KEMPER STATE TAX FREE INCOME SERIES
485APOS, 2000-12-01
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        Filed electronically with the Securities and Exchange Commission
                              on December 1, 2000

                                                               File No. 2-81549
                                                               File No. 811-3657

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM N-1A


                   REGISTRATION STATEMENT UNDER THE SECURITIES
                                   ACT OF 1933                            /    /
                           Pre-Effective Amendment No.
                                                       --                 /    /
                         Post-Effective Amendment No. 33
                                                       --                 /  X /
                                     and/or
                        REGISTRATION STATEMENT UNDER THE
                         INVESTMENT COMPANY ACT OF 1940                   /    /

         Amendment No.  33
                       ----                                               /  X /


                        Kemper State Tax-Free Income Series.
                        -----------------------------------
                 (Exact Name of Registrant as Specified in Charter)

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

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

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

It is proposed that this filing will become effective (check appropriate box):

<TABLE>
<S>                                                             <C>
/    / Immediately upon filing pursuant to paragraph  ( b )    /    /  days after filing pursuant to paragraph ( a ) ( 1 )
/    / days after filing pursuant to paragraph ( a ) ( 2 )     /    /  On (date)pursuant to paragraph ( b )
/  X / On February 1, 2001 pursuant to paragraph ( a ) ( 1 )   /    /  On ( date ) pursuant to paragraph ( a ) ( 3 ) of Rule 485
</TABLE>

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


<PAGE>

                      KEMPER STATE TAX -FREE INCOME SERIES

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



                                       2
<PAGE>

                                                                       LONG-TERM
                                                                       INVESTING
                                                                            IN A
                                                                      SHORT-TERM
                                                                      WORLD (SM)

     February 1, 2001

Prospectus

                                          KEMPER CALIFORNIA TAX-FREE INCOME FUND

                                                                         Class S

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

                                                             [LOGO] KEMPER FUNDS


<PAGE>

HOW THE                      INVESTING IN
FUND WORKS                   THE FUND

 2  Kemper California        11  How To Buy, Sell or Exchange
    Tax-Free Income Fund         Shares

 9  Other Policies And Risks 13  Policies You Should
                                 Know About
10  Financial Highlights
                             17  Understanding
                                 Distributions And Taxes

<PAGE>

How The Fund Works

This fund invests mainly in municipal bonds, and seeks income that is free from
regular federal income tax as well as state and local income tax for investors
in that state.

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

<PAGE>

TICKER SYMBOLS      CLASS S





Kemper
California Tax-Free
Income Fund



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

                                       2
<PAGE>

--------------------------------------------------------------------------------
The Fund's Main Strategy

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

The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.

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

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

---[ICON]-----------------------------------------------------------------------
     CREDIT QUALITY POLICIES

Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.

Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).

The fund could put up to 25% of total assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, junk bonds may pay higher yields and have higher volatility and risk of
default.

                                       3
<PAGE>

--------------------------------------------------------------------------------
The Main Risks Of Investing In The Fund

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

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

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

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

Other factors that could affect performance include:

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

o    derivatives could produce disproportionate losses

o    securities that rely on third-party insurers to raise their credit quality
     could fall in price or go into default if the financial condition of the
     insurer deteriorates

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

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

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

This fund may suit California taxpayers who are in a moderate to high tax
bracket and are seeking a long-term income investment that generates tax-free
income.

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

                                       4
<PAGE>

--------------------------------------------------------------------------------
Performance

The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.

For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.

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

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

11.42   8.25    12.59   -5.47   19.48    2.98    8.59    6.02  6.70
--------------------------------------------------------------------------------





--------------------------------------------------------------------------------
  1991    1992    1993   1994    1995    1996    1997    1998   1999     2000
--------------------------------------------------------------------------------

Best quarter: ____%, Q_ 19__          YTD return as of ___: ___%

Worst quarter: ____%, Q_ 19__

------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/2000)
------------------------------------------------------------------------------

                                                                   Since
                             Since       Since        Since          --
                             --           --            --        Life of
                             1 Year     5 Years      10 Years     Class A
------------------------------------------------------------------------------
Fund -- Class A
------------------------------------------------------------------------------
Index
------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
------------------------------------------------------------------------------

Class S does not have a full calendar year of performance and past performance
data is not provided. Although Class A shares are not offered in this
prospectus, they are invested in the same portfolio. Class S shares' annual
returns differ only to the extent that the classes have different fees and
expenses.

                                       5
<PAGE>

--------------------------------------------------------------------------------
How Much Investors Pay

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

--------------------------------------------------------------------------------
Fee Table                                                           Class S
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment                 None
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee                                                        %
--------------------------------------------------------------------------------
Distribution (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------

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

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

Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class S shares                                 $            $            $
------------------------------------------------------------------------------

Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class S shares                                 $            $            $
------------------------------------------------------------------------------


                                       6
<PAGE>

--------------------------------------------------------------------------------
THE INVESTMENT ADVISOR

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

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

For serving as the fund's investment advisor, Scudder Kemper receives a
management fee.

For the most recent fiscal year, the actual amount the fund paid in management
fees was --% of its average daily net assets.

                                       7
<PAGE>

---[ICON]-----------------------------------------------------------------------
          FUND MANAGERS

Below are the people who handle the fund's day-to-day management:

Philip G. Condon                  Matthew J. Caggiano
Co-Lead Portfolio                 o Began investment
Manager                             career in 1989
o Began investment career         o Joined the advisor
  in 1976                           in 1991
o Joined the advisor              o Joined the fund team
  in 1983                           in 1999
o Joined the fund team
  in 1999

Eleanor R. Brennan
Co-Lead Portfolio
Manager
o Began investment career
  in 1990
o Joined the advisor
  in 1995
o Joined the fund team
  in 1998

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

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

The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.

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



                                       8
<PAGE>

--------------------------------------------------------------------------------
Other Policies and Risks

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

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

o    As a temporary defensive measure, the fund could shift up to 100% of its
     assets into investments such as U.S. or Canadian securities money market
     securities. This could prevent losses, but would mean that the fund was not
     pursuing its goal.

o    The fund may trade securities actively. This could raise transaction costs
     (thus lowering performance) and could mean higher taxable distributions.

o    Scudder Kemper measures credit quality at the time it buys securities,
     using independent ratings or, for unrated securities, its own credit
     analysis. If a security's credit quality changes, the security will usually
     be sold unless the adviser believes this would not be in the shareholders'
     best interests.

For more information

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

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

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

                                       9
<PAGE>

Financial Highlights

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

{INSERT TABLE}

                                       10
<PAGE>

How to Buy, Sell and Exchange Class S Shares

Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."

--------------------------------------------------------------------------------
Class S            First investment          Additional investments
--------------------------------------------------------------------------------

                   $2,500 or more for        $100 or more for regular
                   regular accounts          accounts

                   $1,000 or more for IRAs   $50 or more for IRAs

                                             $50 or more with an Automatic
                                             Investment Plan
--------------------------------------------------------------------------------

By mail or         o Fill out and sign an    Send a Scudder investment slip
express              application             or short note that includes:
(see below)
                   o Send it to us at the    o fund and class name
                     appropriate address,
                     along with an           o account number
                     investment check
                                             o check payable to "The Scudder
                                               Funds"
--------------------------------------------------------------------------------

By wire            o Call 1-800-SCUDDER for  o Call 1-800-SCUDDER for
                     instructions               instructions
--------------------------------------------------------------------------------

By phone           --                        o Call 1-800-SCUDDER for
                                               instructions
--------------------------------------------------------------------------------

With an automatic  o Fill in the             o To set up regular investments
investment plan      information on your       from a bank checking account,
                     application and include   call 1-800-SCUDDER
                     a voided check
--------------------------------------------------------------------------------

Using QuickBuy     --                        o Call 1-800-SCUDDER
--------------------------------------------------------------------------------

On the Internet    o Go to "funds and        o Call 1-800-SCUDDER to ensure
                     prices" at                you have electronic services
                     www.scudderdirect.com
                                             o Register at www.scudder.com
                   o Print out a prospectus
                     and a new account       o Follow the instructions for
                     application               buying shares with money from
                                               your bank account
                   o Complete and return
                     the application with
                     your check
--------------------------------------------------------------------------------


--------------------------------------------------------------------------------
[ICON]       Regular mail:
             The Scudder Funds, PO Box 2291, Boston, MA 02107-2291

             Express, registered or certified mail:
             The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839

             Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------

                                       11
<PAGE>

Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.

--------------------------------------------------------------------------------
                   Exchanging into another
Class S            fund                      Selling Shares
--------------------------------------------------------------------------------

                   $2,500 or more to open a  Some transactions, including
                   new account ($1,000 or    most for over $100,000, can
                   more for IRAs)            only be ordered in writing; if
                                             you're in doubt, see page 15
                   $100 or more for
                   exchanges between
                   existing accounts
--------------------------------------------------------------------------------

By phone or wire   o Call 1-800-SCUDDER for  o Call 1-800-SCUDDER for
                     instructions              instructions
--------------------------------------------------------------------------------

Using SAIL(TM)     o Call 1-800-343-2890     o Call 1-800-343-2890 and
                     and follow the            follow the instructions
                     instructions
--------------------------------------------------------------------------------

By mail,           Your instructions should  Your instructions should
express or fax     include:                  include:
(see previous
page)              o the fund, class, and    o the fund, class and account
                     account number you're     number from which you want to
                     exchanging out of         sell shares

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

                   o a daytime telephone
                     number
--------------------------------------------------------------------------------

With an automatic  --                        o To set up regular cash
withdrawal plan                                payments from a Scudder
                                               account, call 1-800-SCUDDER
--------------------------------------------------------------------------------

Using QuickSell    --                        o Call 1-800-SCUDDER
--------------------------------------------------------------------------------

On the Internet    o Register at             --
                     www.scudder.com

                   o Follow the
                     instructions for making
                     on-line exchanges
--------------------------------------------------------------------------------


                                       12
<PAGE>

--------------------------------------------------------------------------------
[ICON]    Questions? You can speak to a Scudder representative between 8 a.m.
          and 8 p.m. Eastern time on any fund business day by calling
          1-800-SCUDDER.
--------------------------------------------------------------------------------

Policies You Should Know About

Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.

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

In either case, keep in mind that the information in this prospectus applies
only to the fund's Class S shares. The fund does have other share classes, which
are described in separate prospectuses and which have different fees,
requirements, and services.

In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-SCUDDER.

Policies about transactions

The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).

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

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

                                       13
<PAGE>

--------------------------------------------------------------------------------
[ICON]    The Scudder Web site can be a valuable resource for shareholders with
          Internet access. To get up-to-date information, review balances or
          even place orders for exchanges, go to www.scudder.com.
--------------------------------------------------------------------------------

Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.

--------------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------------

QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-SCUDDER.

When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.

When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The fund
can only accept wires of $100 or more.

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

                                       14
<PAGE>

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

When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.

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

Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.

How the fund calculates share price

For each share class, the price at which you buy shares is the net asset value
per share, or NAV. To calculate NAV, each share class of the fund uses the
following equation:

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

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

                                       15
<PAGE>

Other rights we reserve

You should be aware that we may do any of the following:

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

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

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

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

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

                                       16
<PAGE>

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

Understanding Distributions and Taxes

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

The fund intends to pay dividends and distributions to its shareholders annually
in November or December, and if necessary may do so at other times as well.

You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.

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

                                       17
<PAGE>

The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:

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

-------------------------------------------------------------------
Generally taxed at capital gains rates
-------------------------------------------------------------------
o long-term capital gains from selling fund shares
-------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
-------------------------------------------------------------------

You may be able to claim a tax credit or deduction for your share of any foreign
taxes the fund pays.

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

If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.

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

                                       18
<PAGE>

--------------------------------------------------------------------------------
To Get More Information

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

Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).

If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials in person at the SEC's Public Reference Room
in Washington, DC.

SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (800) SEC-0330

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



SEC File Number

Kemper California Tax-Free Income Fund     811-3657




Principal Underwriter

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

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


<PAGE>

                                                                       LONG-TERM
                                                                       INVESTING
                                                                            IN A
                                                                      SHORT-TERM
                                                                       WORLD(SM)
February 1, 2001

Prospectus

                                            KEMPER NEW YORK TAX-FREE INCOME FUND

                                                                         Class S

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

                                                             [LOGO] KEMPER FUNDS


<PAGE>

HOW THE                       INVESTING IN
FUND WORKS                    THE FUND

  2 Kemper New York Tax-Free   10 How To Buy, Sell and
    Income Fund                   Exchange Class S Shares

  8 Other Policies And Risks   12 Policies You Should
                                  Know About
  9 Financial Highlights
                               16 Understanding
                                  Distributions And Taxes









<PAGE>


How The Fund Works

This fund invests mainly in municipal bonds. and seeks income that is free from
regular federal income tax as well as state and local income tax for investors
in that state.

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

<PAGE>


Kemper New York Tax-Free Income Fund



TICKER SYMBOLS  CLASS S

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

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



                                       2
<PAGE>

The Fund's Main Strategy

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

The fund can buy many types of municipal securities. These may include revenue
bonds (which are backed by revenues from a particular source), general
obligation bonds (which are typically backed by the issuer's ability to levy
taxes), as well as, to a limited extent, municipal lease obligations and
investments representing an interest in these.

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

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

[ICON]
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES

Normally, at least 90% of the fund's municipal securities are in the top four
grades of credit quality.

Up to 10% of the fund's municipal securities may be junk bonds, which are those
below the fourth credit grade (i.e., grade BB/Ba and below).

Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.


                                       3
<PAGE>

The Main Risks Of Investing In The Fund

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

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

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

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

Other factors that could affect performance include:

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

o        derivatives could produce disproportionate losses

o        securities that rely on third-party insurers to raise their credit
         quality could fall in price or go into default if the financial
         condition of the insurer deteriorates

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

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



                                       4
<PAGE>

Performance

The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.

For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.

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

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1991           13.39
1992            9.43
1993           12.95
1994           -4.95
1995           17.98
1996            2.54
1997            8.89
1998            6.00
1999            0.0
2000            0.0

Best quarter: ____%, Q_ 19__          YTD return as of ___: ___%
Worst quarter: ____%, Q_ 19__


Average Annual Total Returns (as of 12/31/2000)
--------------------------------------------------------------------------------
                                                                         Since
                                    Since       Since        Since          --
                                    --           --            --        Life of
                                    1 Year      5 Years      10 Years    Class A
--------------------------------------------------------------------------------
Fund -- Class A
--------------------------------------------------------------------------------
Index
--------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a widely recognized unmanaged
measure of approximately 15,000 bonds. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
--------------------------------------------------------------------------------


The table includes the effects of maximum sales loads. In both the table and the
chart, returns for 1991 would have been lower if operating expenses hadn't been
reduced.

Class S does not have a full calendar year of performance and past performance
data is not provided. Although Class A shares are not offered in this
prospectus, they are invested in the same portfolio. Class S shares' annual
returns differ only to the extent that the classes have different fees and
expenses.


                                       5
<PAGE>

How Much Investors Pay


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

--------------------------------------------------------------------------------
Fee Table                                                             Class S
--------------------------------------------------------------------------------

Shareholder Fees, paid directly from your investment                   None
--------------------------------------------------------------------------------

Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee
--------------------------------------------------------------------------------
Distribution (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------


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

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

Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class S shares                                 $            $            $
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class S shares                                 $            $            $
------------------------------------------------------------------------------


                                       6
<PAGE>

THE INVESTMENT ADVISOR

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

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

For serving as the fund's investment advisor, Scudder Kemper receives a
management fee.

For the most recent fiscal year, the actual amount the fund paid in management
fees was --% of its average daily net assets.

[ICON]
--------------------------------------------------------------------------------
FUND MANAGERS

Below are the people who handle the fund's day-to-day
management:

Ashton P. Goodfield            Philip G. Condon
Co-Lead Portfolio Manager      Co-Lead Portfolio Manager
o  Began investment career     o  Began investment career
   in 1986                        in 1976
o  Joined the advisor in 1986  o  Joined the advisor
o  Joined the fund team           in 1983
   in 1999                     o  Joined the fund team
                                  in 1999


THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

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

The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.


                                       7
<PAGE>

Other Policies and Risks

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

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

o        As a temporary defensive measure, the fund could shift up to 100% of
         its assets into investments such as U.S. or Canadian securities money
         market securities. This could prevent losses, but would mean that the
         fund was not pursuing its goal.

o        The fund may trade securities actively. This could raise transaction
         costs (thus lowering performance) and could mean higher taxable
         distributions.

o        Scudder Kemper measures credit quality at the time it buys securities,
         using independent ratings or, for unrated securities, its own credit
         analysis. If a security's credit quality changes, the security will
         usually be sold unless the adviser believes this would not be in the
         shareholders' best interests.

For more information

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

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

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


                                       8
<PAGE>

Financial Highlights

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

[INSERT TABLE]



                                       9
<PAGE>

How to Buy, Sell and Exchange Class S Shares

Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Class S            First investment                 Additional investments
------------------------------------------------------------------------------------
<S>                <C>                              <C>
                   $2,500 or more for regular       $100 or more for regular
                   accounts                         accounts

                   $1,000 or more for IRAs          $50 or more for IRAs

                                                    $50 or more with an Automatic
                                                    Investment Plan
------------------------------------------------------------------------------------
By mail or        o  Fill out and sign an           Send a Scudder investment slip
express              application                    or short note that includes:
(see below)
                  o  Send it to us at the           o  fund and class name
                     appropriate address, along
                     with an investment check       o  account number

                                                    o  check payable to "The Scudder
                                                       Funds"
------------------------------------------------------------------------------------
By wire           o  Call 1-800-SCUDDER for        o  Call 1-800-SCUDDER for
                     instructions                     instructions
------------------------------------------------------------------------------------
By phone          --                               o  Call 1-800-SCUDDER for
                                                      instructions
------------------------------------------------------------------------------------
With an automatic o  Fill in the information on    o  To set up regular investments
investment plan      your application and include     from a bank checking account,
                     a voided check                   call 1-800-SCUDDER
------------------------------------------------------------------------------------
Using QuickBuy    --                               o  Call 1-800-SCUDDER
------------------------------------------------------------------------------------
On the Internet   o  Go to "funds and prices" at   o  Call 1-800-SCUDDER to ensure
                     www.scudderdirect.com            you have electronic services

                  o  Print out a prospectus and a  o  Register at www.scudder.com
                     new account application
                                                   o  Follow the instructions for
                  o  Complete and return the          buying shares with money from
                     application with your check      your bank account
------------------------------------------------------------------------------------


--------------------------------------------------------------------------------
[ICON]       Regular mail:
             The Scudder Funds, PO Box 2291, Boston, MA 02107-2291

             Express, registered or certified mail:
             The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839

             Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
</TABLE>


                                       10
<PAGE>

Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Class S           Exchanging into another fund       Selling shares
--------------------------------------------------------------------------------------
<S>               <C>                                <C>
                  $2,500 or more to open a new       Some transactions, including
                  account ($1,000 or more for        most for over $100,000, can
                  IRAs)                              only be ordered in writing; if
                                                     you're in doubt, see page 14
                  $100 or more for exchanges
                  between existing accounts
---------------------------------------------------------------------------------------
By phone or wire  o  Call 1-800-SCUDDER for          o  Call 1-800-SCUDDER for
                     instructions                       instructions
---------------------------------------------------------------------------------------
Using SAIL(TM)    o  Call 1-800-343-2890 and         o  Call 1-800-343-2890 and
                     follow the instructions            follow the instructions
---------------------------------------------------------------------------------------
By mail,          Your instructions should           Your instructions should
express or fax    include:                           include:
(see previous
page)             o  the fund, class, and account    o  the fund, class and account
                     number you're exchanging           number from which you want to
                     out of                             sell shares

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

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

                  o  a daytime telephone number
---------------------------------------------------------------------------------------
With an automatic --                                 o  To set up regular cash
withdrawal plan                                         payments from a Scudder
                                                        account, call 1-800-SCUDDER
---------------------------------------------------------------------------------------
Using QuickSell   --                                 o  Call 1-800-SCUDDER
---------------------------------------------------------------------------------------
On the Internet   o  Register at www.scudder.com     --

                  o  Follow the instructions for
                     making on-line exchanges
---------------------------------------------------------------------------------------
</TABLE>


                                       11
<PAGE>

--------------------------------------------------------------------------------
[ICON]         Questions? You can speak to a Scudder representative between 8
               a.m. and  8 p.m. Eastern time on any fund business day by calling
               1-800-SCUDDER.
--------------------------------------------------------------------------------

Policies You Should Know About

Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.

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

In either case, keep in mind that the information in this prospectus applies
only to the fund's Class S shares. The fund does have other share classes, which
are described in separate prospectuses and which have different fees,
requirements, and services.

In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-SCUDDER.

Policies about transactions

The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. eastern time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).

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

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


                                       12
<PAGE>

--------------------------------------------------------------------------------
[ICON]          The Scudder Web site can be a valuable resource for shareholders
                with Internet access. To get up-to-date information, review
                balances or even place orders for exchanges, go to
                www.scudder.com (Class S).
--------------------------------------------------------------------------------

Automated phone information is available 24 hours a day. You can use your
automated phone services to get information on Scudder funds generally and on
accounts held directly at Scudder. If you signed up for telephone services, you
can also use this service to make exchanges and sell shares.

--------------------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at 1-800-343-2890
--------------------------------------------------------------------------------

QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-SCUDDER.

When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.

When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The fund
can only accept wires of $100 or more.

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

                                       13
<PAGE>

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

When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.

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

Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.

How the fund calculates share price

For each share class, the price at which you buy shares is the net asset value
per share, or NAV. To calculate NAV, each share class of the fund uses the
following equation:

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

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



                                       14
<PAGE>

Other rights we reserve

You should be aware that we may do any of the following:

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

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

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

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

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




                                       15
<PAGE>

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

Understanding Distributions and Taxes

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

The fund intends to pay dividends and distributions to its shareholders annually
in November or December, and if necessary may do so at other times as well.

You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.

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


                                       16
<PAGE>

The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:

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

You may be able to claim a tax credit or deduction for your share of any foreign
taxes the fund pays.

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

If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.

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



                                       17
<PAGE>

To Get More Information

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

Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).

If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials in person at the SEC's Public Reference Room
in Washington, DC.

SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (800) SEC-0330

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

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

SEC File Number
Kemper New York Tax-Free Income Fund     811-3657

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


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

<PAGE>

                          KEMPER TAX-FREE INCOME FUNDS
                       STATEMENT OF ADDITIONAL INFORMATION
                                February 1, 2001

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

                                 Class S shares

                 222 South Riverside Plaza, Chicago, Illinois 60606

                                 1-800-621-1048


This Statement of Additional Information is not a prospectus. It is the combined
Statement  of  Additional  Information  for the Class S shares of the Funds.  It
should be read in  conjunction  with the combined  prospectus  dated February 1,
2001.  The  prospectus  may be  obtained  without  charge by  writing  to Kemper
Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606-5808 or calling
1-800-621-1048.


                                TABLE OF CONTENTS

INVESTMENT RESTRICTIONS..............................................2
INVESTMENTS..........................................................4
INVESTMENT POLICIES AND TECHNIQUES..................................19
DIVIDENDS AND TAXES.................................................26
PERFORMANCE.........................................................29
INVESTMENT MANAGER AND UNDERWRITER..................................33
BROKERAGE COMMISSIONS...............................................36
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES.......................37
PURCHASE OF SHARES..................................................37
REDEMPTION OR REPURCHASE OF SHARES..................................38
OFFICERS AND TRUSTEES...............................................42
Capital Structure...................................................47
APPENDIX -- RATINGS OF INVESTMENTS..................................49

The financial  statements  appearing in the Funds' August 31 2000 Annual Reports
to Shareholders are incorporated herein by reference.  The financial  statements
for the Funds for which this  Statement of Additional  Information  is requested
accompany this document and may also be obtained by calling 1-800-621-1048.



<PAGE>



             Kemper California Tax-Free Income Fund ("California Fund")
               Kemper New York Tax-Free Income Fund ("New York Fund")
                        (collectively the "State Funds")

                                 Class S shares

The Funds offer multiple classes of shares. Class S is offered in this Statement
of  Additional  Information.  Each  class  has its own  important  features  and
policies.  The Funds also have three other share  classes  offered in a separate
prospectus and Statement of Additional Information.

INVESTMENT RESTRICTIONS

Certain  fundamental  investment  restrictions  have been  adopted for each Fund
which  cannot be  changed  for a Fund  without  approval  of a  majority  of its
outstanding  voting shares. As defined in the Investment Company Act of 1940, as
amended,  (the  "1940  Act") this means the lesser of the vote of (a) 67% of the
shares of the Fund present at a meeting  where more than 50% of the  outstanding
shares are present in person or by proxy or (b) more than 50% of the outstanding
shares of the Fund.

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

Each Fund may not, as a fundamental policy:

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

2.   Make loans except as permitted  under the 1940 Act, and as  interpreted  or
     modified by regulatory authority having jurisdiction from time to time

3.   Borrow money, except as permitted under the 1940 Act, and as interpreted or
     modified by regulatory authority having jurisdiction, from time to time.

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

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

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

7.   Issue senior  securities,  except as  permitted  under the 1940 Act, and as
     interpreted or modified by regulatory authority having  jurisdiction,  from
     time to time.

If a percentage  restriction  is adhered to at the time of  investment,  a later
increase or decrease in percentage  beyond the specified  limit resulting from a
change in values or net assets will not be considered a violation.  In the event
a Fund  acquires  illiquid  assets as a result  of the  exercise  of a  security
interest relating to municipal securities,  the Fund will dispose of such assets
as promptly as possible.  Although no Fund has the current intention to do so, a
Fund may invest more than 25% of its net assets in industrial development bonds.
For  purposes of  diversification,  identification  of the issuer of a municipal
security  depends  on the  terms and  conditions  of the  obligation.  Each Fund
considers the issuer to be the party with the primary  financial  obligation for
the  issue.  The Funds  did not  borrow  money as  permitted  by the  investment
restrictions  in the latest  fiscal year.  Neither of the Funds have any present
intention of borrowing during the current year.

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

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

                                       2
<PAGE>

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

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

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

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

The  California  Fund has adopted the  following  non-fundamental  restrictions,
which may be changed by the Board of Trustees without shareholder approval. This
Fund may not:

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

2.   Pledge its  securities  or  receivables  or transfer or assign or otherwise
     encumber them in an amount  exceeding  the amount of the borrowing  secured
     thereby.

3.   Write,  purchase or sell puts,  calls or  combinations  thereof,  except in
     accordance with its investment objective and policies.

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

The New York Fund has adopted the following non-fundamental restrictions,  which
may be changed by the Board of Trustees without shareholder approval. This Funds
may not:

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

2.   Pledge its  securities  or  receivables  or transfer or assign or otherwise
     encumber  them in an  amount  to  exceed  10% of its net  assets  to secure
     borrowings.

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

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

Interfund  Borrowing  and Lending  Program.  The Trust's  Board of Trustees  has
approved the filing of an  application  for exemptive  relief with the SEC which
would permit the Funds to  participate  in an interfund  lending  program  among
certain  investment  companies advised by the Adviser.  If the Funds receive the
requested  relief,  the interfund  lending program would allow the participating
funds to  borrow  money  from and loan  money to each  other  for  temporary  or
emergency  purposes.  The  program  would be subject  to a number of  conditions
designed to ensure fair and  equitable  treatment  of all  participating  funds,
including the following: (1) no fund may borrow money through the program unless
it receives a more favorable  interest rate than a rate approximating the lowest
interest rate at which bank loans would be available to any of the participating
funds under a loan agreement; and (2) no fund may lend money through the program
unless  it  receives  a more  favorable  return  than  that  available  from  an
investment in repurchase agreements and, to the extent applicable,  money market
cash sweep  arrangements.  In addition,  a fund would participate in the program
only if and to the extent that such  participation is consistent with the fund's
investment  objectives  and  policies  (for  instance,  money market funds would
normally  participate


                                       3
<PAGE>

only as lenders and tax exempt  funds only as  borrowers).  Interfund  loans and
borrowings  would extend  overnight,  but could have a maximum duration of seven
days.  Loans could be called on one day's notice. A fund may have to borrow from
a bank at a higher  interest rate if an interfund loan is called or not renewed.
Any delay in  repayment  to a lending  fund  could  result in a lost  investment
opportunity  or  additional  costs.  The program is subject to the oversight and
periodic  review of the  Boards of the  participating  funds.  To the extent the
Funds are actually engaged in borrowing  through the interfund  lending program,
the Funds, as a matter of non-fundamental  policy, may not borrow for other than
temporary or emergency purposes (and not for leveraging).

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

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

INVESTMENTS

Except as otherwise indicated,  the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment  objective,  shareholders  should consider whether the Fund
remains  an  appropriate  investment  in light of their then  current  financial
position and needs.  The net asset value of the Fund's  shares will  increase or
decrease with changes in the market price of the Fund's  investments,  and there
can be no assurance that the Fund's objective will be met.

The Fund is an open-end management  investment company which continuously offers
and  redeems  shares  at net  asset  value.  The Fund is a  company  of the type
commonly known as a mutual fund.

Descriptions  in  this  Statement  of  Additional  Information  of a  particular
investment  practice or  technique  in which a Fund may engage (such as hedging,
etc.) or a  financial  instrument  which a Fund may  purchase  (such as options,
forward foreign currency contracts,  etc.) are meant to describe the spectrum of
investments  that Scudder  Kemper  Investments,  Inc.  (the  "Adviser"),  in its
discretion,  might,  but is not required to, use in managing a Fund's  portfolio
assets.  The Adviser may, in its  discretion,  at any time employ such practice,
technique  or  instrument  for each Fund,  but not for all funds  advised by it.
Furthermore,  it is possible  that  certain  types of financial  instruments  or
investment  techniques  described  herein  may  not be  available,  permissible,
economically  feasible or effective for their intended  purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
the Fund, but, to the extent  employed,  could from time to time have a material
impact on the Fund's performance.

Changes  in  portfolio   securities   are  made  on  the  basis  of   investment
considerations  and it is against the policy of  management  to make changes for
trading purposes.

MUNICIPAL  SECURITIES.  Each of the  Funds  invests  principally  in  "Municipal
Securities,"  which are debt  obligations  issued to  obtain  funds for  various
public purposes, including the construction of a wide range of public facilities
such as airports,  bridges, highways,  housing,  hospitals, mass transportation,
schools,  streets and water and sewer  works.  Other  public  purposes for which
Municipal Securities may be issued include:

     o    to refund outstanding obligations

     o    to obtain funds for general operating expenses

     o    to obtain funds to loan to other public institutions and facilities.



                                       4
<PAGE>

The two general classifications of Municipal Securities are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Revenue  bomds are payable  only from the  revenues  derived  from a  particular
facility  or class of  facilities  or, in some  cases,  from the  proceeds  of a
special excise or other specific revenue source.

The yields on  Municipal  Securities  are  dependent  on a variety  of  factors,
including general money market  conditions,  general conditions of the Municipal
Securities market, size of a particular offering, the maturity of the obligation
and  rating of the  issue.  The  ratings  of  Moody's  Investors  Service,  Inc.
("Moody's"),  Standard & Poor's Corporation ("S&P"),  Fitch IBCA, Inc. ("Fitch")
and Duff & Phelps Credit Rating Co. ("Duff")  represent their opinions as to the
quality of the Municipal  Securities  which they undertake to rate. It should be
emphasized,  however,  that  ratings are  relative  and  subjective  and are not
absolute standards of quality. Consequently,  Municipal Securities with the same
maturity, coupon and rating may have different yields while Municipal Securities
of the same maturity and coupon with different ratings may have the same yield.

The Funds may invest in tax-exempt  leases. A tax-exempt lease is an obligation,
often a lease purchase or installment contract, pursuant to which a governmental
user of a capital asset,  such as an item of equipment,  agrees to make payments
of the purchase  price plus interest  over a period of years,  normally with the
right to  purchase  the  asset at the  termination  of the  lease  for a nominal
amount.  Tax-exempt  leases  normally have a term of only two to seven years,  a
relatively  short  period of time,  and often have a higher  interest  rate than
tax-exempt  investments of a comparable term. Currently,  it is anticipated that
not more  than 5% of the net  assets of a Fund will be  invested  in  tax-exempt
leases during the coming year.

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

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

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

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

1995-96 through 1997-98 Fiscal Years

With  the  end of the  recession  of the  early  1990's  and a  growing  economy
beginning in 1994, the State's financial  condition  improved markedly through a
combination  of  increasing  revenues,  slowdown  in growth  of  social  welfare
programs,  and continued spending restraint.  The last of the  recession-induced
budget  deficits  was repaid,  allowing  the State's  Special  Fund for Economic
Uncertainties  (the "SFEU") to post a positive  cash balance for only the second
time in the 1990's,  totaling $281 million as of June 30, 1997. The State's cash
position  also  improved and no deficit  borrowing  occurred  over the last four
fiscal years.

The economy  grew  strongly  during  these fiscal  years,  and as a result,  the
General  Fund took in  substantially  greater tax revenues  (approximately  $2.2
billion in 1995-96,  $1.6  billion in 1996-97,  $2.4 billion in 1997-98 and $1.0
billion in 1998-99) than were  initially  planned when the budgets were enacted.
These  additional  funds were largely directed to school spending


                                       5
<PAGE>

as mandated by Proposition  98, and to make up shortfalls  from reduced  federal
health and welfare aid in 1995-96 and 1996-97.  The  accumulated  budget deficit
from the recession years was eliminated.

1998-99 Fiscal Year Budget

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

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

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

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

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

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

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

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

1999-2000 Fiscal Year Budget

On January 8, 1999,  Governor Davis released his proposed budget for Fiscal Year
1999-2000  (the "January  Governor's  Budget").  The January  Governor's  Budget
generally  reported  that general fund  revenues for FY 1998-99 and FY 1999-2000
would be lower  than  earlier  projections  (primarily  due to  weaker  overseas
economic  conditions  perceived  in late 1998),  while some  caseloads  would be
higher than earlier  projections.  The January  Governor's Budget proposed $60.5
billion of general fund  expenditures in FY 1999-2000,  with a $415 million SFEU
reserve at June 30, 2000.

The 1999 May Revision showed an additional $4.3 billion of revenues for combined
fiscal  years  1998-99 and  1999-2000.  The final Budget Bill was adopted by the
Legislature  on June 16,  1999,  and was signed by the Governor on June 29, 1999
(the  "1999  Budget  Act"),  meeting  the  Constitutional  deadline  for  budget
enactment for only the second time in the 1990's.

The final 1999 Budget Act estimated General Fund revenues and transfers of $63.0
billion,  and contained  expenditures  totaling $63.7 billion after the Governor
used his line-item veto to reduce the  legislative  Budget Bill  expenditures by
$581  million  (both  General Fund and Special  Fund).  The 1999 Budget Act also
contained expenditures of $16.1 billion from special funds and $1.5 billion from
bond funds. The  Administration  estimated that the SFEU would have a balance at
June 30,  2000,  of about  $880  million.  Not  included  in this  amount was an
additional  $300 million which (after the Governor's  vetoes) was "set aside" to
provide funds for employee salary increases (to be negotiated in bargaining with
employee unions), and for litigation  reserves.  The 1999 Budget Act anticipates
normal cash flow borrowing during the fiscal year.

The principal features of the 1999 Budget Act include the following:

Proposition 98 funding for K-12 schools was increased by $1.6 billion in General
Fund moneys over revised 1998-99 levels,  $108.6 million higher than the minimum
Proposition 98 guarantee.  Of the 1999-2000 funds,  major new programs  included
money for reading improvement,  new textbooks,  school safety, improving teacher
quality,  funding teacher bonuses,


                                       6
<PAGE>

providing greater  accountability for school performance,  increasing  preschool
and after  school care  programs  and  funding  deferred  maintenance  of school
facilities.

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

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

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

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

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

Constitutional, Legislative and Other Factors

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

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

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

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

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

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



                                       7
<PAGE>

These Debt  Obligations may also be insured by the State of California  pursuant
to an insurance  program  implemented by the Office of Statewide Health Planning
and Development for health facility  construction  loans. If a default occurs on
insured Debt Obligations,  the State Treasurer will issue debentures payable out
of a reserve fund established  under the insurance program or will pay principal
and interest on an unaccelerated basis from  unappropriated  State funds. At the
request of the Office of Statewide  Health Planning and  Development,  Arthur D.
Little,  Inc. prepared a study in December 1983, to evaluate the adequacy of the
reserve  fund  established  under the  insurance  program  and based on  certain
formulations and assumptions found the reserve fund  substantially  underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded  that an  additional  10%  reserve be  established  for  "multi-level"
facilities.  For  the  balance  of the  reserve  fund,  the  update  recommended
maintaining the current reserve  calculation method. In March of 1990, Arthur D.
Little,  Inc.  prepared  a further  review of the  study  and  recommended  that
separate reserves  continue to be established for "multi-level"  facilities at a
reserve  level  consistent  with those that would be  required  by an  insurance
company.

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

Upon the default of a mortgage or deed of trust with respect to California  real
property, the creditor's nonjudicial  foreclosure rights under the power of sale
contained  in the  mortgage  or deed of trust  are  subject  to the  constraints
imposed by  California  law upon  transfers of title to real property by private
power of sale.  During the  three-month  period  beginning  with the filing of a
formal  notice of default,  the debtor is entitled to reinstate  the mortgage by
making any overdue  payments.  Under  standard loan  servicing  procedures,  the
filing of the formal notice of default does not occur unless at least three full
monthly  payments  have  become  due and  remain  unpaid.  The  power of sale is
exercised by posting and  publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage,  in the manner  described above, up to five business days prior to the
scheduled sale date. Therefore,  the effective minimum period for foreclosing on
a mortgage  could be in excess of seven months after the initial  default.  Such
time delays in  collections  could disrupt the flow of revenues  available to an
issuer for the payment of debt service on the  outstanding  obligations  if such
defaults  occur with  respect to a  substantial  number of mortgages or deeds of
trust securing an issuer's obligations.

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

Certain Debt  Obligations in the Portfolio may be obligations  which finance the
acquisition  of  single  family  home  mortgages  for  low and  moderate  income
mortgagors.  These  obligations may be payable solely from revenues derived from
the home  mortgages,  and are  subject  to  California's  statutory  limitations
described  above  applicable  to  obligations  secured by real  property.  Under
California antideficiency  legislation,  there is no personal recourse against a
mortgagor of a single family  residence  purchased  with the loan secured by the
mortgage,  regardless of whether the creditor  chooses  judicial or  nonjudicial
foreclosure.

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



                                       8
<PAGE>

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

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

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

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

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

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

During the recession years of the early 1990s, General Fund revenues for several
years were less than originally  projected,  so that the original Proposition 98
appropriations  turned out to be higher than the minimum percentage  provided in
the law. The  Legislature  responded to these  developments  by designating  the
"extra"  Proposition  98 payments  in one year as a "loan"  from  future  years'
Proposition 98  entitlements,  and also intended that the "extra" payments would
not be included  in the  Proposition  98 "base" for  calculating  future  years'
entitlements.  In 1992, a lawsuit was filed, California Teachers' Association v.
Gould,  which  challenged  the validity of these  off-budget  loans.  During the
course of this  litigation,  a trial court  determined that almost $2 billion in
"loans"  which  had been  provided  to school  districts  during  the  recession
violated  the  constitutional  protection  of support  for public  education.  A
settlement  was  reached on April 12,  1996 which  ensures  that  future  school
funding will not be in jeopardy over repayment of these so-called loans.



                                       9
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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



                                       10
<PAGE>

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

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

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

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

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

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

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

Article XIII D of Proposition 218 also adds several provisions  affecting "fees"
and  "charges"  which are  defined as "any levy other than an ad valorem  tax, a
special tax, or an assessment,  imposed by a local  government  upon a parcel or
upon a person as an  incident  of  property  ownership,  including a user fee or
charge for a  property  related  service."  All new and,  after  June 30,  1997,
existing  property  related  fees  and  charges  must  conform  to  requirements
prohibiting,  among other things,  fees and charges which (i) generate  revenues
exceeding the funds required to provide the property related  service,  (ii) are
used for any  purpose  other  than  those  for which  the fees and  charges  are
imposed,  (iii) are for a service not actually used by, or immediately available
to,  the  owner of the  property  in  question,  or (iv)  are  used for  general
governmental  services,  including police,  fire or library services,  where the
service is available to the public at large in substantially  the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or  increased,  written  notice must be given to the record  owner of
each parcel of land affected by such fee or charges.  The local  government must
then hold a hearing upon the proposed  imposition  or increase of such  property
based fee,  and if written  protests  against the  proposal  are  presented by a
majority of the owners of the identified  parcels,  the local government may not
impose or increase the fee or charge.  Moreover,  except for fees or charges for
sewer, water and refuse collection services, no property related fee or

                                       11
<PAGE>

charge may be imposed or increased  without majority  approval by
the property  owners subject to the fee or charge or, at the option of the local
agency,  two-thirds  voter approval by the  electorate  residing in the affected
area.

Proposition 87. On November 8, 1988,  California voters approved Proposition 87.
Proposition 87 amended Article XVI,  Section 16, of the California  Constitution
by authorizing  the California  Legislature to prohibit  redevelopment  agencies
from receiving any of the property tax revenue raised by increased  property tax
rates  levied to repay  bonded  indebtedness  of local  governments  approved by
voters on or after January 1, 1989.

New York Fund.  As  described in the New York Fund's  prospectus,  the Fund will
invest in bonds issued by the State of New York or its  political  subdivisions.
The Fund is  therefore  subject to various  statutory,  political  and  economic
factors  unique to the State of New York.  Discussed  below are some of the more
significant  factors  that could affect the ability of the bond issuers to repay
interest and principal on New York securities owned by the Fund. The information
is derived from various public sources,  all of which are available to investors
generally,  and which the Fund believes to be  accurate.Some  of the significant
financial considerations relating to the New York Fund's investments in New York
Municipal  Obligations  are summarized  below.  This summary  information is not
intended to be a complete description and is principally derived from the Annual
Information  Statement of the State of New York as supplemented and contained in
official  statements  relating to issues of New York Municipal  Obligations that
were available  prior to the date of this  Statement of Additional  Information.
The accuracy and  completeness  of the  information  contained in those official
statements have not been independently verified.

The Fund's  ability to achieve its  investment  objective is dependent  upon the
ability  of  the  issuers  of New  York  Municipal  Obligations  to  meet  their
continuing obligations for the payment of principal and interest. New York State
and New York City face long-term  economic  problems that could seriously affect
their ability and that of other  issuers of New York  Municipal  Obligations  to
meet their financial obligations.

Certain substantial issuers of New York Municipal Obligations (including issuers
whose  obligations  may  be  acquired  by the  Fund)  have  experienced  serious
financial  difficulties  in  recent  years.  These  difficulties  have at  times
jeopardized the credit standing and impaired the borrowing  abilities of all New
York issuers and have generally  contributed to higher  interest costs for their
borrowings and fewer markets for their  outstanding debt  obligations.  Although
several  different  issues of  municipal  securities  of New York  State and its
agencies  and  instrumentalities  and of New York City have been  downgraded  by
Standard & Poor's and  Moody's in recent  years,  Standard & Poor's and  Moody's
have recently placed the debt obligations of New York State and New York City on
CreditWatch with positive  implications and upgraded the debt obligations of New
York City,  respectively.  Strong demand for New York Municipal  Obligations has
also at times had the effect of permitting New York Municipal  Obligations to be
issued with yields relatively lower, and after issuance,  to trade in the market
at prices relatively higher, than comparably rated municipal  obligations issued
by other jurisdictions.  A recurrence of the financial  difficulties  previously
experienced by certain issuers of New York Municipal Obligations could result in
defaults or declines in the market values of those issuers' existing obligations
and,  possibly,  in the  obligations  of other  issuers  of New  York  Municipal
Obligations.   Although  as  of  the  date  of  this   Statement  of  Additional
information,  no issuers of New York Municipal  Obligations  are in default with
respect to the payment of their  Municipal  Obligations,  the  occurrence of any
such default could affect  adversely the market values and  marketability of all
New York Municipal  Obligations  and,  consequently,  the net asset value of the
Fund's portfolio.

State Economy. New York is one of the most populous states in the nation and has
a relatively high level of personal wealth.  The State's economy is diverse with
a comparatively large share of the nation's finance, insurance,  transportation,
communications and services  employment,  and a very small share of the nation's
farming  and  mining  activity.  The  State's  location  and its  excellent  air
transport  facilities  and natural  harbors  have made it an  important  link in
international  commerce.  Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
workforce  engaged in  manufacturing,  and an increasing  proportion  engaged in
service industries.

State per capita personal income has historically been significantly higher than
the national average,  although the ratio has varied substantially.  Because New
York City (the "City") is a regional employment center for a multi-state region,
State personal  income  measured on a residence  basis  understates the relative
importance  of the  State to the  national  economy  and the size of the base to
which State taxation applies.

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

State Budget. The State  Constitution  requires the governor (the "Governor") to
submit to the State legislature (the  "Legislature") a balanced executive budget
which contains a complete plan of  expenditures  for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing  all  proposed  appropriations  or


                                       12
<PAGE>

reappropriations  and any new or  modified  revenue  measures  to be  enacted in
connection with the executive  budget.  The entire plan constitutes the proposed
State financial plan for that fiscal year. The Governor is required to submit to
the  Legislature  quarterly  budget  updates which include a revised  cash-basis
state  financial plan, and an explanation of any changes from the previous state
financial plan.

State law  requires  the  Governor to propose a balanced  budget  each year.  In
recent  years,  the State  has  closed  projected  budget  gaps of $5.0  billion
(1995-96),  $3.9 billion  (1996-97),  $2.3 billion  (1997-98),  and less than $1
billion  (1998-99).  The State's  current fiscal year began on April 1, 1999 and
ends on March 31, 2000.  On March 31, 1999,  the State  adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999,  it enacted the remainder of the budget.  The Governor  approved
the  budget as passed by the  Legislature.  Prior to  passing  the budget in its
entirety for the current  fiscal year,  the State  enacted  appropriations  that
permitted the State to continue its operations.

In 1999-2000, General Fund disbursements,  including transfer to support capital
projects,  debt service and other funds,  are  estimated at $37.36  billion,  an
increase of $868 million or 2.38 percent over 1998-99.  Projected spending under
the  1999-2000  enacted  budget is $215 million above the  Governor's  Executive
Budget  recommendations,  including  30-day  amendments.  This change is the net
result of spending actions that occurred during  negotiations on the Budget. The
increase in General Fund  spending is  comprised of $1.1 billion in  legislative
additions to the Executive  Budget  (primarily in education),  offset by various
actions,  including  re-estimates  of required  spending  based on  year-to-date
results and the  identification of certain other resources that offset spending,
such as $250  million from  commencing  the process of  privatizing  the Medical
Malpractice Insurance Association (MMIA), $250 million from the retention of the
Debt  Reduction  Reserve  Fund within the General Fund and about $100 million in
excess  fund  balances.  The  MMIA was  established  in 1983 to  provide  excess
liability  insurance to doctors and medical providers.  Legislation enacted with
the 1999-2000 budget initiates the process of MMIA  privatization  and transfers
excess fund balances to the State.

The 1999-2000 enacted budget provides for $831 million in new funding for public
schools,  the largest  year-to-year  increase in State history.  The budget also
enacts  several  new tax cuts  valued at $375  million  when fully  phased in by
2003-04.  None of the $1.82  billion  cash  surplus  from  1998-99 is assumed to
support spending in 1999-2000,  but instead is reserved to help offset the costs
of previously enacted tax cuts that take effect after 1999-2000.

The 1999-2000  Financial Plan projects a closing balance of $2.85 billion in the
General Fund. The balance is comprised of the $1.82 billion surplus from 1998-99
that has been set aside to finance already-enacted tax cuts, $473 million in the
Tax  Stabilization  Reserve  Fund  (TSRF),  $250  million in the Debt  Reduction
Reserve Fund (DRRF),  $107 million in the  Contingency  Reserve Fund (CRF),  and
$200 million in the Community  Projects Fund (CPF),  which finances  legislative
initiatives.  The State expects to close  1999-2000  with cash balances in these
funds at their highest level ever.

Preliminary analysis by Division of Budget ("DOB") indicates that the State will
have a 2000-01 budget gap of approximately  $1.9 billion,  or about $300 million
above the 1999-2000 Executive Budget estimate (after adjusting for the projected
costs of collective  bargaining).  This estimate  includes an assumption for the
projected costs of new collective bargaining agreements, $500 million in assumed
operating efficiencies, as well as the planned application of approximately $615
million of the $1.82 billion tax reduction  reserve.  In recent years, the State
has closed projected budget gaps which DOB estimates at $5.0 billion  (1995-96),
$3.9  billion  (1996-97),  $2.3  billion  (1997-98),  and less  than $1  billion
(1998-99).   DOB  will  formally   update  its   projections   of  receipts  and
disbursements  for  future  years as part of the  Governor's  2000-01  Executive
Budget  submission.  The revised  expectations  for these years will reflect the
cumulative  impact of tax reductions and spending  commitments  enacted over the
last several years as well as new 2000-01 Executive Budget recommendations.

The General  Fund is the  principal  operating  fund of the State and is used to
account for all financial transactions except those required to be accounted for
in another  fund. It is the State's  largest fund and received  almost all State
taxes and other resources not dedicated to particular  purposes.  In the State's
1999-2000  fiscal year, the General Fund (exclusive of transfers) is expected to
account for approximately 47.1 percent of all Governmental  Funds  disbursements
and 69.3  percent of total State Funds  disbursements.  General  Fund moneys are
also  transferred to other funds,  primarily to support certain capital projects
and debt service payments in other fund types.

Total receipts and transfers from other funds are projected to be $39.31 billion
in  1999-2000,  an increase of $2.57  billion over  1998-99.  Total General Fund
disbursements  and transfers to other funds are projected to be $37.36  billion,
an increase of $868  million  over  1998-99.  Total  General  Fund  receipts and
transfers in 1999-2000  are now projected to be $39.31  billion,  an increase of
$2.57 billion from the $36.74 billion  recorded in 1998-99.  This total includes
$35.93 billion in tax receipts,  $1.36 billion in  miscellaneous  receipts,  and
$2.02 billion in transfers  from other funds.  The transfer of the $1.82 billion
surplus  recorded in 1998-99 to the  1999-2000  fiscal  period has the effect of
exaggerating  the  growth  in State  receipts  from  year to year by  depressing
reported 1998-99 figures and inflating 1999-2000 projections.



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<PAGE>

Receipts  from user taxes and fees are  projected  to total  $7.35  billion,  an
increase of $105 million from reported  collections in the prior year. The sales
tax  component of this  category  accounts for  virtually  all of the  1999-2000
growth.  Growth in base sales tax yield,  after  adjusting for tax law and other
changes,  is projected at 5.6 percent.  Modest  increases in motor fuel and auto
rental tax receipts over 1998-99  levels are also  expected.  However,  receipts
from other user taxes and fees are estimated to decline by $177 million.

The yield of other excise taxes in this category, particularly the cigarette and
alcoholic beverage taxes, show long-term declining trends. General Fund declines
in 1999-2000  motor vehicle fee  receipts,  in contrast,  reflect  statutory fee
reductions  and an increased  amount of  collections  earmarked to the Dedicated
Highway and Bridge Trust Fund.

Significant  statutory changes in this category during the 1999-2000 legislative
session  include:  delaying  until  March  1,  2000  the  implementation  of the
exemption  from State  sales tax of clothing  and  footwear  priced  under $110;
providing  week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear  priced under $500;  enactment of a variety of small sales
tax exemptions including certain equipment used in providing  telecommunications
service for sale, property and services used in theatrical productions, computer
hardware  used to design  Internet  web sites,  and building  materials  used in
farming;  a reduction in the beer tax rate;  and an expanded  exemption from the
alcoholic beverage tax for small brewers.

Following the pattern of the last two fiscal years,  education  programs receive
the largest  share of new funding  contained in the  1999-2000  Financial  Plan.
School aid is  expected to grow by $831  million or 8.58  percent  over  1998-99
levels (on a State fiscal year basis). Outside of education,  the largest growth
in  spending is for State  Operations  ($207  million,  including  $100  million
reserved for possible collective bargaining costs); Debt Service ($183 million),
and mental hygiene programs, including funding for a cost of living increase for
care providers ($114 million). These increases were offset, in part, by spending
reductions  or  actions  in health and social  welfare  ($280  million),  and in
general State charges ($222 million).

Under the  1999-2000  enacted  budget,  General  Fund  spending on school aid is
projected at $10.52  billion on a State  fiscal year basis,  an increase of $831
million  from the  prior  year.  The  budget  provides  additional  funding  for
operating aid,  building aid, and several other  targeted aid programs.  It also
funds  the  balance  of aid  payable  for the  1998-99  school  year that is due
primarily  in the first  quarter of the  1999-2000  fiscal  year.  For all other
educational  programs,  disbursements  are  projected  to grow by $78 million to
$2.99 billion.

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

Debt  Limits and  Outstanding  Debt.  There are a number of methods by which the
State of New York may incur debt.  Under the State  Constitution,  the State may
not,  with limited  exceptions  for  emergencies,  undertake  long-term  general
obligation  borrowing  (i.e.,  borrowing  for more  than one  year)  unless  the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters.  There is no limitation on the amount of
long-term  general  obligation  debt that may be so authorized and  subsequently
incurred by the State.

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

The State employs additional long-term financing mechanisms,  lease-purchase and
contractual-obligation   financings,   which  involve   obligations   of  public
authorities  or  municipalities  that are  State-supported  but are not  general
obligations of the State.  Under these  financing  arrangements,  certain public
authorities  and   municipalities   have  issued   obligations  to  finance  the
construction   and   rehabilitation   of  facilities  or  the   acquisition  and
rehabilitation of equipment,  and expect to meet their debt service requirements
through the receipt of rental or other  contractual  payments made by the State.
Although these  financing


                                       14
<PAGE>

arrangements involve a contractual  agreement by the State to make payments to a
public authority,  municipality or other entity,  the State's obligation to make
such  payments is  generally  expressly  made  subject to  appropriation  by the
Legislature  and the  actual  availability  of money to the State for making the
payments.  The State has also  entered into a  contractual-obligation  financing
arrangement  with the LGAC to restructure  the way the State makes certain local
aid payments.

Sustained  growth in the State's economy could  contribute to closing  projected
budget gaps over the next several years, both in terms of  higher-than-projected
tax receipts and in lower-than-expected  entitlement spending. The State assumes
that the  2000-01  Financial  Plan will  achieve  $500  million in savings  from
initiatives by State agencies to deliver  services more  efficiently,  workforce
management  efforts,  maximization  of federal  and  non-General  Fund  spending
offsets,  and other actions necessary to help bring projected  disbursements and
receipts into balance.  The  projections do not assume any  gap-closing  benefit
from the potential settlement of State claims against the tobacco industry.

Spending from Debt Service Funds are estimated at $3.64 billion in 1999-2000, up
$370 million or 11.31 percent from 1998-99.  Transportation purposes,  including
debt  service on bonds  issued for State and local  highway and bridge  programs
financed  through the New York State  Thruway  Authority  and  supported  by the
Dedicated  Highway  and  Bridge  Trust  Fund,  account  for $124  million of the
year-to-year growth. Debt service for educational purposes,  including State and
City University programs financed through the Dormitory Authority, will increase
by $80  million.  The  remaining  growth is for a variety of  programs in mental
health and corrections, and for general obligation financings.

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

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

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

Litigation. Certain litigation pending against New York State or its officers or
employees could have a substantial or long-term adverse effect on New York State
finances.  Among the more  significant of these cases are those that involve (1)
the  validity  of  agreements  and  treaties  by  which  various  Indian  tribes
transferred  title to New York State of certain  land in central and upstate New
York; (2) certain aspects of New York State's Medicaid  policies,  including its
rates,  regulations and procedures;  (3) challenges to the  constitutionality of
Public  Health Law  2807-d,  which  imposes a gross  receipts  tax from  certain
patient care  services;  (4) action  seeking  enforcement  of certain  sales and
excise taxes and tobacco products and motor fuel sold to non-Indian consumers on
Indian  reservations;  (5) a  challenge  to the  Governor's  application  of his
constitutional line item veto authority; and (6) a challenge to the enactment of
the Clean Water/Clean Air Bond Act of 1996.

Several actions challenging the  constitutionality of legislation enacted during
the 1990  legislative  session  which  changed  actuarial  funding  methods  for
determining state and local  contributions to state employee  retirement systems
have been decided  against the State. As a result,  the Comptroller  developed a
plan to restore the State's  retirement  systems to prior funding  levels.  Such
funding is expected to exceed prior  levels by $116  million in fiscal  1996-97,
$193  million  in fiscal  1997-98,  peaking at $241  million in fiscal  1998-99.
Beginning  in  fiscal   2001-02,   State   contributions   required   under  the
Comptroller's  plan are projected to be less than that required  under the prior
funding  method.  As a result of the United States Supreme Court decision in the
case of State of Delaware v. State of New York,  on January 21, 1994,  the State
entered  into a  settlement  agreement  with  various  parties.  Pursuant to all
agreements  executed in  connection  with the action,  the State was required to
make  aggregate  payments  of $351.4  million.  Annual  payments  to the various
parties will continue  through the State's  2002-03 fiscal year in amounts which
will not exceed  $48.4  million in any fiscal  year  subsequent  to the  State's
1994-95  fiscal  year.  Litigation  challenging  the  constitutionality  of  the
treatment of certain  moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental  Reserve Fund previously credited by the State
against prior State and local pension contributions were paid in 1998.

The legal  proceedings  noted above involve State  finances,  State programs and
miscellaneous cure rights,  tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial,  generally
in  excess  of


                                       15
<PAGE>

$100 million.  These proceedings could affect adversely the financial  condition
of the State in the current fiscal year or thereafter.  Adverse  developments in
these  proceedings,   other  proceedings  for  which  there  are  unanticipated,
unfavorable and material  judgments,  or the initiation of new proceedings could
affect the  ability  of the State to  maintain a  balanced  financial  plan.  An
adverse  decision  in any of these  proceedings  could  exceed the amount of the
reserve  established in the State's  financial plan for the payment of judgments
and,  therefore,  could  affect the  ability of the State to maintain a balanced
financial plan.

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

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

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

In February 1997, the Job Development Authority ("JDA") issued approximately $85
million of State-guaranteed  bonds to refinance certain of its outstanding bonds
and notes in order to restructure  and improve JDA's capital  structure.  Due to
concerns regarding the economic  viability of its programs,  JDA's loan and loan
guarantee  activities  had  been  suspended  since  1995.  As a  result  of  the
structural  imbalances  in JDA's  capital  structure,  and  defaults in its loan
portfolio and loan guarantee  program  incurred between 1991 and 1996, JDA would
have  experienced  a debt service cash flow  shortfall  had it not completed its
recent   refinancing.   JDA  anticipates   that  it  will  transact   additional
refinancings  in 1999,  2000 and 2003 to complete its long-term  plan of finance
and further  alleviate cash flow imbalances  which are likely to occur in future
years.  JDA  recently  resumed  its  lending  activities  under a revised set of
lending programs and underwriting guidelines.

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

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

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

Moody's  ratings of City bonds were  revised in November  1981 from B (in effect
since 1977) to Ba1, in November  1983 to Baa, in December  1985 to Baa1,  in May
1988 to A and again in February  1991 to Baa1.  On February  25,  1998,  Moody's


                                       16
<PAGE>

upgraded  approximately $28 billion of the City's general  obligations from Baa1
to A3. On June 9, 1998,  Moody's  affirmed  its A3 rating to the City's  general
obligations and stated that its outlook was stable.

On March 8, 1999,  Fitch IBCA  upgraded New York City's $26 billion  outstanding
general obligation bonds from A- to A.

New York City is heavily  dependent on New York State and federal  assistance to
cover  insufficiencies  in its revenues.  There can be no assurance  that in the
future federal and State  assistance  will enable the City to make up its budget
deficits. To help alleviate the City's financial  difficulties,  the Legislature
created  the  Municipal  Assistance  Corporation  ("MAC")  in  1975.  Since  its
creation, MAC has provided, among other things, financing assistance to the City
by refunding  maturing City short-term  debt and  transferring to the City funds
received from sales of MAC bonds and notes. MAC is authorized to issue bonds and
notes payable from certain stock transfer tax revenues,  from the City's portion
of the State sales tax derived in the City and, subject to certain prior claims,
from State per capita aid otherwise payable by the State to the City. Failure by
the State to continue the imposition of such taxes, the reduction of the rate of
such taxes to rates  less than  those in effect on July 2, 1975,  failure by the
State to pay such aid  revenues and the  reduction of such aid revenues  below a
specified  level are  included  among the events of  default in the  resolutions
authorizing  MAC's  long-term  debt.  The  occurrence of an event of default may
result in the  acceleration  of the  maturity of all or a portion of MAC's debt.
MAC bonds and notes constitute general  obligations of MAC and do not constitute
an enforceable obligation or debt of either the State or the City.

Since 1975,  the City's  financial  condition  has been subject to oversight and
review by the New York State Financial  Control Board (the "Control  Board") and
since 1978 the City's  financial  statements  have been  audited by  independent
accounting  firms.  To be eligible for  guarantees and  assistance,  the City is
required  during a  "control  period"  to  submit  annually  for  Control  Board
approval, and when a control period is not in effect for Control Board review, a
financial  plan for the next four  fiscal  years  covering  the City and certain
agencies showing  balanced budgets  determined in accordance with GAAP. New York
State also  established the Office of the State Deputy  Comptroller for New York
City  ("OSDC")  to  assist  the  Control  Board in  exercising  its  powers  and
responsibilities.   On  June  30,  1986,   the  City   satisfied  the  statutory
requirements for termination of the control period.  This means that the Control
Board's  powers of  approval  are  suspended,  but the Board  continues  to have
oversight responsibilities.

On June 10, 1997,  the City  submitted to the Control Board the  Financial  Plan
(the  "1998-2001  Financial  Plan")  for the 1998  through  2001  fiscal  years,
relating to the City, the Board of Education  ("BOE") and City University of New
York ("CUNY") and reflected the City's expense and capital  budgets for the 1998
fiscal year,  which were adopted on June 6, 1997.  The 1998-2001  Financial Plan
projected  revenues  and  expenditures  for the 1998  fiscal  year  balanced  in
accordance  with GAAP. The 1998-99  Financial Plan initially  projected  General
Fund  receipts  (including  transfers  from other funds) of $36.22  billion,  an
increase of $1.02 billion over the estimated  1997-1998 level.  Recurring growth
in the State General Fund tax base was also  projected to be  approximately  six
percent during 1998-99, after adjusting for tax law and administrative  changes.
This growth  rate is lower than the rates for  1996-97 or  1997-98,  but roughly
equivalent to the rate for 1995-96.

Although the City has consistently  maintained balanced budgets and is projected
to achieve balanced  operating results for the current fiscal year, there can be
no assurance that the gap-closing  actions  proposed in the 1998-2001  Financial
Plan can be  successfully  implemented or that the City will maintain a balanced
budget in future  years  without  additional  State aid,  revenue  increases  or
expenditure  reductions.  Additional  tax increases and  reductions in essential
City services could adversely affect the City's economic base.

The projections set forth in the 1998-2001  Financial Plan were based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major  assumptions could  significantly  affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the condition
of the regional and local  economies,  the impact on real estate tax revenues of
the real estate market, wage increases for City employees  consistent with those
assumed in the  1998-2001  Financial  Plan,  employment  growth,  the ability to
implement  proposed  reductions  in City  personnel  and  other  cost  reduction
initiatives,  the ability of the Health and Hospitals Corporation and the BOE to
take  actions  to offset  reduced  revenues,  the  ability to  complete  revenue
generating  transactions,  provision of State and Federal aid and mandate relief
and the impact on City  revenues and  expenditures  of Federal and State welfare
reform and any future legislation affecting Medicare or other entitlements.

Implementation of the 1998-2001 Financial Plan is also dependent upon the City's
ability to market its securities successfully.  The City's financing program for
fiscal  years 1998  through  2001  contemplates  the issuance of $5.7 billion of
general  obligation bonds and $5.7 billion of bonds to be issued by the proposed
New York City  Transitional  Finance  Authority  (the  "Finance  Authority")  to
finance City capital projects. The Finance Authority, was created as part of the
City's effort to assist in keeping the City's  indebtedness  within the forecast
level  of the  constitutional  restrictions  on the  amount  of debt the City is
authorized  to incur.  Despite this  additional  financing  mechanism,  the City
currently  projects that, if no further action is taken,


                                       17
<PAGE>

it will reach its debt limit in City fiscal year 1999-2000. Indebtedness subject
to the  constitutional  debt limit includes  liability on capital contracts that
are  expected to be funded with  general  obligation  bonds,  as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment  declaring  the  legislation   establishing  the  Transitional  Finance
Authority  to be  unconstitutional.  If such  legislation  which is currently on
appeal to the Court of Appeals were  voided,  projected  contracts  for the City
capital  projects  would  exceed  the City's  debt  limit.  Future  developments
concerning  the City or entities  issuing debt for the benefit of the City,  and
public discussion of such developments,  as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such  entities  and may also  affect  the market for their
outstanding securities.

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

The City since 1981 has fully  satisfied  its  seasonal  financing  needs in the
public credit markets,  repaying all short-term  obligations within their fiscal
year of issuance.  Although the City's 1998 fiscal year financial plan projected
$2.4  billion  of  seasonal  financing,  the City  expected  to  undertake  only
approximately $1.4 billion of seasonal  financing.  The City issued $2.4 billion
of short-term  obligations in fiscal year 1997. The delay in the adoption of the
State's  budget in certain  past  fiscal  years has  required  the City to issue
short-term notes in amounts exceeding those expected early in such fiscal years.

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

Fiscal difficulties  experienced by the City of Yonkers ("Yonkers")  resulted in
the re-establishment of the Financial Control Board for the City of Yonkers (the
"Yonkers  Board") by New York State in 1984.  The Yonkers  Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the State to
assist Yonkers could result in increased State  expenditures  for  extraordinary
local assistance.

On June 30, 1998,  the City of Yonkers  satisfied the statutory  conditions  for
ending  the  supervision  of its  finances  by a  State-ordered  control  board.
Pursuant to State law, the control  board's powers over City finances lapsed six
months after the satisfaction of these conditions, on December 31, 1998.

Beginning in 1990, the City of Troy  experienced a series of budgetary  deficits
that resulted in the  establishment of a Supervisory  Board for the City of Troy
in 1994. The  Supervisory  Board's powers were increased in 1995,  when Troy MAC
was created to help Troy avoid default on certain  obligations.  The legislation
creating  Troy MAC prohibits  the city of Troy from seeking  federal  bankruptcy
protection  while Troy MAC bonds are  outstanding.  Troy MAC has issued bonds to
effect a restructuring of the City of Troy's obligations.

The 1998-99  budget  included $29.4 million in  unrestricted  aid targeted to 57
municipalities  across the  State.  Other  assistance  for  municipalities  with
special needs totals more than $25.6 million.  Twelve  upstate  cities  received
$24.2 million in one-time assistance from a cash flow acceleration of State aid.

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

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

Year 2000 Compliance.  The State is currently  addressing Year 2000 ("Y2K") data
processing  compliance  issues.  Since its inception,  the computer industry has
used a two-digit  date  convention to represent the year. In the year 2000,  the
date field  will  contain  "00" and,  as a result,  many  computer  systems  and
equipment may not be able to process  dates  properly or may fail since they may
not be able to distinguish  between the years 1900 and 2000. The Year 2000 issue
not only affects computer programs, but also the hardware, software and networks
on which they operate. In addition, any system or


                                       18
<PAGE>

equipment  that is  dependent  on an embedded  chip,  such as  telecommunication
equipment and security systems, may also be adversely affected.

In April 1999 the State  Comptroller  released an audit on the State's Year 2000
compliance.  The audit,  which  reviewed the State's Y2K  compliance  activities
through  October  1998,  found that the State had made progress in achieving Y2K
compliance,  but needed to improve its  activities in several  areas,  including
data interchanges and contingency planning.

The Office for Technology (OFT) will continue to monitor compliance progress for
the  States   mission-critical  and  high-priority   systems  and  is  reporting
compliance progress to the Governor's Office on a quarterly basis. The 1999-2000
enacted  budget  allocates  $19 million for  priority  embedded  systems and $20
million  for  unanticipated  expenses  related to bringing  technology  into Y2K
compliance.  OFT reports that as of June 1999,  the State had completed  over 98
percent of the overall compliance effort for its mission-critical systems; 55 of
the 56  systems  are now Year 2000  compliant.  As of June  1999,  the State had
completed  87  percent of the  overall  compliance  effort on the  high-priority
systems;  236 systems are now Year 2000  compliant.  The State has also procured
independent  validation  and  verification  services from a qualified  vendor to
perform an  automated  review of code that has been  fixed and a testing  review
process for all  mission-critical  systems which is scheduled to be completed by
September 1999.

While New York State is taking  what it  believes  to be  appropriate  action to
address Year 2000 compliance,  there can be no guarantee that all of the State's
systems and equipment  will be Year 2000 compliant and that there will not be an
adverse  impact upon State  operations or finances as a result.  Since Year 2000
compliance by outside  parties is beyond the State's  control to remediate,  the
failure of outside parties to achieve Year 2000 compliance could have an adverse
impact on State operations or finances as well.

INVESTMENT POLICIES AND TECHNIQUES

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

In the course of pursuing these  investment  strategies,  the Funds may purchase
and  sell   exchange-listed  and   over-the-counter  put  and  call  options  on
securities,  fixed-income indices and other financial instruments,  purchase and
sell futures contracts and options thereon,  and enter into various transactions
such as swaps, caps, floors or collars  (collectively,  all the above are called
"Strategic Transactions").  In addition, strategic transactions may also include
new  techniques,  instruments  or  strategies  that are  permitted as regulatory
changes occur.  Strategic  Transactions may be used without limit (except to the
extent  that 80% of the  Funds'  net  assets  are  required  to be  invested  in
tax-exempt municipal  securities,  and as limited by the Funds' other investment
restrictions  and subject to certain  limits imposed by the 1940 Act) to attempt
to protect against possible changes in the market value of securities held in or
to be purchased  for the Funds'  portfolio  resulting  from  securities  markets
fluctuations,  to  protect  the  Funds'  unrealized  gains  in the  value of its
portfolio  securities,  to facilitate the sale of such securities for investment
purposes,  to manage the effective maturity or duration of the Funds' portfolio,
or to establish a position in the derivatives markets as a temporary  substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance  potential  gain although no more than 5% of each Fund's
assets will be committed to Strategic  Transactions entered into for non-hedging
purposes.  Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique  rather than another,  as use of any  Strategic  Transaction  is a
function of numerous variables  including market conditions.  The ability of the
Funds to utilize these Strategic  Transactions  successfully  will depend on the
Adviser's  ability  to  predict  pertinent  market  movements,  which  cannot be
assured.  The Funds will comply with  applicable  regulatory  requirements  when
implementing   these   strategies,   techniques   and   instruments.   Strategic
Transactions  will  not be used to alter  fundamental  investment  purposes  and
characteristics  of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.

Strategic  Transactions,  including derivative contracts,  have risks associated
with them  including  possible  default by the other  party to the  transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect,  the risk that the use of such Strategic Transactions could result
in losses  greater  than if they had not been used.  Use of put and call options
may  result  in  losses  to a Fund,  force  the sale or  purchase  of  portfolio
securities  at  inopportune  times or for prices higher than (in the case of put
options)  or lower than (in the case of call  options)  current  market  values,
limit the amount of  appreciation a Fund can realize on its investments or cause
a Fund to hold a  security  it might  otherwise  sell.  The use of


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<PAGE>

options and futures transactions entails certain other risks. In particular, the
variable degree of correlation  between price movements of futures contracts and
price  movements  in  the  related  portfolio  position  of a Fund  creates  the
possibility  that losses on the hedging  instrument may be greater than gains in
the value of that Fund's position. In addition,  futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets.  As a result, in certain markets,  a Fund might not be able to close
out a transaction without incurring  substantial losses, if at all. Although the
use of futures and options  transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged  position,  at the same
time they tend to limit any  potential  gain which might result from an increase
in value of such position.  Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing  potential  financial risk than
would  purchases  of options,  where the  exposure is limited to the cost of the
initial premium.  Losses resulting from the use of Strategic  Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.

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

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

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

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

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



                                       20
<PAGE>

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

Unless the  parties  provide  for it,  there is no central  clearing or guaranty
function in an OTC option.  As a result,  if the  Counterparty  fails to make or
take delivery of the security,  currency or other  instrument  underlying an OTC
option  it has  entered  into  with a Fund or  fails  to make a cash  settlement
payment due in  accordance  with the terms of that option,  a Fund will lose any
premium  it paid  for the  option  as well  as any  anticipated  benefit  of the
transaction.  Accordingly,  the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit  enhancement of the  Counterparty's
credit to  determine  the  likelihood  that the terms of the OTC option  will be
satisfied.  A Fund  will  engage  in OTC  option  transactions  only  with  U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary  dealers",  or broker  dealers,  domestic or foreign  banks or other
financial  institutions which have received (or the guarantors of the obligation
of which have  received) a short-term  credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating  organization  ("NRSRO") or are  determined  to be of  equivalent  credit
quality by the Adviser.  The staff of the  Securities  and  Exchange  Commission
("SEC")  currently takes the position that OTC options  purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the  in-the-money  amount,
if any) are  illiquid,  and are subject to a Fund's  limitation  on investing no
more than 15% of its net assets in illiquid securities.

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

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

Each  Fund may  purchase  and sell put  options  on  securities  including  U.S.
Treasury   and  agency   securities,   mortgage-backed   securities,   municipal
obligations  and  Eurodollar  instruments  (whether  or not it holds  the  above
securities in its  portfolio)  and on securities  indices and futures  contracts
other  than  futures  on  individual   corporate  debt  and  individual   equity
securities.  Each Fund will not sell put options if, as a result,  more than 50%
of such Fund's  assets would be required to be segregated to cover its potential
obligations  under such put options other than those with respect to futures and
options  thereon.  In selling  put  options,  there is a risk that a Fund may be
required to buy the  underlying  security at a  disadvantageous  price above the
market price.

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

Each Fund's use of futures and options  thereon will in all cases be  consistent
with  applicable  regulatory  requirements  and  in  particular  the  rules  and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide


                                       21
<PAGE>

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

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

OPTIONS ON SECURITIES  INDICES AND OTHER FINANCIAL  INDICES.  Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through  the sale or  purchase  of options  on  individual  securities  or other
instruments.  Options on  securities  indices  and other  financial  indices are
similar to options on a security or other  instrument  except that,  rather than
settling by physical delivery of the underlying instrument,  they settle by cash
settlement,  i.e.,  an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds,  in the case of a call, or is less than,
in the case of a put, the exercise  price of the option  (except if, in the case
of an OTC option, physical delivery is specified).  This amount of cash is equal
to the excess of the closing  price of the index over the exercise  price of the
option,  which  also may be  multiplied  by a formula  value.  The seller of the
option is  obligated,  in return for the premium  received,  to make delivery of
this  amount.  The  gain or loss on an  option  on an  index  depends  on  price
movements in the instruments making up the market,  market segment,  industry or
other  composite  on which the  underlying  index is based,  rather  than  price
movements in  individual  securities,  as is the case with respect to options on
securities.

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

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

Each Fund will usually  enter into swaps on a net basis,  i.e.,  the two payment
streams  are  netted  out in a cash  settlement  on the  payment  date or  dates
specified in the  instrument,  with a Fund receiving or paying,  as the case may
be, only the net amount


                                       22
<PAGE>

of the two payments.  Inasmuch as the Fund will segregate  assets (or enter into
offsetting positions) to cover its obligations under swaps, the Adviser and each
Fund believe such obligations do not constitute senior securities under the 1940
Act and,  accordingly,  will not treat them as being  subject  to its  borrowing
restrictions.  Each  Fund will not enter  into any  swap,  cap,  floor or collar
transaction unless, at the time of entering into such transaction, the unsecured
long-term debt of the Counterparty,  combined with any credit  enhancements,  is
rated at least A by S&P or Moody's or has an equivalent  rating from an NRSRO or
is determined to be of equivalent  credit quality by the Adviser.  If there is a
default by the  Counterparty,  a Fund may have contractual  remedies pursuant to
the  agreements   related  to  the  transaction.   The  swap  market  has  grown
substantially  in recent  years  with a large  number  of banks  and  investment
banking firms acting both as  principals  and as agents  utilizing  standardized
swap  documentation.  As a result, the swap market has become relatively liquid.
Caps,  floors and  collars are more recent  innovations  for which  standardized
documentation has not yet been fully developed and,  accordingly,  they are less
liquid than swaps.

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

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

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

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

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



                                       23
<PAGE>

CERTIFICATES OF PARTICIPATION. A Fund may purchase Certificates of Participation
in trusts that hold Municipal Securities. A Certificate of Participation gives a
Fund an undivided  interest in the Municipal Security in the proportion that the
Fund's interest bears to the total principal  amount of the Municipal  Security.
Certificates  of  Participation  may be  variable  rate or fixed  rate.  Because
Certificates  of  Participation  are interests in Municipal  Securities that are
generally funded through government appropriations, they are subject to the risk
that  sufficient  appropriations  as to the  timely  payment  of  principal  and
interest on the underlying  Municipal  Securities may not be made. A Certificate
of  Participation  may be backed by a guarantee of a financial  institution that
satisfies  rating  agencies as to the credit  quality of the Municipal  Security
supporting  the  payment  of  principal  and  interest  on  the  Certificate  of
Participation.  Payments of principal and interest  would be dependent  upon the
underlying  Municipal Security and may be guaranteed under a letter of credit to
the extent of such credit. The quality rating by a rating service of an issue of
Certificates  of  Participation  is  based  primarily  upon  the  rating  of the
Municipal  Security held by the trust and the credit rating of the issuer of any
letter of credit  and of any other  guarantor  providing  credit  support to the
issue. The Funds' Advisor considers these factors as well as others, such as any
quality ratings issued by the rating services identified above, in reviewing the
credit risk  presented by a  Certificate  of  Participation  and in  determining
whether the  Certificate of  Participation  is  appropriate  for investment by a
Fund. It is anticipated  by the Funds'  Advisor that, for most publicly  offered
Certificates of Participation,  there will be a liquid secondary market or there
may be demand  features  enabling a Fund to  readily  sell its  Certificates  of
Participation prior to maturity to the issuer or a third party.

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

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

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

INVERSE  FLOATERS.  Each of the Funds may  invest in inverse  floaters.  Inverse
floaters are debt  instruments  with a floating  rate of interest  that bears an
inverse relationship to changes in short-term market interest rates. Investments
in thi9s type of security  involve  special risks as compared to investments in,
for example, a fixed rate municipal security.  The fund could lose money and its
NAV could decline if movements in interest  rates are  incorrectly  anticipated.
Moreover,  the markets for securities of this type may be less developed and may
have less liquidity than the markets for more traditional municipal securities.

ADVANCE  REFUNDED  BONDS.  A Fund may  purchase  Municipal  Securities  that are
subsequently refunded by the issuance and delivery of a new issue of bonds prior
to the date on which the outstanding issue of bonds can be redeemed or paid. The
proceeds  from the new issue of bonds  are  typically  placed in an escrow  fund
consisting  of U.S.  Government  obligations  that are used to pay the interest,
principal and call premium on the issue being refunded. A Fund may also purchase
Municipal Securities that have been refunded prior to purchase by a Fund.

DELAYED DELIVERY TRANSACTIONS.  A Fund may purchase or sell portfolio securities
on a when-issued or delayed  delivery  basis.  When-issued  or delayed  delivery
transactions  involve a commitment by a Fund to purchase or sell securities with
payment  and  delivery  to take place in the  future in order to secure  what is
considered  to be an  advantageous  price  or  yield  to the Fund at the time of
entering  into the  transaction.  The  value of fixed  income  securities  to be
delivered in the future


                                       24
<PAGE>

will fluctuate as interest  rates vary.  Because a Fund is required to set aside
cash or liquid securities to satisfy its commitments to purchase  when-issued or
delayed delivery securities, flexibility to manage the Fund's investments may be
limited if commitments to purchase  when-issued or delayed  delivery  securities
were to exceed 25% of the value of its assets.

When a Fund enters into a delayed  delivery  purchase,  it becomes  obligated to
purchase  securities and it has all the rights and risks  attendant to ownership
of a security, although delivery and payment occur at a later date. The value of
fixed income securities to be delivered in the future will fluctuate as interest
rates vary. At the time a Fund makes the  commitment to purchase a security on a
when-issued  or delayed  delivery  basis,  it will  record the  transaction  and
reflect  the  liability  for the  purchase  and the  value  of the  security  in
determining  its  net  asset  value.  Likewise,  at the  time a Fund  makes  the
commitment to sell a security on a delayed  delivery  basis,  it will record the
transaction and include the proceeds to be received in determining its net asset
value; accordingly,  any fluctuations in the value of the security sold pursuant
to a delayed  delivery  commitment are ignored in calculating net asset value so
long as the  commitment  remains in effect.  A Fund generally has the ability to
close out a purchase  obligation on or before the settlement  date,  rather than
take delivery of the security.

In  when-issued  or delayed  delivery  transactions,  delivery of the securities
occurs beyond  normal  settlement  periods,  but the Fund would not pay for such
securities or start earning interest on them until they are delivered.  However,
when the Fund purchases  securities on a when-issued or delayed  delivery basis,
it  immediately  assumes  the risks of  ownership,  including  the risk of price
fluctuation. Failure to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an alternative
investment.  Depending on market conditions,  the Fund's when-issued and delayed
delivery  purchase  commitments  could cause its net asset value per share to be
more  volatile,  because  such  securities  may increase the amount by which its
total assets, including the value of when-issued and delayed delivery securities
its holds, exceed its net assets.

To the extent a Fund engages in when-issued or delayed  delivery  purchases,  it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's  investment  objective and policies.  The Fund reserves the right to sell
these securities before the settlement date if deemed advisable.

SPECIAL RISK FACTORS -- HIGH YIELD (HIGH RISK) BONDS. Each Fund may invest up to
10% of its net assets without regard to the limitation that Municipal Securities
in which it invests  be rated at the time of  purchase  within the four  highest
grades by an NRSRO or of comparable quality as determined by the Fund's Advisor.
After a Fund has bought a security, its quality level may fall below the minimum
required for  purchase by the Fund.  That would not require the Fund to sell the
security,  but the Advisor will consider such an event in determining  whether a
Fund should continue to hold the security in its portfolio.

These lower rated and non-rated fixed income securities are commonly referred to
as "junk bonds" and are considered,  on balance, to be predominantly speculative
as to the issuer's  capacity to pay interest and repay  principal in  accordance
with the terms of the  obligation,  and they generally  involve more credit risk
than  securities  in the higher  rating  categories.  The market  values of such
securities tend to reflect  individual  issuer  developments to a greater extent
than do those of higher rated securities,  which react primarily to fluctuations
in the general level of interest  rates.  Lower rated  securities  also are more
sensitive  to economic  conditions  than are higher  rated  securities.  Adverse
publicity and investor  perceptions  regarding lower rated bonds, whether or not
based on fundamental  analysis,  may depress the prices for such  securities.  A
Fund may have  difficulty  disposing  of certain high yield  securities  because
there may be a thin  trading  market for such  securities.  The lack of a liquid
secondary  market  may have an  adverse  effect on market  price and the  Fund's
ability to dispose of particular  issues and may also make it more difficult for
the Fund to obtain  accurate  market  quotations  for purposes of valuing  these
assets.  The  characteristics  of the  rating  categories  are  described  under
"Appendix -- Ratings of Investments."

ADDITIONAL  INVESTMENT  INFORMATION.  Each Fund,  may take full advantage of the
entire range of  maturities of Municipal  Securities  and may adjust the average
maturity  of its  investments  from  time to time,  depending  on the  Advisor's
assessment  of  the  relative  yields   available  on  securities  of  different
maturities and its expectations of future changes in interest rates. However, it
is anticipated that, under normal market conditions,  each such Fund will invest
primarily in long-term Municipal  Securities  (generally,  maturities of fifteen
years or more).

A Fund will not normally  engage in the trading of securities for the purpose of
realizing  short-term  profits,  but it will adjust its  portfolio as considered
advisable in view of prevailing or anticipated  market conditions and the Fund's
investment  objective.  Accordingly,  a Fund may sell  portfolio  securities  in
anticipation of a rise in interest rates and purchase securities in anticipation
of a decline in interest rates. In addition,  a security may be sold and another
of comparable quality purchased at approximately the same time to take advantage
of what the Fund  believes  to be a  temporary  disparity  in the  normal  yield
relationship between the two securities. Yield disparities may occur for reasons
not  directly  related to the  investment  quality of  particular  issues or the
general movement of interest rates, such as changes in the overall demand for or
supply of various  types of Municipal  Securities  or changes in the  investment
objectives  of some  investors.  Frequency of portfolio  turnover  will not be a
limiting factor should a


                                       25
<PAGE>

Fund deem it desirable to purchase or sell  securities.  Taking advantage of the
exemption  from the Florida  intangibles  tax could  result in higher  portfolio
turnover and related  transactions  costs. The portfolio  turnover rates for the
Funds are listed under  "Financial  Highlights" in the Funds'  prospectus.  High
portfolio  turnover  (over  100%)  involves  correspondingly  greater  brokerage
commissions or other transaction costs.  Higher portfolio turnover may result in
the realization of greater net short-term capital gains.

DIVIDENDS AND TAXES

DIVIDENDS.  All the net  investment  income  of a Fund is  declared  daily  as a
dividend  on shares  for which the Fund has  received  payment.  Net  investment
income of a Fund consists of all interest income earned on portfolio assets less
all  expenses of the Fund.  Income  dividends  will be  distributed  monthly and
dividends of net realized capital gains will be distributed annually.

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

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

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

(2) To receive both income and capital gain dividends in cash.

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

TAXES.  Each Fund  intends to  continue  to qualify  as a  regulated  investment
company under Subchapter M of the Code and, if so qualified,  will not be liable
for federal income taxes to the extent its earnings are  distributed.  Each Fund
intends to meet the requirements of the Code applicable to regulated  investment
companies distributing  tax-exempt interest dividends and, therefore,  dividends
representing  net  interest  received  on  Municipal   Securities  will  not  be
includable  by  shareholders  in their  gross  income  for  federal  income  tax
purposes,  except to the extent  such  interest  is  subject to the  alternative
minimum tax as discussed below.  Dividends  representing  taxable net investment
income (such as net interest income from temporary investments in obligations of
the U.S.  Government)  and net short-term  capital gains, if any, are taxable to
shareholders as ordinary income and long-term capital gain dividends are taxable
to  shareholders as long-term  capital gains,  regardless of how long the shares
have been held and whether  received in cash or shares.  Gains  attributable  to
market  discount  on  Municipal  Securities  acquired  after  April 30, 1993 are
treated as  ordinary  income.  Long-term  capital  gain  dividends  received  by
individual  shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 12 months. Dividends declared by a Fund in
October,  November or December to  shareholders of record as of a date in one of
those  months  and paid  during the  following  January  are  treated as paid on
December 31 of the calendar year declared for federal income tax purposes.

A Fund's options and futures  transactions are subject to special tax provisions
that may accelerate or defer recognition of certain gains or losses,  change the
character of certain gains or losses, or alter the holding periods of certain of
a Fund's  securities.  For  federal  income tax  purposes,  a Fund is  generally
required to recognize its  unrealized  gains and losses at year end on financial
futures  contracts,  options  thereon,  index options and listed options on debt
securities.  Any  gain  or loss  recognized  on such  financial  instruments  is
generally  considered to be 60% long-term and 40%  short-term  without regard to
the holding period of the contract or option.



                                       26
<PAGE>

A shareholder  who redeems shares of a Fund will recognize  capital gain or loss
for federal income tax purposes measured by the difference  between the value of
the shares redeemed and the adjusted cost basis of the shares.  The gain or loss
will be a capital  gain or loss and will be long-term if the shares are held for
a period of more than one year.  Any loss on shares held six months or less will
be  a  long-term   capital  loss  to  the  extent  any  long-term  capital  gain
distribution  is made with respect to such shares during the period the investor
owns the shares.  In the case of  shareholders  holding shares of a Fund for six
months or less and  subsequently  selling those shares at a loss after receiving
an  exempt-interest  dividend,  the loss will be disallowed to the extent of the
exempt-interest  dividends received.  However, the Secretary of the Treasury may
issue  regulations to shorten the required  holding period from six months to 31
days.

A shareholder who has redeemed shares of a Fund or any Kemper Mutual Fund listed
under  "Purchase,  Repurchase,  and  Redemption  of  Shares--Special  Features--
Combined  Purchases" may reinvest the amount  redeemed at net asset value at the
time of the  reinvestment in shares of any Fund or in shares of the other Kemper
Mutual Funds within six months of the  redemption.  If the redeemed  shares were
purchased after October 3, 1989 and were held less than 91 days, then the lesser
of (a) the sales  charge  waived on the  reinvestment  shares,  or (b) the sales
charge  incurred  on the  redeemed  shares,  is  included  in the  basis  of the
reinvestment  shares and is not included in the basis of the redeemed shares. If
a shareholder  realizes a loss on the  redemption or exchange of a Fund's shares
and  reinvests  in that same  Fund's  shares  within 30 days before or after the
redemption or exchange,  the  transactions may be subject to the wash sale rules
resulting in a postponement  of the  recognition of such loss for federal income
tax  purposes.  An  exchange  of a Fund's  shares for shares of another  fund is
treated as a redemption  and  reinvestment  for federal income tax purposes upon
which gain or loss may be recognized.

Interest on  indebtedness  which is  incurred  to purchase or carry  shares of a
mutual fund which distributes  exempt-interest  dividends during the year is not
deductible  for  federal  income  tax  purposes.  Further,  the Funds may not be
appropriate  investments for persons who are  "substantial  users" of facilities
financed  by  industrial  development  bonds  held by the Funds or are  "related
persons" to such users;  such persons should  consult their tax advisers  before
investing in the Funds.

The  "Superfund  Act of 1986" (the  "Superfund  Act")  imposes a separate tax on
corporations  at a rate of 0.12% of the excess of such  corporation's  "modified
alternative  minimum  taxable  income" over $2 million.  A portion of tax-exempt
interest,  including exempt-interest dividends from a Fund, may be includible in
modified alternative minimum taxable income.  Corporate shareholders are advised
to consult their tax advisers with respect to the  consequences of the Superfund
Act.

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

Net interest on certain  "private  activity  bonds" issued on or after August 8,
1986 is treated as an item of tax preference and may,  therefore,  be subject to
both the  individual  and  corporate  alternative  minimum  tax.  To the  extent
provided  by  regulations  to be  issued  by  the  Secretary  of  the  Treasury,
exempt-interest  dividends from a Fund are to be treated as interest on "private
activity  bonds" in  proportion  to the interest the Fund  receives from private
activity  bonds,  reduced by allowable  deductions.  Exempt-interest  dividends,
except to the extent of interest from "private activity bonds",  are not treated
as a tax preference item. For a corporate  shareholder,  however, such dividends
will be included in determining such corporate  shareholder's  "adjusted current
earnings."  Seventy-five  percent of the excess,  if any, of  "adjusted  current
earnings" over the corporate  shareholder's  alternative  minimum taxable income
with certain adjustments will be a tax preference item.  Corporate  shareholders
are advised to consult  their tax advisers with respect to  alternative  minimum
tax consequences.

Shareholders  will be required to disclose on their  federal  income tax returns
the  amount  of  tax-exempt   interest   earned   during  the  year,   including
exempt-interest dividends received from a Fund.

Individuals  whose  modified  income  exceeds a base  amount  will be subject to
federal  income tax on up to 85% of their  Social  Security  benefits.  Modified
income  includes   adjusted  gross  income,   tax-exempt   interest,   including
exempt-interest dividends from a Fund, and 50% of Social Security benefits.

California  Fund.  Dividends  paid by the  California  Fund,  to the  extent  of
interest  received on  California  state and local  government  issues,  will be
exempt from California income taxes provided at least 50% of the total assets of
the California  Fund are invested in such issues at the close of each quarter in
the taxable year. Any  short-term  and long-term  capital gain dividends will be
includable  in  California  personal  taxable  income  as  dividend  income  and
long-term  capital  gain,  respectively,  and are taxed at  ordinary  income tax
rates.   Dividends  paid  by  the  California  Fund,   including   capital  gain
distributions,  will  be  taxable  to  corporate  shareholders  subject  to  the
California corporate franchise tax.

New York Fund.  Dividends  paid by the New York Fund  representing  net interest
received on New York Municipal Securities will be exempt from New York State and
New York City income taxes. Any short-term and long-term  capital gain dividends


                                       27
<PAGE>

will be  includable  in New York  State  and New York  City  taxable  income  as
dividend  income and  long-term  capital  gain,  respectively,  and are taxed at
ordinary  income  tax  rates.  Dividends  paid by the New York  Fund,  including
capital gain distributions,  will be taxable to corporate  shareholders that are
subject to New York State and New York City corporate franchise tax.

General.  The tax  exemption of Fund  dividends  for federal  income tax and, if
applicable,  particular state or local tax purposes does not necessarily  result
in  exemption  under the  income  or other tax laws of any other  state or local
taxing  authority.  The laws of the several states and local taxing  authorities
vary with  respect to the  taxation  of  interest  income and  investments,  and
shareholders  are advised to consult  their own tax advisers as to the status of
their  accounts under state and local tax laws. The Funds may not be appropriate
investments for qualified retirement plans and Individual Retirement Accounts.

The Trust is required by law to withhold 31% of taxable dividends and redemption
proceeds  paid to certain  shareholders  who do not  furnish a correct  taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances.

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

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

NET ASSET VALUE

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

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

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

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

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

An exchange-traded options contract on securities, currencies, futures and other
financial  instruments is valued at its most recent sale price on such exchange.
Lacking  any sales,  the  options  contract  is valued at the  Calculated  Mean.
Lacking any Calculated  Mean, the options  contract is valued at the most recent
bid quotation in the case of a purchased  options  contract,  or the most

                                       28
<PAGE>

recent bid  quotation.  An equity  security  which is traded on The Nasdaq Stock
recent asked  quotation in the case of a written  options  contract.  An options
contract  on  securities,  currencies  and other  financial  instruments  traded
over-the-counter  is valued at the most  recent bid  quotation  in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written  options  contract.  Futures  contracts  are valued at the most recent
settlement price.  Foreign currency exchange forward contracts are valued at the
value  of  the  underlying  currency  at the  prevailing  exchange  rate  on the
valuation date.

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

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

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

PERFORMANCE

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

A Fund's historical  performance or return for a class of shares may be shown in
the form of "yield," "tax equivalent  yield,"  "average annual total return" and
"total return"  figures.  These various  measures of  performance  are described
below.  Performance  information will be computed  separately for each class. In
certain  cases,  Scudder  Kemper has waived or reduced  its  management  fee and
absorbed certain operating expenses for some of the Funds for the periods and to
the  extent  specified  in the  prospectus  and  this  Statement  of  Additional
Information. See " Investment Advisor and Underwriter." Because of these waivers
and expense  absorptions,  the  performance  results for such Funds may be shown
with  and  without  the  effect  of  these  waivers  and  expense   absorptions.
Performance results not giving effect to waivers and expense absorptions will be
lower.  Certain  performance  information  set forth in this section for the New
York Fund are for the  predecessor of the New York Fund,  also named "Kemper New
York Tax-Free Income Fund."

Yield is a measure of the net investment  income per share earned by a Fund over
a specific  one-month or 30-day period  expressed as a percentage of the maximum
offering price of the Fund's shares (which is net asset value) at the end of the
period.  Tax  equivalent  yield is the  yield  that a  taxable  investment  must
generate in order to equal a Fund's  yield for an investor in a stated  combined
federal and state income tax bracket for the Funds.  Average annual total return
and total return  measure both the net investment  income  generated by, and the
effect of any  realized  or  unrealized  appreciation  or  depreciation  of, the
underlying investments in a Fund.

A Fund's yield is computed in accordance with a standardized  method  prescribed
by rules of the  Securities  and Exchange  Commission.  Because Class S is a new
share class, no numbers are available.

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

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

Where:
             A         =       Dividends and interest earned during the period.
             B         =       Expenses accrued for the period (net of
                               reimbursements).

                                       29
<PAGE>

             C         =       The average daily number of shares outstanding
                               during the period that were entitled to receive
                               dividends.
             D         =       The maximum  offering price per share
                               on the last day of the period (which is
                               net asset value).

In  computing  the  foregoing  yield,  the Trust  follows  certain  standardized
accounting  practices  specified by Securities  and Exchange  Commission  rules.
These practices are not necessarily consistent with those that the Trust uses to
prepare its annual and interim financial statements in conformity with generally
accepted accounting principles.

Each Fund's tax  equivalent  yield is computed by dividing  that  portion of the
Fund's yield  (computed as described  above) that is tax-exempt by one minus the
stated federal income tax rate and adding the result to that portion, if any, of
the  yield  of the  Fund  that is not  tax-exempt.  For  additional  information
concerning  tax-exempt  yields,  see  "Tax-Exempt  versus  Taxable Yield" below.
Because Class S is a new share class, no numbers are available .

A Fund's average annual total return  quotation is computed in accordance with a
standardized   method  prescribed  by  rules  of  the  Securities  and  Exchange
Commission.  The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period,  and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is then
divided by the initial investment, and this quotient is taken to the Nth root (N
representing  the number of years in the  period) and 1 is  subtracted  from the
result,  which is then expressed as a percentage.  The calculation  assumes that
all income and capital gains  dividends paid by the Fund have been reinvested at
net asset value on the  reinvestment  dates  during the period.  Average  annual
total return figures for various periods are set forth in the table below.

Calculation of a Fund's total return is not subject to a  standardized  formula,
except when calculated for purposes of the Fund's  "Financial  Highlights" table
in the Fund's financial statements and prospectus.  Total return performance for
a  specific  period is  calculated  by first  taking a  hypothetical  investment
("initial  investment") in the Fund's shares on the first day of the period, and
computing the "ending  value" of that  investment at the end of the period.  The
total return percentage is then determined by subtracting the initial investment
from the ending value and dividing the remainder by the initial  investment  and
expressing the result as a percentage.  The calculation  assumes that all income
and capital gains  dividends paid by the Fund have been  reinvested at net asset
value on the  reinvestment  dates  during the period.  Total  return may also be
shown as the  increased  dollar value of the  hypothetical  investment  over the
period.  Total  return  figures for  various  periods are set forth in the table
below.

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

A Fund's  performance  figures  are based upon  historical  results  and are not
necessarily representative of future performance.

Class S shares are sold at net asset value. Redemptions of Class B shares may be
subject  to a  contingent  deferred  sales  charge  that is 4% in the first year
following the purchase,  declines by a specified percentage each year thereafter
and becomes  zero after six years.  Returns and net asset value will  fluctuate.
Factors  affecting  a Fund's  performance  include  general  market  conditions,
operating expenses and investment  management.  Any additional fees charged by a
dealer or other  financial  services firm would reduce the returns  described in
this  section.  Shares of a Fund are  redeemable  at the then  current net asset
value of the Fund, which may be more or less than original cost.

A Fund's  performance  may be  compared to that of the  Consumer  Price Index or
various unmanaged bond indexes such as the Lehman Brothers  Municipal Bond Index
and the Salomon  Brothers High Grade Bond Index, and may also be compared to the
performance of other fixed income, state municipal bond funds (as applicable) or
general  municipal  bond  mutual  funds or mutual  fund  indexes as  reported by
independent mutual fund reporting  services such as Lipper Analytical  Services,
Inc. ("Lipper").  Lipper performance  calculations are based upon changes in net
asset value with all dividends  reinvested  and do not include the effect of any
sales charges.

Information may be quoted from  publications  such as Morningstar Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's,  Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various  investments,  performance
indexes of those investments or economic  indicators,  including but not limited
to stocks, bonds,  certificates of deposit, money market funds and U.S. Treasury
obligations. Bank


                                       30
<PAGE>

product performance may be based upon, among other things, the BANK RATE MONITOR
National Index(TM) or various certificate of deposit indexes.  Money market fund
performance may be based upon, among other things,  IBC'sMoney Fund Report(R) or
Money Market Insight(R),  reporting services on money market funds.  Performance
of U.S. Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes.  Certain of these alternative investments may offer fixed
rates of return, and guaranteed principal and may be insured.

A Fund may depict the historical performance of the securities in which the Fund
may invest over periods  reflecting  a variety of market or economic  conditions
either alone or in comparison with alternative investments,  performance indexes
of those  investments  or  economic  indicators.  A Fund may also  describe  its
portfolio holdings and depict its size or relative size compared to other mutual
funds,  the number and  make-up of its  shareholder  base and other  descriptive
factors concerning the Fund.

A Fund may include in its sales  literature and shareholder  reports a quotation
of the current  "distribution rate" for a class of a Fund.  Distribution rate is
simply a measure of the level of dividends  distributed for a specified  period.
It differs from yield,  which is a measure of the income  actually earned by the
Fund's  investments,  and from  total  return,  which is a measure of the income
actually earned by, plus the effect of any realized and unrealized  appreciation
or depreciation of such  investments  during the period.  Distribution  rate is,
therefore,  not intended to be a complete  measure of performance.  Distribution
rate may  sometimes be greater than yield since,  for  instance,  it may include
gains from the sale of options or other short-term and possibly  long-term gains
(which may be  non-recurring)  and may not include the effect of amortization of
bond  premiums.  As  reflected  under  "Investment  Policies and  Techniques  --
Additional  Investment  Information," option writing can limit the potential for
capital appreciation.

There  may  be  quarterly   periods  following  the  periods  reflected  in  the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.

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

Investors  also may want to compare  the  performance  of a Fund to that of U.S.
Treasury  bills,  notes or bonds.  Treasury  obligations  are issued in selected
denominations.  Rates of Treasury  obligations are fixed at the time of issuance
and payment of principal  and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely  with  interest  rates prior to  maturity  and will equal par value at
maturity.  The net asset  value of a Fund will  fluctuate.  Shares of a Fund are
redeemable at net asset value which may be more or less than original cost. Each
Fund's yield will also fluctuate.

Investors may also want to compare performance of a Fund to that of money market
funds.  Money market fund yields will fluctuate and shares are not insured,  but
share values usually remain stable.

From time to time,  a Fund may compare  its  after-tax  total  return to that of
taxable  investments,  including  but not  limited to  certificates  of deposit,
taxable money market funds or U.S.  Treasury bills.  Tax equivalent total return
represents the total return that would be generated by a taxable investment that
produced  the same amount of  after-tax  income and change in net asset value as
the Fund in each period.

TAX-EXEMPT  VERSUS TAXABLE YIELD.  You may want to determine which investment --
tax-exempt  or taxable -- will provide you with a higher  after-tax  return.  To
determine  the  taxable  equivalent  yield,  simply  divide  the yield  from the
tax-exempt  investment  by 1minus your  marginal tax rate.  The tables below are
provided for your convenience in making this calculation for selected tax-exempt
yields and taxable  income  levels.  These yields are  presented for purposes of
illustration  only and are not  representative  of any  yield  that any class of
shares of a Fund may  generate.  The tables are based upon the 1999  federal and
state tax rates and brackets.



                                       31
<PAGE>
<TABLE>
<CAPTION>

Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under $124,500

                                                                                   A Tax-Exempt Yield of:
            Taxable Income                   Your Marginal        4%       5%       6%      7%       8%            9%
       Single               Joint          Federal Tax Rate                  Is Equivalent to a Taxable Yield of
       ------               -----          ----------------      ------------------------------------------------------

<S>                   <C>                    <C>                <C>      <C>      <C>     <C>      <C>           <C>
$25,350-$61,400       $42,350-$102,300       28.0%              5.56     6.94     8.33    9.72     11.11         12.50
Over $61,400          Over $102,300          31.0%              5.80     7.25     8.70    10.14    11.59         13.04

                                               Combined                            A Tax-Exempt Yield of:
            Taxable Income                  California and        4%       5%       6%      7%       8%            9%
       Single               Joint          Federal Tax Rate                  Is Equivalent to a Taxable Yield of
       ------               -----          ----------------      ------------------------------------------------------

$25,350 - $26,644     $42,350 - $53,288     32.3%               5.91     7.39     8.86    10.34    11.82         13.29
$26,644 - $33,673     $53,288 - $67,376     33.8%               6.04     7.55     9.06    10.57    12.08         13.60
$53,673 - $61,400     $67,376 - $102,300    34.7%               6.13     7.66     9.19    10.72    12.25         13.78
Over $61,400          Over $102,300         37.4%               6.39     7.99     9.58    11.18    12.78         14.38


Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under
$124,500 (continued)

                                               Combined                            A Tax-Exempt Yield of:
                                            N.Y. City, N.Y.       4%       5%       6%      7%       8%            9%
            Taxable Income                     State and
       Single               Joint          Federal Tax Rate                  Is Equivalent to a Taxable Yield of
       ------               -----          ----------------      ------------------------------------------------------

$25,350 - $61,400     $42,350 - $02,300      36.1%              6.26     7.82     9.39    10.95    12.52         14.08
Over $61,400          Over $102,300          38.8%              6.54     8.17     9.80    11.44    13.07         14.78




Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over $124,500 *

                                                                                   A Tax-Exempt Yield of:
            Taxable Income                   Your Marginal        4%       5%       6%      7%       8%            9%
       Single               Joint          Federal Tax Rate                  Is Equivalent to a Taxable Yield of
       ------               -----          ----------------      ------------------------------------------------------

$61,400 - $128,100    $102,300 - $155,950  31.9%                5.87     7.34     8.81    10.28    11.75          13.25
$128,100 - $278,450   $155,950 - $278,450  37.1%                6.36     7.95     9.54    11.13    12.72          14.31
Over $278,450         Over $278,450        40.8%                6.76     8.45     10.14   11.82    13.51          15.21


                                                                                   A Tax-Exempt Yield of:
            Taxable Income                Your California and     4%       5%       6%      7%       8%            9%
       Single               Joint          Federal Tax Rate                  Is Equivalent to a Taxable Yield of
       ------               -----          ----------------      ------------------------------------------------------

$61,400 - $128,100    $102,300 - $155,950   38.2%               6.74     8.09     9.71    11.33    12.94          14.56
$128,100 - $278,450   $155,950 - $278,450   42.9%               7.01     8.76     10.51   12.26    14.01          15.76
Over $278,000         Over $278,450         46.3%               7.59     9.49     11.39   13.28    15.18          17.08



                                       32
<PAGE>


Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over $124,500 (continued)*

                                               Combined
                                            N.Y. City, N.Y.                         A Tax-Exempt Yield of:
            Taxable Income                     State and          4%       5%       6%      7%       8%            9%
       Single               Joint          Federal Tax Rate                  Is Equivalent to a Taxable Yield of
       ------               -----          ----------------      ------------------------------------------------------

$61,400 - $128.100    $102,300 - $155,950   39.6%              6.65     8.28     9.93    11.59    13.25          14.90
$128,100 - $278,450   $155,950 - $278,450   44.2%               7.17     8.96     10.75   12.54    14.34          16.13
Over $278,450         Over $278,450         47.5%               7.62     9.52     11.43   13.33    15.24          17.14

</TABLE>

*    This table assumes a decrease of $3.00 of itemized deductions for each $100
     of  adjusted  gross  income  over  $121,200.  For a married  couple with an
     adjusted  gross  income  between  $181,800  and  $304,300  (single  between
     $121,200 and $243,700), add 0.7% to the above Marginal Federal Tax Rate for
     each personal and dependency exemption. The taxable equivalent yield is the
     tax-exempt yield divided by: 100% minus the adjusted tax rate. For example,
     if the table tax rate is 37.1% and you are married with no dependents,  the
     adjusted tax rate is 38.5% (37.1% + 0.7% + 0.7%). For a tax-exempt yield of
     6%, the taxable equivalent yield is about 9.8% (6% / (100% - 38.5%)).

**   The  tables  do not  reflect  the  impact  of the New York  State Tax Table
     Benefit  Recapture  that  is  intended  to  eliminate  the  benefit  of the
     graduated rate structure and applies to taxable income between $100,000 and
     $150,000.

 INVESTMENT ADVISOR AND UNDERWRITER

 INVESTMENT ADVISOR. Scudder Kemper Investments,  Inc. ("Scudder Kemper" or "the
Advisor"),  345 Park  Avenue,  New York,  New York,  is the  Trust's  investment
Advisor. Scudder Kemper is approximately 70% owned by Zurich Financial Services,
a newly formed global insurance and financial  services company.  The balance of
the  Advisor  is owned  by its  officers  and  employees.  There  is a  separate
investment  management agreement for each of the State Funds. The agreements are
substantially  the  same.  Pursuant  to the  investment  management  agreements,
Scudder Kemper acts as each Fund's investment adviser,  manages its investments,
administers its business  affairs,  furnishes  office  facilities and equipment,
provides clerical and administrative services and permits any of its officers or
employees to serve without  compensation as trustees or officers of the Trust if
elected  to such  positions.  The  agreements  provide  that the Trust  pays the
charges and expenses of its  operations  including  the fees and expenses of the
trustees  (except  those who are  officers  or  employees  of  Scudder  Kemper),
independent  auditors,  counsel,  custodian  and transfer  agent and the cost of
share certificates,  reports and notices to shareholders,  brokerage commissions
or transaction  costs,  costs of calculating net asset value and maintaining all
accounting records thereto, taxes and membership dues.

The Trust bears the expenses of  registration  of its shares with the Securities
and  Exchange  Commission  and,  effective  January  1,  2000,  pays the cost of
qualifying  and  maintaining  the  qualification  of the Trust's shares for sale
under the securities laws of the various states ("Blue Sky expenses").  Prior to
January 1, 2000, Kemper  Distributors,  Inc. ("KDI"), as principal  underwriter,
paid the Blue Sky expenses.

Scudder Kemper has agreed to reimburse the California  Fund should all operating
expenses of the California  Fund,  including the compensation of Scudder Kemper,
but  excluding  taxes,  interest,   distribution  services  fees,  extraordinary
expenses,  and brokerage  commissions or transaction costs, exceed 1 1/2% of the
first $30 million of average daily net assets and 1% of average daily net assets
over $30 million on an annual basis.

The agreements  provide that Scudder Kemper shall not be liable for any error of
judgment or of law, or for any loss suffered by the Trust in connection with the
matters to which the  agreements  relate,  except a loss  resulting from willful
misfeasance,  bad faith or gross negligence on the part of Scudder Kemper in the
performance  of its  obligations  and  duties,  or by  reason  of  its  reckless
disregard of its obligations and duties under the agreements.

Each of the investment  management  agreements  continues in effect from year to
year so long as its  continuation is approved at least annually by a majority of
the trustees of the  applicable  Trust who are not parties to such  agreement or
interested persons of any such party except in their capacity as trustees of the
Trust  and by the  shareholders  of the Fund  subject  thereto  or the  Board of
Trustees.  Each  agreement may be terminated at any time upon 60 days' notice by
either  party,  or by a  majority  vote of the  outstanding  shares  of the Fund
subject thereto, and will terminate automatically upon assignment. If additional
Funds become subject to the  investment  management  agreements,  the provisions
concerning  continuation,  amendment and termination  shall be on a Fund by Fund
basis. Additional Funds may be subject to a different agreement.

Responsibility  for  overall  management  of the Trust  rests  with its Board of
Trustees  and  officers.  Professional  investment  supervision  is  provided by
Scudder  Kemper.  The investment  management  agreement for a Fund provides that
Scudder  Kemper  shall  act  as  the  Fund's  investment  adviser,   manage  its
investments and provide the Fund with various services and facilities.



                                       33
<PAGE>

On December 31, 1997, pursuant to the terms of an agreement,  Scudder, Stevens &
Clark,  Inc.  ("Scudder") and Zurich Insurance  Company  ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former  subsidiary  of Zurich and the former  Advisor to each Fund,  and Scudder
changed  its  name to  Scudder  Kemper  Investments,  Inc.  As a  result  of the
transaction,  Zurich owned  approximately  70% of the Adviser,  with the balance
owned by the Adviser's officers and employees.  In certain cases the investments
for the Fund are  managed by the same  individuals  who manage one or more other
mutual  funds  advised by the Adviser that have similar  names,  objectives  and
investment  styles as the Fund.  You  should be aware that the Fund is likely to
differ from these other mutual funds in size, cash flow pattern and tax matters.
Accordingly,  the holdings and  performance  of the Fund can be expected to vary
from those of the other mutual funds.

On September 7, 1998, the businesses of Zurich (including  Zurich's 70% interest
in Scudder  Kemper) and the financial  services  businesses of B.A.T  Industries
p.l.c.  ("B.A.T")  were  combined to form a new global  insurance  and financial
services  company  known as Zurich  Financial  Services,  Inc.  By way of a dual
holding  company   structure,   former  Zurich   shareholders   initially  owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former  B.A.T  shareholders.  On October  17,  2000,  the dual  holding
company structure of Zurich Financial Services Group, comprised of Allied Zurich
p.l.c. in the United Kingdom and Zurich Allied A.G. in Switzerland,  was unified
into a single Swiss holding company, Zurich Financial Services.

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

The current investment management fee rates paid by the Funds are as follows:

Each Fund pays Scudder Kemper an investment  management fee, payable monthly, at
the annual rate (computed separately for each State Fund ) of 0.55% of the first
$250  million of average  daily net  assets,  0.52% of average  daily net assets
between $250 million and $1 billion,  0.50% of average daily net assets  between
$1 billion and $2.5  billion,  0.48% of average  daily net assets  between  $2.5
billion and $5 billion, 0.45% of average daily net assets between $5 billion and
$7.5  billion,  0.43% of average  daily net assets  between $7.5 billion and $10
billion, 0.41% of average daily net assets between $10 billion and $12.5 billion
and 0.40% of average daily net assets over $12.5 billion.

The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below.

Fund               Fiscal 2000           Fiscal 1999            Fiscal 1998
----               -----------           -----------            -----------

California
New York

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

PRINCIPAL  UNDERWRITER.  The Trust has an  underwriting  agreement  with Scudder
Investor  Services,  Inc.,  Two  International  Place,  Boston,  MA  02110  (the
"Distributor"),  a  Massachusetts  corporation,  which  is a  subsidiary  of the
Adviser, a Delaware corporation.  The underwriting agreement,  dated __________,
will remain in effect until ____________,  and from year to year thereafter only
if its  continuance  is approved  annually by a majority of the Trustees who are
not parties to such  agreement  or  interested  persons of any such  party,  and
either by a vote of a majority of the Trustees or a majority of the  outstanding
voting securities of the Fund.

         Under the underwriting agreement, the each Fund is responsible for: the
payment of all fees and expenses in connection  with the  preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements  thereto;  the registration and  qualification of shares for sale in
the various states,  including registering the Fund


                                       34
<PAGE>

as a broker or dealer in the various  states as required;  the fees and expenses
of   preparing,   printing  and  mailing   prospectuses   annually  to  existing
shareholders  (see  below for  expenses  relating  to  prospectuses  paid by the
Distributor),  notices,  proxy  statements,  reports or other  communications to
shareholders  of the Fund;  the cost of printing  and mailing  confirmations  of
purchases of shares and any prospectuses  accompanying such  confirmations;  any
issuance  taxes  and/or any initial  transfer  taxes;  a portion of  shareholder
toll-free telephone charges and expenses of shareholder service representatives;
the cost of wiring funds for share purchases and redemptions (unless paid by the
shareholder who initiates the transaction);  the cost of printing and postage of
business reply envelopes;  and a portion of the cost of computer  terminals used
by both the Fund and the Distributor.

         The Distributor will pay for printing and distributing  prospectuses or
reports  prepared  for its use in  connection  with the  offering  of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising  in  connection  with the  offering of the shares of the Fund to the
public.  The  Distributor  will pay all fees and expenses in connection with its
qualification  and  registration  as a broker or dealer under  federal and state
laws,  a portion of the cost of  toll-free  telephone  service  and  expenses of
shareholder  service  representatives,   a  portion  of  the  cost  of  computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares  issued by the Fund,  unless a 12b-1 Plan is in effect  which
provides that the Fund shall bear some or all of such expenses.

Note:    Although the Funds do not currently  have a 12b-1 Plan, the Funds would
         also pay those fees and expenses permitted to be paid or assumed by the
         Funds  pursuant to a 12b-1  Plan,  if any,  were  adopted by the Funds,
         notwithstanding any other provision to the contrary in the underwriting
         agreement.

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

ADMINISTRATIVE SERVICES. TO BE UPDATED:  Administrative services are provided to
the  Trust  under  an   administrative   services   agreement   ("administrative
agreement") with KDI. KDI bears all its expenses of providing  services pursuant
to the administrative  agreement between Scudder Kemper and the Trust, including
the  payment  of  service  fees.  For  the  services  under  the  administrative
agreement,  each Fund pays KDI an administrative  services fee, payable monthly,
at the annual  rate of up to 0.25% of average  daily net assets of each class of
the Fund.

KDI enters into related arrangements with various  broker-dealer firms and other
service or administrative firms ("firms"),  that provide services and facilities
for their  customers or clients who are investors of a Trust.  The firms provide
such office  space and  equipment,  telephone  facilities  and  personnel  as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include,  but are not limited to,  establishing
and  maintaining  accounts  and  records,  processing  purchase  and  redemption
transactions,  answering  routine inquiries  regarding the Trust,  assistance to
clients in changing dividend and investment  options,  account  designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation.

The Fund and KDI  further  agree  that the  administrative  service  fee will be
computed at an annual  rate of 0.15 of 1% based upon the assets with  respect to
which KDI provides administrative  services.  Firms to which service fees may be
paid include broker-dealers affiliated with KDI. The administrative services fee
may be increased  to an annual rate of 0.25% of average  daily net assets of any
class of the  Trust in the  discretion  of the  Board of  Trustees  and  without
shareholder approval.

The following information concerns the administrative  services fee paid by each
Fund for the fiscal years ended 1998, 1997 and 1996:

TO BE UPDATED:
<TABLE>
<CAPTION>
                                                                                                    Service Fees Paid
                                                               Total Service Fees Paid by            by Administrator
                                    Administrative                   Administrator                      to Kemper
                              Service Fees Paid by Funds                to Firms                     Affiliated Firms
                              --------------------------                --------                     ----------------
                    Fiscal
Fund                 Year               Class S
----                 ----               -------

<S>                    <C>                <C>                             <C>                            <C>
California


                                       35
<PAGE>

                                                               Total Service Fees Paid by            by Administrator
                                    Administrative                   Administrator                      to Kemper
                              Service Fees Paid by Funds                to Firms                     Affiliated Firms
                              --------------------------                --------                     ----------------
                    Fiscal
Fund                 Year               Class S
----                 ----               -------

New York
</TABLE>

KDI also may provide  some of the above  services  and may retain any portion of
the fee  under  the  administrative  agreement  not paid to firms to  compensate
itself  for  administrative  functions  performed  for a Trust.  Currently,  the
administrative  services  fee payable to KDI is based only upon Trust  assets in
accounts for which a firm  provides  administrative  services and it is intended
that KDI will pay all the administrative services fees that it receives from the
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged  against all assets of the Trust while this  procedure is
in effect will depend upon the  proportion  of Trust  assets that is in accounts
for which  there is a firm of record,  the date when  shares  representing  such
assets were purchased. The Board of Trustees of a Trust, in its discretion,  may
approve  basing the fee to KDI on all Trust  assets in the future.  In addition,
KDI may, from time to time, from its own resources pay certain firms  additional
amounts for ongoing  administrative  services and  assistance  provided to their
customers and clients who are shareholders of the Funds.

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

CUSTODIAN AND  SHAREHOLDER  SERVICE AGENT.  State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, ("State Street") as custodian,
has  custody  of all  securities  and  cash  of the  Trust.  It  attends  to the
collection of principal and income,  and payment for and  collection of proceeds
of  securities  bought and sold by the Trust.  State  Stree is also the  Trust's
transfer  agent and  dividend-paying  agent.  Pursuant to a services  agreement,
Kemper  Service  Company  ("KSvC"),  an affiliate of Scudder  Kemper,  serves as
"Shareholder  Service  Agent" of the Trust and, as such,  performs  all of State
Street's  duties as transfer  agent and  dividend  paying  agent.  State  Street
receives as transfer agent, and pays to KSvC as follows:  annual account fees of
$14.00  ($23.00 for retirement  accounts) plus account set up charges,  an asset
based fee of 0.02% and out-of-pocket expense  reimbursement.  State Street's fee
is  reduced  by certain  earnings  credits in favor of the Trust.  For the State
Trust  for the  fiscal  year  ended  August  31,  2000,  State  Street  remitted
shareholder  service fees in the amount of  $____________ to KSvC as Shareholder
Service Agent.

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

LEGAL COUNSEL  Vedder,  Price,  Kaufman & Kammholz,  222 North  LaSalle  Street,
Chicago, Illinois 60601, serves as legal counsel to each Fund.

BROKERAGE COMMISSIONS

Allocation of brokerage is supervised by the Advisor.

The primary objective of the Advisor in placing orders for the purchase and sale
of securities  for a Fund is to obtain the most  favorable  net results,  taking
into account such factors as price, commission where applicable,  size of order,
difficulty of execution and skill required of the executing  broker/dealer.  The
Advisor seeks to evaluate the overall  reasonableness  of brokerage  commissions
paid (to the extent applicable)  through the familiarity of the Distributor with
commissions  charged  on  comparable  transactions,  as  well  as  by  comparing
commissions paid by a Fund to reported  commissions paid by others.  The Advisor
reviews on a routine basis commission rates,  execution and settlement  services
performed, making internal and external comparisons.

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



                                       36
<PAGE>

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

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

Although   certain   research,   market   and   statistical   information   from
broker/dealers may be useful to a Fund and to the Advisor,  it is the opinion of
the Advisor that such  information  only  supplements the Advisor's own research
effort since the information  must still be analyzed,  weighed,  and reviewed by
the Advisor's staff.  Such information may be useful to the Advisor in providing
services to clients other than a Fund,  and not all such  information is used by
the Advisor in connection with a Fund. Conversely,  such information provided to
the Advisor by  broker/dealers  through whom other clients of the Advisor effect
securities  transactions may be useful to the Advisor in providing services to a
Fund.

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

The table below shows approximate  brokerage  commissions paid by each Fund then
existing for the last three  fiscal  years and for the most recent  fiscal year,
the  percentage  thereof  that  was  allocated  to  firms  based  upon  research
information provided.

<TABLE>
<CAPTION>
                                          Allocated to
                                         Firms Based on
                                          Research in
Fund                   Fiscal 1999        Fiscal 1999          Fiscal 1998
----                   -----------        -----------          -----------

<S>                    <C>               <C>                   <C>                         <C>
California             $89,658           94.03%                $1,464,000                  $1,463,000
New York               $26,862            100%                 $701,000                    $  594,000

</TABLE>
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES

PURCHASE OF SHARES

         Shareholders  should maintain a share balance worth at least $2,500 for
Class S. For  fiduciary  accounts such as IRAs,  and custodial  accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts,  the minimum
balance  is $1,000  for Class S.  These  amounts  may be changed by the Board of
Trustees.  A  shareholder  may open an account  with at least  $1,000  ($500 for
fiduciary/custodial   accounts),  if  an  automatic  investment  plan  (AIP)  of
$100/month ($50/month for  fiduciary/custodial  accounts) is established.  Group
retirement  plans and certain other accounts have similar or lower minimum share
balance requirements.

     The  Funds  reserve  the  right,  following  60  days'  written  notice  to
applicable shareholders, to:

     o    for Class S assess an annual $10 per Fund  charge  (with the Fee to be
          paid to the Fund) for any non-fiduciary/non-custodial  account without
          an automatic investment plan (AIP) in place and a balance of less than
          $2,500 for Class S shareholders; and



                                       37
<PAGE>

     o    redeem all shares in Fund  accounts  below $1,000 where a reduction in
          value has  occurred due to a  redemption,  exchange or transfer out of
          the account.  The Fund will mail the proceeds of the redeemed  account
          to the shareholder.

         Reductions  in value that result  solely from market  activity will not
trigger  an  involuntary  redemption.  Shareholders  with a  combined  household
account  balance in any of the Scudder  Funds of  $100,000  or more,  as well as
group  retirement  and certain  other  accounts  will not be subject to a fee or
automatic redemption.

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

REDEMPTION OR REPURCHASE OF SHARES

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

The redemption  price for shares of a Fund will be the net asset value per share
of that Fund next determined  following receipt by the Shareholder Service Agent
of a properly  executed request with any required  documents as described above.
Payment for shares  redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed requested
accompanied by any outstanding  share  certificates in proper form for transfer.
When a Trust is asked to redeem  shares  for which it may not have yet  received
good  payment  (i.e.,  purchases  by  check,  Express-Transfer  or  Bank  Direct
Deposit),  it  may  delay  transmittal  of  redemption  proceeds  until  it  has
determined  that  collected  funds have been  received  for the purchase of such
shares,  which  will be up to 10 days from  receipt  by a Trust of the  purchase
amount.

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

Additional Information About Making Subsequent Investments by QuickBuy

         Shareholders, whose predesignated bank account of record is a member of
the Automated  Clearing  House Network (ACH) and who have elected to participate
in the QuickBuy program,  may purchase shares of the Fund by telephone.  Through
this service  shareholders  may purchase up to $250,000.  To purchase  shares by
QuickBuy,  shareholders  should call before the close of regular  trading on the
Exchange,  normally 4 p.m. eastern time. Proceeds in the amount of your purchase
will be transferred  from your bank checking  account two or three business days
following  your call. For requests  received by the close of regular  trading on
the  Exchange,  shares  will be  purchased  at the net  asset  value  per  share
calculated  at the close of trading on the day of your call.  QuickBuy  requests
received  after the close of regular  trading on the  Exchange  will begin their
processing  and be purchased  at the net asset value  calculated  the  following
business  day. If you  purchase  shares by QuickBuy and redeem them within seven
days of the purchase,  the Fund may hold the redemption proceeds for a period of
up to seven  business  days. If you purchase  shares and there are  insufficient
funds in your bank account the purchase will be canceled and you will be subject
to any losses or fees incurred in the transaction. QuickBuy transactions are not
available for most retirement plan accounts.  However, QuickBuy transactions are
available for Scudder IRA accounts.



                                       38
<PAGE>

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

         The Fund  employs  procedures,  including  recording  telephone  calls,
testing a caller's  identity,  and sending  written  confirmation  of  telephone
transactions,   designed  to  give   reasonable   assurance  that   instructions
communicated  by telephone are genuine,  and to discourage  fraud. To the extent
that the Fund does not follow such  procedures,  it may be liable for losses due
to  unauthorized  or  fraudulent  telephone  instructions.  The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.

Redemption by Telephone

         Shareholders currently receive the right,  automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds  mailed
to their address of record.  Shareholders  may also request to have the proceeds
mailed or wired to their  predesignated  bank account.  In order to request wire
redemptions by telephone,  shareholders  must have completed and returned to the
Transfer Agent the  application,  including the designation of a bank account to
which the redemption proceeds are to be sent.

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

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

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

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

         Note:    Investors   designating   a  savings  bank  to  receive  their
                  telephone  redemption proceeds are advised that if the savings
                  bank  is not a  participant  in the  Federal  Reserve  System,
                  redemption  proceeds must be wired  through a commercial  bank
                  which is a  correspondent  of the  savings  bank.  As this may
                  delay receipt by the  shareholder's  account,  it is suggested
                  that  investors  wishing to use a savings  bank  discuss  wire
                  procedures  with  their  bank  and  submit  any  special  wire
                  transfer    information   with   the   telephone    redemption
                  authorization.   If  appropriate   wire   information  is  not
                  supplied, redemption proceeds will be mailed to the designated
                  bank.

         The Fund  employs  procedures,  including  recording  telephone  calls,
testing a caller's  identity,  and sending  written  confirmation  of  telephone
transactions,   designed  to  give   reasonable   assurance  that   instructions
communicated  by telephone are genuine,  and to discourage  fraud. To the extent
that the Fund does not follow such  procedures,  it may be liable for losses due
to  unauthorized  or  fraudulent  telephone  instructions.  The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.

                                       39
<PAGE>

Redemption by QuickSell

         Shareholders, whose predesignated bank account of record is a member of
the Automated  Clearing  House Network (ACH) and who have elected to participate
in the QuickSell  program may sell shares of the Fund by telephone.  Redemptions
must be for at least  $250.  Proceeds in the amount of your  redemption  will be
transferred  to your bank checking  account two or three business days following
your  call.  For  requests  received  by the  close of  regular  trading  on the
Exchange,  normally 4:00 p.m.  eastern time,  shares will be redeemed at the net
asset  value per share  calculated  at the close of  trading  on the day of your
call.  QuickSell  requests  received  after the close of regular  trading on the
Exchange  will begin  their  processing  and be  redeemed at the net asset value
calculated the following business day. QuickSell  transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.

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

         The Fund  employs  procedures,  including  recording  telephone  calls,
testing a caller's  identity,  and sending  written  confirmation  of  telephone
transactions,   designed  to  give   reasonable   assurance  that   instructions
communicated  by telephone are genuine,  and to discourage  fraud. To the extent
that the Fund does not follow such  procedures,  it may be liable for losses due
to  unauthorized  or  fraudulent  telephone  instructions.  The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.

The No-Load Concept

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

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

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

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

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

SPECIAL FEATURES

SYSTEMATIC EXCHANGE  PRIVILEGE.  The owner of $1,000 or more of any class of the
shares of a Kemper  Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified  amount ($100  minimum) of such shares


                                       40
<PAGE>

for shares of the same class of another such Kemper Fund. If selected, exchanges
will be made automatically  until the privilege is terminated by the shareholder
or the other  Kemper  Fund.  Exchanges  are subject to the terms and  conditions
described  above under  "Exchange  Privilege,"  except  that the $1,000  minimum
investment  requirement  for  the  Kemper  Fund  acquired  on  exchange  is  not
applicable.  This  privilege  may not be used for the exchange of shares held in
certificated form.

EXPRESS-TRANSFER.  EXPRESS-Transfer  permits  the  transfer  of  money  via  the
Automated  Clearing  House  System  (minimum  $100 and maximum  $50,000)  from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund.  Shareholders  can also  redeem  shares  (minimum  $100  and  maximum
$50,000)  from their Fund  account  and  transfer  the  proceeds  to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through  EXPRESS-Transfer  or Bank Direct Deposit may not be redeemed under this
privilege  until such shares have been owned for at least 10 days.  By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon  telephone  instructions  from any person to  transfer  the  specified
amounts  between the  shareholder's  Fund  account and the  predesignated  bank,
savings  and  loan or  credit  union  account,  subject  to the  limitations  on
liability under "Purchase,  Repurchase and Redemption of Shares--General."  Once
enrolled in  EXPRESS-Transfer,  a  shareholder  can  initiate a  transaction  by
calling Kemper Shareholder  Services toll free at 1-800-621-1048  Monday through
Friday,  8:00 a.m. to 3:00 p.m.  Chicago time.  Shareholders  may terminate this
privilege by sending written notice to Kemper Service Company,  P.O. Box 419415,
Kansas City, Missouri  64141-6415.  Termination will become effective as soon as
the Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts.

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

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

SYSTEMATIC  WITHDRAWAL  PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering  price (net asset value) may provide for the payment from
the owner's account of any requested  dollar amount to be paid to the owner or a
designated  payee  monthly,  quarterly,  semiannually  or annually.  The minimum
periodic  payment is $100.  Shares are  redeemed so that the payee will  receive
payment  approximately  the first of the  month.  Any income  and  capital  gain
dividends  will be  automatically  reinvested  at net asset value.  A sufficient
number of full and  fractional  shares will be  redeemed to make the  designated
payment.  Depending upon the size of the payments  requested and fluctuations in
the net asset  value of the  shares  redeemed,  redemptions  for the  purpose of
making such payments may reduce or even exhaust the account.

ADDITIONAL TRANSACTION INFORMATION

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

In addition to the discounts or commissions described above, KDI will, from time
to  time,  pay  or  allow  additional  discounts,   commissions  or  promotional
incentives,  in the form of cash,  to firms that sell shares of a Fund.  In some
instances, such


                                       41
<PAGE>

discounts, commissions or other incentives will be offered only to certain firms
who sell or are expected to sell during  specified time periods  certain minimum
amounts of shares of a Fund, or other funds underwritten by KDI.

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

Investment  dealers  and other  firms  provide  varying  arrangements  for their
clients to purchase and redeem Fund shares.  Some may establish  higher  minimum
investment  requirements  than set forth  above.  Firms may  arrange  with their
clients  for  other  investment  or  administrative  services.  Such  firms  may
independently  establish and charge additional amounts to their clients for such
services,  which charges would reduce the clients'  return.  Firms also may hold
Fund  shares  in  nominee  or  street  name as agent  for and on behalf of their
customers.  In  such  instances,   the  Trust's  transfer  agent  will  have  no
information  with respect to or control over accounts of specific  shareholders.
Such  shareholders  may obtain access to their  accounts and  information  about
their  accounts  only from  their  firm.  Certain  of these  firms  may  receive
compensation   from  the  Trust  through  the  Shareholder   Service  Agent  for
recordkeeping  and  other  expenses  relating  to  these  nominee  accounts.  In
addition,  certain  privileges  with respect to the purchase and  redemption  of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may  participate in a program  allowing them access to their clients'
accounts for servicing including, without limitation,  transfers of registration
and dividend  payee  changes;  and may perform  functions  such as generation of
confirmation  statements  and  disbursement  of  cash  dividends.   Such  firms,
including affiliates of KDI, may receive compensation from the Trust through the
Shareholder Service Agent for these services.

The Trust  reserves the right to withdraw  all or any part of the offering  made
herein and to reject  purchase  orders.  Also,  from time to time, the Trust may
temporarily  suspend  the  offering  of any class of the shares of a Fund to new
investors.  During  the  period  of such  suspension,  persons  who are  already
shareholders  of such class of such Fund  normally are  permitted to continue to
purchase additional shares of such class and to have dividends reinvested.

Code of Ethics

The Funds,  the Adviser and  principal  underwriter  have each adopted  codes of
ethics under rule 17j-1 of the Investment  Company Act. Board members,  officers
of the  Trust  and  employees  of the  Adviser  and  principal  underwriter  are
permitted to make personal securities  transactions,  including  transactions in
securities  that may be purchased or held by the Funds,  subject to requirements
and restrictions set forth in the applicable Code of Ethics.  The Adviser's Code
of Ethics contains provisions and requirements  designed to identify and address
certain  conflicts of interest  between personal  investment  activities and the
interests  of the  Funds.  Among  other  things,  the  Adviser's  Code of Ethics
prohibits  certain types of  transactions  absent prior  approval,  imposes time
periods  during  which  personal   transactions  may  not  be  made  in  certain
securities,  and requires the submission of duplicate broker  confirmations  and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio  managers,  traders,  research  analysts  and others  involved  in the
investment  advisory  process.  Exceptions to these and other  provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.

OFFICERS AND TRUSTEES

The  officers  and  trustees of the Trust,  their  birthdates,  their  principal
occupations and their  affiliations,  if any, with Scudder  Kemper,  the Trust's
Advisor and KDI, the Trust's principal underwriter, are as follows:

JOHN W. BALLANTINE  (2/16/46),  Trustee,  1500 North Lake Shore Drive,  Chicago,
Illinois;  First  Chicago NBD  Corporation/The  First  National Bank of Chicago:
1996-1998 Executive Vice President and Chief Risk Management Officer;  1995-1996
Executive Vice President and Head of International Banking;  1992-1995 Executive
Vice President, Chief Credit and Market Risk Officer.

LEWIS A. BURNHAM  (1/8/33),  Trustee,  16410 Avila  Boulevard,  Tampa,  Florida;
Retired; formerly,  Partner, Business Resources Group; formerly,  Executive Vice
President, Anchor Glass Container Corporation.

DONALD L.  DUNAWAY  (3/8/37),  Trustee,  7515  Pelican  Bay  Boulevard,  Naples,
Florida;  Retired;  formerly,  Executive Vice President,  A.O. Smith Corporation
(diversified manufacturer).



                                       42
<PAGE>

ROBERT B.  HOFFMAN  (12/11/36),  Trustee,  1530 North  State  Parkway,  Chicago,
Illinois; Chairman, Harnischfeger Industries, Inc. (machinery for the mining and
paper industries);  formerly Vice Chairman and Chief Financial Officer, Monsanto
Company (agricultural,  pharmaceutical and nutritional/food products); formerly,
Vice President, Head of International Operations,  FMC Corporation (manufacturer
of machinery and chemicals).

DONALD R. JONES  (1/17/30),  Trustee,  182 Old Wick Lane,  Inverness,  Illinois;
Retired;  Director,  Motorola,  Inc.  (manufacturer of electronic  equipment and
components);  formerly,  Executive Vice President and Chief  Financial  Officer,
Motorola, Inc.

SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto,  Commissioner,  Internal  Revenue  Service;  prior  thereto,  Assistant
Attorney General, U.S. Department of Justice; Director, Bethlehem Steel Corp.

WILLIAM P. SOMMERS  (7/22/33),  Trustee,  24717 Harbour View Drive,  Ponte Vedra
Beach, Florida; Consultant and Director, SRI Consulting;  formerly President and
Chief Executive Officer, SRI International (research and development); formerly,
Executive Vice President,  Iameter (medical  information and educational service
provider);  prior  thereto,  Senior Vice President and Director,  Booz,  Allen &
Hamilton Inc.  (management  consulting  firm)(retired);  Director,  Rohr,  Inc.,
Therapeutic Discovery Corp. and Litton Industries.

THOMAS  W.  LITTAUER  (4/26/55),  Trustee,  Chairman  and Vice  President*,  Two
International  Place,  Boston,   Massachusetts;   Managing  Director,   Adviser;
formerly,   Head  of  Broker  Dealer  Division  of  an  unaffiliated  investment
management  firm during 1997;  prior  thereto,  President  of Client  Management
Services of an unaffiliated investment management firm from 1991 to 1996.

LINDA  C.  COUGHLIN  (  /  /  ),  Trustee,   Two  International  Place,  Boston,
Massachusetts; Managing Director, Adviser

MARK S. CASADY  (9/21/60),  President*,  345 Park  Avenue,  New York,  New York;
Managing  Director,  Adviser;  formerly,   Institutional  Sales  Manager  of  an
unaffiliated mutual fund distributor.

PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza,  Chicago,  Illinois;  Senior  Vice  President  and  Assistant  Secretary,
Adviser.

ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.

KATHRYN L. QUIRK  (12/3/52),  Vice  President*,  345 Park Avenue,  New York, New
York; Managing Director, Adviser.

LINDA J. WONDRACK (9/12/64),  Vice President*,  Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.

JOHN  R.  HEBBLE  (6/27/58),   Treasurer*,   Two  International  Place,  Boston,
Massachusetts; Senior Vice President, Adviser.

BRENDA LYONS (2/21/63),  Assistant Treasurer*,  Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.

CAROLINE  PEARSON  (4/1/62),  Assistant  Secretary*,  Two  International  Place,
Boston,  Massachusetts;  Senior Vice President,  Adviser;  formerly,  Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.

MAUREEN  E. KANE  (2/14/62),  Assistant  Secretary*,  Two  International  Place,
Boston,  Massachusetts;   Vice  President,  Adviser;  formerly,  Assistant  Vice
President  of  an  unaffiliated   investment  management  firm;  prior  thereto,
Associate  Staff  Attorney  of  an  unaffiliated   investment  management  firm;
Associate, Peabody & Arnold (law firm).

ELEANOR R. BRENNAN. (  /  /  ), Vice President*,

ASHTON P. GOODFIELD (  /  /  ), Vice President*,



* Interested persons as defined in the Investment Company Act of 1940.

The  trustees  and officers who are  "interested  persons" as  designated  above
receive no  compensation  from the Funds.  The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during The
Trust's 2000 fiscal year.

                                       43
<PAGE>

<TABLE>
<CAPTION>
                                    Aggregate
                               Compensation from Funds               Pension or                           Total
                               -----------------------               Retirement                        Compensation
                                                                  Benefits Accrued                      from Trust
Name of Trustee                      State Trust              As Part of Fund Expenses              Paid to Trustees**
---------------                      -----------              ------------------------              ------------------

<S>                                       <C>                     <C>                                      <C>
John W. Ballantine
Lewis A. Burnham
Donald L. Dunaway*
Robert B. Hoffman
Donald R. Jones
Shirley D. Peterson
William P. Sommers

</TABLE>


*    Includes deferred fees. Pursuant to deferred  compensation  agreements with
     the Funds,  deferred  amounts accrue interest monthly at a rate approximate
     to the yield of Zurich  Money  Funds -- Zurich  Money  Market  Fund.  Total
     deferred fees (including  interest  thereon)  payable from the Funds to Mr.
     Dunaway are $---------.

**   Includes  compensation for service on the boards of 25 Kemper funds with 41
     fund  portfolios.  Each trustee  currently serves as a trustee of 27 Kemper
     funds with 46 fund portfolios.

As of _____________,  the officers and trustees of the Funds, as a group,  owned
less than 1% of the then  outstanding  shares of each Fund.  No person  owned of
record 5% or more of the  outstanding  shares  of any class of any Fund,  except
that the following owned of record shares of the following Funds:

Kemper California Tax-Free Income

------------------------------------- -----------------------------------
                NAME                              PERCENTAGE
------------------------------------- -----------------------------------
Smith Barney Inc.
Mutual Fund/Comm. Dept.
333 W. 34th Street
New York, NY  10001
------------------------------------- -----------------------------------
BHC Securities, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA  19103
------------------------------------- -----------------------------------
First Union Securities
Commission Accounting
77 W. Wacker Drive
Chicago, IL  60601
------------------------------------- -----------------------------------
Dean Witter Reynolds
Mutual Funds Operations
5 World Trade Center
New York, NY  10048
------------------------------------- -----------------------------------
National Financial Services Corp.
200 Liberty Street
New York, NY  10281
------------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette
Securities Corp.
P.O. Box 2052
Jersey City, NJ  07303
------------------------------------- -----------------------------------
BHC Securities, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA  19103
------------------------------------- -----------------------------------


                                       44
<PAGE>

------------------------------------- -----------------------------------
First Union Securities
Commission Accounting
77 W. Wacker Drive
Chicago, IL  60601
------------------------------------- -----------------------------------
Dean Witter Reynolds
Mutual Funds Operations
5 World Trade Center
New York, NY  10048
------------------------------------- -----------------------------------
Helena G. Hale, TTEE
803 Paseo Alicante
Santa Barbara, CA 93103
------------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner &
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL  07303
------------------------------------- -----------------------------------
Dean Witter
FBO Don & Julie Marchman, TTEE
P.O. Box 250 Church Street Station
New York, NY  10008
------------------------------------- -----------------------------------
Alfred & Dolores DeFrancesco
Attn: Neil Woodruff
P.O. Box 605
Gilroy, CA  95021
------------------------------------- -----------------------------------
Wedbush Morgan Securities
Accounting Department
P.O. Box 30014
Los Angeles, CA  90030
------------------------------------- -----------------------------------


Kemper New York Tax-Free Income

------------------------------------- -----------------------------------
                NAME                              PERCENTAGE
------------------------------------- -----------------------------------
ABN Amro Chicago Corp.
Mutual Funds Admin.
208 LaSalle Street
Chicago, IL  60604
------------------------------------- -----------------------------------
National Financial Services Corp.
FBO Carmel & Pauline Grech
200 Liberty Street
New York, NY  10281
------------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner &
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL  07303
------------------------------------- -----------------------------------
National Financial Services Corp.
FBO Augustino and Luciana Biondi
200 Liberty Street
New York, NY  10281
------------------------------------- -----------------------------------


                                       45
<PAGE>

------------------------------------- -----------------------------------
PaineWebber
FBO Diana Riklis
1020 Park Avenue
New York, NY  10028
------------------------------------- -----------------------------------
Advest Inc.
90 State House Square
Hartford, CT  06103
------------------------------------- -----------------------------------
Merrill Lynch, Pierce, Fenner &
Smith
For the Sole Benefit of Customers
4800 Deer Lake Drive East
Jacksonville, FL  07303
------------------------------------- -----------------------------------


                                       46
<PAGE>


Capital Structure

The State Trust was organized under the name "Kemper California  Tax-Free Income
Fund" as a business  trust under the laws of  Massachusetts  on October 24, 1985
with a single  investment  portfolio.  Effective  January  31,  1986,  the Trust
pursuant to a  reorganization  succeeded to the assets and liabilities of Kemper
California Tax-Free Income Fund, Inc., a Maryland corporation organized in 1983.
On July 27, 1990,  the Trust changed its name to "Kemper State  Tax-Free  Income
Series"  and changed the name of its  initial  portfolio  to "Kemper  California
Tax-Free  Income Fund." The predecessor to the New York Fund, also named "Kemper
New York Tax-Free Income Fund," was organized as a business trust under the laws
of  Massachusetts  on August 9, 1985.  Prior to May 28,  1988,  that  investment
company was known as "Tax-Free  Income  Portfolios" and it offered two series of
shares,  the  National  Portfolio  and the New  York  Portfolio.  Pursuant  to a
reorganization  on May 27, 1988,  the National  Portfolio was terminated and the
New York  Portfolio  continued as the sole  remaining  series of Kemper New York
Tax-Free Income Fund,  which was reorganized  into the New York Fund as a series
of  the  State  Trust  on  July  27,  1990.  Each  State  Fund  is an  open-end,
non-diversified Fund.

The Trust may issue an unlimited number of shares of beneficial  interest in one
or more series or "Funds," all having no par value,  which may be divided by the
Board of Trustees into classes of shares.  Currently,  the State Trust has eight
Funds that offer four classes of shares.  These are Class A, Class B and Class C
shares, as well as Class S shares, which have different expenses,  and which may
affect  performance.  The Board of Trustees of either  Trust may  authorize  the
issuance of additional  classes and additional Funds if deemed  desirable,  each
with its own investment objective, policies and restrictions.

Since the Trust may offer multiple Funds,  each is known as a "series  company."
Shares of each Fund of a Trust have equal  noncumulative  voting  rights  except
that Class B and Class C shares have separate and  exclusive  voting rights with
respect to each  Fund's  Rule 12b-1  Plan.  Shares of each class also have equal
rights with respect to dividends, assets and liquidation of such Fund subject to
any preferences (such as resulting from different Rule 12b-1 distribution fees),
rights or privileges of any classes of shares of a Fund. Shares of the Trust are
fully paid and nonassessable when issued, are transferable  without  restriction
and have no preemptive or conversion  rights.  The Trust is not required to hold
annual shareholder meetings and do not intend to do so. However,  they will hold
special  meetings as required or deemed  desirable for such purposes as electing
trustees,  changing fundamental  policies or approving an investment  management
agreement.  Subject  to the  Agreement  and  Declaration  of Trust of the Trust,
shareholders may remove trustees.  Shareholders will vote by Fund and not in the
aggregate or by class except when voting in the aggregate is required  under the
1940 Act,  such as for the  election  of  trustees,  or when  voting by class is
appropriate.

The Trust generally is not required to hold meetings of its shareholders.  Under
the Agreement and  Declaration of Trust of the Trust  ("Declaration  of Trust"),
however,  shareholder  meetings  will be held in  connection  with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose;  (b) the  adoption of any contract  for which  shareholder  approval is
required by the 1940 Act; (c) any termination of the Trust, a Fund or a class to
the extent and as provided in the Declaration of Trust; (d) any amendment of the
Declaration  of Trust  (other than  amendments  changing  the name of the Trust,
supplying  any  omission,   curing  any  ambiguity  or  curing,   correcting  or
supplementing  any defective or inconsistent  provision  thereof);  and (e) such
additional  matters as may be required by law,  the  Declaration  of Trust,  the
By-laws of the Trust,  or any  registration of the Trust with the Securities and
Exchange  Commission or any state, or as the trustees may consider  necessary or
desirable.  The  shareholders  also  would  vote  upon  changes  in  fundamental
investment objectives, policies or restrictions.

Each trustee serves until the next meeting of  shareholders,  if any, called for
the purpose of electing  trustees and until the election and  qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described  below) or a majority
of the  trustees.  In  accordance  with  the 1940  Act (a) a Trust  will  hold a
shareholder  meeting  for the  election  of trustees at such time as less than a
majority of the  trustees  have been elected by  shareholders,  and (b) if, as a
result  of a vacancy  in the Board of  Trustees,  less  than  two-thirds  of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.

Trustees  may be removed  from  office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the  written  request  of the  holders  of not less than 10% of the
outstanding  shares.  Upon the written request of ten or more  shareholders  who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding  shares of a Trust stating that such  shareholders wish to
communicate  with the  other  shareholders  for the  purpose  of  obtaining  the
signatures  necessary to demand a meeting to consider removal of a trustee,  the
Trust has undertaken to disseminate  appropriate materials at the expense of the
requesting shareholders.

The  Declaration  of  Trust  of  the  Trust  provides  that  the  presence  at a
shareholder meeting in person or by proxy of at least 30% of the shares entitled
to vote on a matter shall  constitute a quorum.  Thus, a meeting of shareholders
of a Trust  could take


                                       47
<PAGE>

place even if less than a majority of the  shareholders  were represented on its
scheduled  date.  Shareholders  would in such a case be permitted to take action
which does not require a larger  vote than a majority  of a quorum,  such as the
election of trustees and ratification of the selection of independent  auditors.
Some matters  requiring a larger vote under the Declaration of Trust of a Trust,
such as termination or reorganization of the Trust and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which  under the 1940 Act require  the vote of a  "majority  of the  outstanding
voting securities" as defined in the 1940 Act.

The  Declaration  of Trust of the  Trust  specifically  authorizes  the Board of
Trustees  to  terminate  the  Trust  or any  Fund  or  class  by  notice  to the
shareholders without shareholder approval.

Under Massachusetts law,  shareholders of a Massachusetts  business trust could,
under certain  circumstances,  be held  personally  liable for  obligations of a
Trust.  The Declaration of Trust of the Trust,  however,  disclaims  shareholder
liability for acts or  obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Trust or the trustees. Moreover, the Declaration of Trust of the
Trust  provides  for  indemnification  out of Trust  property for all losses and
expenses of any shareholder  held  personally  liable for the obligations of the
Trust and the Trust will be covered by  insurance  which the  trustees  consider
adequate to cover  foreseeable  tort  claims.  Thus,  the risk of a  shareholder
incurring  financial loss on account of  shareholder  liability is considered by
Scudder Kemper remote and not material,  since it is limited to circumstances in
which a  disclaimer  is  inoperative  and the Trust itself is unable to meet its
obligations.



                                       48
<PAGE>


APPENDIX -- RATINGS OF INVESTMENTS

The four highest  ratings of Moody's  Investors  Service,  Inc.  ("Moody's") for
municipal bonds are Aaa, Aa, A and Baa.  Municipal bonds rated Aaa are judged to
be of the "best  quality." The rating of Aa is assigned to municipal bonds which
are of "high quality by all standards," but as to which margins of protection or
other  elements  make  long-term  risks  appear  somewhat  larger than Aaa rated
municipal  bonds.  The  Aaa and Aa  rated  municipal  bonds  comprise  what  are
generally  known as "high  grade  bonds."  Municipal  bonds which are rated A by
Moody's possess many favorable  investment  attributes and are considered "upper
medium grade obligations."  Factors giving security to principal and interest of
A rated  municipal  bonds are considered  adequate,  but elements may be present
which suggest a susceptibility to impairment  sometime in the future.  Municipal
bonds which are rated Baa are considered as medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest coverage and principal
security appear adequate for the present but certain protective  elements may be
lacking or may be  characteristically  unreliable over any great length of time.
Such  bonds  lack  outstanding  investment  characteristics  and  in  fact  have
speculative  characteristics  as well.  Municipal  bonds  which are rated Ba are
judged to have speculative  elements;  their future cannot be considered as well
assured.  Often the  protection of interest and  principal  payments may be very
moderate  and thereby not well  safeguarded  during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Municipal
bonds  which  are  rated  B  generally  lack  characteristics  of the  desirable
investment.  Assurance of interest and principal  payments or of  maintenance of
other terms of the contract over any long period of time may be small. Municipal
bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present  elements of danger with  respect to principal or interest.
Municipal bonds which are rated Ca represent  obligations  which are speculative
in a high  degree.  Such  issues  are  often in  default  or have  other  marked
shortcomings.  Municipal  bonds which are rated C are the lowest  rated class of
bonds and issues so rated can be regarded as having  extremely poor prospects of
ever attaining any real investment standing.

The four highest ratings of Standard & Poor's Corporation  ("S&P") for municipal
bonds are AAA, AA, A and BBB.  Municipal bonds rated AAA have the highest rating
assigned  by S&P to a debt  obligation.  Capacity  to  pay  interest  and  repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay  principal  and differ from the highest  rated issues only in
small  degree.  Bonds rated A have a strong  capacity to pay  interest and repay
principal  although they are somewhat more susceptible to the adverse effects of
changes in  circumstances  and  economic  conditions  than bonds in higher rated
categories.  Bonds rated BBB are regarded as having an adequate  capacity to pay
interest and repay principal.  Whereas they normally exhibit adequate protection
parameters,  adverse  economic  conditions  or changing  circumstances  are more
likely to lead to a weakened  capacity to pay interest and repay  principal  for
bonds in this  capacity  than for bonds in higher  rated  categories.  Municipal
bonds  rated BB, B, CCC, CC or C are  regarded,  on  balance,  as  predominantly
speculative  with  respect to capacity to pay  interest  and repay  principal in
accordance with the terms of the  obligation.  BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics,  these are outweighed by large
uncertainties  or major risk exposures to adverse  conditions.  The rating CI is
reserved for income bonds on which no interest is being paid.  Bonds rated D are
in default and payment of interest and/or repayment of principal is in arrears.

The four  highest  ratings  of  Fitch  Investors  Service,  Inc.  ("Fitch")  for
municipal bonds are AAA, AA, A and BBB. Municipal bonds rated AAA are considered
to be investment  grade and of the highest  credit  quality.  The obligor has an
exceptionally  strong  ability to pay  interest  and repay  principal,  which is
unlikely to be affected by  reasonably  foreseeable  events.  Bonds rated AA are
considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay  principal is very strong,  although not quite
as strong as bonds rated AAA.  Because  bonds rated in the AAA and AA categories
are not significantly vulnerable to foreseeable future developments,  short-term
debt of these issuers is generally  rated F-1+.  Bonds rated A are considered to
be investment  grade and of high credit  quality.  The obligor's  ability to pay
interest  and  repay  principal  is  considered  to be  strong,  but may be more
vulnerable to adverse  changes in economic  conditions  and  circumstances  than
bonds with higher ratings. Bonds rated BBB are considered to be investment grade
and of satisfactory  credit quality.  The obligor's  ability to pay interest and
repay  principal  is  considered  to be  adequate.  Adverse  changes in economic
conditions and circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment.  Bonds rated BB are considered
speculative.  The obligor's  ability to pay interest and repay  principal may be
affected over time by adverse economic changes.  However, business and financial
alternatives  can be identified which could assist the obligor in satisfying its
debt service  requirements.  Bonds rated B are  considered  highly  speculative.
While bonds in this class are currently meeting debt service  requirements,  the
probability of continued  timely payment of principal and interest  reflects the
obligor's  limited  margin of safety and the need for  reasonable  business  and
economic activity throughout the life of the issue. Bonds rated CCC have certain
identifiable  characteristics  which, if not remedied,  may lead to default. The
ability to meet  obligations  requires an  advantageous  business  and  economic
environment.


                                       49
<PAGE>

Bonds rated CC are minimally  protected.  Default in payment of interest  and/or
principal  seems  probable over time.  Bonds rated C are in imminent  default in
payment of  interest or  principal.  Bonds rated DDD, DD and D are in default on
interest and/or  principal  payments.  Such bonds are extremely  speculative and
should be valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
on these bonds, and D represents the lowest potential for recovery.

The four  highest  ratings  of Duff & Phelps  Credit  Rating  Co.  ("Duff")  for
municipal  bonds are AAA, AA, A and BBB. Bonds rated AAA have the highest rating
assigned by Duff to a debt  obligation.  They are of the highest credit quality.
The risk factors are  negligible,  being only  slightly  more than for risk-free
U.S.  Treasury  debt.  Bonds  rated AA are of high  credit  quality.  Protection
factors  are  strong.  Risk is modest  but may vary  slightly  from time to time
because of economic  conditions.  Bonds rated A have protection factors that are
average but  adequate.  However,  risk factors are more  variable and greater in
periods  of  economic  stress.  Bonds  rated BBB have below  average  protection
factors but are still considered  sufficient for prudent  investment.  They have
considerable volatility in risk during economic cycles. Bonds rated BB are below
investment  grade but deemed  likely to meet  obligations  when due.  Present or
prospective   financial  protection  factors  fluctuate  according  to  industry
conditions or company  fortunes.  Overall quality may move up or down frequently
within this category.  Bonds rated B are below  investment  grade and possessing
risk that obligations  will not be met when due.  Financial  protection  factors
will fluctuate widely according to economic cycles,  industry  conditions and/or
company  fortunes.  Potential  exists for frequent  changes in the rating within
this category or into a higher or lower rating  grade.  Bonds rated CCC are well
below investment grade securities.  Considerable uncertainty exists as to timely
payment of principal or interest.  Protection factors are narrow and risk can be
substantial  with   unfavorable   economic/industry   conditions,   and/or  with
unfavorable  company  developments.  Bonds  rated D are in  default.  The issuer
failed to meet scheduled principal and/or interest payments.

The "debt securities"  included in the discussions of temporary  investments are
corporate (as opposed to municipal) debt  obligations  rated AAA, AA or A by S&P
or Aaa,  Aa or A by Moody's.  Corporate  debt  obligations  rated AAA by S&P are
"highest grade  obligations."  Obligations bearing the rating of AA also qualify
as "high grade  obligations"  and "in the majority of instances  differ from AAA
issues only in small  degree."  Corporate  debt  obligations  rated A by S&P are
regarded as "upper medium grade" and have "considerable investment strength, but
are not  entirely  free from  adverse  effects of changes in economic  and trade
conditions."  The Moody's  corporate debt ratings of Aaa, Aa and A do not differ
materially from those set forth above for municipal bonds.

Taxable or tax-exempt  commercial  paper ratings of A-1 or A-2 by S&P and P-1 or
P-2 by Moody's are the highest paper  ratings of the  respective  agencies.  The
issuer's earnings,  quality of long-term debt,  management and industry position
are among the factors considered in assigning such ratings.

Subsequent  to its  purchase by a Fund,  an issue of Municipal  Securities  or a
temporary  investment  may cease to be rated or its rating may be reduced  below
the minimum  required  for  purchase by the Fund.  Neither  event  requires  the
elimination of such obligation from the Fund's portfolio,  but KFS will consider
such an event in its  determination  of whether the Fund should continue to hold
such  obligation in its  portfolio.  To the extent that the ratings  accorded by
S&P,  Moody's,  Fitch or Duff for municipal  bonds or temporary  investments may
change as a result of changes in such organizations,  or changes in their rating
systems,  the Fund will attempt to use  comparable  ratings as standards for its
investments in municipal  bonds or temporary  investments in accordance with the
investment policies contained herein.


                                       50

<PAGE>

                        KEMPER STATE TAX -FREE INCOME SERIES

                              PART C. OTHER INFORMATION

<TABLE>
<CAPTION>
   Item 23.       Exhibits
   --------       --------

<S>                 <C>          <C>        <C>
                    (a)          (a)(1)     Amended and Restated Agreement and Declaration of Trust is incorporated
                                            by reference to Post-Effective Amendment No. 22 to the Registration
                                            Statement.

                    (b)                     By-laws is incorporated by reference to Post-Effective Amendment No. 23
                                            to the Registration Statement.

                    (c)          (c)(1)     Written Instrument Establishing and Designating Separate Classes of
                                            Shares is incorporated by reference to Post-Effective Amendment No. 22
                                            to the Registration Statement.

                                 (c)(2)     Amended and Restated Written Instrument Establishing and Designating
                                            Separate Classes of Shares is incorporated by reference to
                                            Post-Effective Amendment No. 25 to the Registration Statement.

                    (d)          (d)(1)     Investment Management Agreement between the Registrant, on behalf of
                                            Kemper California Tax Free Income Fund, and Scudder Kemper Investments,
                                            Inc., dated September 7, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 28 to the Registration Statement.

                                 (d)(2)     Investment Management Agreement between the Registrant, on behalf of
                                            Kemper Florida Tax Free Income Fund, and Scudder Kemper Investments,
                                            Inc., dated September 7, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 28 to the Registration Statement.

                                 (d)(3)     Investment Management Agreement between the Registrant, on behalf of
                                            Kemper New York Tax Free Income Fund, and Scudder Kemper Investments,
                                            Inc., dated September 7, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 28 to the Registration Statement.

                                 (d)(4)     Investment Management Agreement between the Registrant, on behalf of
                                            Kemper Ohio Tax Free Income Fund, and Scudder Kemper Investments, Inc.,
                                            dated September 7, 1998 is incorporated by reference to Post-Effective
                                            Amendment No. 28 to the Registration Statement.

                    (e)          (e)(1)     Underwriting and Distribution Services Agreement between the Registrant
                                            and Kemper Distributors, Inc., dated September 7, 1998 is incorporated
                                            by reference to Post-Effective Amendment No. 28 to the Registration
                                            Statement.

                                 (e)(2)     Selling Group Agreement is incorporated by reference to Post-Effective
                                            Amendment No. 22 to the Registration Statement.

                                 (e)(3)     Addendum--Selling Group Agreement is incorporated by reference to
                                            Post-Effective Amendment No. 22 to the Registration Statement.

                    (f)                     Inapplicable.

                                       3
<PAGE>

                    (g )         (g)(1)     Custody Agreement is incorporated by reference to Post-Effective
                                            Amendment No. 23 to the Registration Statement.

                                 (g)(2)     Amendment to Custody Agreement dated March 15, 1999, is incorporated by
                                            reference to Post-Effective Amendment No. 31 to the Registration
                                            Statement.
                                 (g)(3)
                                            Amendment to Custody Agreement dated March 31, 1999, is incorporated by
                                            reference to Post-Effective Amendment No. 31 to the Registration
                                            Statement.

                    (h)          (h)(1)     Agency Agreement is incorporated by reference to Post-Effective
                                            Amendment No. 22 to the Registration Statement.

                                 (h)(2)     Supplement to Agency Agreement is incorporated by reference to
                                            Post-Effective Amendment No. 25 to the Registration Statement.

                                 (h)(3)     Administrative Services Agreement is incorporated by reference to
                                            Post-Effective Amendment No. 22 to the Registration Statement.

                                 (h)(4)     Amendment to Administrative Services Agreement is incorporated by
                                            reference to Post-Effective Amendment No. 22 to the Registration
                                            Statement.

                                 (h)(5)     Assignment and Assumption Agreement is incorporated by reference to
                                            Post-Effective Amendment No. 22 to the Registration Statement.

                                 (h)(6)     Fund Accounting Services Agreement between the Registrant, on behalf of
                                            Kemper California Tax-Free Income Fund, and Scudder Fund Accounting
                                            Corp., dated December 31, 1997 is incorporated by reference to
                                            Post-Effective Amendment No. 28 to the Registration Statement.

                                 (h)(7)     Fund Accounting Services Agreement between the Registrant, on behalf of
                                            Kemper Florida Tax-Free Income Fund, and Scudder Fund Accounting Corp.,
                                            dated December 31, 1997 is incorporated by reference to Post-Effective
                                            Amendment No. 28 to the Registration Statement.

                                 (h)(8)     Fund Accounting Services Agreement between the Registrant, on behalf of
                                            Kemper New York Tax-Free Income Fund, and Scudder Fund Accounting
                                            Corp., dated December 31, 1997 is incorporated by reference to
                                            Post-Effective Amendment No. 28 to the Registration Statement.

                                 (h)(9)     Fund Accounting Services Agreement between the Registrant, on behalf of
                                            Kemper Ohio Tax-Free Income Fund, and Scudder Fund Accounting Corp.,
                                            dated December 31, 1997 is incorporated by reference to Post-Effective
                                            Amendment No. 28 to the Registration Statement.

                    (i)                     Legal Opinion and Consent of Counsel;  to be filed by amendment.

                    (j)                     Consent of Independent Accountants; to be filed by amendment.

                                       4
<PAGE>

                    (k)                     Inapplicable.

                    (l)                     Inapplicable.

                    (m)          (m)(1)     Rule 12b-1 Plan between the Registrant, on behalf of Kemper California
                                            State Tax-Free Income Fund (Class B shares) and Kemper Distributors,
                                            Inc., dated August 1, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 27 to the Registration Statement.

                                 (m)(2)     Rule 12b-1 Plan between the Registrant, on behalf of Kemper California
                                            State Tax-Free Income Fund, (Class C shares) and Kemper Distributors,
                                            Inc., dated August 1, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 27 to the Registration Statement.

                                 (m)(3)     Rule 12b-1 Plan between the Registrant, on behalf of Kemper Florida
                                            State Tax-Free Income Fund, (Class B shares) and Kemper Distributors,
                                            Inc., dated August 1, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 27 to the Registration Statement.

                                 (m)(4)     Rule 12b-1 Plan between the Registrant, on behalf of Kemper Florida
                                            State Tax-Free Income Fund, (Class C shares) and Kemper Distributors,
                                            Inc., dated August 1, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 27 to the Registration Statement.

                                 (m)(5)     Rule 12b-1 Plan between the Registrant, on behalf of Kemper New York
                                            State Tax-Free Income Fund, (Class B shares) and Kemper Distributors,
                                            Inc., dated August 1, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 27 to the Registration Statement.

                                 (m)(6)     Rule 12b-1 Plan between the Registrant, on behalf of Kemper New York
                                            State Tax-Free Income Fund, (Class C shares) and Kemper Distributors,
                                            Inc., dated August 1, 1998 is incorporated by reference to
                                            Post-Effective Amendment No. 27 to the Registration Statement.

                                 (m)(7)     Rule 12b-1 Plan between the Registrant, on behalf of Kemper Ohio State
                                            Tax-Free Income Fund, (Class B shares) and Kemper Distributors, Inc.,
                                            dated August 1, 1998 is incorporated by reference to Post-Effective
                                            Amendment No. 27 to the Registration Statement.

                                 (m)(8)     Rule 12b-1 Plan between the Registrant, on behalf of Kemper Ohio State
                                            Tax-Free Income Fund, (Class C shares) and Kemper Distributors, Inc.,
                                            dated August 1, 1998 is incorporated by reference to Post-Effective
                                            Amendment No. 27 to the Registration Statement.

                    (n)                     Multi-Distribution System Plan is incorporated by reference to
                                            Post-Effective Amendment No. 25 to the Registration Statement.

                    (p)          (p)(1)     Code of Ethics of Scudder Kemper Investments, Inc. and certain of its
                                            subsidiaries, including Kemper Distributors, Inc. and Scudder Investor
                                            Services, Inc., is incorporated by reference to Post-Effective
                                            Amendment No. 32 to the Registration Statement.

                                 (p)(2)     Code of Ethics of Kemper State Tax-Free Income Series is incorporated
                                            by reference to Post-Effective Amendment No. 32 to the Registration
                                            Statement.
</TABLE>

                                       5
<PAGE>

Item 24.          Persons Controlled By or Under Common Control With Registrant
--------          -------------------------------------------------------------

         Inapplicable.


Item 25.          Indemnification
--------          ---------------

         Article VIII of the  Registrant's  Agreement and  Declaration  of Trust
(Exhibit 1 hereto, which is incorporated herein by reference) provides in effect
that the  Registrant  will  indemnify  its officers and trustees  under  certain
circumstances.  However,  in  accordance  with  Section  17(h)  and 17(I) of the
Investment  Company Act of 1940 and its own terms, said Article of the Agreement
and  Declaration  of Trust does not protect any person  against any liability to
the  Registrant or its  shareholders  to which he would  otherwise be subject by
reason  of  willful  misfeasance,  bad  faith,  gross  negligence,  or  reckless
disregard of the duties involved in the conduct of his office.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees,  officers,  and controlling persons of
the  Registrant  pursuant  to  the  foregoing  provisions,   or  otherwise,  the
Registrant  has been advised that, in the opinion of the Securities and Exchange
Commission,  such  indemnification  is against public policy as expressed in the
Act  and  is,  therefore,   unenforceable.   In  the  event  that  a  claim  for
indemnification  against  such  liabilities  (other  than  the  payment  by  the
Registrant of expenses  incurred or paid by a trustee,  officer,  or controlling
person of the  Registrant  in the  successful  defense of any action,  suit,  or
proceeding)  is asserted by such  trustee,  officer,  or  controlling  person in
connection with the securities being registered,  the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of  appropriate  jurisdiction  the question as to whether such
indemnification  by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

         On June 26, 1997,  Zurich  Insurance  Company  ("Zurich"),  ZKI Holding
Corp.  ("ZKIH"),  Zurich Kemper Investments,  Inc. ("ZKI"),  Scudder,  Stevens &
Clark, Inc.  ("Scudder") and the representatives of the beneficial owners of the
capital stock of Scudder ("Scudder  Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest,  and ZKI was combined
with Scudder ("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested  persons of ZKI or Scudder (the  "Independent  Trustees") for and
against  any  liability  and  expenses  based upon any action or omission by the
Independent  Trustees in connection with their  consideration of and action with
respect to the  Transaction.  In addition,  Scudder has agreed to indemnify  the
Registrant  and the  Independent  Trustees  for and  against any  liability  and
expenses based upon any misstatements or omissions by Scudder to the Independent
Trustees in connection with their consideration of the Transaction.

                                       6
<PAGE>

Item 26.          Business and Other Connections of Investment Adviser
--------          ----------------------------------------------------

                  Scudder Kemper Investments, Inc. has stockholders and
                  employees who are denominated officers but do not as such have
                  corporation-wide responsibilities. Such persons are not
                  considered officers for the purpose of this Item 26.

<TABLE>
<CAPTION>
Name                       Business and Other Connections of Board of Directors of Registrant's Adviser
----                       ----------------------------------------------------------------------------

<S>                        <C>
Stephen R. Beckwith        Treasurer, Scudder Kemper Investments, Inc.**
                           Director, Kemper Service Company
                           Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
                           Director and Treasurer, Scudder Stevens & Clark Corporation**
                           Director and Chairman, Scudder Defined Contribution Services, Inc.**
                           Director and President, Scudder Capital Asset Corporation**
                           Director and President, Scudder Capital Stock Corporation**
                           Director and President, Scudder Capital Planning Corporation**
                           Director and President, SS&C Investment Corporation**
                           Director and President, SIS Investment Corporation**
                           Director and President, SRV Investment Corporation**
                           Director and Chairman, Scudder Threadneedle International Ltd.
                           Director, Scudder Kemper Holdings (UK) Ltd. oo
                           Director and President, Scudder Realty Holdings Corporation *
                           Director, Scudder, Stevens & Clark Overseas Corporation o
                           Director and Treasurer, Zurich Investment Management, Inc. xx
                           Director and Treasurer, Zurich Kemper Investments, Inc.

Lynn S. Birdsong           Director, Vice President and Chief Investment Officer, Scudder Kemper Investments, Inc. **
                           Director and Chairman, Scudder Investments (Luxembourg) S.A. #
                           Director, Scudder Investments (U.K.) Ltd. oo
                           Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
                           Director and Chairman, Scudder Investments Japan, Inc. +
                           Senior Vice President, Scudder Investor Services, Inc.
                           Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
                           Director, Scudder, Stevens & Clark Australia x
                           Director and Vice President, Zurich Investment Management, Inc. xx
                           Director and President, Scudder, Stevens & Clark Corporation **
                           Director and President, Scudder , Stevens & Clark Overseas Corporation o
                           Director, Scudder Threadneedle International Ltd.
                           Director, Korea Bond Fund Management Co., Ltd. @@

William H. Bolinder        Director, Scudder Kemper Investments, Inc.**
                           Member Group Executive Board, Zurich Financial Services, Inc. ##
                           Chairman, Zurich-American Insurance Company xxx

Nicholas Bratt             Director and Vice President, Scudder Kemper Investments, Inc.**
                           Vice President, Scudder MAXXUM Company***
                           Vice President, Scudder, Stevens & Clark Corporation**
                           Vice President, Scudder, Stevens & Clark Overseas Corporation o


Laurence W. Cheng          Director, Scudder Kemper Investments, Inc.**
                           Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
                           Director, ZKI Holding Corporation xx



                                       7
<PAGE>

Gunther Gose               Director, Scudder Kemper Investments, Inc.**
                           CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
                           CEO/Branch Offices, Zurich Life Insurance Company ##

Rolf Huppi                 Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
                           Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
                           Director, Chairman of the Board, Zurich Holding Company of America xxx
                           Director, ZKI Holding Corporation xx

Harold D. Kahn             Chief Financial Officer, Scudder Kemper Investments, Inc.**

Kathryn L. Quirk           Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
                           Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
                           Director, Vice President and Secretary, Scudder Capital Asset Corporation**
                           Director, Vice President and Secretary, Scudder Capital Stock Corporation**
                           Director, Vice President and Secretary, Scudder Capital Planning Corporation**
                           Director, Vice President and Secretary, SS&C Investment Corporation**
                           Director, Vice President and Secretary, SIS Investment Corporation**
                           Director, Vice President and Secretary, SRV Investment Corporation**
                           Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial Services,
                           Inc.*
                           Director, Korea Bond Fund Management Co., Ltd. @@
                           Director, Scudder Threadneedle International Ltd.
                           Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
                           Director, Scudder Investments Japan, Inc. +
                           Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
                           Director and Secretary, Zurich Investment Management, Inc. xx
                           Director, Secretary, Chief Legal Officer and Vice President, Kemper Distributors, Inc.

Edmond D. Villani          Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
                           Director, Scudder, Stevens & Clark Japan, Inc. ###
                           President and Director, Scudder, Stevens & Clark Overseas Corporation o
                           President and Director, Scudder, Stevens & Clark Corporation**
                           Director, Scudder Realty Advisors, Inc. @
                           Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
                           Director, Scudder Threadneedle International Ltd.  oo
                           Director, Scudder Investments Japan, Inc. +
                           Director, Scudder Kemper Holdings (UK) Ltd. oo
                           President and Director, Zurich Investment Management, Inc. xx
                           Director and Deputy Chairman, Scudder Investment Holdings, Ltd.
</TABLE>

                     *     Two International Place, Boston, MA
                     @     333 South Hope Street, Los Angeles, CA
                     **    345 Park Avenue, New York, NY
                     #     Societe Anonyme, 47, Boulevard Royal, L-2449
                              Luxembourg, R.C. Luxembourg B 34.564
                     ***   Toronto, Ontario, Canada
                     @@@   Grand Cayman, Cayman Islands, British West Indies
                      o    20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
                     ###   1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
                     xx    222 S. Riverside, Chicago, IL

                                       8
<PAGE>

                     xxx   Zurich Towers, 1400 American Ln., Schaumburg, IL
                     @@    P.O. Box 309, Upland House, S. Church St.,
                              Grand Cayman, British West Indies
                     ##    Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
                     oo    1 South Place 5th floor, London EC2M 2ZS England
                     ooo   One Exchange Square 29th Floor, Hong Kong
                     +     Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon,
                              Minato-ku, Tokyo 105-0001
                     x     Level 3, 5 Blue Street North Sydney, NSW 2060

Item 27.          Principal Underwriters.
--------          -----------------------

         (a)

         Kemper Distributors, Inc. acts as principal underwriter of the
         Registrant's shares and acts as principal underwriter of the Kemper
         Funds.

         (b)

         Information on the officers and directors of Kemper Distributors, Inc.,
         principal underwriter for the Registrant is set forth below. The
         principal business address is 222 South Riverside Plaza, Chicago,
         Illinois 60606.

<TABLE>
<CAPTION>
         (1)                    (2)                                         (3)

                                Positions and Offices with                   Positions and
         Name                   Kemper Distributors, Inc.                    Offices with Registrant
         ----                   -------------------------                    -----------------------

<S>                             <C>                                          <C>
         Thomas V. Bruns        President                                    None

         Linda C. Coughlin      Director and Vice Chairman                   None

         Kathryn L. Quirk       Director, Secretary, Chief Legal             Vice President
                                Officer and Vice President

         James J. McGovern      Chief Financial Officer and Treasurer        None

         Linda J. Wondrack      Vice President and Chief Compliance Officer  Vice President

         Paula Gaccione         Vice President                               None

         Michael E. Harrington  Managing Director                            None

         Todd N. Gierke         Assistant Treasurer                          None

         Philip J. Collora      Assistant Secretary                          Vice President and Secretary

         Diane E. Ratekin       Assistant Secretary                          None

         Mark S. Casady         Director and Chairman                        President

         Terrence S. McBride    Vice President                               None

         Robert Froelich        Managing Director                            None

                                       9
<PAGE>

         C. Perry Moore         Senior Vice President and Managing Director  None

         Lorie O'Malley         Managing Director                            None

         William F. Glavin      Managing Director                            None

         Gary N. Kocher         Managing Director                            None

         Susan K. Crenshaw      Vice President                               None

         Johnston A. Norris     Managing Director and Senior Vice President  None

         John H. Robison, Jr.   Managing Director and Senior Vice President  None

         Robert J. Guerin       Vice President                               None

         Kimberly S. Nassar     Vice President                               None

         Scott B. David         Vice President                               None
</TABLE>

         (c)      Not applicable


Item 28.            Location of Accounts and Records
--------            --------------------------------

         Accounts, books and other documents are maintained at the offices of
the Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, State Street
Bank and Trust Company ("State Street"), 225 Franklin Street, Boston,
Massachusetts 02110 or, in the case of records concerning transfer agency
functions, at the offices of State Street and of the shareholder service agent,
Kemper Service Company, 811 Main Street, Kansas City, Missouri 64105.

Item 29.         Management Services
--------         -------------------

            Not applicable.

Item 30.         Undertakings
--------         ------------

            Not applicable.


                                       10
<PAGE>

                                   SIGNATURES
                                   ----------


         Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago and State of Illinois, on the 29th day of
November, 2000.

                                          KEMPER STATE TAX-FREE INCOME SERIES



                                          By  /s/ Mark S. Casady
                                              -------------------------------
                                              Mark S. Casady, President


         Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on November 29, 2000 on behalf of
the following persons in the capacities indicated.
<TABLE>
<CAPTION>

SIGNATURE                                   TITLE                                        DATE
---------                                   -----                                        ----


<S>                                          <C>                                         <C>
/s/ Thomas W. Littauer                                                                   November 29, 2000
--------------------------------------
Thomas W. Littauer*                         Chairman and Trustee


/s/ John W. Ballantine                                                                   November 29, 2000
--------------------------------------
John W. Ballantine*                         Trustee


/s/ Lewis A. Burnham                                                                     November 29, 2000
--------------------------------------
Lewis A. Burnham*                           Trustee


/s/ Linda C. Coughlin                       Trustee                                      November 29, 2000
--------------------------------------
Linda C. Coughlin


/s/ Donald L. Dunaway                                                                    November 29, 2000
--------------------------------------
Donald L. Dunaway*                          Trustee


/s/ Robert B. Hoffman                                                                    November 29, 2000
--------------------------------------
Robert B. Hoffman*                          Trustee


/s/ Donald R. Jones                                                                      November 29, 2000
--------------------------------------
Donald R. Jones*                            Trustee


/s/ Shirley D. Peterson                                                                  November 29, 2000
--------------------------------------
Shirley D. Peterson*                        Trustee


/s/ William P. Sommers                                                                   November 29, 2000
--------------------------------------
William P. Sommers*                         Trustee



<PAGE>


/s/ John R. Hebble                                                                       November 29, 2000
--------------------------------------
John R. Hebble                              Treasurer (Principal Financial
                                            and Accounting Officer)

</TABLE>



*By:     /s/ Philip J. Collora
         ---------------------------
         Philip J. Collora**

         **  Attorney-in-fact pursuant to powers of attorney
             incorporated by reference to and included with the
             signature pages of Post-Effective Amendment No. 27
             and Post-Effective Amendment No. 29 to the
             Registration Statement





                                        2
<PAGE>

                                                                File No. 2-81549
                                                               File No. 811-3657


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                                    EXHIBITS

                                       TO

                                    FORM N-1A

                         POST-EFFECTIVE AMENDMENT NO. 33

                            TO REGISTRATION STATEMENT

                                      UNDER

                           THE SECURITIES ACT OF 1933

                                       AND

                                AMENDMENT NO. 33

                            TO REGISTRATION STATEMENT

                                      UNDER

                       THE INVESTMENT COMPANY ACT OF 1940



                       KEMPER STATE TAX-FREE INCOME SERIES



                                       11
<PAGE>


                       KEMPER STATE TAX-FREE INCOME SERIES

                                  EXHIBIT INDEX




                                       12


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