4.15%, 3/01/24* .................... 1,200,000 A1+ 1,200,000
Philadelphia, PA, School District General Obligation, Series 1993A,
4.5%, 7/01/98 (c) .......................................................... 2,000,000 AAA 2,008,712
Philadelphia, PA, Tax and Revenue Anticipation Note, Series 1997A,
4.5%, 6/30/98 .............................................................. 2,000,000 MIG1 2,007,163
Temple University of the Commonwealth, PA, Higher Education,
Series 1997, 4.75%, 5/18/98 ................................................ 3,000,000 SP1+ 3,015,382
SOUTH CAROLINA
South Carolina Public Service Authority, Series 1997, Tax Exempt
Commercial Paper, 3.75%, 10/21/97 .......................................... 1,000,000 A1 1,000,000
TENNESSEE
Franklin, TN, Industrial Development Revenue, Franklin Oaks
Apartments, Weekly Demand Note, Series 1985, 4.15%, 12/15/21* .............. 5,000,000 VMIG1 5,000,000
TEXAS
Grapevine, TX, Industrial Development Revenue Bond, Variable Rate
Demand Note, 3.85%, 12/01/24* .............................................. 800,000 P1 800,000
Harris County Children's Hospital, Series 1996, Weekly Demand Note,
4.1%, 8/01/20* ............................................................. 1,000,000 A1+ 1,000,000
Harris County, TX, Tax Anticipation Note, Series 1997,
4.25%, 2/27/98 ............................................................. 1,000,000 MIG1 1,002,112
Harris County, TX, Health Facilities Authority, Saint Lukes:
Series A, Daily Demand Note, 3.85%, 2/15/27* ............................... 300,000 A1+ 300,000
Series B, Daily Demand Note, 3.85%, 2/15/27* ............................... 900,000 A1+ 900,000
State of Texas, Tax and Revenue Anticipation Note, Series 1998A,
4.75%, 8/31/98 ............................................................. 1,000,000 MIG1 1,008,106
State of Texas, General Obligation, Veterans Housing Assistance
Refunding Bonds, Series 1995, Weekly Demand Note, 4.1%,
12/01/16* .................................................................. 1,500,000 A1+ 1,500,000
Texas Municipal Power Agency, Bond Anticipation Note, Tax
Exempt Commercial Paper, 3.7%, 1/20/98 ..................................... 1,100,000 A1 1,100,000
UTAH
Salt Lake City, UT, Tax Exempt Commercial Paper, 3.7%, 11/13/97 ............... 1,000,000 A1+ 1,000,000
State of Utah, General Obligation Highway, Series 1997B,
Tax Exempt Commercial Paper, 3.8%, 10/07/97 ................................ 2,000,000 A1+ 2,000,000
VERMONT
Vermont Educational & Health Buildings Financing Agency Revenue,
Capital Asset Financing, Series 2005-A, Weekly Demand Note,
4.1%, 8/01/05* ............................................................. 3,200,000 VMIG1 3,200,000
WASHINGTON
Seattle, WA, Municipal Light & Power, Series 1993, Weekly Demand
Note, 4%, 11/01/18* ........................................................ 1,900,000 A1+ 1,900,000
</TABLE>
The accompanying notes are an integral part of the financial statements

45
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND

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

- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------

Total Investment Portfolio (Cost $103,670,313) (a) ......... 101.0 103,670,313
Other Assets and Liabilities, Net .......................... (1.0) (1,056,420)
----- -----------
Net Assets ................................................. 100.0 102,613,893
===== ===========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Floating rate demand notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of
the U.S. Treasury bill rate. Variable rate demand notes are securities
whose interest rates are reset periodically at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable
letter of credit or line of credit from a major bank. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.

(a) At September 30, 1997, the cost for federal income tax purposes of
$103,670,313.

(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are either Standard & Poor's Ratings
Group, Moody's Investors Service, Inc. or Fitch Investors Service, Inc.
Unrated securities (NR) and securities rated by Scudder (SS&C) have been
determined to be of comparable quality to rated eligible securities.

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

At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $655,541, of which $19,559
expires September 30, 1999, $323,801 expires September 30, 2000, $401
expires September 30, 2001, $89,046 expires September 30, 2003, $5,140
expires September 30, 2004, and $217,594 expires September 30, 2005. In
addition, from November 1, 1996 through September 30, 1997, the Fund
incurred approximately $102,679 of net realized capital losses which the
Fund intends to elect to defer and treat as arising in the fiscal year
ended September 30, 1998.

- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

46
<PAGE>

AARP GNMA and U.S. Treasury Fund

96,622,000 Repurchase Agreement with Donaldson, Lufkin and Jenrette dated 9/30/97 at 6.02%
to be repurchased at $96,638,157 on 10/01/97 collateralized by
a $96,561,000 U.S. Treasury Note, 6%, 8/15/99 ......................................... 96,622,000
73,000,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125% to
be repurchased at $73,012,420 on 10/01/97 collateralized by
a $62,010,000 U.S. Treasury Bond, 8.125%, 8/15/19 ..................................... 73,000,000
12,000,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $12,002,000 on 10/01/97 collateralized by
a $12,210,000 U.S. Treasury Note, 6.125%, 3/31/98 ..................................... 12,000,000
-------------
Total Repurchase Agreements (Cost $181,622,000) .......................................... 181,622,000
-------------
- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 20.3%
- -----------------------------------------------------------------------------------------------------------------------------

250,000,000 U.S. Treasury Note, 5.375%, 11/30/97 ..................................................... 250,000,000
200,000,000 U.S. Treasury Note, 5.25%, 12/31/97 ...................................................... 199,968,000
180,000,000 U.S. Treasury Note, 5.5%, 2/28/99 ........................................................ 179,409,600
200,000,000 U.S. Treasury Note, 6.375%, 5/15/00 ...................................................... 202,374,000
100,000,000 U.S. Treasury Note, 5.5%, 11/15/98 ....................................................... 99,766,000
-------------
Total U. S. Treasury Obligations (Cost $932,878,906) .................................... 931,517,600
-------------

- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 79.3%
- -----------------------------------------------------------------------------------------------------------------------------

278,062,162 6.5% with various maturities to 9/15/25 .................................................. 272,945,491
710,640,982 7% with various maturities to 7/15/25 .................................................... 713,075,381
39,208,348 7.125% with various maturities to 9/15/24 ................................................ 40,409,979
748,766,034 7.5% with various maturities to 9/15/27 .................................................. 761,950,976
890,038,904 8% with various maturities to 7/15/27 (b) ................................................ 921,534,055
164,141,932 8.5% with various maturities to 9/15/22 .................................................. 173,459,423
295,125,474 9% with various maturities to 11/15/25 ................................................... 319,080,776
209,460,578 9.5% with various maturities to 9/15/24 .................................................. 227,882,584
151,875,628 10% with various maturities to 3/15/25 ................................................... 168,926,213
42,464 10.25%, 12/15/98 ......................................................................... 44,441
14,507,665 10.5% with various maturities to 1/20/21 ................................................. 16,304,223
3,105,215 11.5% with various maturities to 2/15/16 ................................................. 3,577,751
6,362,423 12% with various maturities to 7/15/15 ................................................... 7,437,849
4,761,039 12.5% with various maturities to 8/15/15 ................................................. 5,625,209
938,535 13% with various maturities to 8/20/15 ................................................... 1,117,986
701,647 13.5% with various maturities to 10/15/14 ................................................ 844,838
295,359 14% with various maturities to 12/15/14 .................................................. 356,154
94,630 14.5%, 10/15/14 .......................................................................... 115,152
190,602 15% with various maturities to 10/15/12 .................................................. 232,744
163,342 16%, 2/15/12 ............................................................................. 200,195
-------------
Total Government National Mortgage Association (Cost $3,550,215,482) ..................... 3,635,121,420
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

47
<PAGE>

AARP GNMA and U.S. Treasury Fund

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

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Total Investment Portfolio (Cost $4,664,716,388) (a) .................... 103.6 4,748,261,020
Other Assets and Liabilities, Net ....................................... (3.6) (164,280,560)
----- -------------
Net Assets .............................................................. 100.0 4,583,980,460
===== =============
</TABLE>

* Effective maturities will be shorter due to prepayments.

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $4,664,716,388 was as
follows:

Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost .......................................... $ 90,347,064

Aggregate gross unrealized depreciation for all
investments in which there is an excess of
tax cost over value .................................... (6,802,432)
-------------

Net unrealized appreciation ............................ $ 83,544,632
=============

(b) When-issued or forward delivery pools included.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities, all of which were U.S.
Government and U.S. Government agencies' obligations (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$4,050,070,014 and $4,415,045,854, respectively.
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $316,261,626, all of which
expires September 30, 2003. In addition, from November 1, 1996 through
September 30, 1997, the Fund incurred approximately $6,993,048 of net
realized capital losses which the Fund intends to elect to defer and treat
as arising in the fiscal year ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

48
<PAGE>

AARP HIGH QUALITY BOND FUND

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 5.7%
- -----------------------------------------------------------------------------------------------------------------------------

25,971,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02%
to be repurchased at $25,975,343 on 10/01/97, collateralized by a $25,394,000
U.S. Treasury Note, 6.625%, 7/31/01 (Cost $25,971,000) ................................ 25,971,000
-----------

- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 20.6%
- -----------------------------------------------------------------------------------------------------------------------------

40,000,000 U.S. Treasury Note, 5.75%, 10/31/97 ...................................................... 40,012,400
6,500,000 U.S. Treasury Note, 5.875%, 8/15/98 ...................................................... 6,511,180
20,000,000 U.S. Treasury Note, 6.75%, 5/31/99 ....................................................... 20,300,000
12,500,000 U.S. Treasury Note, 6.875%, 7/31/99 ...................................................... 12,722,625
14,000,000 U.S. Treasury Note, 6.25%, 10/31/01 ...................................................... 14,126,840
-----------
Total U. S. Treasury Obligations (Cost $93,998,750) ...................................... 93,673,045
-----------

- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 13.4%
- -----------------------------------------------------------------------------------------------------------------------------

26,297,261 8% with various maturities to 4/15/27 .................................................... 27,217,717
33,045,074 7.5% with various maturities to 9/15/27 .................................................. 33,612,789
-----------
Total Government National Mortgage Association (Cost $59,926,976) ........................ 60,830,506
-----------

- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 10.8%
- -----------------------------------------------------------------------------------------------------------------------------

8,190,493 Federal Home Loan Mortgage Corp. 8%, 4/01/08 ............................................. 8,432,932
9,533,592 Federal Home Loan Mortgage Corp. 7.79%, 9/01/24 .......................................... 9,920,942
7,083,331 Federal National Mortgage Association 8.5%, 11/01/09 ..................................... 7,402,081
12,381,444 Federal National Mortgage Association 8% with various maturities to 12/01/09 ............. 12,763,411
10,988,012 Federal National Mortgage Association 6.5%, 11/01/25 ..................................... 10,737,265
-----------
Total U. S. Government Agency Pass-Thrus (Cost $49,171,515) .............................. 49,256,631
-----------

- -----------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 2.2%
- -----------------------------------------------------------------------------------------------------------------------------

10,000,000 Abbey National PLC Global Medium-Term Note, 6.69%, 10/17/05
(Cost $9,997,100) ..................................................................... 10,022,300
-----------

- -----------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 13.9%
- -----------------------------------------------------------------------------------------------------------------------------

Automobile Receivables 3.0%
13,500,000 Ford Credit Automobile Trust Series 1996-B A3, 6.1%, 3/15/00 ............................. 13,516,875
-----------
Credit Card Receivables 1.1%
5,000,000 Advanta Corp. Series 1997-1 A4, 7.65%, 5/25/27 ........................................... 5,143,750
-----------
Home Equity Loans 4.8%
10,000,000 Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/28 ................. 10,184,375
6,682,000 The Money Store Home Equity Loan Trust Series 1996-B A1, 6.72%, 2/15/10 .................. 6,677,791
5,000,000 The Money Store Home Equity Series 1997-A A6, 7.21%, 10/15/21 ............................ 5,114,063
-----------
21,976,229
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

49
<PAGE>

AARP HIGH QUALITY BOND FUND

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

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Manufactured Housing 5.0%
3,750,000 Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/28 ................... 3,868,945
4,500,000 Green Tree Financial Corp., Series 1995-6 B1, 7.7%, 9/15/26 .............................. 4,619,520
4,000,000 Green Tree Financial Corp., Series 1997-1 B1, 7.23%, 3/15/28 ............................. 4,009,063
1,500,000 Green Tree Financial Corp., Series 1997-2 B2, 8.05%, 4/15/28 ............................. 1,561,172
3,730,000 Green Tree Financial Corp., Series 1995-10 B1, 7.05%, 2/15/27 ............................ 3,765,406
4,500,000 Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D, 9.85%, 7/15/11 ................ 4,736,250
-----------
22,560,356
-----------
Total Asset Backed (Cost $62,115,271) .................................................... 63,197,210
-----------

- -----------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 32.1%
- -----------------------------------------------------------------------------------------------------------------------------

Consumer Staples 2.5%
10,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/01/22 ............................................... 11,470,000
-----------
Financial 10.2%
1,500,000 American Express Credit Corp., 11.625%, 12/12/00 ......................................... 1,544,250
15,000,000 Associates Corp. of North America, 6.625%, 5/15/01 ....................................... 15,126,000
10,000,000 Deutsche Bank, 7.5%, 4/25/09 ............................................................. 10,567,400
5,500,000 Shurgard Storage Centers, Inc. (REIT), 7.5%, 4/25/04 ..................................... 5,701,520
5,000,000 Susa Partnership L.P., 8.2%, 6/01/17 ..................................................... 5,281,250
8,250,000 Taubman Realty Group L.P., Medium-Term Note, 7%, 10/01/03 ................................ 8,346,690
-----------
46,567,110
-----------
Media 1.6%
7,000,000 A.H. Belo Corp., 7.75%, 6/01/27 .......................................................... 7,321,650
-----------
Service Industries 2.2%
10,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ....................................................... 10,087,500
-----------
Durables 1.8%
7,500,000 Northrop Grumman Corp., 7.875%, 3/01/26 .................................................. 8,065,800
-----------
Technology 3.2%
15,000,000 International Business Machines Corp., 7%, 10/30/45 ...................................... 14,583,150
-----------
Energy 2.9%
2,500,000 Lyondell Petrochemical Co., 7.55%, 2/15/26 ............................................... 2,509,400
-----------
10,000,000 Norsk Hydro AS, 7.75%, 6/15/23 ........................................................... 10,598,100
-----------
13,107,500
-----------
Metals & Minerals 1.5%
6,500,000 Potash Corp., 7.125%, 6/15/07 ............................................................ 6,627,400
-----------
Transportation 4.1%
13,500,000 Continental Airlines Inc., Series 1997-1A, 7.461%, 4/01/15 ............................... 14,145,300
4,000,000 Norfolk Southern Corp., 7.8%, 5/15/27 .................................................... 4,283,880
-----------
18,429,180
-----------
Utilities 2.1%
10,000,000 Public Service Electric & Gas Co., 1st Refunding Mortgage, 6.25%, 1/01/07 ................ 9,655,400
-----------
Total Corporate Bonds (Cost $141,260,543) ................................................ 145,914,690
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

50
<PAGE>

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

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

<S> <C> <C>
Total Investment Portfolio (Cost $442,441,155) (a) .................... 98.7 448,865,382
Other Assets and Liabilities, Net ..................................... 1.3 6,004,136
----- -----------
Net Assets ............................................................ 100.0 454,869,518
===== ===========
</TABLE>

* Effective maturities will be shorter due to prepayments.

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $442,441,155 was as
follows:

Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ......... $ 7,613,705

Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ......... (1,189,478)
-----------

Net unrealized appreciation ................................ $ 6,424,227
===========
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $2,264,764,844.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the year ended September 30, 1997 aggregated $220,023,243
and $92,541,818, respectively. Purchases and sales of obligations of the
U.S. Government and U.S. Government agencies aggregated $138,952,123 and
$266,185,773, respectively.
- --------------------------------------------------------------------------------
At September 30, 1997, and to the extent provided in regulations, the Fund
had a capital loss carryforward of approximately $8,993,357, of which
$7,756,158 expires September 30, 2003, and $1,237,199 expires September
30, 2005. In addition, from November 1, 1996 through September 30, 1997,
the Fund incurred approximately $1,252,429 of net realized capital losses
which the Fund intends to elect to defer and treat as arising in the
fiscal year ended September 30, 1998.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

51
<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND

<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL INVESTMENTS (UNDER 1 YEAR) - 0.5%
- -----------------------------------------------------------------------------------------------------------------------------

INDIANA
Jasper County, IN, Pollution Control Revenue, Northern Indiana Public
Services, Series C, Daily Demand Bond, 3.8%, 4/01/19* ....................... 1,400,000 VMIG1 1,400,000
MASSACHUSETTS
Massachusetts Health & Educational Facilities Authority, Brigham and
Women's Hospital, Series A, Weekly Demand Note, 4.1%,
7/01/17* .................................................................... 900,000 AA 900,000
OHIO
Cuyahoga County, OH, Health & Education, University Hospital of
Cleveland, Daily Demand Note, 3.85%, 1/01/16* ............................... 3,400,000 VMIG1 3,400,000
PUERTO RICO
Puerto Rico, Series 1996, Variable Rate Demand Bond, 3.65%,
7/01/11* (c) ................................................................ 2,000,000 AAA 2,000,000
TEXAS
Harris County, TX, Health Facilities Authority, Saint Lukes, Daily
Demand Note:
Series A, 3.85%, 2/15/27* ................................................ 400,000 A1+ 400,000
Series B, 3.85%, 2/15/27* ................................................ 1,000,000 A1+ 1,000,000
-------------
Total Short-Term Municipal Investments (Cost $9,100,000) ....................... 9,100,000
-------------

- -----------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL INVESTMENTS (OVER 1 YEAR) - 97.8%
- -----------------------------------------------------------------------------------------------------------------------------

ALASKA
Alaska Housing Finance Corp., Veterans Mortgage Project, 8.1%,
9/01/20 ..................................................................... 3,675,000 AAA 3,748,537
Anchorage, AK, Electric Utility Revenue, 6.5%, 12/01/07 (c) .................... 2,620,000 AAA 2,993,009
North Slope Borough, AK, General Obligation Capital Appreciation:
Series 1997A, Zero Coupon, 6/30/08 (c) ...................................... 7,000,000 AAA 4,116,560
Series A, Zero Coupon, 6/30/06 (c) .......................................... 4,000,000 AAA 2,630,000
Series B, Zero Coupon:
1/01/03 (c) .............................................................. 16,000,000 AAA 12,580,640
6/30/04 (c) .............................................................. 15,500,000 AAA 11,305,390
6/30/05 (c) .............................................................. 25,600,000 AAA 17,752,064
ARIZONA
Arizona Municipal Finance Program, Certificate of Participation,
Series 25, 7.875%, 8/01/14 (c) .............................................. 3,500,000 AAA 4,602,500
Maricopa County, AZ, School District #28, Kyrene Elementary, Series B,
Zero Coupon, 1/01/04 (c) .................................................... 4,000,000 AAA 3,004,440
Maricopa County, AZ, School District #6, Washington Elementary,
Series B, 4.1%, 7/01/13 (c) ................................................. 2,950,000 AAA 2,578,300
Maricopa County, AZ, Unified School District #41, Gilbert School,
Zero Coupon, 1/01/05 (c) .................................................... 5,280,000 AAA 3,775,042
CALIFORNIA
Alameda County, CA, Certificate of Participation, Santa Rita Jail Project,
5.375%, 6/01/09 (c) ......................................................... 8,995,000 AAA 9,526,694
</TABLE>

The accompanying notes are an integral part of the financial statements

52
<PAGE>

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Banning, CA, Wastewater, Certificate of Participation:
8%, 1/01/19 (c) ............................................................. 960,000 AAA 1,294,061
8%, 1/01/19 (c) ............................................................. 1,080,000 AAA 1,455,818
Big Bear Lake, CA, Series 1996, 6%, 4/01/11 (c) ................................ 3,800,000 AAA 4,233,276
California Housing Finance Agency, 5.7%, 8/01/16 (c) ........................... 5,175,000 AAA 5,270,893
California Housing Finance Agency, 5.3%, 8/01/14 (c) ........................... 3,460,000 AAA 3,506,745
California State Public Works Board, Lease Revenue, Series A, 6.3%,
12/01/06 (c) (d) ............................................................ 8,095,000 AAA 9,211,867
Irvine Ranch, CA, Water District, 7.875%, 2/15/23 .............................. 3,000,000 A 3,042,750
Los Angeles County, CA, Capital Asset Leasing, 6%, 12/01/06 (c) ................ 9,000,000 AAA 9,990,180
Los Angeles County, CA, Public Works Authority:
Series 1996B, 5.25%, 9/01/11 (c) ............................................ 3,000,000 AAA 3,052,290
Series 1996A, 6%, 9/01/04 (c) ............................................... 2,920,000 AAA 3,208,759
Los Angeles County, CA, Public Works Finance Authority, Lease
Revenue, Multiple Projects IV, 4.75%, 12/01/10 (c) .......................... 11,140,000 AAA 10,862,503
Madera County, CA, Certificates of Participation, Valley Children's
Hospital, 6.5%, 3/15/10 (c) ................................................. 2,840,000 AAA 3,291,617
Oakland, CA, Redevelopment Agency, Tax Allocation, 6%,
2/01/07 (c) ................................................................. 2,000,000 AAA 2,223,280
Riverside, CA, Transportation Commission, Sales Tax Revenue, Series A,
5.7%, 6/01/06 (c) ........................................................... 5,400,000 AAA 5,892,966
San Diego Water Authority, CA, Certificate of Participation:
5.632%, 4/25/07 (c) ......................................................... 6,300,000 AAA 6,782,265
5.681%, 4/22/09 (c) ......................................................... 4,500,000 AAA 4,848,435
San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Revenue
Refunding, 6.75%, 7/01/10 (c) ............................................... 2,000,000 AAA 2,370,680
San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road
Revenue, Capital Appreciation, Refunding, Series 1997A, Zero
Coupon, 1/15/12 (c) ......................................................... 3,000,000 AAA 1,424,460
San Joaquin, CA, Certificate of Participation, County Public Facilities
Project, 5.5%, 11/15/13 (c) ................................................. 2,000,000 AAA 2,109,680
Sweetwater Authority, CA, Water Revenue, 5.25%, 4/01/10 (c) .................... 10,000,000 AAA 10,428,900
Three Valleys Municipal Water District Certificates of Participation, CA,
5%, 11/01/14 (c) ............................................................ 3,000,000 AAA 2,939,130
Whittier, CA, Presbyterian Intercommunity Hospital, Health Facilities
Revenue, 6.25%, 6/01/08 (c) ................................................. 1,780,000 AAA 2,015,672
COLORADO
Castle Rock Ranch, CO, Public Facilities Revenue:
6.3%, 12/01/07 .............................................................. 3,115,000 AA 3,429,272
6.4%, 12/01/08 .............................................................. 3,310,000 AA 3,672,677
6.375%, 12/01/11 ............................................................ 2,000,000 AA 2,205,840
Mesa County, CO, Residual Revenue, Single Family Housing, ETM,
Zero Coupon, 12/01/11** (c) ................................................. 3,855,000 AAA 1,857,455
CONNECTICUT
Connecticut Resource Recovery Authority:
Series 1996, 6.25%, 11/15/05 (c) ............................................ 2,000,000 AAA 2,224,360
Series 1996A, 6.25%, 11/15/06 (c) ........................................... 4,525,000 AAA 5,065,240
Connecticut State Health Facility Authority, Series 1992B, 6.15%,
11/15/04 .................................................................... 5,000,000 AA 5,222,300
</TABLE>

The accompanying notes are an integral part of the financial statements

53
<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DISTRICT OF COLUMBIA
District of Colombia, General Obligation:
6.5%, 6/01/10 (c) ........................................................... 2,270,000 AAA 2,581,943
Series B, Zero Coupon, 6/01/00 (c) .......................................... 3,500,000 AAA 3,117,730
Series B, 6.125%, 6/01/03 (c) ............................................... 4,000,000 AAA 4,319,720
Refunding, 1993 Series A, 5.875%, 6/01/05 (c) ............................... 4,750,000 AAA 5,108,720
Series B, 5.4%, 6/01/06 (c) (d) ............................................. 18,905,000 AAA 19,782,192
Series B3, 5.4%, 6/01/06 (c) ................................................ 10,000,000 AAA 10,464,000
Series B, 5.5%, 6/01/07 (c) (d) ............................................. 25,000,000 AAA 26,319,500
Series B, 5.5%, 6/01/08 (c) (d) ............................................. 21,300,000 AAA 22,459,146
Series A, Prerefunded 6/1/99 at 102, 7.5%, 6/01/09*** (c) ................... 5,000,000 AAA 5,373,100
Series B, 5.5%, 6/01/09 (c) (d) ............................................. 16,150,000 AAA 16,958,307
Series B, 5.5%, 6/01/09 (c) ................................................. 2,840,000 AAA 2,982,142
Series B, 5.5%, 6/01/10 (c) (d) ............................................. 15,590,000 AAA 16,284,067
Series B, 5.5%, 6/01/12 (c) ................................................. 1,050,000 AAA 1,090,729
FLORIDA
Florida Department of Environmental Preservation, Series A, 4.75%,
7/01/12 (c) ................................................................. 10,000,000 AAA 9,549,600
Florida Municipal Power Agency, Stanton II Project, 4.5%, 10/01/16 (c) ......... 4,400,000 AAA 3,880,580
GEORGIA
Cobb County, GA, Kennestone Hospital Authority, Series A, 5.625%,
4/01/11 (c) ................................................................. 2,305,000 AAA 2,461,602
Macon-Bibb County, GA, Hospital Authority, Medical Center of Central
Georgia, Series C, 5.25%, 8/01/11 (c) ....................................... 6,975,000 AAA 7,217,730
Municipal Electric Authority of Georgia, 5th Crossover, Project #1, 6.4%,
1/01/13 (c) ................................................................. 3,500,000 AAA 3,990,000
HAWAII
Hawaii State, General Obligation, Series 1992 BZ, 6%, 10/01/09 (c) ............. 2,000,000 AAA 2,217,040
ILLINOIS
Central Lake County, IL, Joint Action Water Agency, Refunding Revenue,
Zero Coupon, 5/01/02 (c) .................................................... 2,245,000 AAA 1,823,995
Chicago O'Hare International Airport, IL, Refunding Revenue:
Series 1996A, 6%, 1/01/06 (c) ............................................... 2,000,000 AAA 2,178,840
Series C, 5%, 1/01/11 (c) ................................................... 6,500,000 AAA 6,537,115
Chicago, IL, Board of Education, 6.125%, 1/01/06 (c) ........................... 4,000,000 AAA 4,403,080
Chicago, IL, Wastewater Transmission Revenue:
5.5%, 1/01/09 (c) (d) ....................................................... 11,990,000 AAA 12,744,411
5.5%, 1/01/10 (c) ........................................................... 7,220,000 AAA 7,656,016
Chicago, IL, General Obligation:
6.25%, 1/01/11 (c) .......................................................... 3,000,000 AAA 3,366,150
Emergency Telephone System, 5.55%, 1/01/08 (c) (d) .......................... 5,820,000 AAA 6,189,163
Series A, 5.375%, 1/01/13 (c) (d) ........................................... 15,410,000 AAA 15,887,248
Series B, 5.125%, 1/01/15 (c) ............................................... 9,550,000 AAA 9,484,391
Series B, 5%, 1/01/10 (c) ................................................... 5,200,000 AAA 5,232,760
Series B, 5%, 1/01/11 (c) ................................................... 1,620,000 AAA 1,621,426
Chicago, IL, General Obligation Lease, Board of Education:
Series 1996, 6.25%, 12/01/11 (c) ............................................ 1,600,000 AAA 1,804,656
Series A, 6.25%, 1/01/10 (c) ................................................ 11,550,000 AAA 12,938,656
Series A, 6.25%, 1/01/15 (c) (d) ............................................ 26,000,000 AAA 29,145,480
</TABLE>

The accompanying notes are an integral part of the financial statements

54
<PAGE>

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A, 6%, 1/01/16 (c) ................................................... 11,025,000 AAA 12,000,933
Series A, 6%, 1/01/20 (c) ................................................... 36,625,000 AAA 39,797,091
Chicago, IL, Public Building Commission, Building Revenue:
Series A, 5.25%, 12/01/07 (c) ............................................... 3,500,000 AAA 3,648,225
Series A, 5.25%, 12/01/09 (c) (d) ........................................... 10,420,000 AAA 10,877,021
Series A, 5.25%, 12/01/11 (c) ............................................... 9,705,000 AAA 10,018,277
Chicago, IL, Public Building Commission, Board of Education, Series A,
Zero Coupon, 1/01/06 (c) .................................................... 2,430,000 AAA 1,642,850
Cook & Dupage Counties, IL, Housing Development Authority:
Zero Coupon, 12/01/07 (c) ................................................... 2,550,000 AAA 1,550,910
Zero Coupon, 12/01/08 (c) ................................................... 2,625,000 AAA 1,503,836
Zero Coupon, 12/01/09 (c) ................................................... 2,860,000 AAA 1,538,566
Cook County, IL, General Obligation, Zero Coupon, 11/01/04 (c) ................. 3,205,000 AAA 2,315,612
Cook County, IL, Community High School District #233,
Capital Appreciation:
Series 1993 B, Zero Coupon, 12/01/08 (c) ................................. 1,700,000 AAA 979,234
Series 1993 B, Zero Coupon, 12/01/09 (c) ................................. 1,700,000 AAA 919,972
Series 1993 B, Zero Coupon, 12/01/10 (c) ................................. 1,665,000 AAA 845,753
Cook County, IL, General Obligation, Series C, 6%, 11/15/07 (c) ................ 5,000,000 AAA 5,527,100
Decatur, IL, General Obligation:
Series 1991, Zero Coupon, 10/01/03 (c) ...................................... 1,455,000 AAA 1,105,436
Series 1991, Zero Coupon, 10/01/04 (c) ...................................... 1,415,000 AAA 1,019,946
Decatur, IL, Public Building Commission, General Obligation,
Certificate of Participation:
6.5%, 1/01/03 (c) ........................................................ 1,725,000 AAA 1,890,565
6.5%, 1/01/06 (c) ........................................................ 1,500,000 AAA 1,689,360
Evergreen Park, IL, Little Company of Mary Hospital, 7.75%,
2/15/09 (c) ................................................................. 2,935,000 AAA 3,033,029
Hoffman Estates, IL, Tax Increment Revenue, Capital Appreciation,
Junior Lien, Series 1991, Zero Coupon, 5/15/07 .............................. 17,460,000 A 10,803,724
Illinois Dedicated Tax Revenue, Civic Center Project:
6.25%, 12/15/11 (c) ......................................................... 3,000,000 AAA 3,414,090
6.25%, 12/15/20 (c) ......................................................... 6,975,000 AAA 7,823,090
Series A, 6.5%, 12/15/07 (c) ................................................ 4,765,000 AAA 5,487,136
Series A, 6.5%, 12/15/08 (c) ................................................ 5,255,000 AAA 6,081,349
Illinois Educational Facilities Authority, Loyola University:
Series 1991 A, Zero Coupon, 7/01/04 (c) ..................................... 2,860,000 AAA 2,085,769
Zero Coupon, 7/01/05 (c) .................................................... 4,000,000 AAA 2,773,400
Illinois Health Facilities Authority, Brokaw-Mennonite Healthcare:
6%, 8/15/06 (c) ............................................................. 1,380,000 AAA 1,506,781
6%, 8/15/07 (c) ............................................................. 1,460,000 AAA 1,597,620
6%, 8/15/08 (c) ............................................................. 1,550,000 AAA 1,701,915
6%, 8/15/09 (c) ............................................................. 1,640,000 AAA 1,802,409
Illinois Health Facilities Authority:
Children's Memorial Hospital, 6.25%, 8/15/13 (c) ............................ 3,400,000 AAA 3,813,848
Felician Healthcare Inc., Series A, 6.25%, 12/01/15 (c) (d) ................. 17,000,000 AAA 18,953,300
Memorial Medical Center, 6.75%, 10/01/11 (c) ................................ 2,135,000 AAA 2,307,444
Methodist Health Service, Series 1985 G, 8%, 8/01/15 (c) .................... 9,880,000 AAA 10,622,087
Sherman Hospital, 6.75%, 8/01/11 (c) ........................................ 2,700,000 AAA 2,943,567
SSM Healthcare System, 6.4%, 6/01/08 (c) .................................... 1,350,000 AAA 1,527,390
</TABLE>

The accompanying notes are an integral part of the financial statements

55
<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joliet, IL, Junior College Assistance Corp., Lease Revenue, North Campus
Extension Center, 6.7%, 9/01/12 (c) ......................................... 2,500,000 AAA 2,969,275
Kane County, IL, Series 1996A, 6.5%, 2/01/10 (c) ............................... 1,775,000 AAA 2,039,013
Kane, Cook and Dupage Counties, IL, School District #46 Elgin:
Series 1996B, Zero Coupon, 1/01/11 (c) ...................................... 1,040,000 AAA 517,941
Series 1996B, Zero Coupon, 1/01/12 (c) ...................................... 1,300,000 AAA 609,999
Series 1996B, Zero Coupon, 1/01/13 (c) ...................................... 2,095,000 AAA 925,299
Kendall, Kane and Will Counties, IL, Community Unit School District
Number 308, Oswego:
Zero Coupon, 3/01/02 (c) ................................................. 1,055,000 AAA 863,655
Zero Coupon, 3/01/05 (c) ................................................. 1,540,000 AAA 1,084,699
Zero Coupon, 3/01/06 (c) ................................................. 1,595,000 AAA 1,065,460
Metropolitan Pier & Exposition Authority, IL, McCormick Place
Expansion Project:
Series 1994, Zero Coupon, 6/15/13 (c) .................................... 5,625,000 AAA 2,424,544
Zero Coupon, 12/15/03 (c) ................................................ 3,200,000 AAA 2,408,448
Zero Coupon, 6/15/04 (c) ................................................. 10,300,000 AAA 7,527,240
Northwest Surburban Municipal Joint Action Water Agency, IL, Supply
System Revenue, 6.45%, 5/01/07 (c) .......................................... 2,575,000 AAA 2,915,183
Rosemont, IL, Tax Increment:
Series C, Zero Coupon, 12/01/05 (c) ......................................... 4,455,000 AAA 3,028,643
Series C, Zero Coupon, 12/01/07 (c) ......................................... 2,655,000 AAA 1,614,771
Skokie, IL, Park District, Series 1994B, Zero Coupon, 12/01/11 (c) ............. 3,000,000 AAA 1,423,710
State University Retirement System, IL, Special Revenue, Zero Coupon,
10/01/03 (c) ................................................................ 2,750,000 AAA 2,089,312
University of Illinois, Board of Trustees:
Series 1991, Zero Coupon, 4/01/03 (c) ....................................... 3,890,000 AAA 3,023,853
Series 1991, Zero Coupon, 4/01/05 (c) ....................................... 3,830,000 AAA 2,687,051
Will County, IL, Community Unit School District #201-U, Crete-Monee,
Capital Appreciation:
Zero Coupon, 12/15/00 (c) ................................................ 1,325,000 AAA 1,153,041
Zero Coupon, 12/15/01 (c) ................................................ 1,730,000 AAA 1,435,727
INDIANA
Fort Wayne, IN, Parkview Memorial Hospital, Series A, 6.5%,
11/15/12 (c) ................................................................ 1,400,000 AAA 1,485,932
Indiana Health Facilities Finance Authority, Hospital Revenue,
Community Hospital Project:
6.4%, 5/01/12 (c) ........................................................ 5,000,000 AAA 5,431,900
6%, 7/01/01 (c) .......................................................... 1,395,000 AAA 1,474,292
Indiana Health Facilities Financing Authority, Hospital Revenue, Tax
Exempt Custodian Receipts Refund, Series 1997A, 6%, 7/01/02 (c) ............. 1,480,000 AAA 1,579,796
Indiana Health Facilities Financing Authority:
Series 1990A, 6%, 7/01/03 (c) ............................................... 1,570,000 AAA 1,688,896
Series 1990A, 6%, 7/01/04 (c) ............................................... 1,665,000 AAA 1,799,865
Series 1990A, 6%, 7/01/05 (c) ............................................... 1,765,000 AAA 1,916,066
Series 1990A, 6%, 7/01/06 (c) ............................................... 1,875,000 AAA 2,045,306
Series 1990A, 6%, 7/01/07 (c) ............................................... 1,985,000 AAA 2,171,848
Series 1990A, 6%, 7/01/09 (c) ............................................... 1,125,000 AAA 1,231,313
Series 1990A, 6%, 7/01/10 (c) ............................................... 1,185,000 AAA 1,293,297
</TABLE>

The accompanying notes are an integral part of the financial statements

56
<PAGE>

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1990A, 6%, 7/01/11 (c) ............................................... 1,260,000 AAA 1,374,912
Series 1990A, 6%, 7/01/12 (c) ............................................... 1,345,000 AAA 1,466,386
Series 1990A, 6%, 7/01/13 (c) ............................................... 1,420,000 AAA 1,545,812
Series 1990A, 6%, 7/01/14 (c) ............................................... 1,505,000 AAA 1,634,881
Series 1990A, 6%, 7/01/15 (c) ............................................... 1,600,000 AAA 1,733,456
Series 1990A, 6%, 7/01/16 (c) ............................................... 1,700,000 AAA 1,835,949
Series 1990A, 6%, 7/01/17 (c) ............................................... 1,800,000 AAA 1,941,444
Series 1990A, 6%, 7/01/18 (c) ............................................... 1,910,000 AAA 2,054,281
Series 1997A, 6%, 7/01/08 (c) ............................................... 1,085,000 AAA 1,189,453
Indiana University, Revenue Refunding, Series H, Zero Coupon,
8/01/06 (c) ................................................................. 8,500,000 AAA 5,565,715
Indiana University, Student Fee Revenue, Series J, 5%, 8/01/18 (c) ............. 4,200,000 AAA 3,971,016
Indiana University, Revenue Refunding, Student Fee Revenue, Series H,
Zero Coupon, 8/01/08 (c) .................................................... 10,000,000 AAA 5,825,000
Madison County, IN, Community Hospital of Anderson, Prerefunded
1/1/98 at 102, 8%, 1/01/14*** (c) ........................................... 7,055,000 AAA 7,269,260
Merrillville, IN, Multiple School Building Corp., First Mortgage,
Zero Coupon, 1/15/11 (c) .................................................... 4,000,000 AAA 1,988,000
IOWA
Polk County, IA, Mercy Hospital, 6.75%, 11/01/05 (c) ........................... 5,000,000 AAA 5,464,900
KANSAS
Kansas City, KS, Utility System Revenue:
Capital Appreciation, Prerefunded, Zero Coupon, 3/01/01*** (c) .............. 4,095,000 AAA 3,529,931
ETM, Zero Coupon, 9/01/04** (c) ............................................. 3,575,000 AAA 2,602,743
ETM, Zero Coupon, 9/01/05** (c) ............................................. 5,300,000 AAA 3,657,212
ETM, Zero Coupon, 9/01/06** (c) ............................................. 1,875,000 AAA 1,228,181
Zero Coupon, 9/01/04 (c) .................................................... 2,640,000 AAA 1,929,840
Zero Coupon, 9/01/05 (c) .................................................... 3,950,000 AAA 2,748,963
Zero Coupon, 9/01/06 (c) .................................................... 1,375,000 AAA 908,545
LOUISIANA
Louisiana Public Facilities Authority, Prerefunded, 2/15/08 at 100,
4.75%, 5/01/16*** ........................................................... 5,765,000 AAA 5,844,903
New Orleans, LA, General Obligation:
Zero Coupon, 7/15/06 (c) .................................................... 4,850,000 AAA 2,941,379
Zero Coupon, 9/01/07 (c) .................................................... 10,000,000 AAA 6,216,700
Orleans, LA, Levee District, Levee Improvement Bonds, Series 1986,
5.95%, 11/01/14 (c) ......................................................... 1,945,000 AAA 2,079,847
MARYLAND
Baltimore, MD, Revenue Exchanged, Auto Parking Revenue,
Series 1996A, 5.9%, 7/01/12 (c) ............................................. 3,100,000 AAA 3,405,474
MASSACHUSETTS
Massachusetts General Obligation, Series D, 7%, 10/01/03 (c) ................... 7,000,000 AAA 7,532,490
MICHIGAN
Detroit, MI, General Obligation, Distributable State Aid Refunding,
5.25%, 5/01/08 (c) .......................................................... 1,500,000 AAA 1,566,855
Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue, Borgess
Medical Center, Series A, 6%, 7/01/09 (c) ................................... 8,250,000 AAA 8,530,252
Michigan Hospital Finance Authority, Sisters of Mercy Healthcorp
Obligated Group, Series P, 5.25%, 8/15/08 (c) ............................... 8,655,000 AAA 9,018,770
</TABLE>

The accompanying notes are an integral part of the financial statements

57
<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MINNESOTA
Northern Minnesota Municipal Power Agency, Series 1989A, 7.25%,
1/01/16 ..................................................................... 7,500,000 A 7,928,475
MISSOURI
Missouri Health & Educational Facilities Authority, SSM Healthcare:
1992 Series AA, 6.35%, 6/01/08 (c) .......................................... 8,125,000 AAA 9,231,787
1992 Series AA, 6.4%, 6/01/09 (c) ........................................... 8,640,000 AAA 9,863,510
NEVADA
Clark County, NV, School District:
General Obligation, Series B, Zero Coupon, 3/01/05 (c) ...................... 8,070,000 AAA 5,725,504
Series 1991B, Zero Coupon, 3/01/09 (c) ...................................... 4,350,000 AAA 2,458,489
NEW JERSEY
New Jersey Highway Authority, ETM, 6.5%, 1/01/11 ............................... 4,835,000 AAA 5,350,266
New Jersey Housing and Finance Agency, Home Mortgage Purchase
Revenue, Zero Coupon, 10/01/16 (c) .......................................... 3,980,000 AAA 603,806
New Jersey Turnpike Authority:
6.5%, 1/01/09 (c) ........................................................... 5,000,000 AAA 5,760,200
Series 1991A, 6.3%, 1/01/01 (c) ............................................. 1,250,000 AAA 1,329,325
NEW YORK
New York City, NY, General Obligation:
8%, 11/01/01 (c) ............................................................ 760,000 AAA 774,128
5.9%, 2/01/05 (c) ........................................................... 5,500,000 AAA 5,936,975
8.125%, 11/01/05 (c) ........................................................ 1,400,000 AAA 1,426,166
Series 1989 E, 7%, 12/01/07 (c) ............................................. 115,000 AAA 117,348
Series A, ETM, 8%, 11/01/01** (c) ........................................... 740,000 AAA 790,720
Series A, 3%, 8/15/02 (c) ................................................... 9,000,000 AAA 8,418,420
Series C, 6.4%, 8/01/04 (c) ................................................. 500,000 AAA 546,200
Series C, 6.4%, 8/01/05 (c) ................................................. 430,000 AAA 468,167
Series C, Prerefunded 8/01/02 at 101.50, 6.4%, 8/01/05*** (c) ............... 10,000,000 AAA 11,061,900
Series D, 8%, 8/01/05 (c) ................................................... 5,000 AAA 5,167
Series D, 6%, 8/01/06 (c) ................................................... 140,000 AAA 144,525
Series D, 6%, 8/01/08 (c) ................................................... 370,000 AAA 381,958
Series E, ETM, 7%, 12/01/07** (c) ........................................... 1,385,000 AAA 1,408,143
New York State Dormitory Authority:
College and University Pooled Capital Program, 7.8%, 12/01/05 (c) ........... 8,840,000 AAA 9,394,445
State University of New York, 6%, 7/01/09 (c) ............................... 2,000,000 AAA 2,215,400
New York State Dormitory Authority Revenue, City University:
Series C, 7.5%, 7/01/10 (c) ................................................. 5,750,000 AAA 7,173,470
Series D, 7%, 7/01/09 (c) ................................................... 4,000,000 AAA 4,787,040
New York State Energy Research and Development Authority, Pollution
Control Revenue, Electric and Gas, 5.9%, 12/01/06 (c) ....................... 5,300,000 AAA 5,818,658
New York State, Urban Development Authority, Correctional Facilities,
6.5%, 1/01/11 (c) ........................................................... 4,500,000 AAA 5,185,845
Suffolk County, NY, Industrial Development Agency, Southwest Sewer
System, 6%, 2/01/07 (c) ..................................................... 8,000,000 AAA 8,771,760
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency:
5.5%, 1/01/07 (c) ........................................................... 2,000,000 AAA 2,121,860
Power System Revenue, Series B, 6%, 1/01/18 (c) ............................. 8,775,000 AAA 9,611,959
</TABLE>

The accompanying notes are an integral part of the financial statements

58
<PAGE>

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
North Carolina Municipal Power Agency, Number One, Catawba Electric
Power Revenue:
5.25%, 1/01/08 (c) ....................................................... 2,500,000 AAA 2,612,725
6%, 1/01/11 (c) .......................................................... 8,235,000 AAA 9,101,157
7.5%, 1/01/17 ............................................................ 4,520,000 A 4,648,730
Series 1992, 7.25%, 1/01/07 (c) .......................................... 5,000,000 AAA 5,947,300
Series 1997, 6%, 1/01/08 (c) ............................................. 2,585,000 AAA 2,849,058
NORTH DAKOTA
Bismarck, ND, Hospital Revenue, St. Alexius Medical Center, Series 1991,
Zero Coupon, 5/01/02 (c) .................................................... 2,850,000 AAA 2,324,716
OHIO
Cleveland, OH, Water Works Revenue, Series 1993G, 5.5%,
1/01/13 (c) (d) ............................................................. 10,000,000 AAA 10,495,600
Hamilton County, OH, Electric System Mortgage Revenue, Series B,
Prerefunded 10/15/98 at 102, 8%, 10/15/22*** (c) ............................ 3,720,000 AAA 3,948,296
Ohio Air Quality Development Authority, Ohio Power Company,
Series B, 7.4%, 8/01/09 (c) ................................................. 5,000,000 AAA 5,367,550
OKLAHOMA
Tulsa, OK, Industrial Development Authority, Hospital Revenue,
St. John's Medical Center:
Zero Coupon, 12/01/02 (c) ................................................ 3,930,000 AAA 3,133,428
Zero Coupon, 12/01/04 (c) ................................................ 5,430,000 AAA 3,924,695
Zero Coupon, 12/01/06 (c) ................................................ 6,430,000 AAA 4,199,626
PENNSYLVANIA
Pennsylvania Industrial Development Authority, Economic
Development Revenue:
5.8%, 1/01/08 (c) ........................................................ 4,250,000 AAA 4,622,938
5.8%, 7/01/08 (c) ........................................................ 4,875,000 AAA 5,318,918
Philadelphia, PA, Water & Wastewater Refunding Revenue:
5.5%, 6/15/07 (c) ........................................................... 5,000,000 AAA 5,304,550
5.625%, 6/15/09 (c) ......................................................... 20,000,000 AAA 21,537,600
5.625%, 6/15/09 (c) ......................................................... 10,855,000 AAA 11,689,532
Westmoreland County, PA, Industrial Development Revenue,
Westmoreland Health System, 5.375%, 7/01/11 (c) ............................. 7,300,000 AAA 7,621,054
PUERTO RICO
Commonwealth of Puerto Rico, Highway & Transportation Authority
Revenue, 5.5%, 7/01/09 (c) .................................................. 10,940,000 AAA 11,732,822
RHODE ISLAND
Rhode Island Clean Water Protection Agency, Pollution Control Revenue,
Revolving Fund, Series A, 5.4%, 10/01/15 (c) ................................ 2,000,000 AAA 2,058,220
Rhode Island Convention Center Authority, Refunding Revenue:
Series 1993 B, 5%, 5/15/10 (c) .............................................. 5,000,000 AAA 5,046,400
Series 1993 B, 5.25%, 5/15/15 (c) (d) ....................................... 22,000,000 AAA 22,251,460
Rhode Island Depositors Economic Protection Corp., Special Obligation:
Series B, 5.8%, 8/01/10 (c) ................................................. 6,200,000 AAA 6,751,242
Series B, 5.8%, 8/01/11 (c) ................................................. 4,525,000 AAA 4,920,892
Series B, 5.8%, 8/01/12 (c) ................................................. 2,500,000 AAA 2,715,775
Series B, 5.8%, 8/01/13 (c) ................................................. 7,340,000 AAA 7,959,790
</TABLE>

The accompanying notes are an integral part of the financial statements

59
<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SOUTH CAROLINA
Piedmont Municipal Power Agency, SC, Electric Revenue:
5.5%, 1/01/12 (c) ........................................................... 2,810,000 AAA 2,966,461
Series 1991 A, 6.5%, 1/01/16 (c) ............................................ 2,570,000 AAA 2,977,114
Series 1991 A, ETM, 6.5%, 1/01/16** (c) ..................................... 430,000 AAA 498,116
Series 1993, 5.5%, 1/01/08 (c) .............................................. 1,075,000 AAA 1,139,758
Series 1993, ETM, 5.5%, 1/01/08** (c) ....................................... 840,000 AAA 899,052
Series 1993, ETM, 5.5%, 1/01/12** (c) ....................................... 2,190,000 AAA 2,311,939
TENNESSEE
Knox County, TN, Health & Educational Hospital Facilities Board,
Fort Sanders Alliance:
5.75%, 1/01/11 (c) ....................................................... 15,405,000 AAA 16,637,862
5.75%, 1/01/12 (c) ....................................................... 17,880,000 AAA 19,290,732
6.25%, 1/01/13 (c) ....................................................... 4,000,000 AAA 4,519,600
Knox County, TN, Health, Education and Housing Facilities Board:
5.75%, 1/01/14 (c) .......................................................... 2,000,000 AAA 2,149,180
Fort Sanders Alliance, 7.25%, 1/01/09 (c) ................................... 3,750,000 AAA 4,544,888
TEXAS
Austin, TX, Utility Systems Revenue Refunding, Series A, Zero Coupon,
11/15/08 (c) ................................................................ 3,460,000 AAA 1,997,423
Austin, TX, Combined Utility System Revenue, Zero Coupon,
11/15/09 (c) ................................................................ 5,020,000 AAA 2,722,697
Bexar County, TX, Health Facilities Development Corporation, Baptist
Health System:
Series 1997A, 6%, 11/15/11 (c) ........................................... 2,000,000 AAA 2,211,460
Series 1997, 6%, 11/15/12 (c) ............................................ 3,000,000 AAA 3,315,510
Brownsville, TX, Utility System Revenue, 6.25%, 9/01/10 (c) .................... 4,085,000 AAA 4,608,084
Cedar Hill, TX, Zero Coupon:
Series 1996, 8/15/09 ........................................................ 1,500,000 AAA 823,890
Series 1996, 8/15/10 ........................................................ 3,130,000 AAA 1,614,204
Dallas, TX, Housing Finance Corp., Single Family Mortgage Revenue,
Zero Coupon, 10/01/16 (c) ................................................... 6,535,000 AAA 934,701
Dallas-Fort Worth, TX, Airport Revenue:
7.75%, 11/01/03 (c) ......................................................... 1,000,000 AAA 1,176,060
7.8%, 11/01/05 (c) .......................................................... 2,000,000 AAA 2,398,760
7.8%, 11/01/06 (c) .......................................................... 2,025,000 AAA 2,431,053
7.375%, 11/01/08 (c) ........................................................ 4,500,000 AAA 5,252,265
7.375%, 11/01/10 (c) ........................................................ 3,500,000 AAA 4,074,245
Harris County, TX, Health Facilities Development:
6.25%, 5/15/08 (c) .......................................................... 2,785,000 AAA 3,135,158
6.25%, 5/15/09 (c) .......................................................... 2,965,000 AAA 3,338,798
Harris County, TX, General Obligation:
Capital Appreciation Bond, Zero Coupon, 10/01/06 (c) ........................ 9,035,000 AAA 5,894,795
Flood Control District, Zero Coupon, 10/01/00 (c) ........................... 1,000,000 AAA 879,300
Toll Road Authority, Toll Road Revenue, Subordinate Lien:
Series A, Zero Coupon, 8/15/05 (c) ....................................... 4,025,000 AAA 2,785,340
Series A, Zero Coupon, 8/15/06 (c) ....................................... 4,010,000 AAA 2,632,204
Unlimited Tax, Series A, Zero Coupon, 8/15/04 (c) ........................ 2,050,000 AAA 1,491,519
</TABLE>

The accompanying notes are an integral part of the financial statements

60
<PAGE>

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Houston, TX, Water & Sewer System Authority:
Series C, Zero Coupon, 12/01/06 (c) ......................................... 14,575,000 AAA 9,434,543
Series C, Zero Coupon, 12/01/08 (c) ......................................... 19,000,000 AAA 10,944,380
Series C, Zero Coupon, 12/01/09 (c) ......................................... 14,750,000 AAA 7,982,110
Zero Coupon, 12/01/10 (c) ................................................... 5,000,000 AAA 2,539,800
Series 1991C, Zero Coupon, 12/01/12 (c) ..................................... 3,350,000 AAA 1,508,338
Hurst Euless Bedford, TX, Independent School District, Series 1994,
Zero Coupon, 8/15/09 (c) .................................................... 4,925,000 AAA 2,705,106
Lubbock, TX, Health Facilities Development Corp., Methodist Hospital:
Series B, 5.5%, 12/01/06 (c) ................................................ 3,945,000 AAA 4,070,806
Series B, 5.6%, 12/01/07 (c) ................................................ 2,415,000 AAA 2,500,781
Series B, 5.625%, 12/01/08 (c) .............................................. 4,400,000 AAA 4,541,504
Lubbock, TX, Health Facilities Development Corporation, Series B,
5.625%, 12/01/09 (c) ........................................................ 4,640,000 AAA 4,752,659
Montgomery County, TX, General Obligation, Library Refunding:
Zero Coupon, 9/01/03 (c) .................................................... 3,475,000 AAA 2,657,923
Zero Coupon, 9/01/04 (c) .................................................... 3,475,000 AAA 2,523,128
Zero Coupon, 9/01/05 (c) .................................................... 3,475,000 AAA 2,399,766
North Central Texas Health Facilities Development Corp., Presbyterian
Hospital, Prerefunded 12/01/97 at 102, 8.875%, 12/01/15*** (c) .............. 5,000,000 AAA 5,141,700
Northeast Hospital Authority, TX, Revenue, Series 1997, 6%,
5/15/10 (c) ................................................................. 2,180,000 AAA 2,396,300
Northwest Texas Independent School District, Capital Appreciation
Bonds, Series 1991, Zero Coupon, 8/15/10 (c) ................................ 3,690,000 AAA 1,903,007
San Antonio, TX, Electric and Gas, Revenue Refunding:
Series A, Zero Coupon, 2/01/05 (c) .......................................... 2,500,000 AAA 1,774,175
Series A, Zero Coupon, 2/01/05 (c) .......................................... 8,000,000 AAA 5,677,360
Series A, Zero Coupon, 2/01/06 (c) .......................................... 17,900,000 AAA 12,054,039
San Antonio, TX, Electric and Gas, Zero Coupon, 2/01/08 (c) .................... 8,115,000 AAA 4,870,785
San Antonio, TX, Hotel Revenue, Series 1996, 6%, 8/15/06 (c) ................... 2,000,000 AAA 2,202,020
San Antonio, TX, Series 1991 B, Zero Coupon, 2/01/09 (c) ....................... 4,400,000 AAA 2,483,360
Tarrant County, TX, Health Facilities Development Corp., Hospital
Refunding Revenue, Fort Worth Osteopathic Hospital:
6%, 5/15/11 (c) .......................................................... 4,615,000 AAA 5,124,727
6%, 5/15/21 (c) .......................................................... 6,235,000 AAA 6,792,097
Texas General Obligation:
Capital Appreciation Bond, Super Collider, Series C, Zero Coupon,
4/01/06 (c) .............................................................. 7,385,000 AAA 4,933,919
Superconductor Revenue, Series C, Zero Coupon, 4/01/05 (c) .................. 8,390,000 AAA 5,907,902
Texas Municipal Power Agency:
6.1%, 9/01/07 (c) ........................................................... 9,250,000 AAA 10,297,933
6.1%, 9/01/09 (c) ........................................................... 4,435,000 AAA 4,974,961
Texas Public Finance Authority, Building Authority:
Series B, 6.25%, 2/01/08 (c) ................................................ 5,190,000 AAA 5,860,444
Zero Coupon, 2/01/06 (c) .................................................... 13,915,000 AAA 9,370,500
</TABLE>

The accompanying notes are an integral part of the financial statements

61
<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UTAH
Associated Municipal Power System, UT, Hunter Project,
Refunding Revenue:
Zero Coupon, 7/01/00 (c) ................................................. 2,755,000 AAA 2,448,534
Zero Coupon, 7/01/02 (c) ................................................. 5,200,000 AAA 4,202,848
Zero Coupon, 7/01/04 (c) ................................................. 5,895,000 AAA 4,313,372
Zero Coupon, 7/01/05 (c) ................................................. 5,900,000 AAA 4,106,282
Zero Coupon, 7/01/06 (c) ................................................. 5,895,000 AAA 3,892,056
Zero Coupon, 7/01/07 (c) ................................................. 3,750,000 AAA 2,338,763
Intermountain Power Supply Agency, UT, Power Supply Revenue:
5%, 7/01/12 (c) ............................................................. 1,000,000 AAA 986,580
Series A, Zero Coupon, 7/01/02 (c) .......................................... 1,655,000 AAA 1,334,526
Series A, Zero Coupon, 7/01/03 (c) .......................................... 1,000,000 AAA 768,500
Series A, Zero Coupon, 7/01/04 (c) .......................................... 1,730,000 AAA 1,261,672
Series A, 6.5%, 7/01/08 (c) ................................................. 4,000,000 AAA 4,583,720
Series B, Zero Coupon, 7/01/02 (c) .......................................... 8,230,000 AAA 6,636,343
Intermountain Power Supply Agency, UT, Series 1993, 5.55%, 7/01/11 ............. 7,000,000 A 7,145,110
Provo, UT, Electric System Revenue, ETM, 10.375%, 9/15/15** (c) ................ 1,800,000 AAA 2,603,826
VIRGINIA
Roanoke, VA, Industrial Development Authority, Roanoke Memorial
Hospital, Series B, 6.125%, 7/01/17 (c) ..................................... 5,500,000 AAA 6,115,670
Southeastern Public Service Authority, VA, Refunding Revenue, Series A,
5.25%, 7/01/10 (c) .......................................................... 7,380,000 AAA 7,672,027
Virginia Beach, VA, Development Authority, Virginia Beach General
Hospital Project:
6%, 2/15/11 (c) .......................................................... 1,595,000 AAA 1,767,212
5.125%, 2/15/18 (c) ...................................................... 3,000,000 AAA 2,927,580
Winchester County, VA, Industrial Development Authority, Hospital
Revenue, 6.0%, 1/01/15* (c) ................................................. 5,700,000 AAA 5,749,362
WASHINGTON
Clark County, WA, Public Utility District No. 1:
6%, 1/01/06 (c) ............................................................. 7,500,000 AAA 8,192,175
Series 1995, 6%, 1/01/08 (c) ................................................ 2,200,000 AAA 2,420,990
King County, WA, Public Hospital District #1, Valley Medical Center,
Series 1992, 5.5%, 9/01/17 (c) .............................................. 3,500,000 AAA 3,505,810
King & Snohomish Counties, WA, General Obligation, School District #417,
5.6%, 12/01/10 (c) .......................................................... 1,650,000 AAA 1,770,945
Snohomish County, WA, School District #6, 6.5%, 12/01/07 ....................... 3,325,000 A 3,798,380
Washington, General Obligation Series AT-5, Zero Coupon,
8/01/10 (c) ................................................................. 2,625,000 AAA 1,364,974
Washington Health Care Facilities Authority, Empire Health
Services-Spokane:
5.65%, 11/01/05 (c) ...................................................... 2,155,000 AAA 2,297,273
5.7%, 11/01/06 (c) ....................................................... 3,440,000 AAA 3,689,228
5.75%, 11/01/07 (c) ...................................................... 7,350,000 AAA 7,921,022
5.8%, 11/01/09 (c) ....................................................... 4,595,000 AAA 4,977,350
5.8%, 11/01/10 (c) ....................................................... 2,100,000 AAA 2,266,131
</TABLE>

The accompanying notes are an integral part of the financial statements

62
<PAGE>

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

<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Public Power Supply System, Revenue Refunding,
Nuclear Power Project #1:
6%, 7/01/08 (c) .......................................................... 5,000,000 AAA 5,481,350
Series A, 7%, 7/01/11 (c) ................................................ 3,830,000 AAA 4,178,224
Series B, 7.25%, 7/01/12 (c) ............................................. 10,895,000 AAA 11,955,737
Series 1989A, 7.5%, 7/01/15 .............................................. 1,500,000 AAA 1,615,875
Series A, 7.5%, 07/01/15 (c) ............................................. 1,595,000 AAA 1,718,214
Series A, Prerefunded 7/1/99 at 102, 7.5%, 07/01/15*** (c) ............... 2,405,000 AAA 2,590,786
Washington Public Power Supply System, Revenue Refunding,
Nuclear Project #2:
Series 1992A, Zero Coupon, 7/01/11 (c) ................................... 4,200,000 AAA 2,037,378
Series A, 7.25%, 7/01/03 (c) ............................................. 2,000,000 AAA 2,197,460
Series A, 5.7%, 7/01/08 (c) .............................................. 5,000,000 AAA 5,342,050
Series C, 7%, 7/01/01 (c) ................................................ 10,000,000 AAA 10,907,600
Series C, 7.375%, 7/01/11 (c) ............................................ 1,370,000 AAA 1,523,892
Washington Public Power Supply System, Revenue Refunding,
Nuclear Project #3:
7.5%, 7/01/08 (c) ........................................................ 4,000,000 AAA 4,883,400
Series 1989A, Zero Coupon, 7/01/10 (c) ................................... 5,860,000 AAA 3,022,295
Series A, Prerefunded 7/1/99 at 102, 7.25%, 7/01/16*** (c) ............... 3,630,000 AAA 3,895,208
Series A, Zero Coupon, 7/01/04 (c) ....................................... 3,625,000 AAA 2,643,676
Series A, Zero Coupon, 7/01/05 (c) ....................................... 4,125,000 AAA 2,860,069
Washington State Housing Finance, Series A, 7.1%, 12/01/17 ..................... 5,105,000 AAA 5,230,532
WEST VIRGINIA
West Virginia, School Building Authority Revenue, Series B, 6.75%,
7/01/10 (c) ................................................................. 4,000,000 AAA 4,343,400
WISCONSIN
Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/01/04 (c) ............ 3,475,000 AAA 2,552,458
Wisconsin Health & Educational Facilities Authority:
6.1%, 8/15/09 (c) ........................................................... 2,000,000 AAA 2,217,820
Felician Healthcare Inc., Series B, 6.25%, 1/01/22 (c) ...................... 5,285,000 AAA 5,918,724
Hospital Sisters Services Inc. - Obligated Group, 5.375%,
6/01/18 (c) .............................................................. 4,800,000 AAA 4,708,656
St. Luke's Medical Center, 7.1%, 8/15/11 (c) ................................ 2,000,000 AAA 2,206,300
Villa St. Francis Inc., Series C, 6.25%, 1/01/22 (c) ........................ 9,230,000 AAA 10,336,769
Wheaton Franciscan Services, 6.1%, 8/15/08 (c) .............................. 4,580,000 AAA 5,100,151
Wisconsin Health & Educational Facilities Authority Aurora Medical:
5.75%, 11/15/06 (c) ......................................................... 2,000,000 AAA 2,148,120
5.75%, 11/15/07 (c) ......................................................... 1,500,000 AAA 1,618,125
6%, 11/15/08 (c) ............................................................ 4,085,000 AAA 4,507,185
6%, 11/15/09 (c) ............................................................ 4,330,000 AAA 4,820,026
Wisconsin Health & Educational Facilities Authority, SSM Healthcare:
Series 1992 AA, 6.4%, 6/01/08 (c) ........................................... 2,335,000 AAA 2,645,999
Series 1992 AA, 6.45%, 6/01/09 (c) .......................................... 2,485,000 AAA 2,857,502
Series 1992 AA, 6.45%, 6/01/10 (c) .......................................... 2,650,000 AAA 3,050,336
Series 1992 AA, 6.5%, 6/01/11 (c) ........................................... 2,820,000 AAA 3,232,002
Series 1992 AA, 6.5%, 6/01/12 (c) ........................................... 3,000,000 AAA 3,480,630
-------------
Total Long-Term Municipal Investments (Cost $1,533,349,712) .................... 1,674,354,483
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

63
<PAGE>

AARP INSURED TAX FREE GENERAL BOND FUND

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

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Total Investment Portfolio (Cost $1,542,449,712) (a) ........ 98.3 1,683,454,483
Other Assets and Liabilities, Net ........................... 1.7 28,553,685
----- -------------
Net Assets .................................................. 100.0 1,712,008,168
===== =============
</TABLE>

** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.

*** Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest on tax-exempt issues and to retire the bonds in full at the
earliest refunding date.

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $1,542,746,371 was as
follows:

Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ........ $140,968,309

Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ........ (260,197)
------------

Net unrealized appreciation ............................... $140,708,112
============

(b) (Unaudited) All of the securities held have been determined to be of
appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc. Unrated securities (NR) and
securities rated by Scudder (SS&C) have been determined to be of
comparable quality to rated eligible securities.

(d) At September 30, 1997, this security, in whole or in part, has been
pledged to cover initial margin requirements for open futures contracts.

At September 30, 1997, open futures contracts sold were as follows:

<TABLE>
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C>
U.S Treasury Bond ........ December, 1997 945 106,665,885 108,940,781
-----------

Total net unrealized depreciation on open futures contracts sold ....... 2,274,896
===========
</TABLE>

The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $449,459,820 and $466,467,485,
respectively.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$126,793,957 and $181,012,552, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

64
<PAGE>

AARP BOND FUND FOR INCOME

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 11.2%
- -------------------------------------------------------------------------------------------------------------------------------

6,505,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02%
to be repurchased at $6,506,088 on 10/01/97, collateralized
by a $6,626,000 U.S. Treasury Note, 4.75%, 9/30/98 (Cost $6,505,000) .................. 6,505,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM NOTES 18.9%
- -------------------------------------------------------------------------------------------------------------------------------

11,000,000 Federal Home Loan Mortgage Corp., Discount Note, 10/01/97
(Cost $11,000,000) .................................................................... 10,998,307
-------------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 1.3%
- -------------------------------------------------------------------------------------------------------------------------------

3,000,000 U.S. Treasury STRIP (Principal only) 11/15/18 (Cost $717,527) ............................ 758,010
-------------
- -------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 4.3%
- -------------------------------------------------------------------------------------------------------------------------------

436,344 9%, 8/15/21 .............................................................................. 470,157
941,565 8.5%, 6/15/26 ............................................................................ 985,111
1,005,290 7.5%, 4/15/27 ............................................................................ 1,022,561
-------------
Total Government National Mortgage Association (Cost $2,445,149) ......................... 2,477,829
-------------
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS* 1.7%
- -------------------------------------------------------------------------------------------------------------------------------

953,359 Federal Home Loan Mortgage Corp., 7.79% with various maturities to 9/01/24
(Cost $996,558) ....................................................................... 992,094
-------------
- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 3.0%
- -------------------------------------------------------------------------------------------------------------------------------

250,000 Fage Dairy Industry SA, 9%, 2/01/07 ...................................................... 243,750
1,000,000 Hutchison Whampoa, Ltd., 7.5%, 8/01/27 ................................................... 984,750
500,000 Petroleos Mexicanos SA, 8.85%, 9/15/07 ................................................... 511,500
-------------
Total Foreign Bonds - U.S.$ Denominated (Cost $1,738,998) ................................ 1,740,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 8.7%
- -------------------------------------------------------------------------------------------------------------------------------

Credit Card Receivables 0.9%
500,000 Advanta Corp., Series 1997-1 A4, 7.65%, 5/25/27 .......................................... 514,375
-------------
Home Equity Loans 2.2%
500,000 Contimortgage Home Equity Loan Trust, Series 1997-3 M1-F, 7.31%, 8/15/28 ................. 509,219
300,000 The Money Store Inc. Home Equity Loan Trust, Series 1996-C A4,
7.4%, 6/15/21 ......................................................................... 306,750
500,000 The Money Store Inc. Home Equity Series 1997-A A2, 6.56%, 12/15/09 ....................... 503,125
-------------
1,319,094
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

65
<PAGE>

AARP BOND FUND FOR INCOME

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

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufactured Housing 5.6%
375,000 Associated Manufactured Housing Corp., Series 1997-1 B1, 7.6%, 6/15/28 ................... 386,895
330,062 Green Tree Financial Corp., Series 1997-A A1, 6.3%, 8/15/23 .............................. 330,577
500,000 Green Tree Financial Corp., Series 1995-6 B1, 7.7%, 9/15/26 .............................. 513,280
500,000 Green Tree Financial Corp., Series 1997-1 B2, 7.76%, 3/15/28 ............................. 511,094
500,000 Green Tree Financial Corp., Series 1997-2 B2, 8.05%, 4/15/28 ............................. 520,391
1,000,000 Green Tree Financial Corp., Series 1995-10 B1, 7.05%, 2/15/27 ............................ 1,009,492
-------------
3,271,729
-------------
Total Asset Backed (Cost $4,995,928) ..................................................... 5,105,198
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 49.5%
- -------------------------------------------------------------------------------------------------------------------------------

Consumer Discretionary 1.8%
500,000 Rite Aid Corp., 7.7%, 2/15/27 ............................................................ 525,535
500,000 Tultex Corp., 9.625%, 4/15/07 ............................................................ 530,000
-------------
1,055,535
-------------
Consumer Staples 0.7%
400,000 Polymer Group, Inc., 9%, 7/01/07 ......................................................... 404,000
-------------
Health 1.7%
500,000 NBTY Inc., 8.625%, 9/15/07 ............................................................... 496,250
500,000 Tenet Healthcare Corp., 8.625%, 1/15/07 .................................................. 517,500
-------------
1,013,750
-------------
Communications 3.5%
500,000 Comcast Cellular, 9.5%, 5/01/07 .......................................................... 522,500
1,000,000 Rogers Cantel Inc., 8.3%, 10/01/07 ....................................................... 1,000,000
500,000 WorldCom, Inc., 7.75%, 4/01/07 ........................................................... 524,170
-------------
2,046,670
-------------
Financial 14.6%
1,000,000 First Industrial L.P., 7.6%, 5/15/07 ..................................................... 1,041,850
1,000,000 First Union Capital II, 7.85%, 1/01/27 ................................................... 1,008,240
1,000,000 General Motors Acceptance Corp., 6.869%, 8/15/07 ......................................... 1,013,438
1,000,000 Security Capital Industrial Trust, 7.625%, 7/01/17 ....................................... 1,020,000
500,000 Shurgard Storage Centers, Inc. (REIT), 7.5%, 4/25/04 ..................................... 518,320
1,000,000 Spieker Properties, Inc., 7.125%, 7/01/09 ................................................ 1,007,110
1,000,000 Susa Partnership L.P., 8.2%, 6/01/17 ..................................................... 1,056,250
500,000 Taubman Realty Group LP Medium Term Note, 8%, 7/30/01 .................................... 519,165
250,000 Taubman Realty Group LP Medium Term Note, 7%, 10/01/03 ................................... 252,930
1,000,000 US West Capital Funding Inc., 7.9%, 2/01/27 .............................................. 1,053,740
-------------
8,491,043
-------------
Media 6.5%
1,000,000 Harcourt General, Inc., 7.2%, 8/01/27 .................................................... 974,270
500,000 Hollinger International, 8.625%, 3/15/05 ................................................. 515,000
500,000 Outdoor Systems, Inc., 8.875%, 6/15/07 ................................................... 510,000
125,000 Tele-Communications, Inc., 8%, 8/01/05 ................................................... 130,390
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ........................................................ 1,147,590
520,000 Viacom Inc., 6.75%, 1/15/03 .............................................................. 509,106
-------------
3,786,356
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

66
<PAGE>

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

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Service Industries 5.3%
500,000 Pierce Leahy Corp., 9.125%, 7/15/07 ...................................................... 523,750
1,000,000 Prime Hospitality Corp., 9.25%, 1/15/06 .................................................. 1,045,000
500,000 SC International Services, Inc., 9.25%, 9/01/07 .......................................... 508,750
1,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ....................................................... 1,008,750
-------------
3,086,250
-------------
Durables 0.4%
250,000 Tracor, Inc., 8.5%, 3/01/07 .............................................................. 256,250
-------------
Manufacturing 1.8%
500,000 Argo-Tech Corp., 8.625%, 10/01/07 ........................................................ 501,250
50,000 GFSI Inc., 9.625%, 3/01/07 ............................................................... 51,375
500,000 Mead Corp., 7.55%, 3/01/47 ............................................................... 519,600
-------------
1,072,225
-------------
Technology 2.8%
500,000 Amphenol Corp., 9.875%, 5/15/07 .......................................................... 532,500
100,000 Fairchild Semiconductor Corp., 10.125%, 3/15/07 .......................................... 107,500
1,000,000 International Business Machines Corp., 7%, 10/30/45 ...................................... 972,210
-------------
1,612,210
-------------
Energy 5.0%
500,000 Barrett Resources Corp., 7.55%, 2/01/07 .................................................. 511,250
500,000 Chesapeake Energy Corp., 8.5%, 3/15/12 ................................................... 487,500
250,000 Dawson Production Services, Inc., 9.375%, 2/01/07 ........................................ 260,625
250,000 Lomak Petroleum, Inc., 8.75%, 1/15/07 .................................................... 248,750
1,000,000 Lyondell Petrochemical Co., 7.55%, 2/15/26 ............................................... 1,003,760
400,000 Pride Petroleum Services, Inc., 9.375%, 5/01/07 .......................................... 428,000
-------------
2,939,885
-------------
Metals & Minerals 2.7%
500,000 AK Steel Corp., 9.125%, 12/15/06 ......................................................... 526,250
1,000,000 Potash Corp., 7.125%, 6/15/07 ............................................................ 1,019,600
-------------
1,545,850
-------------
Construction 0.4%
250,000 Nortek, Inc., 9.25%, 3/15/07 ............................................................. 253,750
-------------
Transportation 2.3%
300,000 Continental Airlines Inc. Series 1997-1B, 7.461%, 4/01/13 ................................ 313,371
500,000 Norfolk Southern Corp., 7.8%, 5/15/27 .................................................... 535,485
500,000 Allied Holdings, Inc., 8.625%, 10/01/07 .................................................. 506,875
1,355,731
-------------
Total Corporate Bonds (Cost $28,241,662) ................................................. 28,919,505
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Total Investment Portfolio (Cost $56,640,822) (a) ......................... 98.6 57,495,943
Other Assets and Liabilities, Net ......................................... 1.4 828,203
----- ----------
Net Assets ................................................................ 100.0 58,324,146
===== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements

67
<PAGE>

AARP BOND FUND FOR INCOME

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

- --------------------------------------------------------------------------------
* Effective maturities will be shorter due to prepayments.

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $56,640,822 was as
follows:

Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $ 905,465

Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (50,344)
---------
Net unrealized appreciation ................................ $ 855,121
=========
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the period February 1, 1997 (commencement of operations)
through September 30, 1997, aggregated $33,747,629 and $1,303,851,
respectively. Purchases and sales of obligations of the U.S. Government
and Government agencies aggregated $7,091,422, and $637,484, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

68
<PAGE>

AARP BALANCED STOCK AND BOND FUND

50,692,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at
6.125% to be repurchased at $50,700,624 on 10/01/97, collateralized by a
$39,775,000 U.S. Treasury Bond, 8.75%, 5/15/20 (Cost $50,692,000) ................... 50,692,000
-----------

- -------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS 6.9%
- -------------------------------------------------------------------------------------------------------------------------------

5,000,000 U.S. Treasury Bond, 6.25%, 8/15/23 ..................................................... 4,853,900
5,000,000 U.S. Treasury Note, 5.125%, 4/30/98 .................................................... 4,989,050
10,000,000 U.S. Treasury Note, 5.75%, 12/31/98 .................................................... 10,006,200
2,500,000 U.S. Treasury Note, 5.875%, 3/31/99 .................................................... 2,504,300
3,000,000 U.S. Treasury Note, 6.75%, 5/31/99 ..................................................... 3,045,000
6,000,000 U.S. Treasury Note, 6.875%, 7/31/99 .................................................... 6,106,860
4,500,000 U.S. Treasury Note, 5.875%, 11/15/99 ................................................... 4,502,790
2,000,000 U.S. Treasury Note, 6.125%, 7/31/00 .................................................... 2,012,180
1,500,000 U.S. Treasury Note, 5.75%, 10/31/00 .................................................... 1,492,740
3,500,000 U.S. Treasury STRIP (Interest only), (6.38%***), 2/15/09 ............................... 1,712,550
10,000,000 U.S. Treasury STRIP (Principal only), (6.62%***), 11/15/18 ............................. 2,526,700
-----------
Total U. S. Treasury Obligations (Cost $43,022,393) .................................... 43,752,270
-----------

- -------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION** 1.6%
- -------------------------------------------------------------------------------------------------------------------------------

3,214,790 10% with various maturities to 2/15/25 ................................................. 3,580,349
6,503,131 8.5%, 11/15/25 ......................................................................... 6,807,933
-----------
Total Government National Mortgage Association (Cost $10,159,715) ...................... 10,388,282
-----------

- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY PASS-THRUS** 6.0%
- -------------------------------------------------------------------------------------------------------------------------------

14,224,171 Federal National Mortgage Association, 6.5% with various maturities
to 3/01/26 .......................................................................... 13,869,957
24,646,080 Federal National Mortgage Association, 7% with various maturities
to 8/01/26 .......................................................................... 24,576,189
-----------
Total U. S. Government Agency Pass-Thrus (Cost $37,394,733) ............................ 38,446,146
-----------

- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- U.S. $ DENOMINATED 1.6%
- -------------------------------------------------------------------------------------------------------------------------------

1,000,000 ABN-AMRO Bank NV, Subordinated note, 7.125%, 10/15/93 .................................. 982,330
6,000,000 Deutsche Bank, 7.5%, 4/25/09 ........................................................... 6,340,440
3,000,000 Province of Ontario Global, 6%, 2/21/06 ................................................ 2,901,480
-----------
Total Foreign Bonds - U. S. $ Denominated (Cost $9,817,851) ............................ 10,224,250
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

69
<PAGE>

AARP BALANCED STOCK AND BOND FUND

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

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ASSET BACKED 2.1%
- -----------------------------------------------------------------------------------------------------------------------------

Automobile Receivables 1.1%
4,000,000 Ford Credit Automobile Trust Series 1996-A A4, 6.75%, 9/15/00 .......................... 4,045,000
3,000,000 Premier Auto Trust Asset Backed Certificate, Series 1996-3 A4, 6.75%, 11/06/00 ......... 3,029,040
-----------
7,074,040
-----------
Credit Card Receivables 1.0%
4,000,000 Chase Manhattan Credit Card Master Trust, Series 1996-4A, 6.73%, 2/15/03 ............... 4,043,720
2,000,000 Sears Credit Account Master Trust, Series 1995-4A, 6.25%, 1/15/03 ...................... 2,003,740
-----------
6,047,460
-----------
Total Asset Backed (Cost $12,997,645) .................................................. 13,121,500
-----------

- -------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 12.4%
- -------------------------------------------------------------------------------------------------------------------------------

Consumer Discretionary 0.6%
4,000,000 ITT Corp., 7.375%, 11/15/15 ............................................................ 3,874,920
-----------
Communications 0.9%
5,250,000 WorldCom, Inc., 7.75%, 4/01/27 ......................................................... 5,603,115
-----------
Financial 5.2%
5,850,000 Associates Corp. of North America, 6.625%, 5/15/01 ..................................... 5,899,140
4,000,000 Capital One Bank Medium Term Note, 5.95%, 2/15/01 ...................................... 3,919,520
1,000,000 General Electric Capital Services Inc., 7.5%, 8/21/35 .................................. 1,069,320
5,000,000 Highwoods/Forsyth L.P., 7%, 12/01/06 ................................................... 5,011,650
5,000,000 Meditrust Corp., 7%, 8/15/07 ........................................................... 4,977,900
4,000,000 Southern National Corp., 7.05%, 5/23/03 ................................................ 4,080,480
1,500,000 Spieker Properties, Inc., 7.875%, 12/01/16 ............................................. 1,524,915
4,500,000 US West Capital Funding Inc., 7.9%, 1/01/27 ............................................ 4,741,830
2,000,000 Wells Fargo & Co., 6.875%, 4/01/06 ..................................................... 2,014,260
-----------
33,239,015
-----------
Media 1.4%
4,000,000 Tele-Communications, Inc., 8%, 8/01/05 ................................................. 4,172,480
4,500,000 Time Warner Inc., 9.125%, 1/15/13 ...................................................... 5,164,155
-----------
9,336,635
-----------
Service Industries 1.3%
5,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ..................................................... 5,043,750
2,700,000 U.S. Filter Corp., 4.5%, 12/15/01 ...................................................... 3,199,500
-----------
8,243,250
-----------
Durables 1.5%
1,000,000 Ford Motor Co., 8.875%, 1/15/22 ........................................................ 1,196,760
2,000,000 Lockheed Martin Corp., 7.75%, 5/01/26 .................................................. 2,133,520
1,000,000 McDonnell Douglas Corp., 9.75%, 4/01/12 ................................................ 1,262,450
2,000,000 Northrop Grumman Corp., 7%, 3/01/06 .................................................... 2,036,520
3,100,000 Northrop Grumman Corp., 7.875%, 3/01/26 ................................................ 3,333,864
-----------
9,963,114
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

70
<PAGE>

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

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Technology 0.3%
1,500,000 Loral Corp., 8.375%, 6/15/24 ........................................................... 1,703,640
-----------
Energy 0.7%
4,150,000 PanEnergy Corp., 7.375%, 9/15/03 ....................................................... 4,323,429
-----------
Transportation 0.5%
2,500,000 AMR Corp., 9.75%, 8/15/21 .............................................................. 3,131,575
-----------
Total Corporate Bonds (Cost $75,947,204) ............................................... 79,418,693
-----------

- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 1.3%
- -------------------------------------------------------------------------------------------------------------------------------

Health 0.1%
Pharmaceuticals
290,000 Sandoz Capital BVI Ltd., 2%, 10/06/02 .................................................. 424,850
-----------
Financial 0.1%
Other Financial Companies
200,000 First Financial Management Corp., 5%, 12/15/99 ......................................... 352,500
-----------
Media 0.9%
Advertising
7,000,000 Interpublic Group of Companies Inc., 1.8%, 9/16/04 ..................................... 5,810,000
-----------
Service Industries 0.2%
Miscellaneous Commercial Services
1,000,000 ADT Operations Inc. Liquid Yield Option Note, 7/06/10 .................................. 1,113,750
260,000 Jardine Strategic Holdings Ltd., 7.5%, 5/07/49 (b) ..................................... 317,200
-----------
1,430,950
-----------
Total Convertible Bonds (Cost $6,812,228) .............................................. 8,018,300
-----------

- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 1.0%
- -------------------------------------------------------------------------------------------------------------------------------

Shares
Consumer Discretionary 0.5%
Department & Chain Stores
56,200 K Mart 7.75% ........................................................................... 3,287,700
-----------
Financial 0.3%
Consumer Finance 0.2%
33,100 Advanta Corp. 6.75% .................................................................... 1,026,100
-----------
Real Estate 0.1%
18,900 Security Capital Industrial Trust, 7% .................................................. 571,725
-----------
Manufacturing 0.2%
Containers & Paper 0.0%
2,100 International Paper Co. 5.25% .......................................................... 118,650
-----------
Industrial Specialty 0.1%
31,300 Cooper Industries, Inc. 6% ............................................................. 719,900
-----------
Office Equipment / Supplies 0.1%
4,700 Ikon Office Solutions, Inc., 5.04% ..................................................... 303,150
-----------
Total Convertible Preferred Stocks (Cost $5,656,472) ................................... 6,027,225
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

71
<PAGE>

AARP BALANCED STOCK AND BOND FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 58.6%
- -------------------------------------------------------------------------------------------------------------------------------

Consumer Discretionary 2.9%
Department & Chain Stores
66,800 J.C. Penney Co., Inc. .................................................................. 3,891,100
45,100 May Department Stores .................................................................. 2,457,950
55,000 Mercantile Stores, Inc. ................................................................ 3,461,563
88,900 Rite Aid Corp. ......................................................................... 4,928,394
73,200 Sears, Roebuck & Co. ................................................................... 4,167,825
-----------
18,906,832
-----------
Hotels & Casinos 0.0%
15,033 Homestead Village, Inc. Warrants (expire 10/29/97)* .................................... 122,143
-----------
Consumer Staples 4.8%
Consumer Electronic & Photographic Products 1.0%
95,900 Whirlpool Corp. ........................................................................ 6,359,357
-----------
Food & Beverage 2.8%
43,900 General Mills, Inc. .................................................................... 3,026,356
159,950 H.J. Heinz Co. ......................................................................... 7,387,691
35,200 Unilever NV (New York shares) .......................................................... 7,484,400
-----------
17,898,447
-----------
Package Goods / Cosmetics 1.0%
124,700 Kimberly-Clark Corp. ................................................................... 6,102,506
-----------
Health 3.8%
Pharmaceuticals
47,600 American Home Products Corp. ........................................................... 3,474,800
67,600 Baxter International Inc. .............................................................. 3,532,100
67,200 Bristol-Myers Squibb Co. ............................................................... 5,560,800
70,800 Schering-Plough Corp. .................................................................. 3,646,200
78,400 SmithKline Beecham PLC (ADR) ........................................................... 3,831,800
122,100 Zeneca Group PLC ....................................................................... 3,987,442
-----------
24,033,142
-----------
Communications 4.4%
Telephone / Communications
111,500 Alltel Corp. ........................................................................... 3,846,750
94,932 Bell Atlantic Corp. .................................................................... 7,636,093
83,200 BellSouth Corp. ........................................................................ 3,848,000
113,500 Frontier Corp. ......................................................................... 2,610,500
126,500 GTE Corp. .............................................................................. 5,739,938
79,400 Sprint Corp. ........................................................................... 3,970,000
100,000 Telecom Corp. of New Zealand ........................................................... 507,395
-----------
28,158,676
-----------
Financial 14.2%
Banks 6.7%
71,500 Banc One Corp. ......................................................................... 3,990,594
43,500 Bankers Trust New York Corp. ........................................................... 5,328,750
</TABLE>

The accompanying notes are an integral part of the financial statements

72
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
11,700 Centura Banks, Inc. .................................................................... 644,231
64,800 Chase Manhattan Corp. .................................................................. 7,646,400
52,800 CoreStates Financial Corp. ............................................................. 3,494,700
24,800 First American Corp. ................................................................... 1,212,100
12,300 First Tennessee National Corp. ......................................................... 701,100
44,100 First Union Corp. ...................................................................... 2,207,756
92,400 Firstar Corp. .......................................................................... 3,349,500
34,100 J.P. Morgan & Co., Inc. ................................................................ 3,874,613
67,600 KeyCorp ................................................................................ 4,301,050
35,500 Old Kent Financial Corp. ............................................................... 2,289,750
34,700 US Bancorp ............................................................................. 3,348,550
-----------
42,389,094
-----------
Insurance 2.4%
62,600 EXEL, Ltd. (ADR) ....................................................................... 3,728,613
73,300 Lincoln National Corp. ................................................................. 5,103,513
42,100 Mid Ocean, Ltd. ........................................................................ 2,668,088
72,400 Safeco Corp. ........................................................................... 3,837,200
-----------
15,337,414
-----------
Consumer Finance 0.5%
22,100 SLM Holding Corp. ...................................................................... 3,414,450
-----------
Other Financial Companies 0.3%
44,800 Federal National Mortgage Association .................................................. 2,105,600
-----------
Real Estate 4.3%
75,700 Arden Realty Group, Inc. ............................................................... 2,375,088
137,600 Equity Office Properties Trust (REIT) .................................................. 4,669,800
116,100 General Growth Properties, Inc. (REIT) ................................................. 4,295,700
66,600 Health Care Property Investment Inc. (REIT) ............................................ 2,580,750
61,700 Meditrust SBI (REIT) ................................................................... 2,560,550
101,600 Nationwide Health Properties Inc. (REIT) ............................................... 2,444,750
26,000 Omega Healthcare Investors (REIT) ...................................................... 936,000
243,962 Security Capital Atlantic Inc. ......................................................... 5,458,650
88,454 Security Capital Industrial Trust (REIT) ............................................... 2,062,084
22,593 Security Capital Industrial Trust Warrants (expire 9/18/98) ............................ 180,744
-----------
27,564,116
-----------
Durables 3.8%
Aerospace 1.2%
28,309 Lockheed Martin Corp. .................................................................. 3,018,447
70,100 Rockwell International Corp. ........................................................... 4,411,919
-----------
7,430,366
-----------
Automobiles 2.1%
93,400 Dana Corp. ............................................................................. 4,611,625
20,800 Eaton Corp. ............................................................................ 1,921,400
160,800 Ford Motor Co. ......................................................................... 7,276,200
-----------
13,809,225
-----------
Construction / Agricultural Equipment 0.5%
56,900 PACCAR, Inc. ........................................................................... 3,186,400
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

73
<PAGE>

AARP BALANCED STOCK AND BOND FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Manufacturing 10.3%
Chemicals 2.7%
22,400 Akso Nobel N.V. (ADR) .................................................................. 1,918,000
22,800 Dow Chemical Co. ....................................................................... 2,067,675
19,400 E.I. du Pont de Nemours & Co. .......................................................... 1,194,313
63,600 Eastman Chemical Co. ................................................................... 3,943,200
121,400 Imperial Chemical Industries PLC (ADR) (New) ........................................... 8,027,575
-----------
17,150,763
-----------
Containers & Paper 0.5%
2,643 Boise Cascade Corp. .................................................................... 111,171
82,100 Westvaco Corp. ......................................................................... 2,960,731
-----------
3,071,902
-----------
Diversified Manufacturing 1.9%
82,600 Olin Corp. ............................................................................. 3,866,713
153,200 TRW Inc. ............................................................................... 8,406,850
-----------
12,273,563
-----------
Electrical Products 2.1%
123,600 Philips Electronics NV (New York shares) ............................................... 10,382,400
57,100 Thomas & Betts Corp. ................................................................... 3,119,088
-----------
13,501,488
-----------
Industrial Specialty 0.1%
16,100 Corning Inc. ........................................................................... 760,725
-----------
Office Equipment / Supplies 1.7%
126,000 Xerox Corp. ............................................................................ 10,607,625
-----------
Specialty Chemicals 1.3%
55,300 BetzDearborn Inc. ...................................................................... 3,781,138
101,100 Witco Corp. ............................................................................ 4,612,688
-----------
8,393,826
-----------
Technology 0.3%
Electronic Components / Distributors
40,100 AMP Inc. ............................................................................... 2,147,856
-----------
Energy 4.8%
Oil Companies 4.4%
28,600 Exxon Corp. ............................................................................ 1,832,188
93,300 Lyondell Petrochemical Co. ............................................................. 2,443,294
8,500 Pennzoil Co. ........................................................................... 677,344
60,000 Royal Dutch Petroleum Co. (New York shares) ............................................ 3,330,000
90,381 Societe Nationale Elf Aquitaine (ADR) .................................................. 6,027,283
93,800 Texaco Inc. ............................................................................ 5,762,838
70,201 Total SA (ADR) ......................................................................... 4,023,395
109,500 YPF S.A. "D" (ADR) ..................................................................... 4,037,813
-----------
28,134,155
-----------
Oil / Gas Transmission 0.4%
51,800 Williams Cos., Inc. .................................................................... 2,424,888
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

74
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Metals & Minerals 1.6%
Steel & Metals
114,435 Allegheny Teledyne Inc. ................................................................ 3,275,702
99,000 Freeport McMoRan Copper & Gold, Inc. "A" ............................................... 2,728,688
101,500 Oregon Steel Mills, Inc. ............................................................... 2,753,188
21,900 Phelps Dodge Corp. ..................................................................... 1,699,988
-----------
10,457,566
-----------
Construction 1.9%
Building Materials 0.3%
46,653 Martin Marietta Materials, Inc. ........................................................ 1,679,508
-----------
Forest Products 1.6%
51,800 Georgia Pacific Corp. .................................................................. 5,406,625
73,900 Louisiana-Pacific Corp. ................................................................ 1,847,500
48,700 Weyerhaeuser Co. ....................................................................... 2,891,563
-----------
10,145,688
-----------
Transportation 1.4%
Marine Transportation 0.6%
137,500 Knightsbridge Tankers Ltd. ............................................................. 3,892,969
-----------
Railroads 0.8%
59,900 CSX Corp. .............................................................................. 3,504,150
15,500 Canadian National Railway .............................................................. 805,668
14,300 Union Pacific Corp. .................................................................... 895,538
-----------
5,205,356
-----------
Utilities 4.4%
Electric Utilities 3.8%
71,400 CINergy Corp. .......................................................................... 2,387,437
20,700 CMS Energy Corp. ....................................................................... 765,900
110,289 Duke Energy Corp. ...................................................................... 5,452,412
63,000 PacifiCorp ............................................................................. 1,409,625
105,200 PG & E Corporation ..................................................................... 2,439,325
38,900 PowerGen PLC (ADR) ..................................................................... 1,915,825
216,500 TNP Enterprises Inc. ................................................................... 5,439,563
114,400 Unicom Corp. ........................................................................... 2,674,100
59,600 Wisconsin Energy Corp. ................................................................. 1,549,600
-----------
24,033,787
-----------
Natural Gas Distribution 0.6%
115,300 MCN Energy Group, Inc. ................................................................. 3,689,600
-----------
Total Common Stocks (Cost $260,773,738) ................................................ 374,389,033
-----------

<S> <C> <C>
Total Investment Portfolio (Cost $513,273,979) (a) .................... 99.4 634,477,699
Other Assets and Liabilities, Net ..................................... 0.6 3,878,558
----- -----------
Net Assets ............................................................ 100.0 638,356,257
===== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements

75
<PAGE>

AARP BALANCED STOCK AND BOND FUND

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

* Non income producing security

** Effective maturities will be shorter due to prepayments.

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

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $513,246,352 was as
follows:

Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ......................................... $ 121,979,635

Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value ....................................... (748,288)
-------------
Net unrealized appreciation ........................... $ 121,231,347
=============

(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $317,200 (.05% of net assets). Their values have been
estimated by the Board of Trustees in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation,
those estimated values may differ significantly from the values that would
have been used had a ready market for the securities existed, and the
difference could be material. The cost of these securities was $295,244 at
September 30, 1997. These securities may also have certain restrictions as
to resale.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments, and U.S. Government and U.S. Government agencies'
obligations) for the year ended September 30, 1997 aggregated $193,993,681
and $109,398,379, respectively. Purchases and sales of U.S. Government and
U.S. Government agencies' obligations aggregated $19,648,049 and
$18,561,811, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

76
<PAGE>

AARP GROWTH AND INCOME FUND

9,855,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 9/30/97 at 6.02% to be repurchased at $9,856,648 on
10/01/97, collateralized by a $8,374,000 U.S. Treasury
Bond, 9.125%, 5/15/09 (Cost $9,855,000) ..................................... 9,855,000
------------

- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 2.0%
- -----------------------------------------------------------------------------------------------------------------

33,000,000 Associates Corp. of North America, Discount Note, 10/01/97 ..................... 33,000,000
35,000,000 General Electric Capital Corp., Discount Note, 10/03/97 ........................ 34,989,150
20,000,000 Norwest Financial Corp., Discount Note, 10/01/97 ............................... 20,000,000
44,000,000 Omnicom Finance Inc., Discount Note, 10/07/97 .................................. 43,958,787
------------
Total Commercial Paper (Cost $131,947,937) ..................................... 131,947,937
------------

- -----------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT 0.4%
- -----------------------------------------------------------------------------------------------------------------

25,000,000 Fifth Third Bancorp., 5.52%, 10/09/97 (Cost $25,000,000) ....................... 24,999,576
------------

- -----------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 4.3%
- -----------------------------------------------------------------------------------------------------------------

Consumer Discretionary 0.9%
Department & Chain Stores
12,550,000 Federated Department Stores, Inc., Debenture, 5%, 10/01/03 ..................... 16,911,125
34,500,000 Home Depot Inc., 3.25%, 10/01/01 ............................................... 42,262,500
------------
59,173,625
------------
Consumer Staples 0.5%
Miscellaneous
490,000 Ralston Purina Group, 7%, 8/01/00 .............................................. 33,013,750
------------
Health 0.1%
Pharmaceuticals
6,260,000 Sandoz Capital BVI Ltd., Debenture, 2%, 10/06/02 ............................... 9,170,900
------------
Communications 0.0%
Telephone / Communications
1,000,000 Compania de Telefonos de Chile, S.A., 4.5%, 1/15/03 ............................ 1,682,500
------------
Financial 1.5%
Banks 1.0%
102,590,000 Deutsche Bank Financial Inc., Convertible to Daimler Benz AG shares,
Zero Coupon, 2/12/17 ........................................................ 48,089,063
17,290,000 MBL International Finance Bermuda, 3%, 11/30/02 ................................ 18,846,100
------------
66,935,163
------------
Other Financial Companies 0.2%
5,200,000 First Financial Management Corp., Debenture, 5%, 12/15/99 ...................... 9,165,000
------------
Real Estate 0.3%
18,250,000 Security Capital Group, Inc., 6.5%, 3/29/16 (b) (c) ............................ 22,585,146
------------
</TABLE>

The accompanying notes are an integral part of the financial statements

77
<PAGE>

AARP GROWTH AND INCOME FUND

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

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Service Industries 0.8%
Miscellaneous Commercial Services 0.6%
25,000,000 ADT Operations Inc., Liquid Yield Option Note, Zero Coupon, 7/06/10 ............ 27,843,750
7,036,000 Jardine Strategic Holdings Ltd., 7.5%, 5/07/49 (b) ............................. 8,583,920
------------
36,427,670
------------
Miscellaneous Consumer Services 0.2%
14,000,000 CUC International Inc., 3%, 2/15/02 ............................................ 16,205,000
------------
Durables 0.2%
Automobiles
6,800,000 Magna International, Inc., 5%, 10/15/02 ........................................ 8,967,500
------------
Manufacturing 0.1%
Diversified Manufacturing
5,000,000 Thermo Electron Corp., 4.25%, 1/01/03 .......................................... 5,825,000
------------
Technology 0.2%
Electronic Components / Distributors 0.1%
5,700,000 HMT Technology Corp., 5.75%, 1/15/04 ........................................... 5,400,750
------------
EDP Peripherals 0.1%
5,500,000 Adaptec Inc., 4.75%, 2/01/04 ................................................... 6,215,000
------------
Total Convertible Bonds (Cost $226,034,527) .................................... 280,767,004
------------

- -----------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 1.6%
- -----------------------------------------------------------------------------------------------------------------

Shares
- ---------------
Consumer Discretionary 0.8%
Department & Chain Stores
956,200 K Mart 7.75% ................................................................... 55,937,700
------------
Financial 0.2%
Consumer Finance 0.1%
129,000 Advanta Corp. 6.75% ............................................................ 3,999,000
------------
Real Estate 0.1%
321,500 Security Capital Industrial Trust "B", 7% ...................................... 9,725,375
------------
Manufacturing 0.4%
Containers & Paper 0.1%
50,200 International Paper Co. 5.25% .................................................. 2,836,300
------------
Industrial Specialty 0.2%
652,400 Cooper Industries, Inc. 6% ..................................................... 15,005,200
------------
Office Equipment / Supplies 0.1%
102,800 Ikon Office Solutions, Inc., 5.04% ............................................. 6,630,600
------------
Metals & Minerals 0.2%
Precious Metals
500,000 Freeport McMoRan Copper & Gold, Inc., Cum. $1.25 ............................... 13,843,750
------------
Total Convertible Preferred Stocks (Cost $96,396,839) .......................... 107,977,925
------------
</TABLE>

The accompanying notes are an integral part of the financial statements

78
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.1%
- -----------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Consumer Discretionary 4.5%
Department & Chain Stores
767,200 J.C. Penney Co., Inc. .......................................................... 44,689,400
782,700 May Department Stores .......................................................... 42,657,150
861,450 Mercantile Stores, Inc. ........................................................ 54,217,509
1,589,100 Rite Aid Corp. ................................................................. 88,095,731
1,257,200 Sears, Roebuck & Co. ........................................................... 71,581,825
------------
301,241,615
------------
Consumer Staples 7.8%
Consumer Electronic & Photographic Products 1.7%
1,656,000 Whirlpool Corp. ................................................................ 109,813,500
------------
Food & Beverage 4.5%
598,400 General Mills, Inc. ............................................................ 41,252,200
2,720,200 H.J. Heinz Co. ................................................................. 125,639,237
105,000 Unilever NV .................................................................... 22,412,944
515,200 Unilever NV (New York shares) .................................................. 109,544,400
------------
298,848,781
------------
Package Goods / Cosmetics 1.6%
2,154,000 Kimberly-Clark Corp. ........................................................... 105,411,375
------------
Health 5.8%
Pharmaceuticals
772,800 American Home Products Corp. ................................................... 56,414,400
1,166,300 Baxter International Inc. ...................................................... 60,939,175
1,154,000 Bristol-Myers Squibb Co. ....................................................... 95,493,500
1,208,800 Schering-Plough Corp. .......................................................... 62,253,200
1,322,600 SmithKline Beecham PLC (ADR) ................................................... 64,642,075
1,446,900 Zeneca Group PLC ............................................................... 47,251,676
------------
386,994,026
------------
Communications 7.2%
Telephone / Communications
1,896,300 Alltel Corp. ................................................................... 65,422,350
1,648,840 Bell Atlantic Corp. ............................................................ 132,628,567
1,424,000 BellSouth Corp. ................................................................ 65,860,000
1,976,900 Frontier Corp. ................................................................. 45,468,700
2,126,300 GTE Corp. ...................................................................... 96,480,862
1,164,600 Sprint Corp. ................................................................... 58,230,000
2,036,000 Telecom Corp. of New Zealand ................................................... 10,330,556
------------
474,421,035
------------
Financial 19.5%
Banks 10.2%
1,215,500 Banc One Corp. ................................................................. 67,840,094
251,000 BankAmerica Corp. .............................................................. 18,401,437
670,300 Bankers Trust New York Corp. ................................................... 82,111,750
1,119,000 Chase Manhattan Corp. .......................................................... 132,042,000
</TABLE>

The accompanying notes are an integral part of the financial statements

79
<PAGE>

AARP GROWTH AND INCOME FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------

<C> <S> <C>
983,800 CoreStates Financial Corp. ..................................................... 65,115,262
299,400 First Chicago NBD Corp. ........................................................ 22,529,850
755,100 First Union Corp. .............................................................. 37,802,194
574,800 J.P. Morgan & Co., Inc. ........................................................ 65,311,650
980,200 KeyCorp ........................................................................ 62,365,225
1,098,600 NationsBank Corp. .............................................................. 67,975,875
643,500 US Bancorp ..................................................................... 62,097,750
------------
683,593,087
------------
Insurance 3.8%
979,100 EXEL Ltd. (ADR) ................................................................ 58,317,644
1,110,200 Lincoln National Corp. ......................................................... 77,297,675
754,300 Mid Ocean Limited .............................................................. 47,803,763
1,248,400 Safeco Corp. ................................................................... 66,165,200
------------
249,584,282
------------
Consumer Finance 0.9%
381,200 SLM Holding Corp. .............................................................. 58,895,400
------------
Other Financial Companies 0.6%
789,400 Federal National Mortgage Association .......................................... 37,101,800
------------
Real Estate 4.0%
245,800 Avalon Properties, Inc. (REIT) ................................................. 7,312,550
386,200 Camden Property Trust (REIT) ................................................... 11,827,375
2,004,900 General Growth Properties, Inc. (REIT) (d) ..................................... 74,181,300
409,800 Health Care Property Investment Inc. (REIT) .................................... 15,879,750
31,100 Mark Centers Trust (REIT) ...................................................... 293,506
457,900 Meditrust SBI (REIT) ........................................................... 19,002,850
680,800 Nationwide Health Properties Inc. (REIT) ....................................... 16,381,750
71,200 Post Properties Inc. (REIT) .................................................... 2,830,200
17,398 Security Capital Group, Inc. (b) (c) ........................................... 24,843,660
1,485,172 Security Capital Industrial Trust (REIT) ....................................... 34,623,072
88,318 Security Capital Industrial Trust Warrants (expire 9/1/98)* .................... 706,544
2,688,521 Security Capital US Realty (REIT) .............................................. 40,058,963
150,000 Spieker Properties, Inc. ....................................................... 6,084,375
102,100 Vornado Realty Trust (REIT) .................................................... 8,672,119
------------
262,698,014
------------
Durables 6.4%
Aerospace 1.9%
445,323 Lockheed Martin Corp. .......................................................... 47,482,565
1,195,100 Rockwell International Corp. (New) ............................................. 75,216,606
------------
122,699,171
------------
Automobiles 3.7%
1,609,000 Dana Corp. ..................................................................... 79,444,375
444,100 Eaton Corp. .................................................................... 41,023,737
2,798,000 Ford Motor Co. ................................................................. 126,609,500
------------
247,077,612
------------
Construction / Agricultural Equipment 0.8%
996,800 PACCAR, Inc. ................................................................... 55,820,800
------------
</TABLE>

The accompanying notes are an integral part of the financial statements

80
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Manufacturing 18.1%
Chemicals 5.3%
474,115 Akzo-Nobel NV .................................................................. 81,024,326
518,300 Dow Chemical Co. ............................................................... 47,003,331
328,100 E.I. du Pont de Nemours & Co. .................................................. 20,198,656
945,000 Eastman Chemical Co. ........................................................... 58,590,000
8,662,000 Imperial Chemical Industries PLC ............................................... 140,710,473
------------
347,526,786
------------
Containers & Paper 0.7%
49,581 Boise Cascade Corp. ............................................................ 2,085,501
1,200,000 Westvaco Corp. ................................................................. 43,275,000
------------
45,360,501
------------
Diversified Manufacturing 3.2%
1,404,600 Olin Corp. ..................................................................... 65,752,837
2,654,000 TRW Inc. ....................................................................... 145,638,250
------------
211,391,087
------------
Electrical Products 3.8%
1,863,400 Philips Electronics NV ......................................................... 157,678,790
428,300 Philips Electronics NV (New York shares) ....................................... 35,977,200
1,014,600 Thomas & Betts Corp. ........................................................... 55,422,525
------------
249,078,515
------------
Machinery / Components / Controls 0.4%
925,000 S.K.F. AB "B" (Free) ........................................................... 26,942,339
------------
Office Equipment / Supplies 2.7%
2,152,900 Xerox Corp. .................................................................... 181,247,269
------------
Specialty Chemicals 2.0%
204,800 ARCO Chemical Co. .............................................................. 9,318,400
709,000 BetzDearborn Inc. .............................................................. 48,477,875
1,649,900 Witco Corp. .................................................................... 75,276,688
------------
133,072,963
------------
Technology 0.6%
Electronic Components / Distributors
673,000 AMP Inc. ....................................................................... 36,047,562
------------
Energy 8.6%
Oil Companies 8.0%
494,800 Exxon Corp. .................................................................... 31,698,125
1,254,000 Lyondell Petrochemical Co. ..................................................... 32,839,125
461,000 Pennzoil Co. ................................................................... 36,735,937
1,058,800 Royal Dutch Petroleum Co. (New York shares) .................................... 58,763,400
759,800 Societe Nationale Elf Aquitaine ................................................ 101,417,646
1,620,400 Texaco Inc. .................................................................... 99,553,325
558,448 Total SA "B" ................................................................... 63,905,990
569,496 Total SA (ADR) ................................................................. 32,639,240
1,844,200 YPF S.A. "D" (ADR) ............................................................. 68,004,875
------------
525,557,663
------------
</TABLE>

The accompanying notes are an integral part of the financial statements

81
<PAGE>

AARP GROWTH AND INCOME FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Oil / Gas Transmission 0.6%
899,000 Williams Cos., Inc. ............................................................ 42,084,438
-------------
Metals & Minerals 1.9%
Steel & Metals
2,081,910 Allegheny Teledyne Inc. ........................................................ 59,594,674
579,010 Freeport McMoRan Copper & Gold, Inc. "A" ....................................... 15,958,963
1,879,100 J & L Specialty Steel, Inc. .................................................... 25,250,406
297,500 Phelps Dodge Corp. ............................................................. 23,093,438
-------------
123,897,481
-------------
Construction 2.7%
Building Materials 0.4%
774,955 Martin Marietta Materials, Inc. ................................................ 27,898,380
-------------
Forest Products 2.3%
817,000 Georgia Pacific Corp. .......................................................... 85,274,375
512,200 Louisiana-Pacific Corp. ........................................................ 12,805,000
851,600 Weyerhaeuser Co. ............................................................... 50,563,750
-------------
148,643,125
-------------
Transportation 1.6%
Railroads
1,032,900 CSX Corp. ...................................................................... 60,424,650
295,950 Canadian National Railway Co. .................................................. 15,383,063
141,100 Norfolk Southern Corp. ......................................................... 14,568,575
241,900 Union Pacific Corp. ............................................................ 15,148,988
-------------
105,525,276
-------------
Utilities 6.4%
Electric Utilities
1,241,200 CINergy Corp. .................................................................. 41,502,625
261,200 CMS Energy Corp. ............................................................... 9,664,400
1,819,120 Duke Energy Corp. .............................................................. 89,932,745
1,054,200 Long Island Lighting Co. ....................................................... 27,013,875
1,080,200 PacifiCorp ..................................................................... 24,169,475
1,951,600 PG & E Corporation ............................................................. 45,252,725
5,986,000 PowerGen PLC ................................................................... 73,753,689
670,603 PowerGen PLC (ADR) ............................................................. 33,027,198
2,176,300 Unicom Corp. ................................................................... 50,871,014
952,800 Wisconsin Energy Corp. ......................................................... 24,772,800
-------------
419,960,546
-------------
Total Common Stocks (Cost $3,954,215,554) ...................................... 6,018,434,429
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

82
<PAGE>

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

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Total Investment Portfolio (Cost $4,443,449,857) (a) ...................... 99.5 6,573,981,871
Other Assets and Liabilities, Net ......................................... 0.5 32,031,026
------ --------------
Net Assets ................................................................ 100.0 6,606,012,897
====== ==============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Non income producing security

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $4,440,901,206 was as
follows:

Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ....... $2,140,784,862

Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ....... (7,704,197)
--------------

Net unrealized appreciation .............................. $2,133,080,665
==============

(b) Securities valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $56,012,726 (0.85% of net assets). Their values have
been estimated by the Board of Trustees in the absence of readily
ascertainable market values. However, because of the inherent uncertainty
of valuation, those estimated values may differ significantly from the
values that would have been used had a ready market for the securities
existed, and the difference could be material. The cost of these
securities at September 30, 1997 was $44,449,203. These securities may
also have certain restrictions as to resale.

(c) Restricted Securities -- securities which have not been registered with
the Securities and Exchange Commission under the Securities Act of 1933.
Information concerning such restricted securities at September 30, 1997 is
as follows:

Security Acquisition Date Cost ($)
-------- ---------------- --------
Security Capital Group, Inc. 4/19/96 18,250,000
Security Capital Group, Inc., 6.5%, 3/29/16 4/19/96 18,250,000

(d) Affiliated Issuer (See Notes to Financial Statements)

- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$2,283,895,347 and $1,713,417,767, respectively.
- --------------------------------------------------------------------------------

Transactions in written call options on securities during the year ended
September 30, 1997 were:

Contracts Premiums Received ($)
--------- ---------------------

Outstanding at September 30, 1996 400 19,199

Contracts written -- --

Contracts expired (400) (19,199)

--------------------------------------
Outstanding at September 30, 1997 -- --
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

83
<PAGE>

AARP U.S. STOCK INDEX FUND

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 3.1%
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
1,179,000 Repurchase Agreement with State Street Bank and Trust Company dated 9/30/97
at 6% to be repurchased at $1,179,197 on 10/01/97, collateralized by a $1,150,000
U.S. Treasury Bond, 6.75%, 8/15/26 (Cost $1,179,000) 1,179,000
-----------

- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY 0.2%
- -------------------------------------------------------------------------------------------------------------------------------

65,000 U.S. Treasury Bill, 5.12%, 10/02/97 (Cost $64,991) 64,995
-----------

- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 92.9%
- -------------------------------------------------------------------------------------------------------------------------------

Shares
- ---------------
Consumer Discretionary 4.9%
Apparel & Shoes 0.1%
100 Fruit of the Loom, Inc. "A"* .............................................................. 2,813
100 Liz Claiborne Inc. ........................................................................ 5,494
200 Nike, Inc. "B" ............................................................................ 10,600
2,000 Stride Rite Corp. ......................................................................... 27,125
-----------
46,032
-----------
Department & Chain Stores 4.1%
600 CVS Corp. ................................................................................. 34,115
100 Charming Shoppes Inc.* .................................................................... 616
1,500 Dayton Hudson Corp. ....................................................................... 89,906
100 Dillard's Inc. ............................................................................ 4,381
100 Federated Department Stores, Inc.* ........................................................ 4,313
1,200 Gap Inc. .................................................................................. 60,075
3,000 Home Depot, Inc. .......................................................................... 156,365
4,300 J.C. Penney Co., Inc. ..................................................................... 250,475
400 K mart Corp. .............................................................................. 5,600
2,500 Limited Inc. .............................................................................. 61,094
300 Longs Drug Stores, Inc. ................................................................... 8,006
200 Lowe's Companies, Inc. .................................................................... 7,775
2,100 May Department Stores ..................................................................... 114,440
100 Mercantile Stores, Inc. ................................................................... 6,294
200 Nordstrom, Inc. ........................................................................... 12,750
500 Costco Companies, Inc. .................................................................... 18,813
1,100 Rite Aid Corp. ............................................................................ 60,981
2,900 Sears, Roebuck & Co. ...................................................................... 165,119
900 TJX Companies, Inc. (New) ................................................................. 27,506
11,300 Wal-Mart Stores Inc. ...................................................................... 413,863
2,700 Walgreen Co. .............................................................................. 69,188
100 Woolworth Corp.* .......................................................................... 2,213
-----------
1,573,888
-----------
Home Furnishings 0.2%
600 Newell Companies Inc. ..................................................................... 24,000
1,300 Rubbermaid, Inc. .......................................................................... 33,231
</TABLE>

The accompanying notes are an integral part of the financial statements

84
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
400 Tupperware Corp. .......................................................................... 11,250
-----------
68,481
-----------
Hotels & Casinos 0.1%
200 HFS, Inc.* ................................................................................ 14,888
100 Harrah's Entertainment, Inc.* ............................................................. 2,244
300 Hilton Hotels Corp. ....................................................................... 10,106
100 ITT Corp.* ................................................................................ 6,775
100 Marriott International, Inc. .............................................................. 7,106
-----------
41,119
-----------
Recreational Products 0.2%
700 Brunswick Corp. ........................................................................... 24,675
250 Hasbro, Inc. .............................................................................. 7,031
1,400 Mattel Inc. ............................................................................... 46,375
-----------
78,081
-----------
Restaurants 0.1%
100 Darden Restaurants Inc. ................................................................... 1,156
900 McDonald's Corp. .......................................................................... 42,863
100 Wendy's International, Inc. ............................................................... 2,125
-----------
46,144
-----------
Specialty Retail 0.1%
100 AutoZone, Inc.* ........................................................................... 3,000
100 Circuit City Stores Inc. .................................................................. 4,031
100 Pep Boys - Manny, Moe & Jack .............................................................. 2,725
800 Tandy Corp. ............................................................................... 26,900
100 Toys "R" Us Inc.* ......................................................................... 3,550
-----------
40,206
-----------
Consumer Staples 8.6%
Alcohol 0.4%
2,400 Anheuser-Busch Companies, Inc. ............................................................ 108,290
800 Seagram Co., Ltd. ......................................................................... 28,200
-----------
136,490
-----------
Consumer Electronic & Photographic Products 0.4%
1,300 Eastman Kodak Co. ......................................................................... 84,419
1,100 Maytag Corp. .............................................................................. 37,538
500 Whirlpool Corp. ........................................................................... 33,156
-----------
155,113
-----------
Consumer Specialties 0.3%
100 American Greeting Corp., "A" .............................................................. 3,688
3,600 Jostens, Inc. ............................................................................. 97,650
-----------
101,338
-----------
Farming 0.0%
105 Archer-Daniels-Midland Co. ................................................................ 2,513
100 Pioneer Hi-Bred International, Inc. ....................................................... 9,100
-----------
11,613
-----------
Food & Beverage 4.3%
100 Albertson's Inc. .......................................................................... 3,488
</TABLE>

The accompanying notes are an integral part of the financial statements

85
<PAGE>

AARP U.S. STOCK INDEX FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
200 American Stores Co. ....................................................................... 4,875
100 CPC International Inc. .................................................................... 9,263
1,800 Campbell Soup Co. ......................................................................... 88,200
8,100 Coca-Cola Co., Inc. (b) ................................................................... 493,594
600 ConAgra Inc. .............................................................................. 39,600
1,700 General Mills, Inc. ....................................................................... 117,194
100 Giant Food, Inc. "A" ...................................................................... 3,256
2,300 H.J. Heinz Co. ............................................................................ 106,231
100 Hershey Foods Corp. ....................................................................... 5,650
1,700 Kellogg Co. ............................................................................... 71,613
200 Kroger Co. ................................................................................ 6,038
7,400 PepsiCo, Inc. ............................................................................. 300,163
1,300 Quaker Oats Co. ........................................................................... 65,488
200 Ralston Purina Group ...................................................................... 17,700
700 SUPERVALU, Inc. ........................................................................... 27,475
1,000 Unilever NV (New York shares) ............................................................. 212,625
100 William Wrigley Jr. Co. ................................................................... 7,531
1,700 Winn-Dixie Stores, Inc. ................................................................... 60,244
-----------
1,640,228
-----------
Package Goods / Cosmetics 3.0%
1,200 Avon Products Inc. ........................................................................ 74,400
800 Clorox Co. ................................................................................ 59,300
2,100 Colgate-Palmolive Co. ..................................................................... 146,334
2,800 Gillette Co. .............................................................................. 241,675
1,300 International Flavors & Fragrances, Inc. .................................................. 63,700
1,400 Kimberly-Clark Corp. ...................................................................... 68,513
7,400 Procter & Gamble Co. ...................................................................... 511,063
-----------
1,164,985
-----------
Textiles 0.2%
200 Springs Industries, Inc. "A" .............................................................. 10,500
600 VF Corporation ............................................................................ 55,575
-----------
66,075
-----------
Health 10.3%
Biotechnology 0.2%
100 Alza Corp. "A" ............................................................................ 2,900
200 Amgen Inc. ................................................................................ 9,588
1,000 Guidant Corp. ............................................................................. 56,000
-----------
68,488
-----------
Health Industry Services 0.2%
1,300 HEALTHSOUTH Corp. ......................................................................... 34,694
100 Humana, Inc.* ............................................................................. 2,381
200 Shared Medical Systems Corp. .............................................................. 10,575
600 United Healthcare Corp. ................................................................... 30,000
-----------
77,650
-----------
Hospital Management 0.1%
400 Columbia/HCA Healthcare Corp. ............................................................. 11,500
100 Manor Care, Inc. .......................................................................... 3,325
</TABLE>

The accompanying notes are an integral part of the financial statements

86
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
200 Tenet Healthcare Corp.* ................................................................... 5,825
-----------
20,650
-----------
Medical Supply & Specialty 0.7%
1,500 Bausch & Lomb, Inc. ....................................................................... 60,750
200 Becton, Dickinson & Co. ................................................................... 9,575
100 Biomet Inc. ............................................................................... 2,400
900 Boston Scientific Corp.* .................................................................. 49,669
700 C.R. Bard, Inc. ........................................................................... 23,756
100 Mallinckrodt, Inc. ........................................................................ 3,600
2,400 Medtronic Inc. ............................................................................ 112,800
100 St. Jude Medical, Inc.* ................................................................... 3,506
400 U.S. Surgical Corp. ....................................................................... 11,675
-----------
277,731
-----------
Pharmaceuticals 9.1%
4,400 Abbott Laboratories ....................................................................... 281,325
100 Allergan, Inc. ............................................................................ 3,619
3,800 American Home Products Corp. .............................................................. 277,400
3,200 Baxter International Inc. ................................................................. 167,200
5,900 Bristol-Myers Squibb Co. .................................................................. 488,225
3,100 Eli Lilly & Co. ........................................................................... 373,356
4,300 Johnson & Johnson ......................................................................... 247,788
6,600 Merck & Co. Inc. .......................................................................... 659,588
6,400 Pfizer, Inc. .............................................................................. 384,400
3,700 Pharmacia & Upjohn, Inc. .................................................................. 135,050
4,000 Schering-Plough Corp. ..................................................................... 206,000
1,800 Warner-Lambert Co. ........................................................................ 242,888
-----------
3,466,839
-----------
Communications 5.8%
Cellular Telephone 0.0%
100 AirTouch Communications, Inc.* ............................................................ 3,544
-----------
Telephone / Communications 5.8%
1,100 Alltel Corp. .............................................................................. 37,950
10,100 American Telephone & Telegraph Co. ........................................................ 447,556
2,200 Ameritech Corp. ........................................................................... 146,300
5,104 Bell Atlantic Corp. ....................................................................... 410,553
3,500 BellSouth Corp. ........................................................................... 161,875
2,100 Frontier Corp. ............................................................................ 48,300
3,300 GTE Corp. ................................................................................. 149,738
100 MCI Communications Corp. .................................................................. 2,938
3,419 SBC Communicatons, Inc. ................................................................... 209,841
100 Sprint Corp. .............................................................................. 5,000
9,900 US West Inc.* ............................................................................. 381,150
5,500 WorldCom, Inc.* ........................................................................... 194,563
-----------
2,195,764
-----------
Financial 14.0%
Banks 8.2%
3,800 Banc One Corp. ............................................................................ 212,088
1,900 Bank of New York Co., Inc. ................................................................ 91,200
</TABLE>

The accompanying notes are an integral part of the financial statements

87
<PAGE>

AARP U.S. STOCK INDEX FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
3,300 BankAmerica Corp. ......................................................................... 241,931
1,000 BankBoston Corp. .......................................................................... 88,438
900 Barnett Banks, Inc. ....................................................................... 63,675
2,500 Chase Manhattan Corp. ..................................................................... 295,000
2,300 Citicorp .................................................................................. 308,056
500 Comerica Inc. ............................................................................. 39,469
2,200 CoreStates Financial Corp. ................................................................ 145,613
150 Fifth Third Bancorp. ...................................................................... 9,806
1,500 First Chicago NBD Corp. ................................................................... 112,875
3,100 First Union Corp. ......................................................................... 155,194
1,800 Fleet Financial Group, Inc. ............................................................... 118,013
100 H.F. Ahmanson & Co. ....................................................................... 5,681
1,400 J.P. Morgan & Co., Inc. ................................................................... 159,075
1,500 KeyCorp ................................................................................... 95,438
2,300 MBNA Corp. ................................................................................ 93,150
2,600 Mellon Bank Corp. ......................................................................... 142,350
1,900 National City Corp. ....................................................................... 116,969
2,700 NationsBank Corp. ......................................................................... 167,063
1,400 Norwest Corp. ............................................................................. 85,750
3,100 PNC Bank Corp. ............................................................................ 151,319
100 SunTrust Banks, Inc. ...................................................................... 6,794
902 US Bancorp ................................................................................ 87,043
900 Wachovia Corp. ............................................................................ 64,800
460 Washington Mutual, Inc. ................................................................... 32,085
100 Wells Fargo & Co. ......................................................................... 27,500
-----------
3,116,375
-----------
Insurance 3.1%
100 Aetna Inc. ................................................................................ 8,144
1,600 Allstate Corp. ............................................................................ 128,600
1,900 American General Corp. .................................................................... 98,563
2,300 American International Group, Inc. ........................................................ 237,331
1,550 Aon Corp. ................................................................................. 81,956
200 Chubb Corp. ............................................................................... 14,213
300 Cigna Corp. ............................................................................... 55,875
800 Conseco Inc. .............................................................................. 39,050
100 General Re Corp. .......................................................................... 19,850
200 Hartford Financial Services Group Inc. .................................................... 17,213
200 Jefferson Pilot Corp. ..................................................................... 15,800
1,000 Lincoln National Corp. .................................................................... 69,625
200 MGIC Investment Corp. ..................................................................... 11,463
2,400 Marsh & McLennan Companies, Inc. .......................................................... 183,900
1,200 Providian Financial Corp. ................................................................. 47,625
800 Safeco Corp. .............................................................................. 42,400
600 St. Paul Companies, Inc. .................................................................. 48,938
450 SunAmerica, Inc. .......................................................................... 17,634
200 Torchmark Corp. ........................................................................... 7,850
100 Transamerica Corp. ........................................................................ 9,950
200 UNUM Corp. ................................................................................ 9,125
</TABLE>

The accompanying notes are an integral part of the financial statements

88
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
100 USF&G Corp. ............................................................................... 2,294
-----------
1,167,399
-----------
Consumer Finance 0.1%
600 Beneficial Corp. .......................................................................... 45,713
-----------
Other Financial Companies 2.6%
2,600 American Express Credit Corp. ............................................................. 212,875
2,600 Federal Home Loan Mortgage Corp. .......................................................... 91,650
5,300 Federal National Mortgage Association ..................................................... 249,100
100 Green Tree Financial Corp. ................................................................ 4,700
400 Household International, Inc. ............................................................. 45,275
2,895 Morgan Stanley, Dean Witter Discover Co. .................................................. 156,511
100 Salomon Inc. .............................................................................. 7,519
3,400 Travelers Group, Inc. ..................................................................... 232,050
-----------
999,680
-----------
Media 1.5%
Advertising 0.0%
150 Interpublic Group of Companies Inc. ....................................................... 7,697
-----------
Broadcasting & Entertainment 1.0%
100 Clear Channel Communications, Inc.* ....................................................... 6,488
2,700 Time Warner Inc. .......................................................................... 146,306
100 U.S. West Media Group ..................................................................... 2,231
100 Viacom Inc. "B"* .......................................................................... 3,163
3,000 Walt Disney Co. ........................................................................... 241,875
-----------
400,063
-----------
Cable Television 0.2%
1,400 Comcast Corp. "A" ......................................................................... 36,050
1,527 Tele-Communications Inc. "A" (New)* ....................................................... 31,304
-----------
67,354
-----------
Print Media 0.3%
600 Gannett Co., Inc. ......................................................................... 64,763
100 Harcourt General, Inc. .................................................................... 4,956
200 Knight-Ridder, Inc. ....................................................................... 10,925
100 New York Times Co. "A" .................................................................... 5,250
100 Times Mirror Co. "A" ...................................................................... 5,494
300 Tribune Co. ............................................................................... 15,994
-----------
107,382
-----------
Service Industries 3.0%
EDP Services 0.1%
300 Automatic Data Processing, Inc. ........................................................... 15,000
600 First Data Corp. .......................................................................... 22,538
500 NextLevel Systems, Inc. ................................................................... 8,375
-----------
45,913
-----------
Environmental Services 0.6%
2,100 Browning Ferris Industries ................................................................ 79,931
4,000 Waste Management Inc. ..................................................................... 139,750
-----------
219,681
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

89
<PAGE>

AARP U.S. STOCK INDEX FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Investment 0.5%
1,050 Charles Schwab Corp. ...................................................................... 37,538
1,900 Merrill Lynch & Co., Inc. ................................................................. 140,956
-----------
178,494
-----------
Miscellaneous Commercial Services 0.0%
100 Cognizant Corp. ........................................................................... 4,075
100 Ecolab, Inc. .............................................................................. 4,856
100 Safety-Kleen Corp. ........................................................................ 2,394
100 Sysco Corp. ............................................................................... 3,694
-----------
15,019
-----------
Miscellaneous Consumer Services 0.1%
300 CUC International Inc. .................................................................... 9,300
800 H & R Block Inc. .......................................................................... 30,900
100 Service Corp. International ............................................................... 3,219
-----------
43,419
-----------
Printing / Publishing 1.7%
5,100 Deluxe Corp. .............................................................................. 171,169
300 Dow Jones & Co., Inc. ..................................................................... 14,025
7,500 Dun & Bradstreet Corp. .................................................................... 212,813
400 Equifax Inc. .............................................................................. 12,575
500 John H. Harland Co. ....................................................................... 11,531
1,600 McGraw-Hill Inc. .......................................................................... 108,300
3,300 Moore Corp., Ltd. ......................................................................... 62,700
1,100 R.R. Donnelley & Sons Co. ................................................................. 39,256
-----------
632,369
-----------
Durables 5.9%
Aerospace 1.5%
2,000 AlliedSignal Inc. ......................................................................... 85,000
4,150 Boeing Co. ................................................................................ 225,916
700 Lockheed Martin Corp. ..................................................................... 74,638
300 Northrop Grumman Corp. .................................................................... 36,413
800 Rockwell International Corp. .............................................................. 50,350
1,100 United Technologies Corp. ................................................................. 89,100
-----------
561,417
-----------
Automobiles 2.5%
5,500 Chrysler Corp. ............................................................................ 202,469
200 Cummins Engine Co., Inc. .................................................................. 15,613
600 Dana Corp. ................................................................................ 29,625
400 Eaton Corp. ............................................................................... 36,950
100 Echlin, Inc. .............................................................................. 3,506
7,900 Ford Motor Co. ............................................................................ 357,475
3,700 General Motors Corp. ...................................................................... 247,669
2,100 Genuine Parts Co. ......................................................................... 64,706
100 Navistar International Corp.* ............................................................. 2,763
-----------
960,776
-----------
Construction / Agricultural Equipment 0.5%
100 Case Corp. ................................................................................ 6,663
</TABLE>

The accompanying notes are an integral part of the financial statements

90
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
2,400 Caterpillar Inc. .......................................................................... 129,450
1,300 Deere & Co. ............................................................................... 69,875
-----------
205,988
-----------
Leasing Companies 0.0%
100 Ryder System, Inc. ........................................................................ 3,594
-----------
Telecommunications Equipment 1.3%
250 Andrew Corp. .............................................................................. 6,547
500 DSC Communications Corp.* ................................................................. 13,469
3,200 Lucent Technologies Inc. .................................................................. 260,400
1,700 Northern Telecom Ltd. ..................................................................... 176,694
100 Scientific-Atlanta, Inc. .................................................................. 2,263
1,000 Tellabs, Inc.* ............................................................................ 51,500
-----------
510,873
-----------
Tires 0.1%
100 Cooper Tire & Rubber Co. .................................................................. 2,656
600 Goodyear Tire & Rubber Co. ................................................................ 41,250
-----------
43,906
-----------
Manufacturing 10.4%
Chemicals 2.4%
200 B.F. Goodrich Co., Inc. ................................................................... 9,050
2,700 Dow Chemical Co. .......................................................................... 244,856
6,300 E.I. du Pont de Nemours & Co. ............................................................. 387,844
800 Eastman Chemical Co. ...................................................................... 49,600
100 Engelhard Corp. ........................................................................... 2,156
100 Great Lakes Chemicals Corp. ............................................................... 4,931
500 Hercules, Inc. ............................................................................ 24,875
3,000 Monsanto Co. .............................................................................. 117,000
400 Morton International, Inc. ................................................................ 14,200
100 Praxair Inc. .............................................................................. 5,119
400 Rohm & Haas Co. ........................................................................... 38,375
100 Sigma-Aldrich Corp. ....................................................................... 3,294
100 Union Carbide Corp. ....................................................................... 4,869
100 W.R. Grace & Co. (New) .................................................................... 7,363
-----------
913,532
-----------
Containers & Paper 0.5%
100 Champion International Corp. .............................................................. 6,094
300 Crown Cork & Seal Co. Inc. ................................................................ 13,838
300 Fort James Corp. .......................................................................... 13,744
1,400 International Paper Co. ................................................................... 77,088
200 Stone Container Corp. ..................................................................... 3,113
100 Temple-Inland, Inc. ....................................................................... 6,400
900 Union Camp Corp. .......................................................................... 55,519
400 Westvaco Corp. ............................................................................ 14,425
-----------
190,221
-----------
Diversified Manufacturing 5.1%
200 Aeroquip-Vickers Inc. ..................................................................... 9,800
1,200 Cooper Industries, Inc. ................................................................... 64,875
</TABLE>

The accompanying notes are an integral part of the financial statements

91
<PAGE>

AARP U.S. STOCK INDEX FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
300 Dover Corp. ............................................................................... 20,363
1,500 Dresser Industries Inc. ................................................................... 64,500
18,000 General Electric Co. ...................................................................... 1,225,125
600 Honeywell, Inc. ........................................................................... 40,313
100 ITT Industries Inc. ....................................................................... 3,319
2,000 Minnesota Mining & Manufacturing Co. ...................................................... 185,000
500 National Service Industries, Inc. ......................................................... 21,969
100 TRW Inc. .................................................................................. 5,488
1,100 Tenneco, Inc. ............................................................................. 52,663
700 Textron, Inc. ............................................................................. 45,500
100 Thermo Electron Corp. ..................................................................... 4,000
1,500 Tyco International Ltd. (New) ............................................................. 123,094
3,000 Westinghouse Electric Corp. ............................................................... 81,188
100 Whitman Corp. ............................................................................. 2,725
-----------
1,949,922
-----------
Electrical Products 0.5%
2,600 Emerson Electric Co. ...................................................................... 149,825
100 Raychem Corp. ............................................................................. 8,450
400 Thomas & Betts Corp. ...................................................................... 21,850
-----------
180,125
-----------
Hand Tools 0.2%
100 Black & Decker Corp. ...................................................................... 3,725
100 Briggs & Stratton Corp. ................................................................... 4,944
300 Snap-On, Inc. ............................................................................. 13,819
900 Stanley Works ............................................................................. 38,700
-----------
61,188
-----------
Industrial Specialty 0.5%
500 Avery Dennison Corp. ...................................................................... 20,000
1,400 Corning Inc. .............................................................................. 66,150
1,000 PPG Industries, Inc. ...................................................................... 62,688
1,200 Pall Corp. ................................................................................ 25,875
200 Sherwin-Williams Co. ...................................................................... 5,888
-----------
180,601
-----------
Machinery / Components / Controls 0.3%
500 General Signal Corp. ...................................................................... 21,625
100 Harnischfeger Industries, Inc. ............................................................ 4,275
800 Illinois Tool Works Inc. .................................................................. 40,000
450 Ingersoll-Rand Co. ........................................................................ 19,378
600 Parker-Hannifin Group ..................................................................... 27,000
400 Timken Co. ................................................................................ 16,025
-----------
128,303
-----------
Office Equipment / Supplies 0.7%
1,300 Pitney Bowes, Inc. ........................................................................ 108,144
1,800 Xerox Corp. ............................................................................... 151,538
-----------
259,682
-----------
Specialty Chemicals 0.2%
500 Air Products & Chemicals, Inc. ............................................................ 41,469
</TABLE>

The accompanying notes are an integral part of the financial statements

92
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
900 Nalco Chemical Co. ........................................................................ 36,056
-----------
77,525
-----------
Technology 12.2%
Computer Software 3.2%
400 Adobe Systems Inc. ........................................................................ 20,150
300 Autodesk, Inc. ............................................................................ 13,613
900 Bay Networks Inc.* ........................................................................ 34,763
1,800 Computer Associates International, Inc. ................................................... 129,263
6,300 Microsoft Corp.* .......................................................................... 833,569
4,500 Oracle Systems Corp. ...................................................................... 163,969
200 Parametric Technology Corp.* .............................................................. 8,825
-----------
1,204,152
-----------
Diverse Electronic Products 0.9%
1,300 Applied Materials, Inc. ................................................................... 123,825
200 Harris Corp. .............................................................................. 9,150
3,100 Motorola Inc. ............................................................................. 222,813
-----------
355,788
-----------
EDP Peripherals 0.2%
1,200 EMC Corp. ................................................................................. 70,050
200 Seagate Technology, Inc.* ................................................................. 7,225
-----------
77,275
-----------
Electronic Components / Distributors 0.2%
1,600 AMP Inc. .................................................................................. 85,700
-----------
Electronic Data Processing 3.9%
100 Apple Computer, Inc.* ..................................................................... 2,169
100 Ceridian Corp.* ........................................................................... 3,700
4,015 Compaq Computer Corp. ..................................................................... 300,121
100 Data General Corp.* ....................................................................... 2,663
2,000 Dell Computer Corp. ....................................................................... 193,750
400 Digital Equipment Corp.* .................................................................. 17,325
5,000 Hewlett-Packard Co. ....................................................................... 347,813
5,100 International Business Machines Corp. ..................................................... 540,281
300 Silicon Graphics Inc.* .................................................................... 7,875
1,300 Sun Microsystems, Inc.* ................................................................... 60,856
100 Unisys Corp.* ............................................................................. 1,531
-----------
1,478,084
-----------
Military Electronics 0.2%
100 Computer Sciences Corp.* .................................................................. 7,075
1,400 EG&G, Inc. ................................................................................ 28,963
100 General Dynamics Corp. .................................................................... 8,713
300 Raytheon Co. .............................................................................. 17,738
-----------
62,489
-----------
Office / Plant Automation 0.9%
1,800 3Com Corp.* ............................................................................... 92,250
400 Cabletron Systems Inc.* ................................................................... 12,800
3,300 Cisco Systems, Inc.* ...................................................................... 241,106
</TABLE>

The accompanying notes are an integral part of the financial statements

93
<PAGE>

AARP U.S. STOCK INDEX FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
300 Novell Inc.* .............................................................................. 2,691
-----------
348,847
-----------
Precision Instruments 0.0%
200 Perkin-Elmer Corp. ........................................................................ 14,613
-----------
Semiconductors 2.7%
300 Advanced Micro Devices Inc.* .............................................................. 9,769
25 General Semiconductor, Inc. ............................................................... 322
8,400 Intel Corp. ............................................................................... 775,425
800 LSI Logic Corp.* .......................................................................... 25,700
1,200 Micron Technology Inc. .................................................................... 41,625
600 National Semiconductor Corp.* ............................................................. 24,600
1,200 Texas Instruments Inc. .................................................................... 162,150
-----------
1,039,591
-----------
Energy 8.9%
Engineering 0.0%
100 Fluor Corp. ............................................................................... 5,363
100 Foster Wheeler Corp. ...................................................................... 4,394
-----------
9,757
-----------
Oil & Gas Production 0.4%
100 Burlington Resources, Inc. ................................................................ 5,131
100 Coastal Corp. ............................................................................. 6,125
149 Enserch Exploration Partners Ltd.* ........................................................ 1,341
200 Kerr-McGee Corp. .......................................................................... 13,763
44 Monterey Resources, Inc. .................................................................. 924
4,500 Occidental Petroleum Corp. ................................................................ 116,719
100 Oryx Energy Co. ........................................................................... 2,544
100 Santa Fe Energy Resources, Inc. ........................................................... 1,250
100 Union Pacific Resources Group ............................................................. 2,619
-----------
150,416
-----------
Oil Companies 7.4%
100 Amerada Hess Corp. ........................................................................ 6,169
3,100 Amoco Corp. ............................................................................... 298,763
100 Ashland Inc. .............................................................................. 5,438
3,200 Atlantic Richfield Co. .................................................................... 273,400
3,300 Chevron Corp. ............................................................................. 274,519
12,900 Exxon Corp. ............................................................................... 826,406
3,600 Mobil Corp. ............................................................................... 266,400
1,400 Phillips Petroleum Co. .................................................................... 72,275
10,400 Royal Dutch Petroleum Co. (New York shares) ............................................... 577,200
400 Sun Co., Inc. ............................................................................. 17,525
3,200 Texaco Inc. ............................................................................... 196,600
400 USX Marathon Group ........................................................................ 14,875
100 Unocal Corp. .............................................................................. 4,325
-----------
2,833,895
-----------
Oil / Gas Transmission 0.1%
200 Enron Corp. ............................................................................... 7,700
100 Sonat, Inc. ............................................................................... 5,088
</TABLE>

The accompanying notes are an integral part of the financial statements

94
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
100 Williams Cos., Inc. ....................................................................... 4,681
-----------
17,469
-----------
Oilfield Services / Equipment 1.0%
800 Baker Hughes, Inc. ........................................................................ 35,000
1,600 Halliburton Co. ........................................................................... 83,200
300 Rowan Companies, Inc. ..................................................................... 10,688
2,800 Schlumberger Ltd. ......................................................................... 235,725
-----------
364,613
-----------
Metals & Minerals 0.9%
Precious Metals 0.3%
100 Barrick Gold Corp. ........................................................................ 2,475
100 Battle Mountain Gold Co. "A" .............................................................. 719
100 Echo Bay Mines, Ltd. ...................................................................... 569
3,100 Freeport McMoRan Copper & Gold, Inc. "B" .................................................. 89,319
100 Homestake Mining Co. ...................................................................... 1,531
143 Newmont Mining Corp. ...................................................................... 6,426
100 Placer Dome Inc. .......................................................................... 1,913
-----------
102,952
-----------
Steel & Metals 0.6%
100 Alcan Aluminium Ltd. ...................................................................... 3,475
1,500 Allegheny Teledyne Inc. ................................................................... 42,938
400 Aluminum Co. of America ................................................................... 32,800
100 Asarco, Inc. .............................................................................. 3,200
100 Bethlehem Steel Corp. ..................................................................... 1,031
900 Cyprus Amax Minerals Co. .................................................................. 21,600
100 Inco Ltd. ................................................................................. 2,506
100 Nucor Corp. ............................................................................... 5,269
200 Phelps Dodge Corp. ........................................................................ 15,525
800 Reynolds Metals Co. ....................................................................... 56,650
600 USX-US Steel Group, Inc. .................................................................. 20,850
1,000 Worthington Industries, Inc. .............................................................. 20,250
-----------
226,094
-----------
Construction 0.7%
Building Products 0.2%
400 Armstrong World Industries, Inc. .......................................................... 26,825
1,000 Masco Corp. ............................................................................... 45,813
-----------
72,638
-----------
Forest Products 0.5%
400 Georgia Pacific Corp. ..................................................................... 41,750
100 Louisiana-Pacific Corp. ................................................................... 2,500
800 Potlatch Corp. ............................................................................ 40,250
1,500 Weyerhaeuser Co. .......................................................................... 89,063
-----------
173,563
-----------
Homebuilding 0.0%
200 Kaufman & Broad Home Corp. ................................................................ 4,338
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

95
<PAGE>

AARP U.S. STOCK INDEX FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Transportation 0.9%
Air Freight 0.0%
100 Federal Express Corp.* .................................................................... 8,000
-----------
Airlines 0.1%
100 AMR Corp.* ................................................................................ 11,069
100 Delta Air Lines, Inc. ..................................................................... 9,419
100 Southwest Airlines Co. .................................................................... 3,194
400 US Airways Group, Inc.* ................................................................... 16,550
-----------
40,232
-----------
Railroads 0.8%
200 Burlington Northern Santa Fe .............................................................. 19,325
1,000 CSX Corp. ................................................................................. 58,500
900 Norfolk Southern Corp. .................................................................... 92,925
1,900 Union Pacific Corp. ....................................................................... 118,988
-----------
289,738
-----------
Trucking 0.0%
200 Caliber System, Inc. ...................................................................... 10,850
-----------
Miscellaneous 0.0%
400 Laidlaw, Inc. ............................................................................. 5,990
-----------
Utilities 4.9%
Electric Utilities 4.4%
300 American Electric Power Co. ............................................................... 13,650
100 Baltimore Gas & Electric Co. .............................................................. 2,775
100 CINergy Corp. ............................................................................. 3,344
100 Carolina Power & Light Co. ................................................................ 3,594
12,400 Central & South West Corp. ................................................................ 275,125
3,700 Consolidated Edison Co. of New York, Inc. ................................................. 125,800
3,400 DTE Energy Co. ............................................................................ 103,488
2,700 Dominion Resources Inc. ................................................................... 102,263
204 Duke Energy Corp. ......................................................................... 10,085
100 Edison International ...................................................................... 2,525
1,400 Entergy Corp. ............................................................................. 36,488
100 FPL Group, Inc. ........................................................................... 5,125
100 GPU, Inc. ................................................................................. 3,588
6,012 Houston Industries Inc. ................................................................... 130,761
100 Niagara Mohawk Power Corp. ................................................................ 956
200 Northern States Power Co. ................................................................. 9,950
1,100 Ohio Edison Co. ........................................................................... 25,781
9,500 PP&L Resources, Inc. ...................................................................... 207,813
100 PacifiCorp ................................................................................ 2,238
100 PG & E Corporation ........................................................................ 2,319
11,300 Peco Energy Co. ........................................................................... 264,844
9,000 Public Service Enterprise Group ........................................................... 231,750
2,000 Southern Company .......................................................................... 45,125
222 Texas Utilities Co., Inc. ................................................................. 7,992
1,600 Unicom Corp. .............................................................................. 37,400
700 Union Electric Co. ........................................................................ 26,906
-----------
1,681,685
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

96
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Natural Gas Distribution 0.5%
200 Consolidated Natural Gas Corp. ............................................................ 11,638
1,300 Eastern Enterprises ....................................................................... 48,506
100 NICOR, Inc. ............................................................................... 3,750
100 ONEOK Inc. ................................................................................ 3,263
1,900 Pacific Enterprises ....................................................................... 64,363
1,600 Peoples Energy Corp. ...................................................................... 60,300
191,820
-----------
Total Common Stocks (Cost $31,668,935) .................................................... 35,405,259
-----------

<S> <C> <C>
Total Investment Portfolio (Cost $32,912,926) (a) 96.2 36,649,254
Other Assets and Liabilities, Net 3.8 1,435,819
------ -----------
Net Assets 100.0 38,085,073
====== ===========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Non income producing security.

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $32,933,269 was as
follows:

Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $ 3,825,138

Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (109,153)
-----------

Net unrealized appreciation ................................. $ 3,715,985
============

(b) At September 30, 1997, this security, in whole or in part, has been
pledged to cover initial margin requirements for open futures contracts.

At September 30, 1997, open futures contracts purchased were as follows:

Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
---------- --------- -------------- ---------

S&P 500 Index ... December, 1997 5 2,377,911 2,387,250
---------

Total net unrealized appreciation on open futures contracts
purchased ................................................... 9,339
=========

The aggregate face value of futures contracts opened and closed during the
year ended September 30, 1997 was $6,641,537 and $4,263,626, respectively.

- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of operations)
through September 30, 1997, aggregated $33,666,582 and $2,094,504,
respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

97
<PAGE>

AARP CAPITAL GROWTH FUND

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 4.7%
- -------------------------------------------------------------------------------------------------------------------------------

57,322,000 Repurchase Agreement with Salomon Brothers dated 9/30/97 at 6.125%
to be repurchased at $57,331,753 on 10/01/97, collateralized by a $44,975,000
U.S. Treasury Bond, 8.75%, 5/15/20 (Cost $57,322,000) .................................. 57,322,000
-----------

- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 95.2%
- -------------------------------------------------------------------------------------------------------------------------------

Shares
- ---------------
Consumer Discretionary 9.0%
Apparel & Shoes 1.2%
270,000 Nike, Inc. "B" ............................................................................ 14,310,000
-----------
Department & Chain Stores 5.7%
320,000 Gap Inc. .................................................................................. 16,020,000
540,000 Home Depot, Inc. .......................................................................... 28,147,500
360,000 Costco Companies, Inc. .................................................................... 13,545,000
500,000 Walgreen Co. .............................................................................. 12,812,500
-----------
70,525,000
-----------
Hotels & Casinos 1.0%
400,000 Mirage Resorts Inc.* ...................................................................... 12,050,000
-----------
Specialty Retail 1.1%
320,000 Tiffany & Co. ............................................................................. 13,600,000
-----------
Consumer Staples 3.6%
Alcohol 1.2%
330,000 Anheuser-Busch Companies, Inc. ............................................................ 14,891,250
-----------
Food & Beverage 1.1%
300,000 H.J. Heinz Co. ............................................................................ 13,856,250
-----------
Package Goods / Cosmetics 1.3%
230,000 Procter & Gamble Co. ...................................................................... 15,884,375
-----------
Health 8.8%
Medical Supply & Specialty 1.2%
308,000 Becton, Dickinson & Co. ................................................................... 14,745,500
-----------
Pharmaceuticals 7.6%
140,000 American Home Products Corp. .............................................................. 10,220,000
180,000 Johnson & Johnson ......................................................................... 10,372,500
100,000 Merck & Co. Inc. .......................................................................... 9,993,750
197,100 Novartis AG (ADR) ......................................................................... 15,176,700
278,000 Pfizer, Inc. .............................................................................. 16,697,375
200,000 Schering-Plough Corp. ..................................................................... 10,300,000
150,000 Warner-Lambert Co. ........................................................................ 20,240,625
-----------
93,000,950
-----------
Financial 20.1%
Banks 4.5%
350,600 BankAmerica Corp. ......................................................................... 25,703,363
155,000 Citicorp .................................................................................. 20,760,313
80,000 J.P. Morgan & Co., Inc. ................................................................... 9,090,000
-----------
55,553,676
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

98
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Insurance 8.3%
270,000 American International Group, Inc. ........................................................ 27,860,625
375,000 Conseco Inc. .............................................................................. 18,304,688
520,000 EXEL, Ltd. (ADR) .......................................................................... 30,972,500
331,100 Hartford Life, Inc. "A" ................................................................... 12,726,656
96,000 MBIA Inc. ................................................................................. 12,042,000
-----------
101,906,469
-----------
Consumer Finance 1.5%
301,700 Associates First Capital Corp. ............................................................ 18,780,825
-----------
Other Financial Companies 5.8%
409,900 American Express Credit Corp. ............................................................. 33,560,563
410,000 Federal National Mortgage Association ..................................................... 19,270,000
270,000 Travelers Group, Inc. ..................................................................... 18,427,500
-----------
71,258,063
-----------
Media 2.2%
Advertising 1.2%
200,000 Omnicom Group, Inc. ....................................................................... 14,550,000
-----------
Cable Television 1.0%
420,000 Tele-Comm Liberty Media Group "A"* ........................................................ 12,573,750
-----------
Service Industries 4.6%
Investment 3.7%
294,500 Franklin Resources Inc. ................................................................... 27,425,313
240,000 Merrill Lynch & Co., Inc. ................................................................. 17,805,000
-----------
45,230,313
-----------
Miscellaneous Commercial Services 0.9%
291,000 Manpower, Inc. ............................................................................ 11,494,500
-----------
Durables 3.7%
Aerospace 2.7%
235,000 Rockwell International Corp. (New) ........................................................ 14,790,313
230,000 United Technologies Corp. ................................................................. 18,630,000
-----------
33,420,313
-----------
Telecommunications Equipment 1.0%
365,000 Ascend Communications, Inc.* .............................................................. 11,816,875
-----------
Manufacturing 11.9%
Chemicals 3.0%
280,000 E.I. du Pont de Nemours & Co. ............................................................. 17,237,500
195,700 Praxair Inc. .............................................................................. 10,017,394
290,000 Sigma-Aldrich Corp. ....................................................................... 9,551,875
-----------
36,806,769
-----------
Diversified Manufacturing 4.5%
325,000 Dresser Industries Inc. ................................................................... 13,975,000
190,000 General Electric Co. ...................................................................... 12,931,875
240,000 TRW Inc. .................................................................................. 13,170,000
240,000 Textron, Inc. ............................................................................. 15,600,000
-----------
55,676,875
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

99
<PAGE>

AARP CAPITAL GROWTH FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Electrical Products 1.6%
75,000 ABB AB (ADR) .............................................................................. 10,612,500
166,000 Emerson Electric Co. ...................................................................... 9,565,750
-----------
20,178,250
-----------
Machinery / Components / Controls 2.8%
300,000 Ingersoll-Rand Co. ........................................................................ 12,918,750
475,500 Parker-Hannifin Group ..................................................................... 21,397,500
-----------
34,316,250
-----------
Technology 16.1%
Diverse Electronic Products 6.0%
270,000 Applied Materials, Inc.* .................................................................. 25,717,500
360,000 General Motors Corp. "H" .................................................................. 23,805,000
170,000 KLA Tencor Corp.* ......................................................................... 11,485,625
240,000 Teradyne Inc.* ............................................................................ 12,915,000
-----------
73,923,125
-----------
Electronic Data Processing 7.6%
480,000 Compaq Computer Corp.* .................................................................... 35,880,000
265,000 Hewlett-Packard Co. ....................................................................... 18,434,063
160,000 International Business Machines Corp. ..................................................... 16,950,000
460,000 Sun Microsystems, Inc.* ................................................................... 21,533,750
-----------
92,797,813
-----------
Semiconductors 2.5%
330,000 Intel Corp. ............................................................................... 30,463,125
-----------
Energy 13.4%
Oil Companies 8.5%
125,000 Amoco Corp. ............................................................................... 12,046,875
200,000 Atlantic Richfield Co. .................................................................... 17,087,500
350,000 Exxon Corp. ............................................................................... 22,421,875
180,000 Mobil Corp. ............................................................................... 13,320,000
254,800 Repsol SA (ADR) ........................................................................... 11,051,950
520,000 Royal Dutch Petroleum Co. (New York shares) ............................................... 28,860,000
-----------
104,788,200
-----------
Oil / Gas Transmission 1.2%
220,000 Enron Corp. ............................................................................... 8,470,000
130,000 Williams Cos., Inc. ....................................................................... 6,085,625
-----------
14,555,625
-----------
Oilfield Services / Equipment 3.7%
240,000 Diamond Offshore Drilling, Inc. ........................................................... 13,245,000
280,000 Santa Fe International Corp. .............................................................. 13,020,000
225,000 Schlumberger Ltd. ......................................................................... 18,942,188
-----------
45,207,188
-----------
</TABLE>

The accompanying notes are an integral part of the financial statements

100
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------

<C> <S> <C>
Transportation 1.3%
Airlines 0.9%
100,000 AMR Corp.* ................................................................................ 11,068,750
--------------
Railroads 0.4%
146,900 Wisconsin Central Transportation Co.* ..................................................... 4,673,256
--------------
Utilities 0.5%
Electric Utilities
350,000 Eastern Utilities Association ............................................................. 6,978,121
--------------
Total Common Stocks (Cost $717,371,809) ................................................... 1,170,881,456
--------------

<S> <C> <C>
Total Investment Portfolio (Cost $774,693,809) (a) ....................... 99.9 1,228,203,456
Other Assets and Liabilities, Net ........................................ 0.1 176,498
------ --------------
Net Assets ............................................................... 100.0 1,228,379,954
====== ==============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Non income producing security.

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $774,693,809 was as
follows:

Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost .......... $464,300,492

Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value .......... (10,790,845)
------------

Net unrealized appreciation ................................. $453,509,647
============

- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997, aggregated
$376,002,590 and $394,567,870, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

101
<PAGE>

AARP SMALL COMPANY STOCK FUND

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 5.8%
- -------------------------------------------------------------------------------------------------------------------------------
2,911,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at
6.02% to be repurchased at $2,911,487 on 10/01/97, collateralized by a $2,753,000
U.S. Treasury Note, 8.5%, 2/15/00 (Cost $2,911,000) ............................. 2,911,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 96.5%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares
- -------------
<C> <S> <C>
Consumer Discretionary 7.2%
Apparel & Shoes 0.6%
17,600 Brown Group, Inc. .................................................................. 320,100
-------------
Home Furnishings 5.5%
6,900 Bush Industries, Inc. "A" .......................................................... 191,044
7,200 Ethan Allen Interiors Inc. ......................................................... 223,200
11,100 Interface, Inc. .................................................................... 323,288
11,800 La-Z-Boy Inc. ...................................................................... 436,600
17,900 Mikasa, Inc. ....................................................................... 248,363
15,800 Oneida Ltd. ........................................................................ 560,900
7,500 Thomas Industries, Inc. ............................................................ 225,000
14,200 Toro Co. ........................................................................... 562,675
-------------
2,771,070
-------------
Hotels & Casinos 0.4%
8,100 Prime Hospitality Corp.* ........................................................... 182,756
Specialty Retail 0.7% -------------
2,600 Eagle Hardware & Garden, Inc.* ..................................................... 51,188
2,300 Getty Petroleum Marketing Co.* ..................................................... 12,506
2,400 Inacom Corp.* ...................................................................... 89,250
7,400 Zale Corp.* ........................................................................ 191,938
-------------
344,882
-------------
Consumer Staples 4.4%
Consumer Electronic & Photographic Products 0.2%
2,700 Harman International Industries, Inc. .............................................. 135,169
Food & Beverage 2.1% -------------
11,400 Michael Foods, Inc. ................................................................ 292,125
19,700 Nash-Finch Co. ..................................................................... 467,875
18,000 Ruddick Corp. ...................................................................... 290,250
-------------
1,050,250
-------------
Textiles 2.1%
22,950 Guilford Mills, Inc. ............................................................... 596,700
12,800 Kellwood Company ................................................................... 453,600
-------------
1,050,300
-------------
Health 2.3%
Health Industry Services 0.3%
8,900 Rotech Medical Corp.* .............................................................. 171,325
-------------
Medical Supply & Specialty 2.0%
19,000 Bindley Western Industries, Inc. ................................................... 530,812
</TABLE>

The accompanying notes are an integral part of the financial statements

102
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,000 West Co., Inc. ..................................................................... 462,000
-------------
992,812
-------------
Financial 17.1%
Banks 9.3%
11,000 ALBANK Financial Corp. ............................................................. 464,750
10,200 Banknorth Group, Inc. .............................................................. 557,175
15,100 Chittenden Corp. ................................................................... 581,350
200 Colonial BancGroup, Inc. ........................................................... 5,750
4,100 Commerce Bancorp, Inc. ............................................................. 159,387
900 Community First Bankshares, Inc. ................................................... 43,650
8,000 FirstBank Puerto Rico .............................................................. 260,000
13,600 Heritage Financial Services, Inc. .................................................. 273,700
2,305 Provident Bankshares Corp. ......................................................... 131,385
4,500 RCSB Financial, Inc. ............................................................... 245,250
12,600 Riggs National Corp. ............................................................... 296,888
12,900 Susquehanna Bancshares, Inc. ....................................................... 396,675
6,300 US Bancorp, Inc. ................................................................... 406,350
16,900 UST Corporation .................................................................... 430,950
7,500 Vermont Financial Services Corp. ................................................... 405,000
-------------
4,658,260
-------------
Insurance 6.8%
800 Allied Group, Inc. ................................................................. 40,650
9,200 American Annuity Group, Inc. ....................................................... 197,800
14,700 American Heritage Life Investment Corp. ............................................ 588,000
600 First American Financial Co. ....................................................... 36,000
16,400 Guaranty National Corp. ............................................................ 556,575
12,600 Harleysville Group, Inc. ........................................................... 529,200
32,300 Hilb, Rogal & Hamilton Co. ......................................................... 593,513
3,100 Life Re Corp. ...................................................................... 163,525
2,300 MMI Companies, Inc. ................................................................ 60,663
7,200 Nymagic, Inc. ...................................................................... 187,200
9,400 Selective Insurance Group, Inc. .................................................... 484,100
-------------
3,437,226
-------------
Consumer Finance 0.3%
9,100 Aames Financial Corp. .............................................................. 147,306
-------------
Other Financial Companies 0.7%
30,300 Cash America International, Inc. ................................................... 340,875
-------------
Media 1.5%
Advertising
1,110 Grey Advertising, Inc. ............................................................. 381,840
14,700 True North Communications, Inc. .................................................... 364,744
-------------
746,584
-------------
Service Industries 7.3%
Environmental Services 1.7%
21,700 Dames & Moore, Inc. ................................................................ 284,812
8,300 Mine Safety Appliance Co. .......................................................... 581,000
-------------
865,812
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

103
<PAGE>

AARP SMALL COMPANY STOCK FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Investment 2.4%
7,100 Interra Financial, Inc. ............................................................ 426,444
8,000 Jefferies Group, Inc. .............................................................. 584,000
23,400 Phoenix Duff & Phelps Corp. ........................................................ 181,350
-------------
1,191,794
-------------
Miscellaneous Commercial Services 1.6%
16,200 ABM Industries, Inc. ............................................................... 428,287
15,600 McGrath Rentcorp ................................................................... 356,850
-------------
785,137
-------------
Printing / Publishing 1.6%
9,200 Bowne & Co., Inc. .................................................................. 323,150
10,900 Merrill Corp. ...................................................................... 501,400
-------------
824,550
-------------
Durables 5.3%
Aerospace 1.6%
7,100 AAR Corp. .......................................................................... 236,962
31,400 Kaman Corp. "A" .................................................................... 576,975
-------------
813,937
-------------
Automobiles 3.1%
4,000 A.O. Smith Corp. ................................................................... 158,500
5,500 Coachmen Industries, Inc. .......................................................... 104,500
20,400 Excel Industries Inc. .............................................................. 406,725
10,300 Exide Corp. ........................................................................ 233,681
26,500 Intermet Corp. ..................................................................... 463,750
15,700 Simpson Industries, Inc. ........................................................... 181,531
-------------
1,548,687
-------------
Construction / Agricultural Equipment 0.6%
8,400 The Manitowoc Company, Inc. ........................................................ 299,775
-------------
Manufacturing 21.1%
Chemicals 1.8%
900 Mississippi Chemical Corp. ......................................................... 17,550
7,600 NCH Corp. .......................................................................... 539,600
13,200 Stepan Co. ......................................................................... 352,275
-------------
909,425
-------------
Containers & Paper 0.5%
2,000 Chesapeake Corp. ................................................................... 72,500
2,100 Clarcor, Inc. ...................................................................... 60,112
3,550 Mosinee Paper Corp. ................................................................ 120,256
-------------
252,868
-------------
Diversified Manufacturing 2.9%
23,500 Cascade Corp. ...................................................................... 464,125
10,200 Robbins & Myers, Inc. .............................................................. 392,700
9,000 Scotsman Industries, Inc. .......................................................... 231,750
4,400 Tredegar Industries, Inc. .......................................................... 309,100
3,100 Valmont Industries ................................................................. 66,069
-------------
1,463,744
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

104
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Electrical Products 0.8%
8,300 C&D Technologies, Inc. ............................................................. 380,762
-------------
Hand Tools 1.0%
13,300 L.S. Starrett Corp. ................................................................ 488,775
-------------
Industrial Specialty 6.6%
14,000 Albany International Corp. "A" ..................................................... 351,750
9,600 Apogee Enterprises, Inc. ........................................................... 235,200
5,500 Applied Power, Inc. "A" ............................................................ 346,156
20,300 Barnes Group, Inc. ................................................................. 574,744
3,500 Electro Scientific Industries, Inc.* ............................................... 213,500
9,200 FSI International, Inc.* ........................................................... 192,050
5,300 Flowserve Corp. .................................................................... 158,337
17,700 Lawson Products, Inc. .............................................................. 522,150
25,300 Spartech Corp. ..................................................................... 379,500
11,800 W.H. Brady Co. "A" ................................................................. 368,750
-------------
3,342,137
-------------
Machinery / Components / Controls 4.3%
22,600 Amcast Industrial Corp. ............................................................ 553,700
14,100 Columbus McKinnon Corp. ............................................................ 370,125
6,200 DT Industries, Inc. ................................................................ 204,600
15,700 Graco, Inc. ........................................................................ 561,275
12,200 Tennant Company .................................................................... 451,400
-------------
2,141,100
-------------
Office Equipment / Supplies 0.6%
13,300 Hunt Manufacturing Co. ............................................................. 304,238
-------------
Wholesale Distributors 2.6%
13,900 A.M. Castle & Co. .................................................................. 361,400
18,400 Applied Industrial Technology, Inc. ................................................ 633,650
10,250 Hughes Supply, Inc. ................................................................ 309,422
-------------
1,304,472
-------------
Technology 10.2%
Computer Software 0.7%
10,000 MTS Systems Corp. .................................................................. 365,000
-------------
Diverse Electronic Products 1.4%
5,500 Cohu, Inc. ......................................................................... 295,625
10,700 Cubic Corp. ........................................................................ 403,925
-------------
699,550
-------------
Edp Peripherals 1.7%
5,400 Black Box Corp.* ................................................................... 236,250
25,100 Gerber Scientific, Inc. ............................................................ 607,106
-------------
843,356
-------------
Electronic Components / Distributors 4.0%
5,500 CTS Corp. .......................................................................... 522,500
8,700 Hutchinson Technology, Inc.* ....................................................... 291,994
6,962 MicroAge Inc.* ..................................................................... 201,898
15,600 Park Electrochemical Corp. ......................................................... 452,400
</TABLE>

The accompanying notes are an integral part of the financial statements

105
<PAGE>

AARP SMALL COMPANY STOCK FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,200 Technitrol, Inc. ................................................................... 565,338
-------------
2,034,130
-------------
Military Electronics 0.7%
10,500 Watkins-Johnson Co. ................................................................ 351,750
-------------
Precision Instruments 1.0%
15,900 Innovex, Inc. ...................................................................... 512,775
-------------
Semiconductors 0.7%
1,800 Burr-Brown Corp.* .................................................................. 60,075
16,900 Chips & Technologies, Inc.* ........................................................ 270,400
-------------
330,475
-------------
Energy 1.7%
Oil & Gas Production 1.2%
12,700 Lomak Petroleum, Inc. .............................................................. 245,269
19,700 Plains Resources, Inc.* ............................................................ 354,600
-------------
599,869
-------------
Oil Companies 0.3%
5,500 Holly Corp. ........................................................................ 143,000
-------------
Oilfield Services / Equipment 0.2%
5,600 Getty Realty Corp. ................................................................. 98,350
-------------
Metals & Minerals 5.3%
Steel & Metals
21,400 Brush Wellman, Inc. ................................................................ 549,712
10,400 Chaparral Steel Co. ................................................................ 159,250
13,200 Cleveland-Cliffs, Inc. ............................................................. 575,850
6,700 Commercial Metals Co. .............................................................. 213,981
14,400 Oregon Metallurgical Corp. ......................................................... 360,900
15,100 Quanex Corp. ....................................................................... 529,444
10,400 RMI Titanium Co.* .................................................................. 260,000
-------------
2,649,137
-------------
Construction 6.5%
Building Materials 4.5%
8,100 Ameron International Corp. ......................................................... 528,525
65,800 Fedders Corp. ...................................................................... 394,800
6,400 Florida Rock Industries, Inc. ...................................................... 380,800
11,000 Lone Star Industries, Inc. ......................................................... 594,000
4,400 Medusa Corp. ....................................................................... 209,550
3,300 Southdown, Inc. .................................................................... 180,263
-------------
2,287,938
-------------
Building Products 0.8%
11,000 Zurn Industries, Inc. .............................................................. 380,875
-------------
Homebuilding 0.2%
2,800 Skyline Corp. ...................................................................... 83,650
-------------
Miscellaneous 1.0%
22,400 Granite Construction, Inc. ......................................................... 518,000
-------------
Transportation 1.1%
Airlines 0.6%
9,600 Alaska Air Group Inc.* ............................................................. 315,600
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

106
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
Trucking 0.5%
8,000 USFreightways Corp. ................................................................ 269,000
-------------
Utilities 5.5%
Electric Utilities 2.1%
10,400 Black Hills Corp. .................................................................. 304,850
21,100 Northwestern Public Service Co. .................................................... 389,031
19,700 Public Service Co. of New Mexico ................................................... 380,456
-------------
1,074,337
-------------
Natural Gas Distribution 3.0%
7,700 Eastern Enterprises ................................................................ 287,306
12,400 Energen Corp. ...................................................................... 440,975
21,500 Laclede Gas Co. .................................................................... 524,063
7,100 Northwest Natural Gas Co. .......................................................... 182,825
2,400 ONEOK Inc. ......................................................................... 78,300
-------------
1,513,469
-------------
Water Supply 0.4%
3,600 California Water Service Co. ....................................................... 177,975
-------------
Total Common Stocks (Cost $40,880,238) ............................................. 48,514,364
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $43,791,238) (a) ....................... 102.3 51,425,364
Other Assets and Liabilities, Net ....................................... (2.3) (1,153,891)
------ -------------
Net Assets .............................................................. 100.0 50,271,473
====== =============
</TABLE>
* Non-income producing security.

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $43,791,238 was as
follows:

Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................ $ 7,693,178

Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value .......................................... (59,052)
-------------
Net unrealized appreciation ......................... $ 7,634,126
=============

- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of
operations) through September 30, 1997, aggregated $41,389,500 and
$752,516, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.

The accompanying notes are an integral part of the financial statements

107
<PAGE>

AARP GLOBAL GROWTH FUND

<TABLE>
<CAPTION>
Principal Market
Amount ($) (c) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 11.1%
- -------------------------------------------------------------------------------------------------------------------------------

UNITED STATES
16,489,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 9/30/97 at 6.02% to be
repurchased at $16,491,757 on 10/01/97, collateralized by a $11,868,000 U.S. Treasury
Bond 9.875%, 11/15/15 (Cost $16,489,000) ........................................ 16,489,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
BONDS 5.8%
- -------------------------------------------------------------------------------------------------------------------------------

UNITED KINGDOM 2.0%
GBP 1,627,000 United Kingdom Treasury Bond, 8.5%, 7/16/07 ........................................ 2,995,714
-------------
UNITED STATES 3.8%
5,600,000 U.S. Treasury Bond, 6.375%, 8/15/27 ................................................ 5,575,472
-------------
Total Bonds (Cost $8,261,551) ...................................................... 8,571,186
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 0.0%
- -------------------------------------------------------------------------------------------------------------------------------

GHANA
13,000 Ashanti Capital Corp., 5.5%, 3/15/03 (Cost $13,000) ................................ 10,465
-------------
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK 0.3%
- -------------------------------------------------------------------------------------------------------------------------------

Shares
- -------------
KOREA
7,919 Samsung Electronics Co., Ltd. (Major electronics manufacturer) (b)
(Cost $294,732) ................................................................. 324,463
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 85.0%
- -------------------------------------------------------------------------------------------------------------------------------

ARGENTINA 0.9%
34,800 YPF S.A. "D" (ADR) (Petroleum company) ............................................. 1,283,250
-------------
AUSTRALIA 2.3%
68,600 Broken Hill Proprietary Co. Ltd. (Petroleum, minerals and steel) ................... 800,235
493,058 Foster's Brewing Group Ltd. (Leading brewery) ...................................... 1,040,875
166,200 Woodside Petroleum Ltd. (Major oil and gas producer) ............................... 1,588,145
-------------
3,429,255
-------------
AUSTRIA 0.4%
14,100 Flughafen Wien AG (Operator of terminals and facilities at Vienna
International Airport) .......................................................... 582,950
-------------
BERMUDA 1.4%
30,520 EXEL Ltd. (ADR) (Provider of liability insurance) .................................. 1,817,848
3,450 Mid Ocean Limited (Property and casualty insurance company) ........................ 218,644
-------------
2,036,492
-------------
BRAZIL 3.1%
38,650 Aracruz Celulose S.A. (ADR) (Producer of eucalyptus kraft pulp) .................... 794,741
1,410,000 Companhia Cervejaria Brahma (pfd.) (Leading beer producer and distributor) ......... 1,087,536
55,200 Companhia Vale do Rio Doce (pfd.) (Diverse mining and industrial complex) .......... 1,345,297
</TABLE>

The accompanying notes are an integral part of the financial statements

108
<PAGE>

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>

25,800 Unibanco Uniao de Bancos Brasileiros SA (ADR) (Major bank) ......................... 944,925
42,140 Usinas Siderurgicas de Minas Gerais S/A (pfd.) (Non-coated flat products and
electrolyte galvanized products) ................................................ 460,422
-------------
4,632,921
-------------
CANADA 1.3%
16,200 Canadian National Railway Co. (Operator of one of Canada's two
principal railroads) ............................................................ 842,053
35,850 Canadian Pacific Ltd. (Ord.) (Transportation and natural resource conglomerate) .... 1,062,040
-------------
1,904,093
-------------
FRANCE 4.2%
17,830 AXA SA (Insurance group providing insurance, finance and real estate services) ..... 1,195,979
41,897 Assurances Generales de France (Health, life, fire, accident and special risk
insurance) ...................................................................... 1,659,357
29,607 Michelin "B" (Leading tire manufacturer) ........................................... 1,681,564
25,766 Schneider SA (Manufacturer of electronic components and automated
manufacturing systems) .......................................................... 1,626,252
-------------
6,163,152
-------------
GERMANY 16.8%
6,206 Allianz AG (Multi-line insurance company) .......................................... 1,497,272
40,107 BASF AG (Leading international chemical producer) .................................. 1,448,160
43,320 Bayer AG (Leading chemical producer) ............................................... 1,724,758
38,346 Bayerische Vereinsbank AG (Commercial bank) ........................................ 2,230,945
40,686 Commerzbank AG (Worldwide multi-service bank) ...................................... 1,466,764
17,300 Daimler-Benz AG (Automobile and truck manufacturer) ................................ 1,427,511
23,505 Deutsche Telekom AG (Telecommunication services) ................................... 454,948
20,566 Deutsche Telekom AG (ADR) .......................................................... 392,039
56,300 Hoechst AG (Chemical producer) ..................................................... 2,498,045
4,286 Mannesmann AG (Bearer) (Diversified construction and technology company) ........... 2,042,396
5,250 Munich Reinsurance AG (Insurance company) .......................................... 1,173,633
1,730 Munich Reinsurance AG (Registered) ................................................. 582,558
56,882 RWE AG (pfd.) (Producer and marketer of petroleum and chemical products) ........... 2,313,009
4,455 SAP AG (pfd.) (Computer software manufacturer) ..................................... 1,190,051
8,860 Schering AG (Pharmaceutical and chemical producer) ................................. 929,900
12,350 Siemens AG (Leading electrical engineering and electronics company) ................ 834,190
30,723 VEBA AG (Electric utility, distributor of oil and chemicals) ....................... 1,795,269
2,060 VIAG AG (Provider of electrical power and natural gas services, aluminum
products, chemicals, ceramics and glass) ........................................ 921,955
-------------
24,923,403
-------------
GHANA 0.4%
52,418 Ashanti Goldfields Co., Ltd. (ADS) (Leading gold producer) ......................... 576,598
-------------
HONG KONG 1.5%
136,000 Hutchison Whampoa, Ltd. (Container terminal and real estate company) ............... 1,335,746
351,000 Kerry Properties, Ltd. (Real estate company) ....................................... 830,098
-------------
2,165,844
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

109
<PAGE>

AARP GLOBAL GROWTH FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
JAPAN 8.7%
56,000 Bridgestone Corp. (Leading automobile tire manufacturer) ........................... 1,345,095
46,000 Canon Inc. (Leading producer of visual image and information equipment) ............ 1,344,929
144,000 Daiwa Securities Co., Ltd. (Brokerage and other financial services) ................ 882,594
6,000 Jafco Co. Ltd. (Venture capital company) ........................................... 263,387
68,000 Matsushita Electric Industrial Co., Ltd. (Leading manufacturer of consumer
electronic products) ............................................................ 1,227,813
95,000 Minebea Co., Ltd. (Manufacturer of bearings, electronic equipment,
machinery parts) ................................................................ 1,054,375
3,400 Nichiei Co., Ltd. (Finance company for small- and medium-sized firms) .............. 323,850
105,000 Nomura Securities Co., Ltd. (Financial advisor, securities broker and underwriter) . 1,365,387
10,300 SMC Corp. (Leading maker of pneumatic equipment) ................................... 981,074
2,700 Shohkoh Fund & Co., Ltd. (Finance company for small- and medium-sized firms) ....... 753,634
10,000 Sony Corp. (Consumer electronic products manufacturer) ............................. 944,217
128,000 Sumitomo Metal Industries, Ltd. (Leading integrated crude steel producer) .......... 266,103
101,000 Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and copper
mining company) ................................................................. 540,407
99,000 The Nichido Fire & Marine Insurance Co., Ltd. (Property and casualty insurance
company) ........................................................................ 647,782
83,000 Tokio Marine & Fire Insurance Co., Ltd. (Property and casualty insurance
company) ........................................................................ 996,811
-------------
12,937,458
-------------
KOREA 0.3%
6,190 Samsung Display Devices Company (Leading manufacturer of CRT and
picture tubes) .................................................................. 299,691
131 Samsung Electronics Co., Ltd. (Major electronics manufacturer) (b) ................. 12,663
7,970 Yukong, Ltd. (Korea's leading oil refiner) ......................................... 148,077
-------------
460,431
-------------
NETHERLANDS 2.7%
19,599 AEGON Insurance Group NV (Insurance company) ....................................... 1,569,811
32,107 ING Groep NV (Insurance and financial services) .................................... 1,474,589
11,800 Philips Electronics NV (Leading manufacturer of electrical equipment) .............. 998,503
-------------
4,042,903
-------------
NEW ZEALAND 0.4%
108,700 Telecom Corp. of New Zealand (Telecommunication services) .......................... 551,538
-------------
SOUTH AFRICA 1.4%
24,465 Anglo American Platinum Corp. Ltd. (ADR) (Leading platinum producer) ............... 425,079
82,460 Sasol Ltd. (Coal mining and processing, crude oil exploration and refining,
petrochemical production) ....................................................... 1,136,800
16,577 South African Breweries (Brewery) .................................................. 481,073
-------------
2,042,952
-------------
SWEDEN 3.4%
54,600 AGA AB "B" (Free) (Producer and distributor of industrial and medical gases) ....... 877,918
54,626 Astra AB "A" (Free) (Pharmaceutical company) ....................................... 1,007,926
58,965 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ............................. 1,717,465
33,252 Skandia Foersaekrings AB (Free) (Financial conglomerate) ........................... 1,485,658
-------------
5,088,967
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

110
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SWITZERLAND 10.3%
1,132 ABB AG (Manufacturer of electrical equipment) ...................................... 1,667,064
10,877 Ciba Specialty Chemical (Registered)* (Manufacturer of chemical products for
plastics, coatings, fibers and fabrics) ......................................... 1,050,683
1,865 Clariant AG (Registered) (Manufacturer of color chemicals) ......................... 1,500,206
14,558 Credit Suisse Group (Registered} (Provider of bank services, management services
and life insurance) ............................................................. 1,966,756
1,605 Holderbank Financiere Glaris AG (Bearer) (Cement producer) ......................... 1,522,791
1,257 Nestle SA (Registered) (Food manufacturer) ......................................... 1,750,899
727 Novartis AG (Bearer) (Pharmaceutical company) ...................................... 1,119,615
702 Novartis AG (Registered) ........................................................... 1,076,287
886 Swiss Reinsurance (Registered) (Life, accident and health insurance company) ....... 1,328,543
5,154 Zurich Group (Registered) (Insurance) .............................................. 2,243,026
-------------
15,225,870
-------------
UNITED KINGDOM 9.5%
95,476 BOC Group PLC (Producer of industrial gases) ....................................... 1,707,682
228,933 Carlton Communications PLC (Television post production products and services) ...... 1,894,736
276,300 General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) .............................. 1,737,798
224,915 Lonrho PLC (Widely diversified industrial holding company) ......................... 418,942
164,400 National Grid Group PLC* (Electric transmission system in England and Wales) ....... 752,698
38,900 Norwich Union PLC* (Multi-line insurance company) .................................. 210,786
77,602 PowerGen PLC (Electric utility) .................................................... 956,137
110,454 Rio Tinto PLC (Mining and finance company) ......................................... 1,763,479
57,941 Reuters Holdings PLC (International news agency) ................................... 686,795
228,900 Shell Transport & Trading PLC (Part owner of Royal Dutch Shell Co.) ................ 1,674,082
105,820 SmithKline Beecham PLC (Manufacturer of ethical drugs and healthcare products) ..... 1,032,469
41,800 Unilever PLC (Manufacturer of consumer goods, food and personal care
products) ....................................................................... 1,220,811
-------------
14,056,415
-------------
UNITED STATES 16.0%
25,800 Advanced Micro Devices Inc.* (Manufacturer of semiconductors and
integrated circuits) ............................................................ 840,113
22,000 Autoliv Inc. (Manufacturer of automobile safety bags) .............................. 935,000
5,600 Biogen Inc.* (Biotechnology research and development) .............................. 181,650
26,900 Boeing Co. (Manufacturer of jet airplanes) ......................................... 1,464,369
10,200 Boston Scientific Corp.* (Developer and producer of medical devices) ............... 562,913
16,750 Charles Schwab Corp. (Discount brokerage services.) ................................ 598,813
11,000 Chiron Corp. (Developer of therapeutic and diagnostic products) .................... 248,875
46,700 Electronic Data Systems Corp. (Provider of information technology services) ........ 1,657,850
29,410 Enron Corp. (Major natural gas pipeline system) .................................... 1,132,285
23,300 First Data Corp. (Credit-card processing services) ................................. 875,206
15,200 Guidant Corp. (Developer and manufacturer of products used in minimally
invasive surgery) ............................................................... 851,200
23,500 International Business Machines Corp. (Principal manufacturer and servicer of
business and computing machines) ................................................ 2,489,531
18,110 MBIA Inc. (Insurer of municipal bonds) ............................................. 2,271,673
31,100 National Semiconductor Corp. (Manufacturer of integrated circuits and transistors).. 1,275,100
</TABLE>

The accompanying notes are an integral part of the financial statements

111
<PAGE>

AARP GLOBAL GROWTH FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
14,200 Newmont Mining Corp. (International gold exploration and mining company) ........... 638,113
22,200 Parametric Technology Corp.* (Mechanical design software producer) ................. 979,575
19,500 Praxair Inc. (Producer of industrial gases and specialized coatings) ............... 998,156
28,300 Sabre Group Holdings Inc.* (Travel reservation system provider) .................... 1,013,494
32,400 Stillwater Mining Co.* (Exploration and development of mines in Montana
producing platinum, palladium and associated metals) ............................ 690,525
21,500 Tele-Communications International, Inc. "A"* (Telecommunication and broadband
cable television services) 352,063
17,200 Toys "R" Us Inc.* (Discount toy supermarts) ........................................ 610,600
29,800 UNUM Corp. (Provider of disability, health and life insurance and group pension
products) ....................................................................... 1,359,625
43,800 US Airways Group, Inc.* (Major airline) ............................................ 1,812,225
-------------
23,838,954
-------------
Total Common Stocks (Cost $103,984,653) ............................................ 125,943,446
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Total Investment Portfolio (Cost $129,042,936) (a) ...................... 102.2 151,338,560
Other Assets and Liabilities, Net ....................................... (2.2) (3,309,187)
------ -------------
Net Assets .............................................................. 100.0 148,029,373
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non income producing security.

(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $129,256,538 was as
follows:

Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................. $ 25,789,866

Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (3,707,844)
-------------
Net unrealized appreciation .......................... $ 22,082,022
=============

(b) Securities valued in good faith by the Valuation Committee of the Board
of Trustees amounted to $337,126 (0.23% of net assets). Their values
have been estimated by the Board of Trustees in the absence of readily
ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready
market for the securities existed, and the difference could be material.
The cost of these securities at September 30, 1997 was $301,565. These
securities may also have certain restrictions as to resale.

(c) Principal amount is stated U.S. Dollars, unless otherwise specificed.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the year ended September 30, 1997 aggregated
$69,664,433 and $31,753,087, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.

Currency Abbreviations
GBP British Pound

The accompanying notes are an integral part of the financial statements

112
<PAGE>

AARP INTERNATIONAL STOCK FUND

<TABLE>
<CAPTION>
Principal Market
Amount ($) (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 6.9%
- -------------------------------------------------------------------------------------------------------------------------------

1,404,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 9/30/97 at 6.02% to be repurchased at $1,404,235 on
10/01/97, collateralized by a $1,446,000
U.S. Treasury Bond, 6.25%, 8/15/23 (Cost $1,404,000) ............................ 1,404,000
-------------
- -------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 3.4%
- -------------------------------------------------------------------------------------------------------------------------------

HONG KONG 1.4%
250,000 Hysan Development Finance Co., Ltd., 6.75%, 6/01/00 ................................ 282,500
-------------
JAPAN 1.3%
250,000 MBL International Finance Bermuda, 3%, 11/30/02 .................................... 272,500
-------------
UNITED KINGDOM 0.7%
GBP 60,000 Royal & Sun Alliance Insurance Group PLC, 7.25%, 11/30/08 .......................... 146,353
-------------
Total Convertible Bonds (Cost $678,726) ............................................ 701,353
-------------
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK 2.2%
- -------------------------------------------------------------------------------------------------------------------------------

Shares
- -------------
AUSTRIA
11,070 Bank Austria AG (Commercial and corporate banking and financial services)
(Cost $362,988) ................................................................. 441,607
-------------
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 88.8%
- -------------------------------------------------------------------------------------------------------------------------------

AUSTRALIA 2.8%
22,342 Commonwealth Bank of Australia (Bank) .............................................. 276,184
135,122 Foster's Brewing Group, Ltd. (Leading brewery) ..................................... 285,251
-------------
561,435
-------------
CANADA 3.3%
9,500 BCE, Inc. (Telecommunication services) ............................................. 284,182
20,200 Moore Corp. Ltd. (Manufacturer of business communication products) ................. 381,408
-------------
665,590
-------------
FINLAND 3.9%
81,040 Merita Ltd. "B" (Financial services group) ......................................... 376,791
44,130 Metsa-Serla Oy "B" (Manufacturer of papers, corrugated and paper board, soft and
hardwood pulp) .................................................................. 406,190
-------------
782,981
-------------
FRANCE 10.2%
745 Bongrain SA (Manufacturer of cheese and other dairy products) ...................... 278,739
3,590 Dexia France (Municipal and local development financing) ........................... 340,032
5,076 Havas SA (Advertising, publishing and broadcasting conglomerate) ................... 344,502
7,830 Scor SA (Property, casualty and life reinsurance company) .......................... 338,220
2,615 Societe Nationale Elf Aquitaine (Petroleum company) ................................ 349,049
11,212 Sommer-Allibert (Manufacturer of plastic products for automotive industry) ......... 425,162
-------------
2,075,704
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

113
<PAGE>

AARP INTERNATIONAL STOCK FUND

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
GERMANY 10.6%
12,098 BHF-Bank AG (Universal banking services) ........................................... 392,323
6,520 Bayer AG (Leading chemical producer) ............................................... 259,590
200 Dyckerhoff AG (Producer of cement, ready-mixed concrete and
finishing products) ............................................................. 71,309
852 Dyckerhoff AG (pfd.) ............................................................... 304,260
6,220 Hochtief AG (Construction and civil engineering services) .......................... 284,079
5,715 Moebel Walther AG (pfd) (Furniture retailer) ....................................... 283,009
6,500 RWE AG (Producer and marketer of petroleum and chemical products) .................. 314,709
1,056 Thyssen AG (Manufacturer of capital goods and steel products) ...................... 246,228
-------------
2,155,507
-------------
IRELAND 2.3%
52,536 Allied Irish Bank PLC (Bank) ....................................................... 462,874
-------------
ITALY 4.3%
54,000 Banca Commerciale Italiana SpA (Commercial bank) ................................... 155,128
11,400 La Rinascente SpA (Department store chain) ......................................... 87,419
89,000 La Rinascente SpA di Risparmio ..................................................... 323,716
78,000 Telecom Italia SpA (Telecommunications, electronics, network construction) ......... 303,358
-------------
869,621
-------------
JAPAN 9.3%
83 East Japan Railway Co. (Railroad operator) ......................................... 389,100
30,000 Matsushita Electric Works, Inc. (Leading maker of building materials and
lighting equipment) ............................................................. 313,082
71,000 Mitsubishi Rayon Co., Ltd. (Producer of acrylic and polyester fibers) .............. 228,757
4,400 Nintendo Co., Ltd. (Game equipment manufacturer) ................................... 411,811
27,000 Nippon Meat Packers, Inc. (Leading meat processor) ................................. 357,808
91,000 Sumitomo Metal Industries, Ltd. (Leading integrated crude steel producer) .......... 189,183
-------------
1,889,741
-------------
MALAYSIA 0.8%
102,000 Guinness Anchor (Brewery) .......................................................... 157,201
-------------
NETHERLANDS 7.5%
2,900 DSM NV (Plastics producer) ......................................................... 283,282
9,530 KLM Royal Dutch Air Lines NV (World-wide full service airline) ..................... 332,815
9,510 Koninklijke Nedlloyd Groep NV (Container shipping and transportation) .............. 318,736
7,100 Koninklijke PTT Nederland (Telecommunication services) ............................. 278,991
5,480 Royal Dutch Petroleum Co. (Owner of 6% of Royal Dutch/Shell Group) ................. 306,754
-------------
1,520,578
-------------
NEW ZEALAND 2.2%
87,800 Air New Zealand Ltd. "B" (Scheduled commercial airline) ............................ 226,121
43,300 Telecom Corp. of New Zealand (Telecommunication services) .......................... 219,701
-------------
445,822
-------------
SPAIN 6.0%
17,200 Autopistas del Mare Nostrum SA (Builder and operator of toll motorways) ............ 278,850
13,100 Banco Bilbao Vizcaya SA (Commercial bank) .......................................... 403,259
8,900 Compania Telefonica Nacional de Espana S.A. (Telecommunication services) ........... 279,634
20,000 Iberdrola SA (Electric utility) .................................................... 245,863
-------------
1,207,606
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

114
<PAGE>

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

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
SWEDEN 6.9%
10,050 AssiDoman AB (Forestry group) ...................................................... 343,058
9,740 OM Gruppen AB (Free) (Operator of financial exchanges and
clearing organizations) ......................................................... 331,834
12,540 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ............................. 365,251
15,250 Svedala Industri AB (Manufacturer of machinery for construction, mineral processing
and materials handling) ......................................................... 355,750
-------------
1,395,893
-------------
SWITZERLAND 6.7%
255 Clariant AG (Registered) (Manufacturer of color chemicals) ......................... 205,122
236 Georg Fischer AG (Bearer) (Manufacturer of automotive products and piping
systems) ........................................................................ 363,451
7,413 Sika Finanz AG (Manufacturer of water management products and systems) ............. 394,986
412 Winterthur Schweizerische Versicherungs-Gesellschaft "B"(Multi-line insurance
company) ........................................................................... 402,511
-------------
1,366,070
-------------
UNITED KINGDOM 12.0%
94,780 Albright & Wilson PLC (Manufacturer of phosphates,susrfactants and
specialty chemicals) ............................................................ 254,498
57,010 Courtaulds Textiles PLC (Producer of clothing, fabrics and home furnishings) ....... 329,145
74,610 Dorling Kindersley Holdings PLC (Book publisher) ................................... 347,735
31,229 Energy Group PLC (Electricity generation and distribution) ......................... 327,863
49,480 General Electric Co., PLC (Manufacturer of power, communications and defense
equipment and other various electrical components) .............................. 311,206
32,100 Harrisons & Crosfield PLC (Manufacturer of chemicals, timber products, pet food,
flour, breakfast cereals and other consumer products) ........................... 63,674
581 Railtrack Group PLC (Operator of most of British railway infrastructure) ........... 8,412
31,300 Rank Group PLC (Diversified leisure services: hotels, amusement machines,
restaurants, film and television) ............................................... 183,738
23,629 Royal & Sun Alliance Insurance Group PLC (Multi-line insurance
holding company) ................................................................ 222,777
68,250 Tomkins PLC (Manufacturer of fluid controls, industrial products, garden
and leisure products) ........................................................... 383,120
-------------
2,432,168
-------------
Total Common Stocks (Cost $16,657,754) ............................................. 17,988,791
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PURCHASED OPTIONS 0.4%
- -------------------------------------------------------------------------------------------------------------------------------

Principal
Amount
- -------------
<S> <C> <C>
FRF 1,719,000 Put on French Francs, strike price 5.73 FRF, expires 12/18/97 ...................... 10,366
FRF 6,515,000 Put on French Francs, strike price 6.07 FRF, expires 12/16/97 ...................... 8,144
DEM 510,000 Put on Deutsche Marks, strike price 1.7 DEM, expires 12/18/97 ...................... 11,189
DEM 1,930,000 Put on Deutsche Marks, strike price 1.81 DEM, expires 12/16/97 ..................... 7,720
JPY 92,800,000 Put on Japanese Yen, strike price 116 JPY, expires 11/20/97 ........................ 29,527
GBP 651,466 Put on British Pounds, strike price .6515 GBP, expires 2/11/98 ..................... 7,622
GBP 194,805 Put on British Pounds, strike price .6494 GBP, expires 12/18/97 .................... 1,116
-------------
Total Purchased Options (Cost $69,986) ............................................. 75,684
-------------
</TABLE>

The accompanying notes are an integral part of the financial statements

115
<PAGE>

AARP INTERNATIONAL STOCK FUND

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $19,173,454) (a) ....................... 101.7 20,611,435
Other Assets and Liabilities, Net ....................................... (1.7) (352,373)
------ -------------
Net Assets .............................................................. 100.0 20,259,062
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $19,189,089 was as
follows:

Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................. $ 1,772,122

Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ........................................... (349,776)
-------------
Net unrealized appreciation .......................... $ 1,422,346
=============

(b) Principal amount is stated U.S. Dollars, unless otherwise specificed.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments) for the period February 1, 1997 (commencement of
operations) through September 30, 1997, aggregated $20,963,300 and
$3,455,984, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of
the investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.

Currency Abbreviations
FRF French Francs
DEM Deutsche Marks
GBP British Pound
JPY Japanese Yen

The accompanying notes are an integral part of the financial statements

116
<PAGE>

AARP DIVERSIFIED INCOME PORTFOLIO

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Money Market 13.6%
- -------------------------------------------------------------------------------------------------------------------------------

5,904,485 AARP High Quality Money Fund (Cost $5,904,485) ..................................... 5,904,485
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Income 60.9%
- -------------------------------------------------------------------------------------------------------------------------------

858,612 AARP Bond Fund for Income .......................................................... 13,050,907
883,992 AARP GNMA and U.S. Treasury Fund ................................................... 13,401,317
-------------
Total Fixed Income (Cost $26,016,430) .............................................. 26,452,224
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Equity 25.6%
- -------------------------------------------------------------------------------------------------------------------------------

205,649 AARP Global Growth Fund ............................................................ 3,956,680
85,076 AARP Growth and Income Fund ........................................................ 4,953,126
122,492 AARP U.S. Stock Index Fund ......................................................... 2,203,628
-------------
Total Equity (Cost $9,714,654) ..................................................... 11,113,434
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $41,635,569) (a) ....................... 100.1 43,470,143

Other Assets and Liabilities, Net ....................................... (0.1) (23,725)
------ -------------
Net Assets .............................................................. 100.0 43,446,418
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $41,635,569 was as
follows:

Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost .............................................. $1,834,574

Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................ --
-------------
Net unrealized appreciation ........................... $1,834,574
=============

- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding money market
investments) for the period February 1, 1997 (commencement of operations)
to September 30, 1997, aggregated $36,584,675 and $897,867, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.

The accompanying notes are an integral part of the financial statements

117
<PAGE>

AARP DIVERSIFIED GROWTH PORTFOLIO

<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Money Market 1.0%
- -------------------------------------------------------------------------------------------------------------------------------

603,912 AARP High Quality Money Fund (Cost $603,912) ....................................... 603,912
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Income 35.5%
- -------------------------------------------------------------------------------------------------------------------------------

722,677 AARP Bond Fund for Income .......................................................... 10,984,684
723,016 AARP GNMA and U.S. Treasury Fund ................................................... 10,960,917
-------------
Total Fixed Income (Cost $21,691,978) .............................................. 21,945,601
-------------
- -------------------------------------------------------------------------------------------------------------------------------
Equity 63.6%
- -------------------------------------------------------------------------------------------------------------------------------

42,447 AARP Capital Growth Fund ........................................................... 2,455,106
322,951 AARP Global Growth Fund ............................................................ 6,213,584
257,671 AARP Growth and Income Fund ........................................................ 15,001,622
254,687 AARP International Stock Fund ...................................................... 4,421,367
221,737 AARP Small Company Stock Fund ...................................................... 4,441,387
375,938 AARP U.S. Stock Index Fund ......................................................... 6,763,123
-------------
Total Equity (Cost $35,603,426) .................................................... 39,296,189
-------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY % OF NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investment Portfolio (Cost $57,899,316) (a) ....................... 100.1 61,845,702

Other Assets and Liabilities, Net ....................................... (0.1) (48,884)
------ -------------
Net Assets .............................................................. 100.0 61,796,818
====== =============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) At September 30, 1997, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $57,900,360 was as
follows:

Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ............................................... $3,945,342

Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ............................................. --
-------------
Net unrealized appreciation ............................ $3,945,342
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding money market
investments) for the period beginning February 1, 1997 (commencement of
operations) to September 30, 1997, aggregated $58,780,646 and $1,567,375,
respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.

The accompanying notes are an integral part of the financial statements

118
<PAGE>

F I N A N C I A L S T A T E M E N T S

Financial Statements are records of the financial status
of an organization. They are prepared by management and
must conform to Generally Accepted Accounting Principles
(GAAP), which are standards established by the Financial
Accounting Standards Board (FASB), the Securities and
Exchange Commission (SEC), and various committees of the
American Institute of Certified Public Accountants
(AICPA).

The AARP Investment Program's Financial Statements
consist of three different financial statements for each
AARP Mutual Fund: Statements of Assets and Liabilities,
Statements of Operations, and Statements of Changes in
Net Assets. The Notes to Financial Statements explain
the significant accounting policies that financial
statements reflect.

119
<PAGE>

STATEMENTS OF ASSETS AND LIABILITIES

The Statements of Assets and Liabilities show the AARP
Investment Program's assets.

Assets include:

o Investments at value: The market value of the AARP
Mutual Fund's holdings on the last day of the
fiscal year;

o Cash: The actual amount of the uninvested assets
held in each AARP Mutual Fund;

o Receivables: Money owed to an AARP Mutual Fund.
Sources of receivables include:

o Investments sold: For which the cash will be
paid to the Fund on a later settlement date;

o Fund shares sold: Proceeds that the Fund will
receive from shares sold to shareholders;

o Dividends and interest earned on the AARP
Mutual Funds securities but not yet paid to
the Fund;

o Expense reimbursements due from the Fund
manager.

o Daily variation margin on open futures contract:
Payments due to/from the broker that reflect the
change in value from the previous day of any
futures contract held in an AARP Mutual Fund's
portfolio (this figure could show up as an asset or
a liability).

Liabilities include amounts owed for:

o Investments purchased for the AARP Mutual Fund's
portfolio but that are not yet paid for;

o Fund shares redeemed but not yet paid to
shareholders;

o Dividends declared but not yet paid to
shareholders;

o Management fees and shareholder servicing fees
incurred but unpaid at fiscal year end;

o Administrative expenses incurred but unpaid at
fiscal year end;

o Other accrued expenses incurred but unpaid at
fiscal year end.

The section Net Assets Consist Of includes the
following:

o Undistributed (overdistributed) net investment
income: An AARP Mutual Fund's accumulated
investment income less expenses and less
distributions paid from net investment income;

120
<PAGE>

o Unrealized appreciation (or depreciation) on
investments: Represents the current value of
investments held less their cost;

o Accumulated net realized capital gain (loss): An
AARP Mutual Fund's accumulated realized gains and
losses from sales of investments, minus
distributions paid from net realized gains;

o Paid-in capital: Represents the dollars invested by
shareholders, minus the amount of money redeemed
since each fund began operations.

The Statement of Assets and Liabilities also shows the
net asset value (NAV) for each AARP Mutual Fund. Net
asset value is calculated by taking a fund's total
assets (securities, cash, etc.), deducting liabilities,
and then dividing this amount by the total number of
shares outstanding.

STATEMENTS OF OPERATIONS

The Statements of Operations includes investment income
from interest and dividends and the various expenses
associated with the operation of the AARP Mutual Funds
for the period ended September 30, 1997. The Statements
of Operations also shows net gains and losses for
various categories of investments, both realized and
unrealized gains and losses for securities sold and in
each AARP Mutual Fund's portfolio. The bottom line tells
you whether each AARP Mutual Fund's net assets have
increased or decreased as a result of fund operations.

STATEMENTS OF CHANGES

The Statements of Changes compares increases and
decreases from each AARP Mutual Fund's operations and
shareholder transactions with those of the previous
year. Most of the terms used in the Statements of
Changes are identical to those that are used in the
other two statements. The categories in the sections
Fund Shares Transaction include:

o Proceeds from the sale of shares: The amount
received by selling new shares to shareholders;

o Net asset value of shares issued due to reinvested
dividends and distributions;

o Cost of shares redeemed (or sold): The amount paid
to shareholders from the exchange or redemption of
shares.

121
<PAGE>

FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AARP High AARP High AARP GNMA AARP High
Quality Quality Tax Free and U.S. Quality
September 30, 1997 Money Fund Money Fund Treasury Fund Bond Fund
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------

Investments, at value (for cost, see accom-
panying lists of investment portfolios) .. $ 469,756,371 $ 103,670,313 $ 4,748,261,020 $ 448,865,382
Cash ........................................ 244 123,586 651 479
Receivable on investments sold .............. -- -- -- 256,069
Investment income receivable ................ 3,373,222 562,596 36,836,345 6,866,968
Receivable on Fund shares sold .............. 899,351 109,045 713,650 53,672
Daily variation margin on futures
contracts ................................ -- -- -- --
Reimbursement from Fund Manager ............. -- -- -- --
Deferred organization expenses .............. -- -- -- --
Other assets ................................ 10,193 2,858 120,992 39,230
------------- -------------- --------------- --------------
Total assets ................................ 474,039,381 104,468,398 4,785,932,658 456,081,800

- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------------------------------------------------------------------------

Investments purchased ....................... -- 1,509,060 187,140,625 --
Fund shares redeemed ........................ 2,239,130 214,719 1,696,937 191,278
Dividends payable ........................... 144,537 48,414 10,425,046 669,462
Unrealized depreciation on forward
currency exchange contracts .............. -- -- -- --
Management fee payable ...................... 149,303 32,489 1,517,280 176,377
Other payables and accrued expenses ......... 195,544 49,823 1,172,310 175,165
------------- -------------- --------------- --------------
Total liabilities ........................... 2,728,514 1,854,505 201,952,198 1,212,282
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at value ......................... $ 471,310,867 $ 102,613,893 $ 4,583,980,460 $ 454,869,518
- -----------------------------------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------------------------------------

Undistributed (overdistributed)
net investment income .................... $ -- $ -- $ -- $ 176,290
Net unrealized appreciation (depreciation) on:
Investments .............................. (120,463) -- 83,544,632 6,424,227
Futures contracts ........................ -- -- -- --
Written options .......................... -- -- -- --
Foreign currency related transactions .... -- -- -- --
Accumulated net realized capital gain (loss) (136,136) (836,922) (323,254,674) (10,524,044)
Paid-in capital ............................. 471,567,466 103,450,815 4,823,690,502 458,793,045
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at value ......................... $ 471,310,867 $ 102,613,893 $ 4,583,980,460 $ 454,869,518
- -----------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding* .. 471,432,488 102,619,379 302,304,535 28,196,489
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, offering and
redemption price per share ............... $1.00 $1.00 $15.16 $16.13
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Unlimited number of shares authorized, $.01 par value, except the AARP
High Quality Tax Free Money Fund, which has a $.001 par value.

The accompanying notes are an integral part of the financial statements

122
<PAGE>

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

<TABLE>
<CAPTION>
AARP Insured AARP Bond AARP Balanced AARP Growth AARP U.S.
Tax Free General Fund for Stock and Bond and Income Stock Index
Bond Fund Income Fund Fund Fund
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------

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

$ 1,683,454,483 $ 57,495,943 $ 634,477,699 $ 6,573,981,871 $ 36,649,254
218,560 1,429 7,264 1,690 122
12,980,844 25,607 1,418,573 27,239,065 1,291,793
20,297,706 575,279 3,527,445 18,166,923 57,781
280,081 244,005 593,571 2,741,932 68,509

324,844 -- -- -- 1,271
-- 111,787 -- -- 86,150
-- 12,137 11,890 -- 14,743
31,162 -- 6,720 74,337 --
---------------- -------------- -------------- ---------------- -------------
1,717,587,680 58,466,187 640,043,162 6,622,205,818 38,169,623

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

1,424,850 -- 858,877 10,271,423 --
484,021 10,676 312,782 1,779,871 7,145
2,722,669 76,713 -- -- --

-- -- -- -- --
664,141 -- 257,599 2,495,173 --
283,831 54,652 257,647 1,646,454 77,405
---------------- -------------- -------------- ---------------- -------------
5,579,512 142,041 1,686,905 16,192,921 84,550
- --------------------------------------------------------------------------------------------------------------------------
$ 1,712,008,168 $ 58,324,146 $ 638,356,257 $ 6,606,012,897 $ 38,085,073
- --------------------------------------------------------------------------------------------------------------------------

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

$ -- $ -- $ 225,657 $ 3,321,388 $ 6,274

141,004,771 855,121 121,203,720 2,130,532,014 3,736,328
(2,274,896) -- -- -- 9,339
-- -- -- -- --
-- -- 131 12,921 --
(23,167,336) 39,320 25,974,502 517,023,954 208,407
1,596,445,629 57,429,705 490,952,247 3,955,122,620 34,124,725
- --------------------------------------------------------------------------------------------------------------------------
$ 1,712,008,168 $ 58,324,146 $ 638,356,257 $ 6,606,012,897 $ 38,085,073
- --------------------------------------------------------------------------------------------------------------------------
92,944,577 3,836,332 29,829,626 113,474,683 2,117,187
- --------------------------------------------------------------------------------------------------------------------------

$18.42 $15.20 $21.40 $58.22 $17.99
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the financial statements

123
<PAGE>

FINANCIAL STATEMENTS

AARP Capital AARP Small
Growth Company
September 30, 1997 Fund Stock Fund
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investments, at value (for cost, see accompanying
lists of investment portfolios) .............. $1,228,203,456 $51,425,364
Cash ............................................ 363 42,863
Receivable on investments sold .................. -- --
Investment income receivable .................... 1,137,338 39,250
Receivable on Fund shares sold .................. 234,479 581,717
Daily variation margin on futures
contracts .................................... -- --
Reimbursement from Fund Manager ................. -- --
Deferred organization expenses .................. -- 11,291
Other assets .................................... 13,675 --
-------------- -----------
Total assets .................................... 1,229,589,311 52,100,485

- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------

Investments purchased ........................... -- 1,648,527
Fund shares redeemed ............................ 255,633 14,414
Dividends payable ............................... -- --
Unrealized depreciation on forward currency
exchange contracts ........................... -- --
Management fee payable .......................... 600,966 --
Other payables and accrued expenses ............. 352,758 166,071
-------------- -----------
Total liabilities ............................... 1,209,357 1,829,012
- --------------------------------------------------------------------------------
Net assets at value ............................. $1,228,379,954 $50,271,473
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------

Undistributed (overdistributed)
net investment income ........................ $ 6,420,037 $ 71,236
Net unrealized appreciation (depreciation) on:
Investments .................................. 453,509,647 7,634,126
Futures contracts ............................ -- --
Written options .............................. -- --
Foreign currency related transactions ........ -- --
Accumulated net realized capital gain (loss) .... 90,878,235 243,255
Paid-in capital ................................. 677,572,035 42,322,856
- --------------------------------------------------------------------------------
Net assets at value ............................. $1,228,379,954 $50,271,473
- --------------------------------------------------------------------------------
Shares of beneficial interest outstanding* ...... 21,237,515 2,510,889
- --------------------------------------------------------------------------------
Net asset value, offering and redemption
price per share .............................. $57.84 $20.02
- --------------------------------------------------------------------------------
* Unlimited number of shares authorized, $.01 par value, except the AARP
High Quality Tax Free Money Fund, which has a $.001 par value.

The accompanying notes are an integral part of the financial statements

124
<PAGE>

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

AARP Global AARP AARP Diversified AARP Diversified
Growth International Income Growth
Fund Stock Fund Portfolio Portfolio
- --------------------------------------------------------------------------------

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

$ 151,338,560 $ 20,611,435 $43,470,143 $61,845,702
851 101,747 -- --
192,871 -- 143,860 209,786
395,359 70,659 163,695 115,643
103,204 34,586 41,640 42,023

-- -- -- --
-- 21,309 -- --
9,150 11,291 -- --
1,366 -- -- --
------------- ------------ ----------- -----------
152,041,361 20,851,027 43,819,338 62,213,154

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

3,511,603 476,638 307,431 325,338
5,759 35,068 23,188 90,998
-- -- 42,301

248,684 -- -- --
81,713 -- -- --
164,229 80,259 -- --
------------- ------------ ----------- -----------
4,011,988 591,965 372,920 416,336
- --------------------------------------------------------------------------------
$ 148,029,373 $ 20,259,062 $43,446,418 $61,796,818
- --------------------------------------------------------------------------------

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

$ 1,144,886 $ 155,031 $ 10,717 $ 645,438

22,295,624 1,437,981 1,834,574 3,946,386
-- -- -- --
-- -- -- --
(263,417) (650) -- --
2,678,448 192,102 44,276 82,133
122,173,832 18,474,598 41,556,851 57,122,861
- --------------------------------------------------------------------------------
$ 148,029,373 $ 20,259,062 $43,446,418 $61,796,818
- --------------------------------------------------------------------------------
7,693,438 1,166,775 2,721,909 3,551,018
- --------------------------------------------------------------------------------

$19.24 $17.36 $15.96 $17.40
- --------------------------------------------------------------------------------
<PAGE>

The accompanying notes are an integral part of the financial statements

125
<PAGE>

FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AARP High AARP High AARP GNMA AARP High
Quality Quality Tax Free and U.S. Quality
Year Ended September 30, 1997 Money Fund Money Fund Treasury Fund Bond Fund

<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------------------

Income:
Interest ............................................. $25,123,665 $ 3,832,142 $ 336,987,461 $ 32,421,813
Dividends ............................................ -- -- -- --
----------- ------------ ------------- ------------
25,123,665 3,832,142 336,987,461 32,421,813
Less foreign taxes withheld .......................... -- -- -- --
----------- ------------ ------------- ------------
25,123,665 3,832,142 336,987,461 32,421,813
- ------------------------------------------------------------------------------------------------------------------------
Expenses:
Management fee ....................................... 1,760,550 410,859 19,228,620 2,287,683
Services to shareholders ............................. 1,901,981 303,908 8,799,290 1,710,593
Trustees' fees and expenses .......................... 26,370 26,792 27,352 27,329
Shareholder communications ........................... 210,593 47,166 1,206,689 230,319
Legal ................................................ 6,018 5,608 6,468 4,737
Auditing ............................................. 27,600 27,300 67,550 50,450
Custodian and accounting fees ........................ 90,351 49,951 926,047 117,428
Registration expenses ................................ 89,506 20,781 48,002 22,583
Amortization of organization expenses ................ -- -- -- --
Other ................................................ 19,775 12,699 94,621 12,545
----------- ------------ ------------- ------------
Total expenses before reductions ........................ 4,132,744 905,064 30,404,639 4,463,667

Expense reductions ...................................... -- -- -- --
----------- ------------ ------------- ------------
Expenses, net ........................................... 4,132,744 905,064 30,404,639 4,463,667
- ------------------------------------------------------------------------------------------------------------------------
Net investment income ................................... 20,990,921 2,927,078 306,582,822 27,958,146
- ------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------

Net realized gain (loss) from:
Investments ........................................ -- -- (7,559,113) (1,765,263)
Futures contracts .................................. -- -- -- 87,958
Written options .................................... -- -- -- --
Foreign currency related transactions .............. -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ........................................ 14,657 -- 85,972,174 10,994,171
Futures contracts .................................. -- -- -- --
Written options .................................... -- -- -- --
Foreign currency related transactions .............. -- -- -- --
----------- ------------ ------------- ------------
Net gain (loss) on investments .......................... 14,657 -- 78,413,061 9,316,866
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............................ $21,005,578 $ 2,927,078 $ 384,995,883 $ 37,275,012
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) These Funds commenced operations on February 1, 1997.

The accompanying notes are an integral part of the financial statements

126
<PAGE>

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

AARP Insured AARP Bond AARP Balanced AARP Growth AARP U.S.
Tax Free General Fund for Stock and Bond and Income Stock Index
Bond Fund Income (a) Fund Fund Fund (a)

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

$ 95,025,384 $ 1,266,014 $ 14,345,542 $ 13,747,932 $ 42,549
-- -- 9,426,256 151,415,232 293,963
- ------------- ----------- ------------- --------------- -----------
95,025,384 1,266,014 23,771,798 165,163,164 336,512
-- -- (144,958) (2,846,162) (2,256)
- ------------- ----------- ------------- --------------- -----------
95,025,384 1,266,014 23,626,840 162,317,002 334,256
- --------------------------------------------------------------------------------

8,224,295 97,012 2,455,813 25,101,044 38,841
2,183,399 62,868 1,686,291 9,412,190 88,085
26,678 16,790 26,346 26,366 16,790
361,629 4,299 204,092 1,102,590 3,232
6,256 5,051 5,124 5,842 5,805
60,000 1,250 35,265 49,000 850
365,524 36,507 159,277 1,096,126 140,260
42,435 48,110 81,464 487,327 29,371
-- 1,709 8,895 -- 2,105
36,514 1,109 10,277 81,869 773
- ------------- ----------- ------------- --------------- -----------
11,306,730 274,705 4,672,844 37,362,354 326,112

-- (274,705) -- -- (258,156)
- ------------- ----------- ------------- --------------- -----------
11,306,730 -- 4,672,844 37,362,354 67,956
- --------------------------------------------------------------------------------
83,718,654 1,266,014 18,953,996 124,954,648 266,300
- --------------------------------------------------------------------------------

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

3,742,633 32,537 27,061,995 533,200,232 96,857
(7,405,850) -- -- -- 111,552
-- -- -- 19,199 --
-- -- 3,212 (401,887) --

62,123,142 855,121 79,619,157 1,168,998,909 3,736,328
(382,821) -- -- -- 9,339
-- -- -- 801 --
-- -- (32) 23,307 --
- ------------- ----------- ------------- --------------- -----------
58,077,104 887,658 106,684,332 1,701,840,561 3,954,076
- --------------------------------------------------------------------------------

$ 141,795,758 $ 2,153,672 $ 125,638,328 $ 1,826,795,209 $ 4,220,376
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of the financial statements

127
<PAGE>

FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AARP Capital AARP Small
Growth Company
Year Ended September 30, 1997 Fund Stock Fund(a)
<S> <C> <C>

- ----------------------------------------------------------------------------------------
INVESTMENT INCOME
- ----------------------------------------------------------------------------------------

Income:
Interest ............................................. $ 1,668,235 $ 65,563
Dividends ............................................ 14,708,887 229,959
Income distributions from Underlying Funds ........... -- --
------------- -----------
16,377,122 295,522
Less foreign taxes withheld .......................... (233,281) --
------------- -----------
16,143,841 295,522
- ----------------------------------------------------------------------------------------
Expenses:
Management fee ....................................... 6,053,108 111,376
Services to shareholders ............................. 2,380,402 140,358
Trustees' fees and expenses .......................... 26,349 18,680
Shareholder communications ........................... 316,503 6,111
Legal ................................................ 4,220 5,082
Auditing ............................................. 46,700 850
Custodian and accounting fees ........................ 183,513 66,854
Registration expenses ................................ 97,064 32,127
Amortization of organization expenses ................ -- 1,709
Other ................................................ 19,841 1,017
------------- -----------
Total expenses before reductions ........................ 9,127,700 384,164

Expense reductions ...................................... -- (143,398)
------------- -----------
Expenses, net ........................................... 9,127,700 240,766
- ----------------------------------------------------------------------------------------
Net investment income ................................... 7,016,141 54,756
- ----------------------------------------------------------------------------------------

- ----------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------------------------

Net realized gain (loss) from:
Investments ........................................ 100,378,671 243,254
Futures contracts .................................. -- --
Written options .................................... -- --
Foreign currency related transactions .............. 603 --
Net unrealized appreciation (depreciation) on:
Investments ........................................ 279,281,659 7,634,126
Futures contracts .................................. -- --
Written options .................................... -- --
Foreign currency related transactions .............. (74) --
------------- -----------
Net gain (loss) on investments .......................... 379,660,859 7,877,380
- ----------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... $ 386,677,000 $ 7,932,136
- ----------------------------------------------------------------------------------------
</TABLE>

(a) These Funds commenced operations on February 1, 1997.

The accompanying notes are an integral part of the financial statements

128
<PAGE>

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

AARP Global AARP AARP Diversified AARP Diversified
Growth International Income Growth
Fund Stock Fund (a) Portfolio (a) Portfolio (a)

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

$ 736,082 $ 54,626 $ -- $ --
1,997,850 241,257 -- --
-- -- 880,498 645,438
------------- ------------ ----------- -----------
2,733,932 295,883 880,498 645,438
(177,801) (23,212) -- --
------------- ------------ ----------- -----------
2,556,131 272,671 880,498 645,438
- --------------------------------------------------------------------------------

932,182 59,143 -- --
711,119 69,681 -- --
26,344 16,790 -- --
74,352 5,674 -- --
5,845 5,382 -- --
29,700 2,250 -- --
191,931 99,557 -- --
43,416 22,796 -- --
2,571 1,709 -- --
3,826 1,676 -- --
------------- ------------ ----------- -----------
2,021,286 284,658 -- --

(74,953) (168,204) -- --
------------- ------------ ----------- -----------
1,946,333 116,454 -- --
- --------------------------------------------------------------------------------
609,798 156,217 880,498 645,438
- --------------------------------------------------------------------------------

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

2,609,572 176,596 44,276 82,133
-- -- -- --
-- -- -- --
672,452 (1,496) -- --

21,313,398 1,437,981 1,834,574 3,946,386
-- -- -- --
-- -- -- --
(250,944) (650) -- --
------------- ------------ ----------- -----------
24,344,478 1,612,431 1,878,850 4,028,519
- --------------------------------------------------------------------------------

$ 24,954,276 $ 1,768,648 $ 2,759,348 $ 4,673,957
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements

129
<PAGE>

FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AARP High AARP High
Quality Quality Tax Free
Money Fund Money Fund
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------------------------------

Years Ended Years Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income ........................ $ 20,990,921 $ 17,543,476 $ 2,927,078 $ 3,191,255
Net realized gain (loss) from:
Investments ................................ -- 2,595 -- 1,553
Futures contracts .......................... -- -- -- --
Written options ............................ -- -- -- --
Foreign currency related transactions ...... -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ................................ 14,657 355,595 -- --
Futures contracts .......................... -- -- -- --
Written options ............................ -- -- -- --
Foreign currency related transactions ........ -- -- -- --
------------- ------------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations ............................. 21,005,578 17,901,666 2,927,078 3,192,808
------------- ------------- ------------- -------------
Distributions to shareholders:
Net investment income ........................ (20,990,921) (17,543,476) (2,927,078) (3,191,255)
Net realized gains ............................. -- -- -- --
------------- ------------- ------------- -------------
Total distributions ............................ (20,990,921) (17,543,476) (2,927,078) (3,191,255)
------------- ------------- ------------- -------------
Fund share transactions:
Proceeds from sale of shares ................. 586,180,766 370,605,211 28,579,750 30,976,787
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 18,980,197 15,692,224 2,345,700 2,545,162
Cost of shares redeemed ........................ (545,990,946) (358,425,484) (39,576,285) (42,004,745)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from Fund
share transactions .......................... 59,170,017 27,871,951 (8,650,835) (8,482,796)
------------- ------------- ------------- -------------
Increase (decrease) in net assets .............. 59,184,674 28,230,141 (8,650,835) (8,481,243)

Net assets at beginning of period .............. 412,126,193 383,896,052 111,264,728 119,745,971
- -----------------------------------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 471,310,867 $ 412,126,193 $ 102,613,893 $ 111,264,728
- -----------------------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- -----------------------------------------------------------------------------------------------------------------

Shares outstanding at beginning of period ...... 412,261,312 384,389,361 111,270,214 119,753,010
------------- ------------- ------------- -------------
Shares sold .................................. 586,181,925 370,605,211 28,579,750 30,976,787
Shares issued to shareholders in
reinvestment of distributions .............. 18,980,197 15,692,224 2,345,700 2,545,162
Shares redeemed .............................. (545,990,946) (358,425,484) (39,576,285) (42,004,745)
------------- ------------- ------------- -------------
Net increase (decrease) in Fund shares ......... 59,171,176 27,871,951 (8,650,835) (8,482,796)
------------- ------------- ------------- -------------
Shares outstanding at end of period ............ 471,432,488 412,261,312 102,619,379 111,270,214
- -----------------------------------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on
February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ -- $ -- $ -- $ --
</FN>
</TABLE>

The accompanying notes are an integral part of the financial statements

130
<PAGE>

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

<TABLE>
<CAPTION>
<S>
AARP GNMA AARP High AARP Insured AARP Bond
and U.S. Quality Tax Free General Fund for
Treasury Fund Bond Fund Bond Fund Income
- ---------------------------------------------------------------------------------------------------------------------------

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

Years Ended Years Ended Years Ended Period Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996 1997(a)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------

<C> <C> <C> <C> <C> <C> <C>
$ 306,582,822 $ 334,151,619 $ 27,958,146 $ 30,375,516 $ 83,718,654 $ 86,584,408 $ 1,266,014

(7,559,113) 23,690,016 (1,765,263) (2,756,840) 3,742,633 15,073,015 32,537
-- -- 87,958 4,190,615 (7,405,850) 3,404,797 --
-- -- -- (214,688) -- -- --
-- -- -- -- -- -- --

85,972,174 (117,084,004) 10,994,171 (7,844,325) 62,123,142 (1,155,352) 855,121
-- -- -- -- (382,821) (1,262,186) --
-- -- -- -- -- -- --
-- -- -- -- -- -- --
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
384,995,883 240,757,631 37,275,012 23,750,278 141,795,758 102,644,682 2,153,672
- --------------- --------------- ------------- ------------- --------------- --------------- ------------

(306,582,822) (334,151,619) (27,958,146) (30,375,516) (83,718,654) (86,584,408) (1,266,014)
-- -- -- -- (8,693,174) -- --
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(306,582,822) (334,151,619) (27,958,146) (30,375,516) (92,411,828) (86,584,408) (1,266,014)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------

305,492,609 346,027,868 38,051,215 64,115,868 103,693,632 124,978,818 59,830,356

175,180,674 193,739,502 19,402,825 21,458,457 55,906,529 52,441,004 959,174
(879,545,728) (793,984,012) (123,806,554) (100,466,218) (252,388,145) (245,115,196) (3,354,542)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------

(398,872,445) (254,216,642) (66,352,514) (14,891,893) (92,787,984) (67,695,374) 57,434,988
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(320,459,384) (347,610,630) (57,035,648) (21,517,131) (43,404,054) (51,635,100) 58,322,646

4,904,439,844 5,252,050,474 511,905,166 533,422,297 1,755,412,222 1,807,047,322 1,500
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,583,980,460 $ 4,904,439,844 $ 454,869,518 $ 511,905,166 $ 1,712,008,168 $ 1,755,412,222 $ 58,324,146
- ---------------------------------------------------------------------------------------------------------------------------

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

328,879,292 345,829,087 32,366,706 33,312,382 98,088,821 101,872,699 100
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
20,334,844 22,947,708 2,386,782 4,006,214 5,746,587 6,963,608 3,995,177

11,645,941 12,859,585 1,215,401 1,341,850 3,094,529 2,918,782 63,663
(58,555,542) (52,757,088) (7,772,400) (6,293,740) (13,985,360) (13,666,268) (222,608)
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
(26,574,757) (16,949,795) (4,170,217) (945,676) (5,144,244) (3,783,878) 3,836,232
- --------------- --------------- ------------- ------------- --------------- --------------- ------------
302,304,535 328,879,292 28,196,489 32,366,706 92,944,577 98,088,821 3,836,332
- ---------------------------------------------------------------------------------------------------------------------------
<FN>

$ -- $ -- $ 176,290 $ 176,290 $ -- $ -- $ --
</FN>
</TABLE>

The accompanying notes are an integral part of the financial statements

131
<PAGE>

FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
AARP Balanced AARP Growth AARP U.S.
Stock and Bond and Income Stock Index
Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------------

Years Ended Years Ended Period Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 (a)
------------- ------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income ........................ $ 18,953,996 $ 13,198,291 $ 124,954,648 $ 105,747,332 $ 266,300
Net realized gain (loss) from:
Investments ................................ 27,061,995 4,984,143 533,200,232 161,815,047 96,857
Futures contracts .......................... -- 34,436 -- -- 111,552
Written options ............................ -- -- 19,199 -- --
Foreign currency related transactions ...... 3,212 334,451 (401,887) (411,014) --
Net unrealized appreciation (depreciation) on:
Investments ................................ 79,619,157 20,509,469 1,168,998,909 381,330,506 3,736,328
Futures contracts .......................... -- 3,391 -- -- 9,339
Written options ............................ -- -- 801 (801) --
Foreign currency related transactions ...... (32) (159,786) 23,307 (16,214) --
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in net assets
resulting from operations ................... 125,638,328 38,904,395 1,826,795,209 648,464,856 4,220,376
------------- ------------- --------------- --------------- ------------
Distributions to shareholders:
Net investment income ........................ (19,390,434) (12,975,460) (126,615,982) (102,016,492) (277,755)
Net realized gains ........................... (5,003,640) (3,378,368) (167,523,016) (67,064,704) --
------------- ------------- --------------- --------------- ------------
Total distributions ............................ (24,394,074) (16,353,828) (294,138,998) (169,081,196) (277,755)
------------- ------------- --------------- --------------- ------------
Fund share transactions:
Proceeds from sale of shares ................. 193,384,596 164,077,214 1,183,350,802 960,952,133 36,277,789
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 22,371,689 14,941,233 268,600,153 153,099,566 242,587
Cost of shares redeemed ...................... (81,824,221) (45,596,030) (597,577,667) (380,970,538) (2,379,424)
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in net assets from
Fund share transactions ..................... 133,932,064 133,422,417 854,373,288 733,081,161 34,140,952
------------- ------------- --------------- --------------- ------------
Increase (decrease) in net assets .............. 235,176,318 155,972,984 2,387,029,499 1,212,464,821 38,083,573

Net assets at beginning of period .............. 403,179,939 247,206,955 4,218,983,398 3,006,518,577 1,500
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 638,356,257 $ 403,179,939 $ 6,606,012,897 $ 4,218,983,398 $ 38,085,073
- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------------------------------------------------------

Shares outstanding at beginning of period ...... 22,865,594 15,074,610 96,018,596 78,371,684 100
------------- ------------- --------------- --------------- ------------
Shares sold .................................. 10,047,891 9,582,056 23,887,562 23,131,229 2,243,958
Shares issued to shareholders in
reinvestment of distributions .............. 1,156,073 873,110 5,612,664 3,734,230 14,065
Shares redeemed .............................. (4,239,932) (2,664,182) (12,044,139) (9,218,547) (140,936)
------------- ------------- --------------- --------------- ------------
Net increase (decrease) in Fund shares ......... 6,964,032 7,790,984 17,456,087 17,646,912 2,117,087
------------- ------------- --------------- --------------- ------------
Shares outstanding at end of period ............ 29,829,626 22,865,594 113,474,683 96,018,596 2,117,187
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ 225,657 $ 535,899 $ 3,321,388 $ 7,239,912 $ 6,274
</FN>
</TABLE>

The accompanying notes are an integral part of the financial statements

132
<PAGE>

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

<TABLE>
<CAPTION>
<S>
AARP Capital AARP Small AARP Global AARP
Growth Company Growth International
Fund Stock Fund Fund Stock Fund
- ---------------------------------------------------------------------------------------------

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

Years Ended Period Ended Years Ended Period Ended
September 30, September 30, September 30, September 30,
1997 1996 1997(a) 1997 1996 1997 (a)
- --------------- ------------- ------------ ------------- ------------ ------------
<C> <C> <C> <C> <C> <C>

$ 7,016,141 $ 7,892,107 $ 54,756 $ 609,798 $ 325,474 $ 156,217

100,378,671 71,644,200 243,254 2,609,572 (33,467) 176,596
-- -- -- -- -- --
-- -- -- -- -- --
603 (38,602) -- 672,452 (36,843) (1,496)

279,281,659 32,512,381 7,634,126 21,313,398 982,226 1,437,981
-- -- -- -- -- --
-- -- -- -- -- --
(74) 4,863 -- (250,944) (336) (650)
- --------------- ------------- ------------ ------------- ------------ ------------

386,677,000 112,014,949 7,932,136 24,954,276 1,237,054 1,768,648
- --------------- ------------- ------------ ------------- ------------ ------------

(7,776,073) (7,038,882) -- (336,444) -- --
(75,674,469) (9,204,690) -- -- -- --
- --------------- ------------- ------------ ------------- ------------ ------------
(83,450,542) (16,243,572) -- (336,444) -- --
- --------------- ------------- ------------ ------------- ------------ ------------

155,757,996 133,269,510 45,455,488 67,490,929 82,274,150 20,394,042

79,684,673 15,425,567 -- 321,411 -- --
(136,425,886) (110,338,687) (3,117,651) (22,052,777) (5,860,726) (1,905,128)
- --------------- ------------- ------------ ------------- ------------ ------------

99,016,783 38,356,390 42,337,837 45,759,563 76,413,424 18,488,914
- --------------- ------------- ------------ ------------- ------------ ------------
402,243,241 134,127,767 50,269,973 70,377,395 77,650,478 20,257,562

826,136,713 692,008,946 1,500 77,651,978 1,500 1,500
- ---------------------------------------------------------------------------------------------
$ 1,228,379,954 $ 826,136,713 $ 50,271,473 $ 148,029,373 $ 77,651,978 $ 20,259,062
- ---------------------------------------------------------------------------------------------

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

19,005,749 18,041,977 100 5,012,508 100 100
- --------------- ------------- ------------ ------------- ------------ ------------
3,214,860 3,299,011 2,689,583 3,954,573 5,395,570 1,283,093

1,860,053 400,664 -- 19,853 -- --
(2,843,147) (2,735,903) (178,794) (1,293,496) (383,162) (116,418)
- --------------- ------------- ------------ ------------- ------------ ------------
2,231,766 963,772 2,510,789 2,680,930 5,012,408 1,166,675
- --------------- ------------- ------------ ------------- ------------ ------------
21,237,515 19,005,749 2,510,889 7,693,438 5,012,508 1,166,775
- ---------------------------------------------------------------------------------------------
<FN>

$ 6,420,037 $ 7,179,969 $ 71,236 $ 1,144,886 $ 288,631 $ 155,031
</FN>
</TABLE>

The accompanying notes are an integral part of the financial statements

133
<PAGE>

FINANCIAL STATEMENTS

- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AARP AARP
Diversified Diversified
Income Portfolio Growth Portfolio
- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------

Period Ended Period Ended
September 30, September 30,
1997(a) 1997(a)
------------ ------------
<S> <C> <C>
Operations:
Net investment income ........................ $ 880,498 $ 645,438
Net realized gain (loss) from:
Investments ................................ 44,276 82,133
Futures contracts .......................... -- --
Written options ............................ -- --
Foreign currency related transactions ...... -- --
Net unrealized appreciation (depreciation) on:
Investments ................................ 1,834,574 3,946,386
Futures contracts .......................... -- --
Written options ............................ -- --
Foreign currency related transactions ........ -- --
------------ ------------
Net increase (decrease) in net assets resulting
from operations ............................. 2,759,348 4,673,957
------------ ------------
Distributions to shareholders:
Net investment income ........................ (869,781) --
Net realized gains ........................... -- --
------------ ------------
Total distributions ............................ (869,781) --
------------ ------------
Fund share transactions:
Proceeds from sale of shares ................. 45,476,743 60,765,788
Net asset value of shares issued to
shareholders in reinvestment of
distributions .............................. 671,013 --
Cost of shares redeemed ........................ (4,640,905) (3,692,927)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions .......................... 41,506,851 57,072,861
------------ ------------
Increase (decrease) in net assets .............. 43,396,418 61,746,818

Net assets at beginning of period .............. 50,000 50,000
- ------------------------------------------------------------------------------------
Net assets at end of period (b) ................ $ 43,446,418 $ 61,796,818
- ------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
- ------------------------------------------------------------------------------------

Shares outstanding at beginning of period ...... 3,333 3,333
------------ ------------
Shares sold .................................. 2,973,907 3,770,457
Shares issued to shareholders in
reinvestment of distributions ............. 42,898 --
Shares redeemed .............................. (298,229) (222,772)
------------ ------------
Net increase (decrease) in Fund shares ......... 2,718,576 3,547,685
------------ ------------
Shares outstanding at end of period ............ 2,721,909 3,551,018
- ------------------------------------------------------------------------------------
<FN>
(a) These Funds commenced operations on
February 1, 1997.
(b) Includes Undistributed (overdistributed)
net investment income $ 10,717 $ 645,438
</FN>
</TABLE>

The accompanying notes are an integral part of the financial statements

134
<PAGE>

F I N A N C I A L H I G H L I G H T S

This section shows you the statistical per share income
and ratio(s) information from operations dividends paid
to shareholders, total returns, expense ratios of the
AARP Mutual Funds, and other information. It is designed
to help you understand how the fund performed and allows
you to compare this year's performance and expenses to
those of prior years.

135
<PAGE>

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
AARP HIGH QUALITY MONEY FUND
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
AARP HIGH QUALITY TAX FREE MONEY FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------
Net investment income ................................... .028 .028 .029 .017 .016
Distributions from net investment income ................ (.028) (.028) (.029) (.017) (.016)
--------------------------------------------
Net asset value, end of period ............................. $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------
Total Return (%) ........................................... 2.80 2.80 2.99 1.76(a) 1.62(a)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 103 111 120 129 134
Ratio of operating expenses, net to average net assets (%) . .85 .85 .87 .90 .93
Ratio of operating expenses before expense reductions,
to average net assets (%) ............................... .85 .85 .87 .91 1.15
Ratio of net investment income to average net assets (%) ... 2.76 2.77 2.94 1.75 1.60
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.

136
<PAGE>

- --------------------------------------------------------------------------------
AARP GNMA AND U.S. TREASURY FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $14.91 $15.19 $14.73 $15.96 $16.19
------------------------------------------
Income from investment operations:
Net investment income ................................... .98 .99 1.01 .93 1.15
Net realized and unrealized gain (loss) on investments .. .25 (.28) .46 (1.23) (.23)
------------------------------------------
Total from investment operations ........................... 1.23 .71 1.47 (.30) .92
------------------------------------------
Less distributions:
Net investment income ................................... (.98) (.99) (.98) (.93) (1.15)
Tax return of capital ................................... -- -- (.03) -- --
------------------------------------------
Total distributions ........................................ (.98) (.99) (1.01) (.93) (1.15)
------------------------------------------
Net asset value, end of period ............................. $15.16 $14.91 $15.19 $14.73 $15.96
------------------------------------------
Total Return (%) ........................................... 8.49 4.79 10.31 (1.90) 5.89
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 4,584 4,904 5,252 5,585 6,712
Ratio of operating expenses to average net assets (%) ...... .65 .64 .67 .66 .70
Ratio of net investment income to average net assets (%) ... 6.51 6.55 6.77 6.09 7.15
Portfolio turnover rate (%) ................................ 86.76 83.44 70.35 114.54 105.49
</TABLE>

- --------------------------------------------------------------------------------
AARP HIGH QUALITY BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $15.82 $16.01 $15.05 $17.19 $16.44
------------------------------------------
Income from investment operations:
Net investment income ................................... .93 .92 .94 .85 .93
Net realized and unrealized gain (loss) on investments .. .31 (.19) .95 (1.76) .93
------------------------------------------
Total from investment operations ........................... 1.24 .73 1.89 (.91) 1.86
------------------------------------------
Less distributions:
Net investment income ................................... (.93) (.92) (.93) (.85) (.93)
Net realized gains on investments ....................... -- -- -- -- (.18)
In excess of net realized gains on investments .......... -- -- -- (.38) --
------------------------------------------
Total distributions ........................................ (.93) (.92) (.93) (1.23) (1.11)
------------------------------------------
Net asset value, end of period ............................. $16.13 $15.82 $16.01 $15.05 $17.19
------------------------------------------
Total Return (%) ........................................... 8.15 4.59 12.98 (5.55) 11.88
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 455 512 533 568 604
Ratio of operating expenses to average net assets (%) ...... .93 .91 .95 .95 1.01
Ratio of net investment income to average net assets (%) ... 5.84 5.76 6.13 5.31 5.64
Portfolio turnover rate (%) ................................ 83.26 169.96 201.07 63.75 100.98
</TABLE>

137
<PAGE>

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
AARP INSURED TAX FREE GENERAL BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $17.90 $17.74 $16.93 $19.00 $17.88
------------------------------------------
Income from investment operations:
Net investment income ................................... .88 .87 .87 .86 .90
Net realized and unrealized gain (loss) on investments .. .61 .16 .81 (1.67) 1.55
------------------------------------------
Total from investment operations ........................... 1.49 1.03 1.68 (.81) 2.45
------------------------------------------
Less distributions:
Net investment income ................................... (.88) (.87) (.87) (.86) (.90)
Net realized gains on investments ....................... (.09) -- -- (.34) (.43)
In excess of net realized gains on investments .......... -- -- -- (.06) --
------------------------------------------
Total distributions ........................................ (.97) (.87) (.87) (1.26) (1.33)
------------------------------------------
Net asset value, end of period ............................. $18.42 $17.90 $17.74 $16.93 $19.00
------------------------------------------
Total Return (%) ........................................... 8.57 5.88 10.21 (4.48) 14.31
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 1,712 1,755 1,807 1,914 2,087
Ratio of operating expenses to average net assets (%) ...... .66 .66 .69 .68 .72
Ratio of net investment income to average net assets (%) ... 4.87 4.83 5.06 4.80 4.90
Portfolio turnover rate (%) ................................ 7.61 18.69 17.45 38.39 47.96
</TABLE>

- --------------------------------------------------------------------------------
AARP BOND FUND FOR INCOME
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ................................... $15.00
------
Income from investment operations:
Net investment income ............................................... .69
Net realized and unrealized gain (loss) on investments .............. .20
------
Total from investment operations ....................................... .89
------
Less distributions from net investment income .......................... (.69)
------
Net asset value, end of period ......................................... $15.20
------
Total Return (%) (b) ................................................... 6.06(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................................. 58
Ratio of operating expenses, net to average net assets (%) ............. -- (d)
Ratio of operating expenses before expense reductions, to average
net assets (%) ...................................................... 1.53(d)
Ratio of net investment income to average net assets (%) ............... 7.03(d)
Portfolio turnover rate (%) ............................................ 13.69(d)
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized
(d) Annualized

138
<PAGE>

- --------------------------------------------------------------------------------
AARP BALANCED STOCK AND BOND FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
For the Period
Years Ended September 30, February 1, 1994(b)
-------------------------- To September 30,
1997(a) 1996 1995 1994
-------------------------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $17.63 $16.40 $14.64 $15.00
-----------------------------------------------
Income from investment operations:
Net investment income ................................... .72 .66 .61 .25
Net realized and unrealized gain (loss) on investments .. 3.98 1.44 1.79 (.37)(c)
-----------------------------------------------
Total from investment operations ........................... 4.70 2.10 2.40 (.12)
-----------------------------------------------
Less distributions:
Net investment income ................................... (.72) (.66) (.60) (.24)
Net realized gains on investments ....................... (.21) (.21) (.04) --
-----------------------------------------------
Total distributions ........................................ (.93) (.87) (.64) (.24)
-----------------------------------------------
Net asset value, end of period ............................. $21.40 $17.63 $16.40 $14.64
-----------------------------------------------
Total Return (%) ........................................... 27.34 13.08 16.80 (.78)(e)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 638 403 247 175
Ratio of operating expenses to average net assets (%) ...... .91 .88 1.01 1.31(f)
Ratio of net investment income to average net assets (%) ... 3.71 4.09 4.12 3.58(f)
Portfolio turnover rate (%) ................................ 26.79 35.22 63.77 49.32(f)
Average commission rate paid (d) ........................... $.0547 $.0549 $ -- $ --
</TABLE>

(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations.
(c) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and
repurchases of Fund shares in relation to fluctuating market values during
the period.
(d) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.
(e) Not Annualized (f) Annualized

- --------------------------------------------------------------------------------
AARP GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997(a) 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $43.94 $38.36 $34.13 $32.91 $28.67
------------------------------------------
Income from investment operations:
Net investment income ................................... 1.19 1.17 1.11 .94 .83
Net realized and unrealized gain (loss) on investments .. 16.00 6.40 5.44 1.62 4.58
------------------------------------------
Total from investment operations ........................... 17.19 7.57 6.55 2.56 5.41
------------------------------------------
Less distributions from:
Net investment income ................................... (1.19) (1.15) (1.09) (1.13) (.87)
Net realized gains on investments ....................... (1.72) (.84) (1.23) (.21) (.30)
------------------------------------------
Total distributions ........................................ (2.91) (1.99) (2.32) (1.34) (1.17)
------------------------------------------
Net asset value, end of period ............................. $58.22 $43.94 $38.36 $34.13 $32.91
------------------------------------------
Total Return (%) ........................................... 40.70 20.20 20.43 7.99 19.38
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 6,606 4,219 3,007 2,312 1,560
Ratio of operating expenses to average net assets (%) ...... .71 .69 .72 .76 .84
Ratio of net investment income to average net assets (%) ... 2.38 2.94 3.28 3.00 3.08
Portfolio turnover rate (%) ................................ 33.4 25.02 31.26 31.82 17.44
Average commission rate paid (b) ........................... $.0619 $.0542 $ -- $ -- $ --
</TABLE>

(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after October 1, 1995.

139
<PAGE>

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
AARP U.S. STOCK INDEX FUND
- --------------------------------------------------------------------------------

The following table includes selected data for a share outstanding throughout
each period(e) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .20
Net realized and unrealized gain (loss) on investment ........... 2.97
------
Total from investment operations ................................... 3.17
------
Less distributions from net investment income ...................... (.18)
------
Net asset value, end of period ..................................... $17.99
------
Total Return (%) (b) ............................................... 21.22(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 38
Ratio of operating expenses, net to average net assets (%) ......... .50(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 2.38(d)
Ratio of net investment income to average net assets (%) ........... 1.94(d)
Portfolio turnover rate (%) ........................................ 14.52(d)
Average commission rate paid ....................................... $.0288
</TABLE>
(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized (d) Annualized
(e) Based on monthly average shares outstanding during the period.

- --------------------------------------------------------------------------------
AARP CAPITAL GROWTH FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Years Ended September 30,
1997(a) 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....................... $43.47 $38.36 $31.74 $36.20 $30.30
------------------------------------------
Income from investment operations:
Net investment income ................................... .34 .42 .36 .00 .06
Net realized and unrealized gain (loss) on investments .. 18.43 5.59 6.91 (1.51) 7.19
------------------------------------------
Total from investment operations ........................... 18.77 6.01 7.27 (1.51) 7.25
------------------------------------------
Less distributions from:
Net investment income ................................... (.41) (.39) (.01) (.05) (.14)
Net realized gains on investments ....................... (3.99) (.51) (.64) (2.90) (1.21)
------------------------------------------
Total distributions ........................................ (4.40) (.90) (.65) (2.95) (1.35)
------------------------------------------
Net asset value, end of period ............................. $57.84 $43.47 $38.36 $31.74 $36.20
------------------------------------------
Total Return (%) ........................................... 46.72 15.97 23.47 (4.70) 24.53
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................... 1,228 826 692 683 607
Ratio of operating expenses, to average net assets (%) ..... .92 .90 .95 .97 1.05
Ratio of net investment income to average net assets (%) ... .70 1.05 1.00 .02 .22
Portfolio turnover rate (%) ................................ 39.04 64.84 98.44 79.65 100.63
Average commission rate paid (b) ........................... $.0576 $.0614 $ -- $ -- $ --
</TABLE>

140
<PAGE>

- --------------------------------------------------------------------------------
AARP SMALL COMPANY STOCK FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .04
Net realized and unrealized gain (loss) on investments .......... 4.98
------
Total from investment operations ................................... 5.02
------
Net asset value, end of period ..................................... $20.02
------
Total Return (%) (b) ............................................... 33.53(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 50
Ratio of operating expenses, net to average net assets (%) ......... 1.75(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 2.79(d)
Ratio of net investment income to average net assets (%) ........... 0.40(d)
Portfolio turnover rate (%) ........................................ 5.01(d)
Average commission rate paid ....................................... $.0274
</TABLE>

(a) Commencement of operations
(b) Total return would have been lower had certain expenses not been reduced.
(c) Not Annualized (d) Annualized
(e) Based on monthly average shares outstanding during the period.

- --------------------------------------------------------------------------------
AARP GLOBAL GROWTH FUND
- --------------------------------------------------------------------------------

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

<TABLE>
Year Ended For the Period
September 30, February 1, 1996(b)
1997 to September 30, 1996
------------- ---------------------
<S> <C> <C>
Net asset value, beginning of period ........................................... $15.49 $15.00
----------------------------
Income from investment operations:
Net investment income ....................................................... .09 .06
Net realized and unrealized gain (loss) on investments ...................... 3.72 .43
----------------------------
Total from investment operations ............................................... 3.81 .49
----------------------------
Less distributions from net investment income .................................. (.06) --
----------------------------
Net asset value, end of period ................................................. $19.24 $15.49
----------------------------
Total Return (%) (c) ........................................................... 24.67 3.27(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ......................................... 148 78
Ratio of operating expenses, net to average net assets (%) ..................... 1.75 1.75(e)
Ratio of operating expenses before expense reductions, to average
net assets (%) .............................................................. 1.82 2.31(e)
Ratio of net investment income to average net assets (%) ....................... .55 1.03(e)
Portfolio turnover rate (%) .................................................... 31.34 12.56(e)
Average commission rate paid ................................................... $.0004 $.0150
</TABLE>

(a) Based on monthly average shares outstanding during the period.
(b) Commencement of operations
(c) Total returns would have been lower had certain expenses not been reduced.
(d) Not Annualized (e) Annualized

141
<PAGE>

- --------------------------------------------------------------------------------
AARP INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .23
Net realized and unrealized gain (loss) on investments .......... 2.13
------
Total from investment operations ................................... 2.36
------
Net asset value, end of period ..................................... $17.36
------
Total Return (%) (b) ............................................... 15.73(c)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 20
Ratio of operating expenses, net to average net assets (%) ......... 1.75(d)
Ratio of operating expenses before expense reductions, to average
net assets (%) .................................................. 4.28(d)
Ratio of net investment income to average net assets (%) ........... 2.35(d)
Portfolio turnover rate (%) ........................................ 50.73(d)
Average commission rate paid ....................................... $.0309
</TABLE>

- --------------------------------------------------------------------------------
AARP DIVERSIFIED INCOME PORTFOLIO
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
For the Period
February 1, 1997(a)
to September 30, 1997
---------------------
<S> <C>
Net asset value, beginning of period ............................... $15.00
------
Income from investment operations:
Net investment income ........................................... .43
Net realized and unrealized gain (loss) on investments .......... .96
------
Total from investment operations ................................... 1.39
------
Less distribution from net investment income ....................... (.43)
------
Net asset value, end of period ..................................... $15.96
------
Total Return (%) (e) ............................................... 9.35(b)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 43
Ratio of operating expenses, net to average net assets (%) ......... --(d)
Ratio of net investment income to average net assets (%) ........... 5.13(c)
Portfolio turnover rate (%) ........................................ 5.57(c)
</TABLE>

(a) Commencement of operations
(b) Not Annualized (c) Annualized
(d) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the period, the Portfolio did bear its
share of the operating, administrative and advisory expenses of the
Underlying AARP Funds.
(e) If the Fund Manager had not maintained some of the underlying AARP Funds'
expenses, the total return for this Fund would have been lower.

142
<PAGE>

- --------------------------------------------------------------------------------
AARP DIVERSIFIED GROWTH PORTFOLIO
- --------------------------------------------------------------------------------

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

(a) Commencement of operations
(b) Not Annualized
(c) Annualized
(d) This Portfolio invests in other AARP Funds, and although the Portfolio did
not incur any direct expenses for the period, the Portfolio did bear its
share of the operating, administrative and advisory expenses of the
Underlying AARP Funds.
(e) Based on monthly average shares outstanding during the period.
(f) If the Fund Manager had not maintained some of the underlying AARP Funds'
expenses, the total return for this Fund would have been lower.

143
<PAGE>

This page
intentionally
left blank.

144
<PAGE>

N O T E S T O
F I N A N C I A L S T A T E M E N T S

More definitive information about the Financial
Statements is found in the Notes section. This
information includes further elaboration on Expenses,
Organization Cost, Portfolio Insurance, and
Transactions, including Management fees and Commitments.

Tax Information and Program Services: Provides you with
toll-free numbers and several addresses where you can
get answers to questions regarding your holdings in the
AARP Investment Program. In addition, tax information
that may be of interest to you can be found in the
section.

Report of Independent Accountants: A letter from Price
Waterhouse LLP, a leading accounting firm, opining that
all the "Financial Statements" are fairly presented in
all material respects, based upon their audits.

Officers and Trustees: Identifies the various members of
the AARP Board of Trustees and the Officers from
Scudder, Stevens & Clark, Inc. responsible for
overseeing the growth and strategic direction of the
AARP Investment Program.

145
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Note 1. Organization and Significant Accounting Policies.

The following AARP Mutual Funds from Scudder (the "AARP Funds" or the
"Funds") are organized as Massachusetts business trusts and are registered under
the Investment Company Act of 1940, as amended, (the "1940 Act") as open-end
management investment companies.

Trust name: Series name:
--------------------------------------------------------------------------
AARP Cash Investment Funds:
AARP High Quality Money Fund
AARP Income Trust:
AARP GNMA and U.S. Treasury Fund
AARP High Quality Bond Fund
AARP Bond Fund for Income
AARP Tax Free Income Trust:
AARP High Quality Tax Free Money Fund
AARP Insured Tax Free General Bond Fund
AARP Growth Trust:
AARP Balanced Stock and Bond Fund
AARP Growth and Income Fund
AARP Global Growth Fund
AARP Capital Growth Fund
AARP U.S. Stock Index Fund
AARP Small Company Stock Fund
AARP International Stock Fund
AARP Managed Investment
Portfolios Trust:
AARP Diversified Income Portfolio
AARP Diversified Growth Portfolio

All Funds are diversified. The Declaration of Trust of each Trust permits
its Trustees to create an unlimited number of series and to issue an unlimited
number of full and fractional shares of each separate series. The Portfolios
within the AARP Managed Investment Portfolios Trust invest primarily in existing
AARP Mutual Funds from Scudder (the "Underlying AARP Funds").

The Funds' financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Funds in
preparation of their financial statements.

A. Security Valuation. The AARP High Quality Money Fund uses the penny
rounding method of security valuation as permitted under Rule 2a-7 of the 1940
Act. Under this method, securities for which market quotations are readily
available and securities purchased with original maturities of 61 days or more
are valued at market. Securities purchased with an original maturity of 60 days
or less are valued at amortized cost. The AARP High Quality Tax Free Money Fund
uses the amortized cost method of security valuation as permitted under Rule
2a-7 of the 1940 Act. Under this method, the value of a security is determined
by adjusting its original cost to face value through the amortization of any
acquisition discount or premium at a constant rate until maturity, which
approximates market. Security valuation with respect to each of the remaining
Funds is performed in the following manner:

Common and preferred stocks traded on U.S. or foreign securities exchanges
are valued at the most recent sale price on such exchange where the security is
principally traded. If no sale occurred, the security is valued at the mean
between the most recent bid and asked quotations on such exchanges. If there is
no such bid and asked quotations the most recent bid quotation is used. Unlisted
securities quoted on the Nasdaq System, for which there have been sales, are
valued at the most recent sale price reported on such system. If there are no
such sales, the value is the high or "inside" bid quotation. Unlisted securities
which are not quoted on the Nasdaq System but are traded in another

146
<PAGE>

over-the-counter market are valued at the most recent sale price on such market.
If there are no such sales, the value is the most recent bid quotation.

Portfolio debt securities other than money market securities are valued by
pricing agents approved by the Trustees, which prices reflect broker/dealer
supplied valuations and electronic data processing techniques. If the pricing
agents are unable to provide such quotations, the most recent bid quotation
supplied by a bona fide market maker shall be used.

Money market instruments purchased with an original maturity of sixty days
or less are valued at amortized cost. Variable rate demand notes are carried at
cost which together with accrued interest approximates market.

Investments of the AARP Diversified Income Portfolio and AARP Diversified
Growth Portfolio are valued at the net asset value per share of each Underlying
AARP Fund as of the close of regular trading on the New York Stock Exchange.

The value of all other securities is determined in good faith under the
direction of the Board of Trustees.

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

C. Futures Contracts. The Funds in the AARP Income Trust, the AARP Insured
Tax Free General Bond Fund, the AARP Balanced Stock and Bond Fund, the AARP
Global Growth Fund, the AARP International Stock Fund, the AARP U.S. Stock Index
Fund, and the AARP Small Company Stock Fund may enter into futures contracts. A
futures contract is an agreement between a buyer or seller and an established
futures exchange or its clearinghouse in which the buyer or seller agrees to
take or make a delivery of a specific amount of an item at a specified price on
a specific date (settlement date). During the period, the AARP High Quality Bond
Fund and the AARP Insured Tax Free General Bond Fund sold interest rate futures
to hedge against declines in the value of portfolio securities and the AARP High
Quality Bond Fund purchased interest rate futures to manage the duration of the
portfolio. Also, during the period, the AARP U.S. Stock Index Fund purchased
index futures as a temporary substitute for purchasing selected investments.

Upon entering into a futures contract, the Fund is required to deposit
with a financial intermediary an amount equal to a certain percentage of the
face value indicated in the futures contract ("initial margin"). Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.

Certain risks may arise upon entering into futures contracts including the
risk that an illiquid secondary market will limit the Fund's ability to close
out a futures contract prior to the settlement date and that a change in the
value of a futures contract may not correlate exactly with changes in the value
of the securities or currencies hedged. When utilizing futures contracts to
hedge, the Fund gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.

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

147
<PAGE>

NOTES TO FINANCIAL STATEMENTS

The Funds in the AARP Income Trust, the AARP Insured Tax Free General Bond
Fund, the AARP Balanced Stock and Bond Fund, the AARP Global Growth Fund, the
AARP International Stock Fund, and the AARP Small Company Stock Fund may enter
into purchased and written options on futures contracts. The Funds in the AARP
Growth Trust and the AARP Income Trust may write covered call options. The Funds
in the AARP Growth Trust may purchase put and call options on stock indices.

During the period, the AARP International Stock Fund purchased put options
on currencies as a hedge against potential adverse price movements in the value
of portfolio assets. Also, during the period, the AARP High Quality Bond Fund
purchased call options on futures as a temporary substitute for purchasing
selected investments.

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

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

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

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

E. Securities Purchased on a Forward Delivery or When-Issued Basis. The
AARP High Quality Money Fund, the Funds in the AARP Income Trust and in the AARP
Tax Free Income Trust, and the AARP Balanced Stock and Bond Fund may purchase
securities on a forward delivery or when-issued basis. Municipal, corporate and
government securities are frequently offered on a forward delivery or
when-issued basis. At the time the Fund makes the commitment to purchase a
security on a forward delivery or when-issued basis, the price of the underlying
security is fixed. The Fund will record the transaction at the time of the
commitment and reflect the value of the security in determining its net asset
value. The settlement date of the transaction can occur within one month or more
after the date the commitment was made. During the period between purchase and
settlement date, no payment is made on behalf of the Fund and no interest
accrues to the Fund. The AARP GNMA and U.S. Treasury Fund had an outstanding
commitment to purchase forward delivery securities as of September 30, 1997

F. Forward Currency Exchange Contracts. The Funds in the AARP Growth
Trust, the AARP High Quality Bond Fund and the AARP Bond Fund for Income may, in
connection with portfolio purchases and sales of securities denominated in a
foreign currency, enter into forward currency exchange contracts ("forward
contracts"). Additionally, from time to time, each Fund may enter into contracts
to hedge certain foreign currency denominated assets. A forward contract is a
commitment to purchase or sell a foreign currency at the settlement date at a
negotiated

148
<PAGE>

rate. During the period, the AARP Balanced Stock and Bond Fund, the AARP Growth
and Income Fund, and the AARP Global Growth Fund utilized forward contracts as a
hedge against changes in exchange rates relating to foreign currency denominated
assets, and as a hedge in connection with portfolio purchases and sales of
securities denominated in foreign currencies. Also, during the period, the AARP
International Stock Fund utilized forward contracts as a hedge in connection
with portfolio purchases and sales of securities denominated in foreign
currencies.

Forward contracts are valued at the prevailing forward exchange rate of
the underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.

Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet the terms of their contracts.
Additionally, when utilizing forward contracts to hedge, the Fund gives up the
opportunity to profit from favorable exchange rate movements during the term of
the contract.

G. Foreign Currency Translations. Foreign currency transactions from
foreign investment activity are translated into U.S. dollars on the following
basis:

(i) market value of investment securities, other assets and liabilities at the
daily rates of exchange, and

(ii) purchases and sales of investment securities, dividend and interest income
and certain expenses at the rates of exchange prevailing on the respective
dates of such transactions.

The Funds do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.

Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.

H. Securities Transactions and Related Investment Income. Securities
transactions are accounted for on the trade date basis and dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis. Original issue discount on securities purchased is accreted on an
effective yield basis over the life of the security. Acquisition discount is
accreted on taxable securities purchased with original maturity dates of one
year or less. Premium on securities purchased by the AARP Tax Free Income Trust
is amortized on an effective yield basis over the life of the security.
Distributions of income and capital gains earned by the Diversified Growth and
Diversified Income Portfolios from the Underlying AARP Funds are recorded on the
ex-dividend date.

Each Fund uses the specific identification method for determining the
realized gain or loss on investments sold for both financial and federal income
tax reporting purposes.

I. Federal Income Taxes. Each of the Funds is treated as a single entity
for federal income tax purposes. It is the policy of each Fund to comply with
the requirements of the Internal Revenue Code of 1986, as amended, which are
applicable to regulated investment companies, and to distribute all of its
taxable and tax exempt income to its shareholders. Accordingly, the Funds paid
no U.S. federal income taxes, and no provisions for federal income taxes were
required.

J. Distribution of Income and Gains. Each AARP Fund intends to follow the
practice of distributing all of its net investment income to shareholders.
Dividends from the AARP High Quality Money Fund and the Funds in the AARP Income
Trust and the AARP Tax Free Income Trust are declared daily and distributed
monthly. Dividends from the AARP Diversified Income Portfolio are declared and
paid monthly. Dividends from the AARP Balanced Stock and

149
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Bond Fund, the AARP U.S. Stock Index Fund, and the AARP Growth and Income Fund
are declared and paid quarterly. Dividends from the AARP Global Growth Fund, the
AARP Small Company Stock Fund, the AARP International Stock Fund, the AARP
Diversified Growth Portfolio, and the AARP Capital Growth Fund are declared and
paid annually. During any particular year, net realized gains for each Fund
which are in excess of any available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders in the following fiscal year. The AARP High Quality Money Fund may
take into account realized gains and losses on the sales of securities in its
daily distributions. Additional distributions may be made by each Fund if
necessary.

The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal income tax
rules and regulations which may differ from generally accepted accounting
principles. These differences relate primarily to investments in options,
futures, forward contracts, foreign denominated investments, mortgage backed
securities, REITs and certain securities sold at a loss. As a result, net
investment income and net realized gain (loss) on investment transactions for a
reporting period may differ from distributions during such period. Accordingly,
the Funds may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of the Fund.

K. Expenses. Each Fund (except for the AARP Diversified Income and
Diversified Growth Portfolios) is charged for those expenses that are directly
attributable to it, such as management, custodian, audit, and certain
shareholder service fees. Expenses that are not directly attributable to a Fund,
such as reports to shareholders, portions of Trustees' and legal fees, are
allocated among all the Funds.

The AARP Diversified Income and Diversified Growth Portfolios ("the
Portfolios") have entered into a Special Servicing Agreement with Scudder,
Stevens & Clark, Inc. (the "Fund Manager"), the Underlying AARP Funds, Scudder
Service Corporation, Scudder Fund Accounting Corporation and Scudder Investor
Services, whereby the Fund Manager arranges for all services pertaining to the
operations of the Portfolios. If the aggregate expenses of the Portfolios are
less than the estimated savings to the Underlying AARP Funds from the operation
of each Portfolio, each of the Underlying AARP Funds will bear those expenses in
proportion to the average daily value of its shares owned by the respective
Portfolio. Consequently, no Underlying AARP Fund will be expected to carry
expenses that are in excess of the estimate of savings to the respective
Underlying AARP Fund. These estimated savings result from the reduction in
shareholder servicing costs due to the elimination of separate shareholder
accounts which either currently are or have potential to be invested in the
Underlying AARP Funds. In the event that the financial benefits to the
Underlying AARP Funds do not exceed aggregate expenses of any Portfolio, the
Fund Manager will pay certain costs on behalf of the respective Portfolio. In
accordance with the Special Servicing Agreement, as discussed above, no expenses
were charged to the AARP Diversified Income and Diversified Growth Portfolios
during the period. For the period February 1, 1997 (commencement of operations)
to September 30, 1997, the Fund Manager paid expenses in the amount $43,964 and
$69,567, on behalf of the Diversified Income and Diversified Growth Portfolios,
respectively. Additionally, the Fund Manager has assumed the organization costs
of each Portfolio.

For the period ended September 30, 1997, the amounts charged and unpaid to
the Underlying AARP Funds under the Special Servicing Agreement, as shown in the
Statement of Operations as part of the Shareholder Services, were as follows:

AARP High Quality Money Fund $ 32,616
AARP Growth and Income Fund $ 58,770
AARP GNMA and U.S. Treasury Fund $ 97,381
AARP International Stock Fund $ 6,683
AARP Bond Fund for Income $ 17,015
AARP Global Growth Fund $ 38,619
AARP Capital Growth Fund $ 6,549
AARP Small Company Stock Fund $ 5,312
AARP U.S. Stock Index Fund $ 17,515

The AARP High Quality Tax Free Money Fund, the AARP High Quality Bond
Fund, the AARP Insured Tax Free General Bond Fund, and the AARP Balanced
Stock and Bond Fund are not subject to the Special Servicing Agreement.

150
<PAGE>

L. Organization Cost. Costs incurred by the AARP Balanced Stock and Bond
Fund, the AARP Global Growth Fund, the AARP U.S. Stock Index Fund, the AARP Bond
Fund for Income, the AARP International Stock Fund, and the AARP Small Company
Stock Fund in connection with their organization and initial registration of
shares have been deferred and are being amortized on a straight-line basis over
a five-year period. The Fund Manager has assumed the organization costs of the
AARP Diversified Growth and the AARP Diversified Income Portfolios.

M. Portfolio Insurance. The cost of premiums paid by the AARP Insured Tax
Free General Bond Fund for insurance on individual securities is
non-cancellable, runs the life of such securities, and is added to the cost
basis of such securities. This insurance provides for the timely payment of
principal and interest on these securities when due and protects the Fund
against loss from default by the Municipal issuer. It does not protect the
investor from losses due to changes in market values.

N. Transactions in Securities of Affiliated Issuers. The AARP Growth and
Income Fund had transactions in securities of affiliated issuers. An affiliated
issuer is a company in which the Fund has ownership of at least 5% of the voting
securities. A summary of the Fund's transactions with companies which are or
were affiliates for the year ended September 30, 1997 is as follows:

<TABLE>
<CAPTION>
Beginning Purchases Sales
Affiliate Cost ($) Cost ($) Cost ($) Ending Cost ($) Market Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General Growth Properties, Inc. 39,388,655 9,946,350 -- 49,335,005 74,181,300
=========================================================================================

<CAPTION>
Realized Gain/Loss ($) Dividend Income ($)
----------------------------------------------------------------------
<S> <C> <C>
Affiliated Issuers -- 3,021,216
Unaffiliated Issuers 533,200,232 148,394,016
----------------------------------------------------------------------
Total 533,200,232 151,415,232
======================================================================
</TABLE>

Note 2. Management Fee and other Related Transactions.

Under the investment management and advisory agreement (the "Management
Agreement") between each Trust (excluding the AARP Managed Investment Portfolios
Trust) and the Fund Manager, the management fee consists of two elements: a Base
Fee and an Individual Fund Fee. The Base Fee is calculated as a percentage of
the combined net assets of all of the AARP Funds ("Program Assets") except the
AARP Diversified Income and the Diversified Growth Portfolios, and each AARP
Fund pays, as its portion of the Base Fee, an amount equal to the ratio of its
daily net assets to the daily net assets of all of the AARP Funds (excluding the
AARP Diversified Income and the Diversified Growth Portfolios).

The Annual Base Fee is calculated as follows:

.35% of the first $2.0 billion of such assets
.33% of the next $2.0 billion of such assets
.30% of the next $2.0 billion of such assets
.28% of the next $2.0 billion of such assets
.26% of the next $3.0 billion of such assets
.25% of the next $3.0 billion of such assets
.24% of such assets thereafter

In addition to the Base Fee, each Fund (excluding the AARP Diversified
Income and the AARP Diversified Growth Portfolios) agrees to pay the Fund
Manager a flat Individual Fund Fee based on the average daily net assets of that
Fund. The Individual Fund Fee Rate recognizes the different characteristics of
each Fund, the varying levels of complexity of investment research and
securities trading required to manage each Fund. The Fund Manager has retained
Bankers Trust Company as Subadviser to the AARP U.S. Stock Index Fund; under the
Subadvisory Agreement, the Fund Manager pays a quarterly fee to the Subadviser,
which amounted to $42,323 for the period ended September 30, 1997.

151
<PAGE>

NOTES TO FINANCIAL STATEMENTS

The Individual Fund Fee Rate is calculated at the following percentages of
the average daily net assets of each Fund:

Fund Rate
- --------------------------------------------- --------------
AARP High Quality Money Fund ............... .10%
AARP High Quality Tax Free Money Fund ...... .10%
AARP GNMA and U.S. Treasury Fund ........... .12%
AARP High Quality Bond Fund ................ .19%
AARP Insured Tax Free General Bond Fund .... .19%
AARP Bond Fund for Income .................. .28%
AARP Balanced Stock and Bond Fund .......... .19%
AARP Growth and Income Fund ................ .19%
AARP U.S. Stock Index Fund ................. 0%
AARP Capital Growth Fund ................... .32%
AARP Small Company Stock Fund .............. .55%
AARP Global Growth Fund .................... .55%
AARP International Stock Fund .............. .60%

The total amount of management fees for each Fund is shown in the
Statement of Operations as Management Fee.

As manager of the assets of each Fund, the Fund Manager directs the
investments of each Fund in accordance with its investment objectives, policies
and restrictions. In addition to portfolio management services, the Fund Manager
under the Management Agreement will provide certain administrative services in
accordance with such Agreement. The Fund Manager has also entered into a Member
Services Agreement with AARP Financial Services Corp. ("AFSC"), a subsidiary of
AARP, and pays portions of its investment management and advisory fee to AFSC.

The Fund Manager agreed to waive a portion of its management fee and
reimburse a portion of expenses in order to maintain the annualized expenses of
the AARP Global Growth Fund at no more than 1.75% of average daily net assets
until January 31, 1998. Effective February 1, 1997, the Fund Manager has agreed
to waive all or a portion of its management fee and reimburse all or a portion
of expenses in order to maintain the following annualized expense ratios until
January 31, 1998: AARP U.S. Stock Index Fund, 0.50% of average daily net assets;
AARP Bond Fund for Income, 0.00% of average daily net assets; AARP International
Stock Fund, 1.75% of average daily net assets; and AARP Small Company Stock
Fund, 1.75% of average daily net assets. The amount of expenses waived and/or
reimbursed by the Fund Manager, if any, for each Fund has been shown in the
Statement of Operations as Expense Reductions.

The Fund Manager did not impose any or a portion of its Management Fee for
certain Funds during the period ended September 30, 1997, as follows: AARP Bond
Fund for Income $97,012; AARP Global Growth Fund $74,953; AARP International
Stock Fund $59,143; AARP Small Company Stock Fund $111,376; and the AARP U.S.
Stock Index Fund $38,841.

On June 26, 1997, the Fund Manager entered into an agreement with The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, pursuant to which Zurich will acquire a majority interest
in the Fund Manager, and the Fund Manager will form a new global investment
organization by combining with Zurich's subsidiary, Zurich Kemper Investments,
Inc. and change its name to Scudder Kemper Investments, Inc. Subject to the
receipt of the required regulatory and shareholder approvals, the transaction is
expected to close in the fourth quarter of 1997.

These Trusts also have a shareholder servicing agreement with Scudder
Service Corporation ("SSC"), a subsidiary of the Fund Manager. As shareholder
servicing agent, SSC provides various transfer agent, dividend disbursing, and
shareholder communication functions. The amount for each Fund is shown in the
table below, and is included in Services to shareholders in the Statements of
Operations.

Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Fund
Manager, is responsible for determining the daily net asset value per share and
maintaining the portfolio and general accounting records of the Funds. The
amount for each Fund is shown in the table below, and is included in Custodian
and accounting fees in the Statements of Operations.

152
<PAGE>

For the period ended September 30, 1997 the amounts charged by SSC and
SFAC to the Funds were as follows:

<TABLE>
<CAPTION>
Total SSC Total SFAC
Amount Unpaid at Amount Unpaid at
Charged To September 30, Charged To September 30,
Fund Fund by SSC(a) 1997* Fund by SFAC(b) 1997*
- ------------------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
AARP High Quality Money Fund $1,505,677 $ 121,984 $ 54,052 $ 4,588
AARP High Quality Tax Free Money Fund 256,965 20,052 30,023 2,500
AARP GNMA and U.S. Treasury Fund 6,732,169 539,940 480,845 38,769
AARP High Quality Bond Fund 1,455,652 114,310 82,859 5,606
AARP Insured Tax Free General Bond Fund 1,741,482 138,720 162,915 13,903
AARP Bond Fund for Income -- -- -- --
AARP Balanced Stock and Bond Fund 1,357,972 132,955 95,386 8,862
AARP Growth and Income Fund 6,853,761 672,527 323,033 31,430
AARP U.S. Stock Index Fund -- -- -- --
AARP Capital Growth Fund 1,889,072 180,473 110,317 10,035
AARP Small Company Stock Fund 93,491 93,491 25,445 25,445
AARP Global Growth Fund 558,504 51,344 95,221 9,698
AARP International Stock Fund -- -- -- --
</TABLE>

* Total unpaid amounts are included in Other payables and accrued expenses
in the Statements of Assets and Liabilities.

(a) SSC did not impose any or a portion of its fee for the AARP Bond Fund for
Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund, and
AARP International Stock Fund amounting to $40,906, $60,094, $25,298, and
$54,419, respectively.

(b) SFAC did not impose any or a portion of its fee for the AARP Bond Fund for
Income, AARP U.S. Stock Index Fund, AARP Small Company Stock Fund, and
AARP International Stock Fund amounting to $25,000, $73,071, $6,725, and
$33,333, respectively.

The AARP Investment Program pays each Trustee unaffiliated with Scudder or
AARP an annual retainer of $10,000; additionally, specified amounts are paid by
each Fund for board and committee meetings attended. The amounts for each Fund
have been shown in the Statement of Operations as Trustees' fees and expenses.

The Diversified Portfolios do not invest in the Underlying AARP Funds for
the purpose of exercising management or control, however, investments within the
set limits may represent a significant portion of an Underlying AARP Fund's net
assets. At September 30, 1997, the Diversified Income Portfolio held the
following Underlying AARP Funds' outstanding shares: approximately 22% of the
AARP Bond Fund for Income; and 6% of the AARP U.S. Stock Index Fund. The
Diversified Growth Portfolio held the following Underlying AARP Funds'
outstanding shares at September 30, 1997: approximately 22% of the AARP
International Stock Fund; 19% of the AARP Bond Fund for Income; 18% of the U.S.
Stock Index Fund; and 9% of the AARP Small Company Stock Fund.

Note 3. Commitments.

As of September 30, 1997, the AARP Global Growth Fund had entered into the
following forward currency exchange contracts resulting in net unrealized
depreciation of $248,684.

Net Unrealized
Appreciation
(Depreciation)
Contracts to Deliver In Exchange For Settlement Date (U.S.$)
- -------------------- ------------------ --------------- -------------------
DEM 7,903,094 USD 4,351,924 1/30/98 $ (155,565)
DEM 3,337,679 USD 1,812,577 2/17/98 (93,119)
-----------
$ (248,684)
===========

153
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Report of Independent Accountants

[PRICE WATERHOUSE LOGO]

To the Trustees and Shareholders of
AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust
and AARP Managed Investment Portfolios Trust

In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of each
of the series constituting AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, AARP Growth Trust and AARP Managed Investment
Portfolios Trust (hereafter referred to as the "Trusts") at September 30,
1997, the results of each of their operations, the changes in each of
their net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trusts' management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at September 30,
1997 by correspondence with the custodian and the application of
alternative auditing procedures where securities purchased had not been
received, provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP

Price Waterhouse LLP
Boston, Massachusetts
November 12, 1997

154
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O F F I C E R S A N D T R U S T E E S

155

<PAGE>

OFFICERS AND TRUSTEES

CAROLE LEWIS ANDERSON

Trustee of AARP Funds; President, MASDUN Capital Advisors; Formerly
Principal, Suburban Capital Markets; Director, VICORP Restaurants, Inc.;
Member of the Board, Association for Corporate Growth of Washington,
D.C.; Trustee, Hasbro Children's Foundation and Mary Baldwin College.

ADELAIDE ATTARD

Trustee of AARP Funds; Member, New York City Department of Aging
Advisory Council--Appointed by Mayor (1995-Present); Consultant,
Gerontology; Commissioner, County of Nassau, NY, Department of Senior
Citizen Affairs (1971-1991); Board Member, American Association of
International Aging (1981 to 1996); Member, NYS Community Services for
the Elderly Advisory Council--Appointed by Governor (1987-1991);
Chairperson, Federal Council on Aging (1981-1986); U.S. Delegate to 1982
United Nations World Assembly on Aging.

ROBERT N. BUTLER, M.D.

Trustee of AARP Funds; Director, International Longevity Center and
Professor of Geriatrics and Adult Development; Chairman, Henry L.
Schwartz Department of Geriatrics and Adult Development, Mount Sinai
Medical Center; Formerly Director, National Institute on Aging, National
Institute of Health (1976-1982).

ESTHER CANJA

Trustee of AARP Funds; Vice President, American Association of Retired
Persons; Trustee and Chair, AARP Group Health Insurance Plan; Board
Liaison, National Volunteer Leadership Network Advisory Committee;
Chair, Board Operations Committee; AARP State Director of Florida
(1990-1992).

LINDA C. COUGHLIN*

Chairperson and Trustee of AARP Funds; Managing Director and Member,
Board of Directors of Scudder, Stevens & Clark, Inc.

HORACE B. DEETS

Vice Chairman and Trustee of AARP Funds; Executive Director,
American Association of Retired Persons; Member, Board of
Councilors, Andrus Gerontology Center; Member of the Board,
HelpAge International.

EDGAR R. FIEDLER

Trustee of AARP Funds; Senior Fellow and Economic Counselor, The
Conference Board, Inc.; Director: The Stanley Works, HT Insight Funds,
and Emerging Mexico Fund.

EUGENE P. FORRESTER

Trustee of AARP Funds; Consultant; International Trade Counselor; Lt.
General (Retired), U.S. Army; Command General, U.S. Army Western
Command, Honolulu; Consultant: Digital Equipment Corp., DHI, Philip
Morris, PICS Previews, and Whittle Communications.

GEORGE L. MADDOX, JR.

Trustee of AARP Funds; Professor Emeritus and Director, Long Term Care
Resources Program, Duke University Medical Center; Senior Fellow, Center
for the Study of Aging and Human Development, Duke University; Professor
Emeritus of Sociology, Departments of Sociology and Psychiatry, Duke
University.

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<PAGE>

ROBERT J. MYERS

Trustee of AARP Funds; Actuarial Consultant; Formerly Executive
Director, National Commission on Social Security Reform; Director: NASL
Series Trust, Inc. and North American Funds, Inc.; Formerly Director,
Board of Pensions, Evangelical Lutheran Church in America; Formerly
Chairman, Commission on Railroad Retirement Reform; Member, U.S.
Office of Technology Assessment, Prospective Payment Assessment
Commission.

JAMES H. SCHULZ

Trustee of AARP Funds; Professor of Economics and Kirstein
Professor of Aging Policy, Policy Center of Aging, Florence
Heller School, Brandeis University.
GORDON SHILLINGLAW

Trustee of AARP Funds; Professor Emeritus of Accounting, Columbia
University Graduate School of Business; Formerly Director and Treasurer,
FERIS Foundation of America.

THOMAS W. JOSEPH* JAMES W. PASMAN*
Vice President Vice President

DAVID S. LEE* KATHRYN L. QUIRK*
Vice President and Assistant Treasurer Vice President and Secretary

THOMAS F. MCDONOUGH* HOWARD SCHNEIDER*
Vice President and Assistant Secretary Vice President

PAMELA A. MCGRATH* CORNELIA SMALL*
Vice President and Treasurer President

EDWARD J. O'CONNELL*
Vice President and Assistant Treasurer

*Scudder, Stevens & Clark, Inc.

Effective January 1, 1995, each member of and nominee for the Board of
Trustees must own shares of one or more of the Funds within the AARP
Investment Program of which he/she serves as Trustee.

157
<PAGE>

SERVICE INFORMATION

SHAREHOLDER Our knowledgeable AARP Mutual Fund Representatives
SERVICE LINE are available to answer questions about the
Program or your account Monday through Friday,
1-800-253-2277 between 8:00 a.m. and 8:00 p.m., Eastern time.
Transactions can be made Monday through Friday
between 8:00 a.m. and 4:00 p.m., Eastern time.

Write: AARP Investment Program from Scudder
P.O. Box 2540
Boston, MA 02208-2540

For overnight AARP Investment Program from Scudder
and certified 42 Longwater Drive
mail: Norwell, MA 02061-1612

EASY-ACCESS LINE Shareholders with a touch-tone telephone may call
this automated line to obtain AARP Fund
1-800-631-4636 performance and account information, or to
exchange or sell (redeem) AARP Mutual Fund shares.
This service is available 24 hours a day, 7 days a
week.

TRANSACTIONS If you have access to a fax machine, you can fax
BY FAX transaction requests. Any exchange or redemption
request received after 4:00 p.m. business days or
1-800-821-6234 on weekends will be processed the next business
day. All faxes are kept confidential.

TDD (TELECOMMUNICATIONS AARP members with hearing or speech impairments
DEVICE FOR THE DEAF AND and access to TDD equipment can communicate with
SPEECH?IMPAIRED) the AARP Investment Program Monday through Friday
between 8:00 a.m. and 5:00 p.m., Eastern time.
1-800-634-9454 Transactions can be made between 8:00 a.m. and
4:00 p.m., Eastern time.

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TAX INFORMATION (UNAUDITED)

Of the dividends paid from net investment income by the AARP High Quality
Tax Free Money Fund and the AARP Insured Tax Free General Bond Fund for
the Funds' fiscal years ending September 30, 1997, 100% constituted
exempt-interest dividends for regular federal income tax purposes.

Pursuant to Section 852 of the Internal Revenue Code, the AARP Balanced
Stock and Bond Fund, the AARP Growth and Income Fund, the AARP U.S. Stock
Index Fund, the AARP Capital Growth Fund, the AARP Global Growth Fund, and
the AARP Insured Tax Free General Bond Fund designate $22,565,952,
$503,261,408, $72,533, $71,098,608, $1,636,598, and $2,583,310,
respectively, as capital gain dividends for their fiscal years ended
September 30, 1997.

Pursuant to Section 853 of the Internal Revenue code, the AARP Global
Growth Fund and the AARP International Stock Index Fund designate $0.023
and $0.020 per share (representing a total of $177,801 and $23,212) of
foreign taxes and $0.097 and $0.126 per share (representing a total of
$743,398 and $147,497) of foreign source income as having been paid in the
fiscal year ended September 30, 1997, respectively.

Pursuant to Section 854 of the Internal Revenue Code, the percentages of
ordinary income dividends paid qualify for the dividends received
deduction for corporations are as follow: AARP Balanced Stock and Bond
Fund 41.32%, AARP Capital Growth Fund 100%, AARP U.S. Stock Index Fund
100%, and AARP Growth and Income Fund 96.36%.

In January 1998 you will receive federal tax information on all
distributions paid to your account in calendar year 1997.

159

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GLOSSARY

AVERAGE ANNUALIZED The one-year return of an investment based on its
TOTAL RETURN compounded total return. The annualized return
gives the investor an idea of the performance
during each year of a listed period, such as 3
years, 5 years or 10 years.

BARBELL STRATEGY An investment strategy where the portfolio manager
holds bonds with short maturities and long
maturities that would give the impression of a bar
bell if the clusters of bonds on either end were
illustrated.

COUPON The name given to the interest payments that could
be clipped and sent to the issuer for payment. The
average coupon rate would be the expected interest
rates of all the bonds held in a portfolio.

QUALITY Quality is a measure of a bond issuer's ability to
repay interest and principal in a timely manner.
The average quality is a designation of all the
bonds held in the portfolio.

DURATION Duration is a mathematical calculation of the
average life of a bond (or bonds in a bond fund)
that serves as a useful measure of its price risk.
Each year of duration represents an expected 1%
change in the price of a bond for every 1% change
in interest rates. For example, if a bond fund has
an average duration of two years, its price will
fall about 2% when interest rates rise by one
percentage point. Conversely, the bond fund's
price will rise about 2% when interest rates fall
by one percentage point.

MATURITY The date upon which bonds mature, that is, the
date when the issuer must pay back the face amount
of the bond. An investor who buys $10,000 worth of
25-year bonds will receive $10,000 at the end of
25 years, after having received interest payments
(coupons) over the 25-year period.

PREPAYMENT RISK The possibility that, as interest rates fall,
homeowners will refinance their home mortgages,
resulting in the prepayment of GNMA securities.

TOTAL RETURN A measure of an investment's performance that
takes into account income paid, other
distributions, and any increase or decline in the
value of the principal over a given period of
time.

VALUATION The process in which the value of a security is
assessed or determined.

YIELD The income per share paid to mutual fund
shareholders from the dividends and interest of
that fund, expressed as a percentage for a stated
period of time. It is based on past performance
and measured in time increments.

YIELD TO MATURITY Concept used to determine the rate of return an
investor will receive if a long-term,
interest-bearing investment, such as a bond, is
held until its maturity date.

160
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