SCUDDER CALIFORNIA TAX FREE TRUST
497, 1997-08-06
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         Pursuant to Rule 497(c) under the  Securities  Act of 1933, as amended,
please accept this letter as certification that the prospectus for the Fund does
not  differ  from  that  contained  in  Post-Effective  Amendment  No.  16  (the
"Amendment") to the Trust's Registration  Statement on Form N-1A. This Amendment
was filed electronically on July 30, 1997.



<PAGE>



                     SCUDDER CALIFORNIA TAX FREE MONEY FUND
                                       and
                        SCUDDER CALIFORNIA TAX FREE FUND


              Two Pure No-Load(TM) (No Sales Charges) Mutual Funds
                        Specializing in the Management of
                    California Municipal Security Portfolios


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                       STATEMENT OF ADDITIONAL INFORMATION

   
                                 August 1, 1997
    



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         This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund dated August
1, 1997, as amended from time to time, a copy of which may be obtained without
charge by writing to Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110-4103.
    


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<TABLE>
<CAPTION>

                                        TABLE OF CONTENTS
                                                                                                                   Page     
<S>                                                                                                                  <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
         General Investment Objectives and Policies of Scudder California Tax Free Money Fund.........................1
         General Investment Objective and Policies of Scudder California Tax Free Fund................................3
         Investments..................................................................................................4
         Investments, Investment Techniques and Considerations of the Funds..........................................13
         Economic Factors............................................................................................16
         Constitutional, Legislative and Other Factors...............................................................19
         Trustees' Power to Change Objectives and Policies...........................................................27
         Investment Restrictions.....................................................................................27

PURCHASES............................................................................................................29
         Additional Information About Opening an Account.............................................................29
         Checks......................................................................................................30
         Wire Transfer of Federal Funds..............................................................................30
         Additional Information About Making Subsequent In  vestments................................................30
         Additional Information About Making Subsequent Investments by AutoBuy.......................................30
         Share Price.................................................................................................31
         Share Certificates..........................................................................................31
         Other Information...........................................................................................31

EXCHANGES AND REDEMPTIONS............................................................................................32
         Exchanges...................................................................................................32
         Redemption by Telephone.....................................................................................32
         Redemption By AutoSell......................................................................................33
         Redemption by Mail or Fax...................................................................................34
         Redemption by Write-A-Check.................................................................................34
         Redemption-in-kind..........................................................................................34
         Other Information...........................................................................................34

FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................35
         The Pure No-Load(TM) Concept................................................................................35
         Internet access.............................................................................................36
         Dividend and Capital Gain Distribution Options..............................................................37
         Scudder Investor Centers....................................................................................37
         Reports to Shareholders.....................................................................................37
         Transaction Summaries.......................................................................................37

THE SCUDDER FAMILY OF FUNDS..........................................................................................37

SPECIAL PLAN ACCOUNTS................................................................................................42

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................43

PERFORMANCE INFORMATION..............................................................................................44
         Average Annual Total Return.................................................................................44
         Cumulative Total Return.....................................................................................44
         Total Return................................................................................................45
         Yield.......................................................................................................45
         Effective Yield.............................................................................................45
         Tax-Equivalent Yield........................................................................................46
         Comparison of Portfolio Performance.........................................................................46

ORGANIZATION OF THE FUNDS............................................................................................49

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                                  TABLE OF CONTENTS (continued)
               
                                                                                                                  Page


INVESTMENT ADVISER...................................................................................................50
         Personal Investments by Employees of the Adviser............................................................53

TRUSTEES AND OFFICERS................................................................................................53

REMUNERATION.........................................................................................................55
         Responsibilities of the Board--Board and Committee Meetings.................................................55
         Compensation of Officers and Trustees.......................................................................55

DISTRIBUTOR..........................................................................................................56

TAXES................................................................................................................57
         Federal Taxation............................................................................................57
         State Taxation..............................................................................................60

PORTFOLIO TRANSACTIONS...............................................................................................61
         Brokerage Commissions.......................................................................................61
         Portfolio Turnover..........................................................................................62

NET ASSET VALUE......................................................................................................62

ADDITIONAL INFORMATION...............................................................................................64
         Experts.....................................................................................................64
         Shareholder Indemnification.................................................................................64
         Ratings of Municipal Obligations............................................................................64
         Commercial Paper Ratings....................................................................................65
         Glossary....................................................................................................66
         Other Information...........................................................................................66

FINANCIAL STATEMENTS.................................................................................................67
         Scudder California Tax Free Money Fund......................................................................67
         Scudder California Tax Free Fund............................................................................67

</TABLE>

                                       ii
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                  THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES

                (See "Investment objectives and policies" in the
                               Funds' prospectus.)


   
         Scudder  California Tax Free Money Fund and Scudder California Tax Free
Fund  (each a "Fund,"  collectively  the  "Funds")  are each a series of Scudder
California  Tax Free Trust (the  "Trust").  The Funds are series of an  open-end
management investment company but are not investment companies themselves.
    

General Investment Objectives and Policies of Scudder 
California Tax Free Money Fund

   
         The investment objectives of Scudder California Tax Free Money Fund are
stability of capital and the  maintenance of a constant net asset value of $1.00
per share,  while providing  California  taxpayers income exempt from California
state  personal  income and regular  federal  income tax. The Fund pursues these
objectives  through the professional and efficient  management of a high quality
portfolio consisting  primarily of short-term municipal  obligations (as defined
under  "Investments,  Investment  Techniques and  Considerations of the Funds --
Municipal  Obligations")  having remaining  maturities 397 calendar days or less
with a dollar-weighted  average portfolio  maturity of 90 days or less. The Fund
seeks to  maintain a constant  net asset  value of $1.00 per share,  although in
certain  circumstances this may not be possible.  There can be no assurance that
the Fund's objectives will be met or that income to shareholders which is exempt
from  regular  federal  income tax will be exempt from state and local taxes and
the  federal  alternative  minimum  tax.  Because  of its  focus  on  California
tax-exempt  investments,  the Scudder California Tax Free Money Fund may have to
concentrate a significant  percentage of its assets in a single issuer.  Changes
in the financial  condition or market  assessment of the financial  condition of
these  entities  could  have  a  significant  adverse  impact  on the  Fund.  An
investment  in the Fund may be riskier than an investment in a money market fund
that does not focus on  investments  from a single  state.  Because  the Fund is
intended for investors  subject to both  California  state  personal  income and
federal  income taxes,  it may not be  appropriate  for all investors and is not
available in all states.

         Under normal market conditions, the Fund's portfolio securities consist
of California  municipal  securities.  In addition,  the Fund may make temporary
taxable investments as described below, and may hold cash.  Generally,  the Fund
may purchase  only  securities  which are rated,  or issued by an issuer  rated,
within  the  two  highest  quality  ratings  categories  of two or  more  of the
following rating agencies:  Moody's Investors Service, Inc. ("Moody's") (Aaa and
Aa, MIG-1 and MIG-2, and P1 and P2), Standard & Poor's ("S&P") (AAA and AA, SP1+
and SP1, A1+ and A1 and A2), and Fitch Investors  Service,  Inc.  ("Fitch") (AAA
and AA, F1+, F1 and F2).  Where only one rating  agency has rated a security (or
its  issuer),  the Fund may purchase  that  security as long as the rating falls
within the  categories  described  above.  Where a security  (or its  issuer) is
unrated, the Fund may purchase that security if, in the judgment of the Adviser,
it is comparable in quality to securities described above. All of the securities
in  which  the Fund may  invest  are  dollar-denominated  and must  meet  credit
standards  applied by the Adviser  pursuant  to  procedures  established  by the
Trustees.  Should an issue of municipal  securities  cease to be rated or if its
rating is reduced  below the minimum  required  for  purchase by a money  market
fund,  the Adviser will dispose of any such security  unless the Trustees of the
Fund  determine  that such  disposal  would not be in the best  interests of the
Fund.

The Fund's  Investments.  Scudder  California  Tax Free  Money  Fund  invests in
municipal  securities  of issuers  located in  California  and other  qualifying
issuers  (including  Puerto Rico, the U.S.  Virgin Islands and Guam).  It is the
opinion of bond counsel,  rendered on the date of issuance, that the income from
these obligations is exempt from both California personal income tax and regular
federal income tax ("California municipal securities"). These securities include
general  obligation and revenue bonds and notes of issuers located in California
and of other qualifying issuers.  General obligation bonds and notes are secured
by the issuer's pledge of its full faith, credit and taxing power for payment of
principal  and interest.  Revenue  bonds and notes are  generally  paid from the
revenues  of a  particular  facility or a specific  excise tax or other  revenue
source.  The Fund may invest in municipal  notes,  which are  generally  used to
provide  short-term  capital  needs,  and have  maturities  of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes, bond
anticipation  notes and  construction  loan  notes.  The Fund may also invest in
municipal bonds with remaining maturities of 397 calendar days or less.
    

                                       
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         Ordinarily, the Fund expects that 100% of its portfolio securities will
be California  municipal  securities.  As a matter of  fundamental  policy which
cannot be changed  without the approval of a majority of the Fund's  outstanding
voting securities (as defined under "Investment Restrictions"),  at least 80% of
the net assets of the Fund will be invested in municipal  obligations the income
from which is exempt from both regular  federal and  California  state  personal
income  tax except  that the Fund may invest  more than 20% of its net assets in
securities the income from which may be subject to federal and California income
taxes during periods  which,  in the opinion of the Fund's  investment  adviser,
Scudder,  Stevens & Clark, Inc. (the "Adviser"),  require a temporary  defensive
position for the  protection  of  shareholders.  It is  impossible to accurately
predict how long such alternative strategies may be utilized.
    
       

         From  time to time on a  temporary  basis  or for  temporary  defensive
purposes,  the Fund may, subject to its investment  restrictions,  hold cash and
invest in temporary  taxable  investments  which mature in 397 calendar  days or
less at the time of purchase,  consisting of (1) other obligations  issued by or
on behalf of municipal or corporate issuers;  (2) U.S. Treasury notes, bills and
bonds; (3) obligations of agencies and instrumentalities of the U.S. Government;
(4) money market  instruments,  such as domestic bank  certificates  of deposit,
finance company and corporate  commercial paper, and bankers'  acceptances;  and
(5) repurchase  agreements with respect to any of the obligations which the Fund
is  permitted  to purchase.  The Fund does not invest in  instruments  issued by
banks or savings and loan  associations  unless at the time of  investment  such
issuers  have total assets in excess of $1 billion (as of the date of their most
recently  published  financial  statements).  Commercial  paper  investments are
limited  to  commercial  paper  rated A-1 by S&P,  Prime 1 by  Moody's or F-1 by
Fitch.  The Fund may hold cash or invest in temporary  taxable  investments due,
for  example,  to  market  conditions  or  pending  investment  of  proceeds  of
subscriptions  for  shares of the Fund or  proceeds  from the sale of  portfolio
securities or in anticipation of  redemptions.  However,  the Adviser expects to
invest such proceeds in municipal  obligations as soon as practicable.  Interest
income from temporary  investments  may be taxable to  shareholders  as ordinary
income.

Amortized Cost Valuation of Portfolio  Securities.  Pursuant to Rule 2a-7 of the
Securities  and Exchange  Commission  (the "SEC"),  Scudder  California Tax Free
Money Fund uses the  amortized  cost  method of valuing its  investments,  which
facilitates  the  maintenance  of the Fund's per share net asset value at $1.00.
The amortized  cost method,  which is used to value all of the Fund's  portfolio
securities,  involves  initially  valuing a security at its cost and  thereafter
amortizing  to maturity  any  discount or premium,  regardless  of the impact of
fluctuating interest rates on the market value of the instrument.

         Consistent  with the  provisions  of the  Rule,  the Fund  maintains  a
dollar-weighted  average portfolio  maturity of 90 days or less,  purchases only
instruments  having  remaining  maturities  of 397  calendar  days or less,  and
invests only in securities determined by the Trustees to be of high quality with
minimal credit risks.

         The Trustees have also established procedures designed to stabilize, to
the extent reasonably  possible,  the Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of the
Fund's portfolio by the Trustees, at such intervals as they deem appropriate, to
determine  whether  the Fund's net asset  value  calculated  by using  available
market  quotations  or  market  equivalents  (i.e.,  determination  of  value by
reference to interest rate levels, quotations of comparable securities and other
factors)  deviates  from  $1.00  per  share  based  on  amortized  cost.  Market
quotations  and market  equivalents  used in such review may be obtained from an
independent pricing service approved by the Trustees.

         The extent of  deviation  between the Fund's net asset value based upon
available market  quotations or market  equivalents and $1.00 per share based on
amortized cost will be periodically  examined by the Trustees. If such deviation
exceeds l/2 of l%, the Trustees will promptly consider what action, if any, will
be initiated.  In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders,  they  will  take  such  corrective  action  as they  regard to be
necessary and appropriate,  including the sale of portfolio instruments prior to
maturity  to realize  capital  gains or losses or to shorten  average  portfolio
maturity;  withholding part or all of dividends or payment of distributions from
capital or capital gains;  redemptions of shares in kind; or  establishing a net
asset value per share by using available  market  quotations or equivalents.  In
addition,  in order to  stabilize  the net  asset  value  per share at $1.00 the
Trustees  have the  authority  (1) to reduce or  increase  the  number of shares
outstanding on a pro-rata basis, and (2) to offset each  shareholder's  pro-rata
portion of the  deviation  between  net asset value per share and $1.00 from the
shareholder's  accrued dividend account or from future  dividends.  The Fund may

                                       2
<PAGE>

hold cash for the purpose of stabilizing its net asset value per share. Holdings
of cash,  on which no return  is  earned,  would  tend to lower the yield of the
Fund.

         Special  Considerations.  The  investment  objectives  and  policies of
Scudder  California  Tax  Free  Money  Fund are  sought  through  the  following
additional  strategies  employed in the  management of the  portfolio  which are
described under  "Investments,  Investment  Techniques and Considerations of the
Funds":

         1.       Income Level and Credit Risk.

         2.       Municipal Obligations.

         3.       Investing in California.

         4.       When-Issued Securities.

         5.       Stand-By Commitments.

         6.       Third Party Puts.

         7.       Repurchase Agreements.

         8.       Reverse Repurchase Agreements.

General Investment Objective and Policies of Scudder California Tax Free Fund

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

         The Adviser believes that investment  results can be enhanced by active
professional  management.  Professional  management  distinguishes the Fund from
unit investment trusts, which cannot be actively managed.

         There can be no assurance that the objective of the Fund will be met or
that all income to  shareholders  which is exempt from  regular  federal  income
taxes will be exempt from state or local taxes, or from the federal  alternative
minimum tax.

The  Fund's  Investments.  Normally,  at  least  75%  of the  intermediate-  and
long-term  securities  purchased by the Fund will be investment-grade  municipal
securities which are those rated Aaa, Aa, A, or Baa by Moody's or AAA, AA, A, or
BBB by S&P or  Fitch,  or  unrated  securities  judged by the  Adviser  to be of
equivalent quality,  or securities issued or guaranteed by the U.S.  Government.
The  Fund  may  also  invest  up to 25%  of its  total  assets  in  fixed-income
securities rated below investment-grade,  that is, rated below Baa by Moody's or
below  BBB  by  S&P or  Fitch,  or in  unrated  securities  considered  to be of
equivalent  quality as  determined  by the  Adviser.  The Fund may not invest in
fixed-income  securities  rated  below B by  Moody's,  S&P or  Fitch,  or  their
equivalent.

         Moody's  considers bonds it rates Baa to have  speculative  elements as
well  as  investment-grade  characteristics.  Securities  rated  below  BBB  are
commonly  referred to as "junk bonds" and involve  greater price  volatility and
higher  degrees of  speculation  with  respect to the payment of  principal  and
interest than higher-quality  fixed-income securities.  In addition, the trading
market for these  securities  is  generally  less liquid  than for  higher-rated
securities and the Funds may have  difficulty  disposing of these  securities at
the time they wish to do so. The lack of a liquid  secondary  market for certain
securities  may also make it more  difficult  for the  Funds to obtain  accurate
market quotations for purposes of valuing their portfolios and calculating their
net asset values.
    

         Issuers  of junk  bonds  may be  highly  leveraged  and  may  not  have
available to them more traditional  methods of financing.  Therefore,  the risks
associated  with acquiring the securities of such issuers  generally are greater
than is the case with higher rated securities.  For example,  during an economic
downturn or a sustained  period of rising interest rates,  issuers of high yield

                                       3
<PAGE>

securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged.  In addition,  the market for high yield municipal
securities is relatively new and has not weathered a major  economic  recession,
and it is unknown what effects such a recession  might have on such  securities.
During  such a period,  such  issuers may not have  sufficient  revenues to meet
their interest  payment  obligations.  The issuer's  ability to service its debt
obligations also may be adversely affected by specific issuer  developments,  or
the issuer's  inability to meet specific projected  business  forecasts,  or the
unavailability of additional  financing.  The risk of loss due to default by the
issuer is  significantly  greater  for the  holders of junk bonds  because  such
securities may be unsecured and may be  subordinated  to other  creditors of the
issuer.

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

         Adverse publicity and investor  perceptions,  which may not be based on
fundamental  analysis,  also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market.  Factors adversely  affecting the market
value of such  securities  are likely to affect  adversely  the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is  required  to  seek  recovery  upon  a  default  on a  portfolio  holding  or
participate in the restructuring of the obligation.
       

   
         The Fund expects to invest  principally in securities rated A or better
by Moody's,  S&P or Fitch or unrated  securities  judged by the Adviser to be of
equivalent  quality at the time of  purchase.  Securities  in these three rating
categories are judged by the Adviser to have an adequate if not strong  capacity
to repay principal and pay interest.

         High quality bonds,  those within the two highest of the quality rating
categories,  characteristically have a strong capacity to pay interest and repay
principal.  Medium-grade  bonds, those within the next two such categories,  are
defined as having  adequate  capacity to pay  interest and repay  principal.  In
addition,   certain  medium-grade  bonds  are  considered  to  have  speculative
characteristics.  While some  lower-grade  bonds  (so-called  "junk bonds") have
produced  higher  yields  than  investment-grade  bonds  in the  past,  they are
considered to be predominantly speculative and, therefore, carry greater risk.

         The Fund's  investments must also meet credit standards  applied by the
Adviser.  Should the rating of a portfolio  security be  downgraded  after being
purchased  by the Fund,  the Adviser  will  determine  whether it is in the best
interest of the Fund to retain or dispose of the security.

Investments

         The  Fund  invests  in  municipal  securities  of  issuers  located  in
California and other qualifying  issuers (including Puerto Rico, the U.S. Virgin
Islands and Guam).  It is the opinion of bond  counsel,  rendered on the date of
issuance,  that the income from these obligations is exempt from both California
personal  income  tax and  regular  federal  income tax  ("California  municipal
securities").  The Fund may invest in municipal  bonds,  which meet  longer-term
capital needs and generally  have  maturities of more than one year when issued.
These  securities  include  general  obligation  and revenue  bonds,  industrial
development and pollution  control bonds of issuers  located in California.  The
Fund may  invest  in  municipal  notes,  which  are  generally  used to  provide
short-term  capital  needs and have  maturities  of one year or less.  Municipal
notes  include  tax  anticipation  notes,   revenue   anticipation  notes,  bond
anticipation  notes and construction  loan notes.  General  obligation bonds and
notes are secured by the  issuer's  pledge of its full faith,  credit and taxing
power  for  payment  of  principal  and  interest.  Revenue  bonds and notes are
generally paid from the revenues of a particular facility, a specific excise tax
or other revenue source.

         Under normal market conditions,  the Fund expects to invest principally
in California municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in California municipal
securities with short- and medium-term maturities.
    

                                       4
<PAGE>

   
         The Fund may also  invest  up to 20% of its total  assets in  municipal
securities  the  interest  income  from  which  is  taxable  or  subject  to the
alternative  minimum tax ("AMT"  bonds).  Fund  distributions  from  interest on
certain  municipal  securities  subject to the alternative  minimum tax, such as
private  activity  bonds,  will be a preference item for purposes of calculating
individual and corporate  alternative  minimum taxes,  depending upon investors'
particular situations.  In addition,  state and local taxes may apply, depending
upon your state and local tax laws.

         Ordinarily,  the Fund expects 100% of its  portfolio  securities  to be
California municipal securities.  As a matter of fundamental policy which cannot
be changed without the approval of a majority of the Fund's  outstanding  voting
securities (as defined under "Investment Restrictions"), at least 80% of the net
assets of the Fund will be invested in California municipal securities except as
stated below. The Fund may also, for temporary defensive purposes,  hold cash or
invest its assets in taxable securities.  It is impossible to accurately predict
how long these alternative strategies may be utilized.

         When,  in the opinion of the Adviser,  defensive  considerations  or an
unusual  disparity  between  the  after-tax  income on taxable  investments  and
comparable  municipal  obligations  make it advisable to do so, up to 20% of the
Fund's  net  assets  may be  held  in cash or  invested  in  short-term  taxable
investments such as (1) U.S. Treasury notes, bills and bonds; (2) obligations of
agencies  and  instrumentalities  of the U.S.  Government;  and (3) money market
instruments,  such as domestic bank certificates of deposit, finance company and
corporate  commercial  paper,  and  bankers'  acceptances.  Notwithstanding  the
foregoing, the Fund may invest more than 20% of its net assets in securities the
income  from which may be subject to federal  and  California  income tax during
periods which, in the opinion of the Adviser,  require a defensive  position for
the  protection of  shareholders.  Investors  should be aware that shares of the
Fund do not represent a complete investment program.

         The  Fund  may  invest  in  stand-by  commitments,  third  party  puts,
when-issued   securities  and  enter  into  repurchase  agreements  and  reverse
repurchase  agreements,  which may involve certain expenses and risks, including
credit  risks.  The Fund may also  invest in variable  rate demand  instruments.
These  securities and techniques are not expected to comprise a major portion of
the  Fund's  investments.  The Fund may also  utilize  various  other  strategic
transactions,  including derivatives. See "Additional information about policies
and investments" for more information about these investment techniques.

         During  the  fiscal  year  ended  March  31,   1997,   based  upon  the
dollar-weighted  average ratings of the Fund's portfolio  holdings at the end of
each month during that period, the Fund had the following percentages of its net
assets  invested  in debt  securities  rated (or if unrated,  considered  by the
Adviser to be equivalent to rated securities) in the categories indicated: 4.59%
BB+ and 0.69% BB.

         A portion of the Fund's  income  may be subject to  federal,  state and
local income taxes.
    

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

                                       5
<PAGE>

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

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

         The  Fund may  purchase  participation  interests  in  municipal  lease
obligations  held by a  commercial  bank or other  financial  institution.  Such
participations  provide the Fund with the right to a pro rata undivided interest
in the underlying municipal lease obligations.  In addition, such participations
generally  provide the Fund with the right to demand  payment,  on not more than
seven days' notice, of all or any part of the Fund's  participation  interest in
the underlying municipal lease obligation,  plus accrued interest. The Fund will
only invest in such  participations if, in the opinion of bond counsel,  counsel
for the issuers of such  participations or counsel selected by the Adviser,  the
interest from such  participations is exempt from regular federal income tax and
state income tax, if applicable.

Indexed  Securities.  Scudder  California  Tax Free Fund may  invest in  indexed
securities,  the  value  of which  is  linked  to  currencies,  interest  rates,
commodities,  indices or other financial indicators  ("reference  instruments").
Most indexed securities have maturities of three years or less.

         Indexed  securities differ from other types of debt securities in which
the Fund may invest in several  respects.  First,  the interest  rate or, unlike
other debt  securities,  the principal  amount payable at maturity of an indexed
security  may  vary  based  on  changes  in  one  or  more  specified  reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency  exchange  rates between two  currencies  (neither of which need be the
currency in which the instrument is denominated).  The reference instrument need
not be related to the terms of the indexed security.  For example, the principal
amount of a U.S.  dollar  denominated  indexed  security  may vary  based on the
exchange rate of two foreign  currencies.  An indexed security may be positively
or negatively indexed;  that is, its value may increase or decrease if the value
of the  reference  instrument  increases.  Further,  the change in the principal
amount payable or the interest rate of an indexed  security may be a multiple of
the  percentage  change  (positive or  negative) in the value of the  underlying
reference instrument(s).

         Investment in indexed securities involves certain risks. In addition to
the credit risk of the  security's  issuer and the normal risks of price changes
in  response  to changes in  interest  rates,  the  principal  amount of indexed
securities  may  decrease  as a result  of  changes  in the  value of  reference
instruments.  Further,  in the case of certain  indexed  securities in which the
interest  rate is linked to a reference  instrument,  the  interest  rate may be
reduced to zero, and any further  declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.

   
Illiquid  and  Restricted  Securities.   Each  Fund  may  occasionally  purchase
securities  other than in the open market.  While such purchases may often offer
attractive  opportunities  for  investment  not otherwise  available on the open
market,  the securities so purchased are often  "restricted  securities" or "not
readily marketable," i.e., securities which cannot be sold to the public without
registration  under  the  Securities  Act  of  1933  or the  availability  of an
exemption  from  registration  (such as Rules 144 or 144A) or  because  they are
subject to other legal or contractual delays in or restrictions on resale.
    

Strategic  Transactions and Derivatives.  Scudder  California Tax Free Fund may,
but is not required to, utilize various other investment strategies as described
below to hedge  various  market  risks  (such as  interest  rates  and  broad or
specific market movements),  to manage the effective maturity or duration of the
Fund's portfolio, or to enhance potential gain. These strategies may be executed

                                       6
<PAGE>

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

         In the course of pursuing  these  investment  strategies,  the Fund may
purchase and sell  exchange-listed and  over-the-counter put and call options on
securities,  fixed-income indices and other financial instruments,  purchase and
sell financial  futures  contracts and options  thereon,  and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic  Transactions").  Strategic Transactions may
be used  without  limit to attempt to protect  against  possible  changes in the
market value of securities  held in or to be purchased for the Fund's  portfolio
resulting from securities markets fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio  securities,  to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio,  or to establish a position in the derivatives  markets
as a temporary substitute for purchasing or selling particular securities.  Some
Strategic  Transactions  may also be used to enhance  potential gain although no
more than 5% of the Fund's  assets will be committed  to Strategic  Transactions
entered into for non-hedging purposes. Any or all of these investment techniques
may be used at any  time and in any  combination,  and  there  is no  particular
strategy that dictates the use of one technique  rather than another,  as use of
any Strategic  Transaction is a function of numerous variables  including market
conditions.  The  ability of the Fund to utilize  these  Strategic  Transactions
successfully  will depend on the Adviser's  ability to predict  pertinent market
movements,  which  cannot be  assured.  The Fund  will  comply  with  applicable
regulatory  requirements  when  implementing  these  strategies,  techniques and
instruments.  Strategic  Transactions  involving  financial  futures and options
thereon will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes and not for speculative purposes.

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

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

         A put option  gives the  purchaser  of the  option,  upon  payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security,  commodity, index, currency or other instrument at the exercise price.
For  instance,  the  Fund's  purchase  of a put  option on a  security  might be
designed  to protect  its  holdings in the  underlying  instrument  (or, in some
cases, a similar  instrument)  against a substantial decline in the market value
by giving  the Fund the right to sell such  instrument  at the  option  exercise
price.  A call  option,  upon payment of a premium,  gives the  purchaser of the
option the right to buy, and the seller the  obligation to sell,  the underlying
instrument  at the  exercise  price.  The Fund's  purchase of a call option on a

                                       7
<PAGE>

security,  financial  future,  index,  currency  or  other  instrument  might be
intended to protect the Fund against an increase in the price of the  underlying
instrument  that it  intends  to  purchase  in the future by fixing the price at
which it may purchase such instrument.  An American style put or call option may
be exercised at any time during the option period while a European  style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options").  Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the  performance  of the  obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.

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

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

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

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

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

                                       8
<PAGE>

subject to the Fund's  limitation on investing no more than 10% of its assets in
illiquid securities.

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

         The 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 the Fund must be  "covered"
(i.e., the Fund must own the securities or futures contract subject to the call)
or must meet the asset segregation  requirements  described below as long as the
call is  outstanding.  Even though the Fund will  receive the option  premium to
help  protect it against  loss,  a call sold by the Fund exposes the Fund during
the term of the option to possible loss of opportunity  to realize  appreciation
in the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold.

         The Fund may  purchase  and sell put options on  securities,  including
U.S.  Treasury  and agency  securities,  mortgage-backed  securities,  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. The Fund will not sell put options if, as a result, more than 50% of
the Fund's  assets  would be required to be  segregated  to cover its  potential
obligations  under such put options other than those with respect to futures and
options  thereon.  In selling put options,  there is a risk that the Fund may be
required to buy the  underlying  security at a  disadvantageous  price above the
market price.

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

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

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

                                       9
<PAGE>

Options on Securities  Indices and Other  Financial  Indices.  The 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. The 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 the  Fund to do so.  A  combined
transaction  will usually  contain  elements of risk that are present in each of
its component transactions.  Although combined transactions are normally entered
into based on the Adviser's  judgment that the combined  strategies  will reduce
risk or otherwise  more  effectively  achieve the desired  portfolio  management
goal, it is possible that the  combination  will instead  increase such risks or
hinder achievement of the portfolio management objective.

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

         The Fund will usually  enter into swaps on a net basis,  i.e.,  the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument,  with the Fund receiving or paying, as the case may
be,  only the net amount of the two  payments.  Inasmuch as these  swaps,  caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute  senior securities under
the  Investment   Company  Act  of  1940,  as  amended  (the  "1940  Act")  and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The Fund will not enter into any swap, cap, floor or collar transaction  unless,
at the time of entering into such transaction,  the unsecured  long-term debt of
the Counterparty,  combined with any credit enhancements, is rated at least A by
S&P or Moody's or has an equivalent  rating from an NRSRO or is determined to be
of  equivalent  credit  quality  by the  Adviser.  If there is a default  by the
Counterparty,  the Fund may have contractual remedies pursuant to the agreements
related to the  transaction.  The swap market has grown  substantially in recent
years with a large number of banks and  investment  banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid.  Caps, floors and collars are more
recent innovations for which  standardized  documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.

                                       10
<PAGE>

Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S.  dollar-denominated futures contracts or options
thereon  which are  linked  to the  London  Interbank  Offered  Rate  ("LIBOR"),
although  foreign  currency-denominated  instruments  are available from time to
time.  Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use  Eurodollar  futures  contracts  and options  thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.

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

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

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

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

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

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

                                       11
<PAGE>

   
segregation of assets with a value equal to the Fund's net obligation, if any.
    

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

         The Fund's activities  involving Strategic  Transactions may be limited
by the  requirements  of  Subchapter M of the Internal  Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.  (See
"TAXES.")

Management  Strategies.  In  pursuit  of its  investment  objectives,  the  Fund
purchases  securities that it believes are attractive and competitive  values in
terms of  quality,  yield,  and the  relationship  of current  price to maturity
value. However, recognizing the dynamics of municipal bond prices in response to
changes in general economic conditions,  fiscal and monetary policies,  interest
rate levels and market forces such as supply and demand for various bond issues,
the Adviser,  subject to the  Trustees'  review,  performs  credit  analysis and
manages the Fund's  portfolio  continuously,  attempting  to take  advantage  of
opportunities  to improve  total return,  which is a  combination  of income and
principal performance over the long term. The primary strategies employed in the
management of the Fund's portfolio are:

         Emphasis on Credit  Analysis.  As indicated above, the Fund's portfolio
is invested in municipal  obligations  rated within, or judged by the Adviser to
be of a quality comparable to, the six highest rating categories of Moody's, S&P
or Fitch.  The  ratings  assigned  by  Moody's,  S&P and Fitch  represent  their
opinions as to the quality of the  securities  which they  undertake to rate. It
should be  emphasized,  however,  that ratings are relative and are not absolute
standards of quality.  Furthermore,  even within this  segment of the  municipal
bond market,  relative credit standing and market perceptions thereof may shift.
Therefore,  the Adviser believes that it should review  continuously the quality
of municipal obligations.

         The  Adviser  has over many years  developed  an  experienced  staff to
assign its own quality  ratings which are  considered in making value  judgments
and in arriving at purchase or sale  decisions.  Through the  discipline of this
procedure the Adviser  attempts to discern  variations in credit rankings of the
published services and to anticipate changes in credit ranking.

         Variations of Maturity.  In an attempt to capitalize on the differences
in total return from municipal obligations of differing  maturities,  maturities
may be varied  according to the structure and level of interest  rates,  and the
Adviser's  expectations of changes therein. To the extent that a Fund invests in
short-term maturities, capital volatility will be reduced.

         Emphasis on Relative  Valuation.  The  interest  rate (and hence price)
relationships  between different categories of municipal obligations of the same
or generally  similar  maturity  tend to change  constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
disparities  in yield  relationships  may afford  opportunities  to  implement a
flexible  policy  of  trading  a Fund's  holdings  in order  to  invest  in more
attractive market sectors or specific issues.

         Market  Trading  Opportunities.  In  pursuit  of the above the Fund may
engage in short-term trading (selling securities held for brief periods of time,
usually less than three months) if the Adviser believes that such  transactions,
net of costs, would further the attainment of the Fund's objective. The needs of
different  classes of lenders and borrowers and their changing  preferences  and
circumstances  have  in  the  past  caused  market  dislocations   unrelated  to
fundamental  creditworthiness  and trends in interest rates which have presented
market trading  opportunities.  There can be no assurance that such dislocations
will occur in the future or that either Fund will be able to take  advantage  of

                                       12
<PAGE>

them.  The Fund will limit its voluntary  short-term  trading to the extent such
limitation  is necessary for it to qualify as a "regulated  investment  company"
under the Code.

Special  Considerations.  The  investment  objectives  and  policies  of Scudder
California Tax Free Fund are sought through the following additional  strategies
employed  in  the  management  of  the  portfolio   which  are  described  under
"Investments, Investment Techniques and Considerations of the Funds":

         1.       Income Level and Credit Risk.

         2.       Municipal Obligations.

         3.       Investing in California.

         4.       When-Issued Securities.

         5.       Stand-by Commitments.

         6.       Third Party Puts.

         7.       Repurchase Agreements.

         8.       Reverse Repurchase Agreements.

Investments, Investment Techniques and Considerations of the Funds

Income  Level and Credit  Risk.  Because  the Funds  principally  intend to hold
investment-grade  (in the case of California Tax Free Fund) and high quality (in
the case of California Tax Free Money Fund)  municipal  obligations,  the income
earned on  shares  of each Fund tend to be less than it might be on a  portfolio
emphasizing lower quality securities.  Municipal  obligations are subject to the
provisions of  bankruptcy,  insolvency  and other laws  affecting the rights and
remedies of creditors,  such as the federal  bankruptcy  laws, and laws, if any,
which may be enacted by Congress or state  legislatures  extending  the time for
payment of principal or interest,  or both, or imposing other  constraints  upon
enforcement of such obligations or upon  municipalities to levy taxes.  There is
also the  possibility  that as a result of litigation or other  conditions,  the
power or ability of any one or more issuers to pay,  when due,  principal of and
interest  on its or their  municipal  obligations  may be  materially  affected.
Scudder  California Tax Free Fund may invest in municipal  securities rated B by
S&P,  Fitch or Moody's  although it intends to invest  principally in securities
rated in higher grades.  Although each Fund's quality  standards are designed to
minimize the credit risk of investing in the Fund,  that risk cannot be entirely
eliminated.  Shares of the Funds are not insured by any agency of  California or
of the U.S. Government.

Municipal  Obligations.  Municipal  obligations  are  issued  by or on behalf of
states,  territories  and  possessions of the United States and their  political
subdivisions,  agencies and instrumentalities to obtain funds for various public
purposes.  The interest on most of these  obligations  is generally  exempt from
regular federal income tax in the hands of most individual  investors,  although
it may be subject to the individual and corporate  alternative  minimum tax. The
two principal classifications of municipal obligations are "notes" and "bonds."

         1. Municipal  Notes.  Municipal notes are generally used to provide for
short-term  capital  needs and  generally  have  maturities of one year or less.
Municipal notes include:  tax anticipation  notes;  revenue  anticipation notes;
bond anticipation notes; and construction loan notes.

         Tax  anticipation  notes are sold to finance  working  capital needs of
municipalities.  They are generally  payable from specific tax revenues expected
to be  received  at a future  date.  Revenue  anticipation  notes are  issued in
expectation  of receipt  of other  types of  revenue  such as  federal  revenues
available under the Federal Revenue Sharing Program.  Tax anticipation notes and
revenue  anticipation  notes are  generally  issued in  anticipation  of various
seasonal  revenues  such  as  income,  sales,  use,  and  business  taxes.  Bond
anticipation  notes  are sold to  provide  interim  financing.  These  notes are
generally issued in anticipation of long-term  financing in the market.  In most
cases, such financing provides for the repayment of the notes. Construction loan

                                       13
<PAGE>

notes  are sold to  provide  construction  financing.  After  the  projects  are
successfully  completed and accepted,  many projects receive permanent financing
through the Federal  Housing  Administration  under  "Fannie  Mae" (the  Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association).  There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.

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

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

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

         Industrial  development and pollution control bonds, although nominally
issued by municipal  authorities,  are generally not secured by the taxing power
of the  municipality  but are secured by the revenues of the  authority  derived
from payments by the industrial  user.  Under federal tax  legislation,  certain
types of Industrial  Development Bonds and Pollution Control Bonds may no longer
be issued on a tax-exempt basis, although previously-issued bonds of these types
and certain refundings of such bonds are not affected. Each Fund may invest more
than 25% of its  assets in  industrial  development  or other  private  activity
bonds, subject to each Fund's fundamental  investment policies, and also subject
to each Fund's  current  intention not to invest in municipal  securities  whose
investment  income is  taxable  or  subject  to the  Fund's  20%  limitation  on
investing in AMT bonds.  For the purposes of each Fund's  investment  limitation
regarding   concentration  of  investments  in  any  one  industry,   industrial
development  or other private  activity  bonds  ultimately  payable by companies
within the same industry will be considered as if they were issued by issuers in
the same industry.

         3. Other  Municipal  Obligations.  There is, in addition,  a variety of
hybrid  and  special  types  of  municipal   obligations  as  well  as  numerous
differences in the security of municipal obligations both within and between the
two principal classifications above.

         The  Funds may  purchase  variable  rate  demand  instruments  that are
tax-exempt  municipal  obligations  providing  for a periodic  adjustment in the
interest  rate paid on the  instrument  according  to changes in interest  rates
generally.  These instruments also permit a Fund to demand payment of the unpaid
principal  balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument.  The Funds intend to
exercise  the demand  only (1) upon a default  under the terms of the  municipal
obligation,  (2) as needed to provide liquidity to the Funds, or (3) to maintain
their respective  investment  portfolio ratings standards.  A bank that issues a
repurchase  commitment may receive a fee from a Fund for this  arrangement.  The
issuer of a variable rate demand  instrument may have a  corresponding  right to
prepay in its  discretion  the  outstanding  principal  of the  instrument  plus
accrued  interest  upon notice  comparable  to that  required  for the holder to
demand payment.

                                       14
<PAGE>

         The variable rate demand  instruments that these Funds may purchase are
payable on demand on not more than thirty  calendar  days' notice.  The terms of
the instruments  provide that interest rates are adjustable at intervals ranging
from daily up to six months,  and the  adjustments are based upon the prime rate
of a bank or other appropriate interest rate adjustment index as provided in the
respective instruments. The Funds determine the variable rate demand instruments
that they purchase in  accordance  with  procedures  approved by the Trustees to
minimize credit risks.  The Adviser may determine that an unrated  variable rate
demand instrument meets a Fund's quality criteria by reason of being backed by a
letter of credit or guarantee  issued by a bank that meets the quality  criteria
for the Fund. Thus, either the credit of the issuer of the municipal  obligation
or the guarantor bank or both meet the quality  standards of a Fund. The Adviser
reevaluates  each unrated  variable rate demand  instrument  held by a Fund on a
quarterly  basis to  determine  that it  continues  to meet the  Fund's  quality
criteria.

         The value of the underlying variable rate demand instruments may change
with changes in interest rates generally,  but the variable rate nature of these
instruments  should decrease changes in value due to interest rate fluctuations.
Accordingly,  as interest rates decrease or increase,  the potential for capital
gain and the risk of capital loss on the disposition of portfolio securities are
less  than  would be the case  with the  comparable  portfolio  of fixed  income
securities.  The Funds may purchase  variable rate demand  instruments  on which
stated  minimum or maximum  rates,  or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does,  increases or decreases  in value of such  variable  rate
demand notes may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable  rate adjustment  index,  the
variable rate demand  instruments are not comparable to long-term fixed interest
rate  securities.  Accordingly,  interest  rates  on the  variable  rate  demand
instruments  may be higher or lower  than  current  market  rates for fixed rate
obligations of comparable quality with similar final maturities.

         The maturity of the variable rate demand  instruments held by the Funds
are ordinarily  deemed to be the longer of (1) the notice period required before
the  Fund  is  entitled  to  receive  payment  of the  principal  amount  of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.

General  Considerations.  An  entire  issue  of  municipal  obligations  may  be
purchased by one or a small number of institutional investors such as one of the
Funds. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be  registered  under the  Securities  Act of 1933 prior to offer and
sale  unless  an  exemption  from  such  registration  is  available,  municipal
obligations   which  are  not  publicly  offered  may  nevertheless  be  readily
marketable.  A secondary market exists for municipal  obligations which were not
publicly offered initially.

         Obligations  purchased for the Funds are subject to the  limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment  restrictions.  The Adviser determines whether a municipal obligation
is  readily  marketable  based on whether  it may be sold in a  reasonable  time
consistent with the customs of the municipal  markets  (usually seven days) at a
price (or  interest  rate)  which  accurately  reflects  its value.  The Adviser
believes  that the  quality  standards  applicable  to each  Fund's  investments
enhance marketability.  In addition, Stand-by Commitments and demand obligations
also enhance marketability.

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

         Yields  on  municipal  obligations  depend  on a  variety  of  factors,
including money market conditions, municipal bond market conditions, the size of
a particular  offering,  the maturity of the  obligation  and the quality of the
issue.

         The Funds  expect  that each will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following  categories:  hospitals and health facilities;  turnpikes and toll
roads;  ports and airports;  or colleges and universities.  Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing  authorities;  general obligations of states and
localities; lease rental obligations of states and local authorities;  state and
local housing finance authorities;  municipal utilities systems;  bonds that are

                                       15
<PAGE>

secured  or  backed  by  the  Treasury  or  other  U.S.  Government   guaranteed
securities;  or industrial  development and pollution control bonds. There could
be  economic,  business  or  political  developments,  which  might  affect  all
municipal  obligations of a similar type.  However,  each Fund believes that the
most  important  consideration  affecting  risk  is  the  quality  of  municipal
obligations.

Investing in  California.  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.

Economic Factors

         Fiscal Years Prior to 1996-97. By the close of the 1989-90 Fiscal Year,
California's  revenues had fallen below  projections  so that the State's budget
reserve,  the Special Fund for Economic  Uncertainties (the "Special Fund"), was
fully  depleted  by June 30,  1990.  A  recession  which had begun in  mid-1990,
combined  with higher  health and  welfare  costs  driven by the  State's  rapid
population   growth,   adversely  affected  General  Fund  revenues  and  raised
expenditures above initial budget appropriations.

         As a result of these factors and others,  the State confronted a period
of budget  imbalance.  Beginning  with the  1990-91  Fiscal Year and for several
years  thereafter,  the budget  required  multibillion  dollar  actions to bring
projected   revenues  and  expenditures   into  balance.   During  this  period,
expenditures  exceeded  revenues  in  four  out  of six  years,  and  the  State
accumulated  and  sustained a budget  deficit in the Special Fund -  approaching
$2.8 billion at its peak on June 30, 1993.

         By the 1993-94 Fiscal Year, the accumulated deficit was too large to be
prudently  retired  in one year and a two-year  program  was  implemented.  This
program  used  revenue  anticipation  warrants to carry a portion of the deficit
over to the end of the fiscal year.

         The 1994-95 Budget Act projected General Fund revenues and transfers of
$41.9 billion.  Expenditures were projected to be $40.9 billion - an increase of
$1.6 billion over the prior year. As a result of the improving economy, however,
the fiscal year  ultimately  produced  revenues and  transfers of $42.7  billion
which more than offset  expenditures  of $42.0  billion and thereby  reduced the
accumulated budget deficit.

         With  strengthening  revenues and reduced  caseload growth driven by an
improving economy, the State entered the 1995-96 Fiscal Year budget negotiations
with the smallest  nominal "budget gap" to be closed in many years.  The 1995-96
Budget Act projected General Fund revenues and transfers of $44.1 billion, a 3.5
percent  increase from the prior year, and  expenditures  were budgeted at $43.4
billion.  In addition,  the Department of Finance  projected that after repaying
the last of the carryover  budget deficit,  there would be a positive balance of
$28 million in the budget reserve as of June 30, 1996.
       

   
         1996-97 Fiscal Year. The 1996-97  Governor's  Budget,  released January
10, 1996, projected General Fund revenues and transfers of $45.6 billion, a 1.3%
increase over 1995-96.  The Governor's budget proposed two major initiatives,  a
15%  personal  and  corporate  income tax cut and a revision  of the trial court
funding program,  which would have the effect of reducing General Fund revenues.
The Governor's Budget proposed General Fund  expenditures of $45.2 billion.  The
Governor's Budget also proposed Special Fund revenues equal to expenditures,  at
a level of $13.3 billion.

         The May  Revision of the  Governor's  Budget,  released on May 21, 1996
("The May  Revision"),  updated  revenue  estimates for the 1996-97 Fiscal Year,
reflecting  stronger  economic  activity in the State and thus  greater  revenue
growth.  The revised estimate was for $47.1 billion of revenues,  still assuming
the Governor's tax cut would be enacted, and $46.5 billion of expenditures.

         1996-97  Budget Act. The 1996-97  Budget Act was signed by the Governor
on July 15, 1996,  along with various  implementing  bills.  The Governor vetoed
about $82 million of  appropriations  (both General Fund and Special Fund). With
the signing
    
                                       16
<PAGE>
   
of the Budget Act, the State implemented its regular cash flow borrowing program
with the  issuance of $3.0  billion of Revenue  Anticipation  Notes to mature on
June 30, 1997. The Budget Act  appropriates a budget reserve in the Special Fund
of $305 million,  as of June 30, 1997. The Department of Finance  projects that,
on June 30, 1997, the State's available borrowable (cash) resources will be $2.9
billion,  after  payment  of all  obligations  due by  that  date,  so  that  no
cross-fiscal year borrowing is anticipated.

         Revenues.  The Legislature  rejected the Governor's proposed 15% cut in
personal  income taxes (to be phased in over three years),  approved a 5% cut in
bank and  corporation  taxes,  to be effective  for income years  commencing  on
January 1, 1997. As a result of the Legislature's  failure to enact the personal
income tax cut,  revenues  for the Fiscal Year are  estimated to be $550 million
higher  than  projected  in the May  Revision,  and are now  estimated  to total
$47.643  billion,  a 3.3  percent  increase  over the  final  estimated  1995-96
revenues. Special Fund revenues are estimated to be $13.3 billion.

         Expenditures.  The  Budget Act  contains  General  Fund  appropriations
totaling  $47.251  billion,  a 4.0  percent  increase  over the final  estimated
1995-96 expenditures. Special Fund expenditures are budgeted at $12.6 billion.

         The following are principal features of the 1996-97 Budget Act:

         1. Proposition 98 funding for schools and community  college  districts
increased by almost $1.6 billion  (General Fund) and $1.65 billion above revised
1995-96  levels.  Almost  half of this  money was  budgeted  to fund  class-size
reductions in  kindergarten  and grades 1-3.  Also,  for the second  consecutive
year, the full cost of living allowance (3.2 percent) was funded. Proposition 98
increases have brought K-12 expenditures to almost $4,800 per pupil (also called
ADA,  or  Average  Daily  Attendance),  an almost  15%  increase  over the level
prevailing  during the recession years. Out of this $1.6 billion total community
colleges will receive an increase in funding of $157 million for 1996-97.

         Due to higher than projected  revenues in 1995-96,  an additional  $1.1
billion  ($190  per  K-12 ADA and  $145  million  for  community  colleges)  was
appropriated  and  retroactively  applied  towards  the 1995-96  Proposition  98
guarantee,  bringing  K-12  expenditures  in that year to over  $4,600  per ADA.
Similar retroactive  increases totaling $230 million,  based on final figures on
revenues and State population  growth,  were made to the 1991-92 and the 1994-95
Proposition 98 guarantees, most of which was allocated to each school site.

         2. The Budget Act  assumed  savings of  approximately  $660  million in
health and  welfare  costs  which  required  changes in federal  law,  including
federal  welfare  reform.  The Budget Act further assumed federal law changes in
August 1996 which would allow welfare cash grant levels to be reduced by October
1, 1996. These cuts totaled  approximately  $163 million of the anticipated $660
million savings. See "Federal Welfare Reform".

         3. A 4.9 percent  increase in funding for the  University of California
($130 million  General Fund) and the California  State  University  system ($101
million General Fund), with no increases in student fees.

         4.  The  Budget  Act  assumed  the  federal   government  will  provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants.  These funds reduce  appropriations in these categories that
would  otherwise  have to be paid from the General  Fund.  (For purposes of cash
flow projections,  the Department of Finance expects $540 million of this amount
to be received during the 1996-97 fiscal year.)

         5. General Fund support for the Department of Corrections was increased
by about 7 percent over the prior year, reflecting estimates of increased prison
population.

         6. With respect to aid to local governments, the principal new programs
included in the Budget Act are $100 million in grants to cities and counties for
law enforcement  purposes,  and budgeted $50 million for  competitive  grants to
local governments for programs to combat juvenile crime.

         The Budget Act did not contain any tax increases. As noted, there was a
reduction in bank and corporate  taxes. In addition,  the  Legislature  approved
another  one-year  suspension of the Renters Tax Credit,  saving $520 million in
expenditures.
    

                                       17
<PAGE>

   
         Federal Welfare Reform.  Following enactment of the 1996-97 Budget Act,
Congress  passed and the  President  signed (on  August 22,  1996) the  Personal
Responsibility and Work Opportunity Act of 1996 (P.L. 104-193, the "Law") making
a fundamental reform of the current welfare system.  Among many provisions,  the
Law includes:  (i) conversion of Aid to Families with Dependent Children from an
entitlement  program to a block  grant  titled  Temporary  Assistance  for Needy
Families (TANF), with lifetime time limits on TANF recipients, work requirements
and other changes;  (ii)  provisions  denying certain federal welfare and public
benefits  to legal  noncitizens,  allowing  states  to elect to deny  additional
benefits (including TANF) to legal noncitizens, and generally denying almost all
benefits to illegal  immigrants;  and (iii)  changes in the Food Stamp  program,
including reducing maximum benefits and imposing work requirements.

         The Law  requires  states to  implement  the new TANF program not later
than July 1, 1997 and provides  California  approximately  $3.7 billion in block
grant funds for FY  1996-97.  States are  allowed to  implement  TANF as soon as
possible  and  will  receive  a  prorated  block  grant  effective  the  date of
application. The California State Plan is to be submitted in time to allow grant
reductions to be implemented  effective January 1, 1997 (allowing $92 million of
the $163 million  referred to in paragraph 2 above to be saved) and to allow the
State to capture  approximately  $267 million in additional  federal block grant
funds over the  currently  budgeted  level.  None of the other  federal  changes
needed to achieve the balance of the $660 million  cost  savings  were  enacted.
Thus in lieu of the $660 million  savings  initially  assumed to be saved, it is
now projected that savings will total approximately $360 million.

         A preliminary  analysis of the Law by the Legislative  Analyst's Office
indicated  that an  overall  assessment  of how these  changes  will  affect the
State's General Fund will not be known for some time, and will depend on how the
State implements the Law. There are many choices including how quickly the State
implements  the Law; the degree to which the State elects to make up for cuts in
federal  aid;  provide  more aid to  counties,  or cut some of its own  existing
programs for  noncitizens;  and the State's  ability to avoid certain  penalties
written into the Law.

         1997-98 Fiscal Year Proposed  Budget.  On January 9, 1997, the Governor
released  his  proposed  budget for the  1997-98  Fiscal  Year (the  "Governor's
Budget").  The Governor's Budget projects General Fund revenues and transfers in
1997-98 of $50.7  billion,  a 4.6% increase from revised  1996-97  figures.  The
Governor proposes  expenditures of $50.3 billion,  a 3.9% increase from 1996-97.
The Governor's Budget projects a balance in the SFEU of $553 million on June 30,
1998.  The  Governor's  Budget  also  anticipates  about $3 billion of  external
borrowing  for cash flow  purposes  during  the year,  with no  requirement  for
cross-fiscal year borrowing.

         Among the major  initiatives and features of the Governor's  Budget are
the following:

         1. A  proposed  10% cut in the Bank and  Corporation  Tax  rate,  to be
phased in over two years.

         2.  Proposition 98 funding for K-14 schools will be increased again, as
a result of stronger  revenues.  Per-pupil  funding for K-12  schools will reach
$5,010,  compared to $4,220 as recently as the 1993-94 Fiscal Year.  Part of the
new funding is proposed to be dedicated to the completion of the current program
to reduce class size to 20 pupils in lower elementary  grades, and to expand the
program by one grade, so that it will cover K-3rd grade.

         3. Funding for higher  education  will be increased  consistent  with a
four-year  "compact"  established  in 1995-96.  There is not projected to be any
increase  in  student  fees  at any of the  three  levels  of the  State  higher
education system.

         4. The 1997-98 proposed  Governor's Budget assumes  approximately  $500
million in savings  contingent  upon  federal  action.  The Budget  assumes that
federal law will be enacted to remove the maintenance-of-effect  requirement for
Supplemental  Security  Income  (SSI)  payments,  thereby  enabling the state to
reduce grant levels pursuant to previously enacted state law ($279 million). The
Budget also  assumes the federal  government  will fund $216 million in costs of
health care for illegal immigrants.
    

         The Orange  County  Bankruptcy.  On  December 6, 1994,  Orange  County,
California  and its  Investment  Pool (the "Pool")  filed for  bankruptcy  under
Chapter 9 of the United States Bankruptcy Code. The subsequent restructuring led
to the sale of substantially  all of the Pool's portfolio and resulted in losses
estimated  to be  approximately  $1.7 billion (or  approximately  22% of amounts
deposited by the

                                       18
<PAGE>

Pool investors).  Approximately  187 California public entities -- substantially
all of which are public agencies  within the county -- had various bonds,  notes
or other forms of  indebtedness  outstanding.  In some instances the proceeds of
such indebtedness were invested in the Pool.

         In April,  1996, the County emerged from bankruptcy  after closing on a
$900 million  recovery  bond deal.  At that time,  the County and its  financial
advisors  stated that the County had  emerged  from the  bankruptcy  without any
structural  fiscal problems and assured that the County would not slip back into
bankruptcy.  However, for many of the cities, schools and special districts that
lost money in the County portfolio,  repayment remains contingent on the outcome
of  litigation  which is  pending  against  investment  firms and other  finance
professionals.  Thus, it is  impossible to determine the ultimate  impact of the
bankruptcy and its aftermath on these various agencies and their claims.

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.

         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

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<PAGE>

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

                                       20
<PAGE>

any event exceed six months'  advance  interest on the amount prepaid during the
12-month period in excess of 20% of the original  principal  amount of the loan.
This  limitation  could  affect the flow of revenues  available to an issuer for
debt  service on the  outstanding  debt  obligations  which  financed  such home
mortgages.

         Proposition  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.

                                       21
<PAGE>

         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.

         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:

                  1.  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;

                  2.  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;

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

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

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

                  6. 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;

                  7.  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

                  8. 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

                                       22
<PAGE>

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.

         Senate Bill 1590 (O'Connell),  introduced February 16, 1996, would make
the Guardino  decision  inapplicable to any tax first imposed or increased by an
ordinance or resolution  adopted before December 14, 1995. The California  State
Senate  passed  the Bill on May 16,  1996  and it is  currently  pending  in the
California State Assembly.  It is not clear whether the Bill, if enacted,  would
be 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's  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's  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.
    

                                       23
<PAGE>

   
         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 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 which is approved by voters on or after January 1, 1989.

When-Issued  Securities.   The  Funds  may  purchase  securities  offered  on  a
"when-issued" or "forward delivery" basis. When so offered,  the price, which is
generally  expressed  in yield  terms,  is fixed at the time the  commitment  to
purchase  is made,  but  delivery  and payment  for the  when-issued  or forward
delivery  securities  take place at a later  date.  During  the  period  between
purchase and  settlement,  no payment is made by the purchaser to the issuer and
no interest accrues to the purchaser.  To the extent that assets of the Fund are
not invested prior to the  settlement of a purchase of securities,  a Fund earns
no income;  however, it is intended that the Funds will be fully invested to the
extent  practicable  and subject to the policies  stated herein.  When-issued or
forward delivery purchases are negotiated directly with the other party, and are
not traded on an exchange.  While when-issued or forward delivery securities may
be sold prior to the settlement date, it is intended that the Fund will purchase
such  securities  with the  purpose of  actually  acquiring  them  unless a sale
appears  desirable  for  investment  reasons.  At the time the  Fund  makes  the
commitment to purchase securities on a when-issued or forward delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset  value.  The Trust does not believe  that either  Fund's net asset
value or income will be adversely  affected by its purchase of  securities  on a
when-issued  or forward  delivery  basis.  Each Fund  establishes  a  segregated
account  in  which  it  maintains  cash,  U.S.  Government  securities  or other
high-grade  debt  obligations  equal in value to commitments  for when-issued or
forward delivery securities.  Such segregated  securities either will mature or,
if necessary, be sold on or before the settlement date. Neither Fund enters into
such transactions for leverage purposes.

Stand-by  Commitments.  Subject  to  the  receipt  of  any  required  regulatory
authorization, a Fund may acquire "Stand-by Commitments," which will enable that
Fund to improve its portfolio liquidity by making available same-day settlements
on  portfolio  sales (and thus  facilitate  the payment of same-day  payments of
redemption   proceeds  in  federal  funds).   Each  Fund  may  enter  into  such
transactions  subject  to the  limitations  in the rules  under the 1940 Act.  A
Stand-by Commitment is a right acquired by a Fund, when it purchases a municipal
obligation from a broker/dealer or other financial  institution  ("seller"),  to
sell up to the same principal  amount of such securities back to the seller,  at
the Fund's option, at a specified price.  Stand-by Commitments are also known as
"puts."  Each Fund's  investment  policies  permit the  acquisition  of Stand-by
Commitments solely to facilitate portfolio liquidity.  The exercise by a Fund of
a Stand-by  Commitment  is subject to the  ability of the other party to fulfill
its contractual commitment.

         Stand-by  Commitments  acquired by a Fund have the following  features:
(1) they are in writing and are physically held by the Fund's custodian; (2) the
Fund's rights to exercise them are unconditional  and unqualified;  (3) they are
entered into only with sellers which in the Adviser's  opinion present a minimal
risk of  default;  (4)  although  Stand-by  Commitments  are  not  transferable,
municipal  obligations  purchased  subject to such  commitments may be sold to a
third party at any time,  even though the  commitment  is  outstanding;  and (5)
their exercise price is (i) the Fund's  acquisition cost (excluding the cost, if

                                       24
<PAGE>

any, of the Stand-by Commitment) of the municipal  obligations which are subject
to the commitment  (excluding any accrued  interest which the Fund paid on their
acquisition),  less any amortized market premium or plus any amortized market or
original issue discount  during the period the Fund owned the  securities,  plus
(ii) all interest  accrued on the  securities  since the last  interest  payment
date. Each Fund expects to refrain from exercising a Stand-by  Commitment in the
event that the amount  receivable  upon  exercise of the Stand-by  Commitment is
significantly  greater  than the then  current  market  value of the  underlying
municipal  obligations,  determined  as described in the section  entitled  "Net
Asset  Value,"  in  order  to  avoid  imposing  a  loss  on a  seller  and  thus
jeopardizing a Fund's business relationship with that seller.

         Each Fund expects that  Stand-by  Commitments  generally  are available
without  the  payment  of any  direct or  indirect  consideration.  However,  if
necessary  or  advisable,  each Fund will pay for Stand-by  Commitments,  either
separately  in cash or by paying a higher price for portfolio  securities  which
are acquired subject to the commitments.  As a matter of nonfundamental  policy,
the total  amount  "paid" by a Fund in either  manner for  outstanding  Stand-by
Commitments  will not exceed  one-half of 1% of the value of the total assets of
that Fund calculated  immediately after any Stand-by Commitment is acquired.  If
the Fund pays additional  consideration for a Stand-by Commitment,  the yield on
the security to which the Stand-by  Commitment relates will, in effect, be lower
than if the Fund had not acquired such Stand-by Commitment.

         It is  difficult  to evaluate the  likelihood  of use or the  potential
benefit of a Stand-by  Commitment.  Therefore,  it is expected that the Trustees
will determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the Stand-by Commitment is less than
the exercise price of the Stand-by Commitment,  such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a Stand-by  Commitment,
its cost will be  reflected as  unrealized  depreciation  for the period  during
which the commitment is held.

         Management  understands  that the Internal  Revenue Service (the "IRS")
has issued a revenue ruling to the effect that, under specified circumstances, a
registered  investment company is the owner of tax-exempt municipal  obligations
acquired subject to a put option. The IRS has also issued private letter rulings
to certain  taxpayers  (which do not serve as precedent for other  taxpayers) to
the effect that tax-exempt  interest received by a regulated  investment company
with respect to such  obligations  is tax-exempt in the hands of the company and
may be distributed to its shareholders as exempt-interest dividends. The IRS has
subsequently  announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases  involving the sale of
securities or participation  interests therein if the purchaser has the right to
cause the security,  or the participation  interest therein,  to be purchased by
either the seller or a third party.  Each Fund intends to take the position that
it is the owner of any  municipal  obligations  acquired  subject  to a Stand-By
Commitment and that  tax-exempt  interest  earned with respect to such municipal
obligations is tax-exempt in its hands.  There is no assurance that the IRS will
agree with such  position in any  particular  case.  There is no assurance  that
Stand-by  Commitments  will be  available  to a Fund nor has either Fund assumed
that  such  commitments   would  continue  to  be  available  under  all  market
conditions.

Third Party Puts.  The Funds may also purchase  long-term  fixed rate bonds that
have been coupled with an option granted by a third party financial  institution
allowing a Fund, at specified intervals, (not exceeding 397 calendar days in the
case of Scudder  California  Tax Free Money Fund) to tender (or "put") the bonds
to the institution  and receive the face value thereof (plus accrued  interest).
These  third  party  puts are  available  in  several  different  forms,  may be
represented by custodial receipts or trust certificates and may be combined with
other features such as interest rate swaps.  The Fund receives a short-term rate
of interest (which is periodically  reset),  and the interest rate  differential
between  that rate and the fixed rate on the bond is retained  by the  financial
institution.  The  financial  institution  granting  the option does not provide
credit  enhancement,  and in the event that there is a default in the payment of
principal,  or interest on, or downgrading of, a bond to below investment grade,
or a loss of the  bond's  tax-exempt  status,  the  put  option  will  terminate
automatically, and the risk to the Fund will be that of holding such a long-term
bond and, in the case of Scudder  California  Tax Free Money Fund,  the weighted
average maturity of the Fund's portfolio would be adversely affected.

         These  bonds  coupled  with puts may present the same tax issues as are
associated  with  Stand-By  Commitments  discussed  above.  As with any Stand-by
Commitments  acquired by the Funds,  each Fund intends to take the position that
it is the owner of any municipal  obligation  acquired  subject to a third-party
put,  and  that  tax-exempt  interest  earned  with  respect  to such  municipal

                                       25
<PAGE>

obligations are tax-exempt in its hands. There is no assurance that the IRS will
agree with such  position  in any  particular  case.  Additionally,  the federal
income tax treatment of certain other  aspects of these  investments,  including
the treatment of tender fees and swap payments, in relation to various regulated
investment  company tax provisions is unclear.  However,  the Adviser intends to
manage the Funds' portfolios in a manner designed to minimize any adverse impact
from these investments.

Repurchase  Agreements.  The Funds may enter into repurchase agreements with any
member bank of the Federal Reserve System or any domestic broker/dealer which is
recognized as a reporting  Government  securities dealer if the creditworthiness
of the bank or  broker/dealer  has been determined by the Adviser to be at least
as high as that of other  obligations  the Funds may  purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's, S&P or Fitch.

         A  repurchase  agreement  provides  a means for a Fund to earn  taxable
income on funds for periods as short as overnight.  It is an  arrangement  under
which the purchaser (i.e., the Fund) acquires a security  ("Obligation") and the
seller agrees,  at the time of sale, to repurchase the Obligation at a specified
time and price.  Securities  subject  to a  repurchase  agreement  are held in a
segregated  account and the value of such  securities kept at least equal to the
repurchase  price on a daily basis.  The repurchase price may be higher than the
purchase  price,  the  difference  being income to the Fund, or the purchase and
repurchase  prices may be the same,  with  interest  at a stated rate due to the
Fund together with the  repurchase  price on the date of  repurchase.  In either
case,  the income to a Fund (which is taxable) is unrelated to the interest rate
on the Obligation  itself.  Obligations  will be held by the custodian or in the
Federal Reserve Book Entry system.

         For purposes of the 1940 Act, a repurchase  agreement is deemed to be a
loan  from a Fund to the  seller of the  Obligation  subject  to the  repurchase
agreement  and is  therefore  subject  to  that  Fund's  investment  restriction
applicable  to  loans.  It is not  clear  whether  a court  would  consider  the
Obligation  purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by the Fund to the seller. In the
event of the  commencement of bankruptcy or insolvency  proceedings with respect
to the seller of the  Obligation  before  repurchase of the  Obligation  under a
repurchase  agreement,  a Fund may encounter  delay and incur costs before being
able to sell the  security.  Delays may  involve  loss of interest or decline in
price of the Obligation.  If the court  characterized  the transaction as a loan
and a Fund has not  perfected  an interest in the  Obligation,  that Fund may be
required to return the  Obligation  to the seller's  estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund is at risk of
losing some or all of the principal and income involved in the  transaction.  As
with any unsecured debt obligation purchased for each Fund, the Adviser seeks to
minimize  the  risk of loss  through  repurchase  agreements  by  analyzing  the
creditworthiness  of the  obligor,  in this case the  seller of the  Obligation.
Apart from the risk of bankruptcy or insolvency  proceedings,  there is also the
risk that the seller may fail to repurchase  the  Obligation,  in which case the
Fund may incur a loss if the  proceeds  to the Fund of the sale to a third party
are  less  than  the  repurchase  price.  However,  if the  market  value of the
Obligation subject to the repurchase  agreement becomes less than the repurchase
price (including  interest),  each Fund will direct the seller of the Obligation
to deliver  additional  securities  so that the market  value of all  securities
subject to the repurchase  agreement will equal or exceed the repurchase  price.
It is  possible  that a Fund will be  unsuccessful  in seeking  to  enforce  the
seller's contractual obligation to deliver additional securities.

Reverse  Repurchase  Agreements.  The Funds may enter into  "reverse  repurchase
agreements,"  which are repurchase  agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. Each Fund
maintains a segregated account,  as described under "When-Issued  Securities" in
connection with outstanding  reverse repurchase  agreements.  Reverse repurchase
agreements  are  deemed  to be  borrowings  subject  to each  Fund's  investment
restrictions  applicable  to that  activity.  Each Fund will enter into  reverse
repurchase agreements only when the Adviser believes that the interest income to
be earned from the investment of the proceeds of the transaction will be greater
than the  interest  expense  of the  transaction.  Each Fund does not  intend to
invest more than 5% of its net assets in reverse repurchase agreements.

Securities  backed by  guarantees.  The Funds  invests in  securities  backed by
guarantees from banks,  insurance  companies and other  financial  institutions.
Scudder  California  Tax Free Money  Fund's  ability to maintain a stable  share
price may  depend  upon such  guarantees,  which are not  supported  by  federal
deposit  insurance.  Consequently,  changes  in  the  credit  quality  of  these

                                       26
<PAGE>

institutions  could have an adverse impact on securities they have guaranteed or
backed, which could cause losses to the Fund and affect its share price.

Trustees' Power to Change Objectives and Policies

         Except as  specifically  stated to the  contrary,  the  objectives  and
policies of the Funds stated above may be changed by the Trustees without a vote
of the shareholders.

Investment Restrictions

         The  following  restrictions  are  fundamental  policies and may not be
changed  with  respect to each Fund  without  the  approval of a majority of the
outstanding  voting  securities  of such Fund which,  under the 1940 Act and the
rules thereunder and as used in this Statement of Additional Information,  means
the lesser of (1) 67% or more of the voting  securities  of such Fund present at
such  meeting,  if the  holders  of  more  than  50% of the  outstanding  voting
securities of such Fund are present or  represented  by proxy,  or (2) more than
50% of the outstanding voting securities of a Fund. Any investment  restrictions
herein which  involve a maximum  percentage of securities or assets shall not be
considered  to  be  violated  unless  an  excess  over  the  percentage   occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund.

         As a matter of fundamental policy, the Trust may not, on behalf of each
Fund:

         (1)      borrow money except as a temporary  measure for  extraordinary
                  or  emergency  purposes or except in  connection  with reverse
                  repurchase agreements;  provided that the Fund maintains asset
                  coverage of 300% for all borrowings;

         (2)      purchase or sell real estate  (except that the Fund may invest
                  in (i)  securities  of companies  which deal in real estate or
                  mortgages  and  (ii)  securities  secured  by real  estate  or
                  interests  therein,  and  the  Trust,  on  behalf  of  Scudder
                  California Tax Free Fund only,  reserves  freedom of action to
                  hold and to sell real  estate  acquired as a result of Scudder
                  California Tax Free Fund's  ownership of securities);  and the
                  Trust,  on  behalf  of each  Fund,  may not  purchase  or sell
                  physical   commodities  or  contracts   relating  to  physical
                  commodities;

         (3)      act as underwriter of the securities issued by others,  except
                  to the  extent  that  it  may  be  deemed  an  underwriter  in
                  connection with the disposition of portfolio securities of the
                  Funds;

         (4)      make loans to other  persons,  except  (a) loans of  portfolio
                  securities  and  (b)  to  the  extent  the  purchase  of  debt
                  securities in  accordance  with its  investment  objective and
                  investment  policies and the entry into repurchase  agreements
                  may be deemed to be loans;

         (5)      issue senior  securities,  except as  appropriate  to evidence
                  indebtedness  which it is permitted  to incur,  and except for
                  shares  of the  separate  classes  or  series  of  the  Trust,
                  provided,  in the case of  Scudder  California  Tax Free  Fund
                  only,   that   collateral   arrangements   with   respect   to
                  currency-related  contracts,  futures  contracts,  options  or
                  other permitted investments, including deposits of initial and
                  variation  margin,  are not  considered  to be the issuance of
                  senior securities for purposes of this restriction;

         (6)      purchase (a) private  activity bonds, or (b) securities  which
                  are neither  municipal  obligations nor securities of the U.S.
                  Government,  its agencies or  instrumentalities,  if in either
                  case the  purchase  would  cause  more than 25% of the  market
                  value of its total  assets at the time of such  purchase to be
                  invested in the securities of one or more issuers having their
                  principal  business  activities  in the same industry (for the
                  purposes  of  this   restriction,   telephone   companies  are
                  considered to be in a separate  industry from gas and electric
                  public  utilities,  and  wholly-owned  finance  companies  are
                  considered  to be in the  industry  of their  parents if their
                  activities  are primarily  related to financing the activities
                  of their parents); or

                                       27
<PAGE>

         (7)      (Scudder California Tax Free Money Fund only) invest more than
                  25% of the value of its total assets in the  securities of any
                  one issuer;

         As a matter of  nonfundamental  policy,  the  Trust,  on behalf of each
Fund, may not:

         (a)      purchase  or  retain  securities  of any  open-end  investment
                  company,  or  securities of  closed-end  investment  companies
                  except by purchase in the open market where no  commission  or
                  profit to a sponsor or dealer results from such purchases,  or
                  except when such purchase, though not made in the open market,
                  is part of a plan of merger, consolidation,  reorganization or
                  acquisition of assets;  in any event the Fund may not purchase
                  more than 3% of the outstanding  voting  securities of another
                  investment company,  may not invest more than 5% of its assets
                  in another  investment  company,  and may not invest more than
                  10% of its assets in other investment companies;

         (b)      pledge, mortgage or hypothecate its assets in excess, together
                  with permitted borrowings, of 1/3 of its total assets;

         (c)      purchase  or  retain  securities  of an  issuer  any of  whose
                  officers,  directors,  trustees  or  security  holders  is  an
                  officer,  director  or  trustee  of  the  Trust  or a  member,
                  officer,  director or trustee of the investment adviser of the
                  Trust  if one or more of such  individuals  owns  beneficially
                  more than  one-half of one percent  (1/2%) of the  outstanding
                  shares or  securities  or both (taken at market value) of such
                  issuer and such  individuals  owning more than one-half of one
                  percent  (1/2%) of such  shares  or  securities  together  own
                  beneficially  more  than 5% of such  shares or  securities  or
                  both;

         (d)      purchase securities on margin or make short sales,  unless, by
                  virtue of its ownership of other securities,  it has the right
                  to  obtain  securities  equivalent  in kind and  amount to the
                  securities sold and, if the right is conditional,  the sale is
                  made  upon the same  conditions,  except  in  connection  with
                  arbitrage  transactions (for Scudder  California Tax Free Fund
                  only,) and except  that the Fund may  obtain  such  short-term
                  credits as may be necessary for the clearance of purchases and
                  sales of securities;

         (e)      invest more than 10% of its net assets in securities which are
                  not readily marketable, the disposition of which is restricted
                  under Federal securities laws, or in repurchase agreements not
                  terminable  within 7 days and the Fund  will not  invest  more
                  than 10% of its total assets in restricted securities;

         (f)      purchase  securities  of any issuer with a record of less than
                  three  years  continuous  operations,  including  predecessors
                  (except U.S. Government securities, securities of such issuers
                  which  are  rated  by  at  least  one  nationally   recognized
                  statistical  rating  organization,  municipal  obligations and
                  obligations  issued or guaranteed by any foreign Government or
                  its  agencies or  instrumentalities,  if such  purchase  would
                  cause  the  investments  of the  Fund in all such  issuers  to
                  exceed  5% of the  total  assets  of the Fund  taken at market
                  value;

         (g)      (Scudder  California Tax Free Fund only) purchase from or sell
                  to any of the Trust's  officers or  Trustees,  its  investment
                  adviser,  its  principal   underwriter  or  the  officers  and
                  Directors of its investment adviser or principal  underwriter,
                  portfolio securities of the Fund;

         (h)      (Scudder  California  Tax  Free  Fund  only)  buy  options  on
                  securities  or  financial  instruments,  unless the  aggregate
                  premiums paid on all such options held by the Fund at any time
                  do not exceed 20% of its net  assets;  or sell put  options on
                  securities  if,  as a  result,  the  aggregate  value  of  the
                  obligations  underlying  such put options  would exceed 50% of
                  the Fund's net assets;

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

                                       28
<PAGE>


         (j)      invest in oil, gas or other mineral leases,  or exploration or
                  development  programs (although it may invest in issuers which
                  own or invest in such interests);

         (k)      borrow money (including reverse repurchase agreements), except
                  for  temporary or emergency  purposes,  in excess of 5% of its
                  total assets (taken at market value) or borrow other than from
                  banks;

         (l)      (Scudder  California Tax Free Fund only) purchase  warrants if
                  as a  result  warrants  taken at the  lower of cost or  market
                  value would  represent more than 5% of the value of the Fund's
                  total net assets or more than 2% of its net assets in warrants
                  that  are  not  listed  on the  New  York  or  American  Stock
                  Exchanges   or  on  an  exchange   with   comparable   listing
                  requirements   (for  this   purpose,   warrants   attached  to
                  securities will be deemed to have no value);

         (m)      (Scudder   California  Tax  Free  Money  Fund  only)  purchase
                  warrants,  unless attached to other  securities in which it is
                  permitted to invest;

         (n)      invest  more  than  25%  of  its  total  assets  in  municipal
                  obligations  the  security of which is derived from any one of
                  the following  categories:  hospitals  and health  facilities;
                  turnpikes and toll roads; ports and airports;  or colleges and
                  universities;

         (o)      enter into Stand-by Commitments if, the total amount "paid" by
                  a Fund in either manner for outstanding  Stand-by  Commitments
                  will not exceed 1/2 of 1% of the value of the total  assets of
                  that Fund calculated immediately after any Stand-by Commitment
                  is acquired;

         (p)      purchase or sell real estate limited partnership interests; or

         (q)      make securities loans unless all loans of portfolio securities
                  are fully collateralized and marked to market daily.

                                    PURCHASES

See  "Purchases"  and  "Transaction   information"  in  the  Funds' prospectus.)

Additional Information About Opening an Account

         Shareholders  of other  Scudder  funds who have  submitted  an  account
application  and have a certified tax  identification  number,  clients having a
regular  investment  counsel  account  with the  Adviser or its  affiliates  and
members of their immediate families, officers and employees of the Adviser or of
any  affiliated  organization  and  their  immediate  families,  members  of the
National Association of Securities Dealers, Inc. ("NASD"), and banks may open an
account by wire.  These  investors  must call  1-800-225-5163  to get an account
number.  During the call,  the investor will be asked to indicate the Fund name,
amount to be wired  ($2,500  minimum),  name of bank or trust company from which
the wire  will be sent,  the  exact  registration  of the new  account,  the tax
identification  number or Social Security number,  address and telephone number.
The investor  must then call the bank to arrange a wire transfer to State Street
Bank,  Attention:  Mutual Funds,  225 Franklin  Street,  Boston,  MA 02110.  The
investor  must give the  Scudder  fund name,  account  name and the new  account
number.  Finally,  the investor must send a completed and signed  application to
the Fund promptly.

                                       29
<PAGE>

Checks

         A  certified  check is not  necessary,  but  checks  are only  accepted
subject to collection at full face value in U.S.  funds and must be drawn on, or
payable through, a U.S. bank.

         If  shares  of  a  Fund  are   purchased   by  a  check  which   proves
uncollectible,  that Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible  for any loss incurred by the Trust or the
principal  underwriter  by reason of such  cancellation.  If the  purchaser is a
shareholder, the Trust shall have the authority, as agent of the shareholder, to
redeem  shares in the account in order to  reimburse  the Fund or the  principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited  from or restricted in placing future orders in any of the Scudder
funds.

Wire Transfer of Federal Funds

         To purchase  shares of Scudder  California Tax Free Fund and obtain the
same  day's  dividend  you must  have your bank  forward  federal  funds by wire
transfer and provide the required  account  information so as to be available to
the Fund prior to twelve  o'clock  noon eastern time on that day. If you wish to
make a purchase of $500,000 or more you should notify the Fund's transfer agent,
Scudder Service Corporation (the "Transfer Agent") of such a purchase by calling
1-800-225-5163.  If either  the  federal  funds or the  account  information  is
received  after twelve  o'clock noon  eastern  time,  but both the funds and the
information  are made available  before the close of regular  trading on the New
York Stock  Exchange  (the  "Exchange")  (normally 4 p.m.  eastern  time) on any
business day, shares will be purchased at net asset value determined on that day
but will not receive the dividend; in such cases, dividends commence on the next
business day.

         In the case of Scudder  California  Tax Free Money Fund,  to obtain the
net asset value  determined as of twelve  o'clock noon and the same day dividend
your bank must forward  federal  funds by wire transfer and provide the required
account  information  so as to be available to the Fund prior to twelve  o'clock
noon  eastern time on that day. If the federal  funds are made  available or the
account  information is received after twelve o'clock noon eastern time but both
the funds and the  information  are made  available  before the close of regular
trading on the Exchange,  normally 4 p.m.  eastern time, on any day, shares will
be  purchased  at the net asset value  determined  as of the close of trading on
that day but will not receive the dividend; in such cases, dividends commence on
the next business day.

         The bank sending an  investor's  federal  funds by bank wire may charge
for the  service.  Presently,  the  Distributor  pays a fee for receipt by State
Street Bank and Trust Company (the  "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.

         Boston  banks are  presently  closed on certain  holidays  although the
Exchange may be open.  These  holidays  include Martin Luther King, Jr. Day (the
3rd Monday in  January),  Columbus  Day (the 2nd Monday in October) and Veterans
Day (November 11).  Investors are not able to purchase  shares by wiring federal
funds on such holidays because the Custodian is not open to receive such federal
funds on behalf of a Fund.

   
Additional Information About Making Subsequent Investments

         To a limited extent, certain financial institutions may place orders to
purchase  shares of Scudder  California Tax Free Fund  unaccompanied  by payment
prior to the  close of  regular  trading  on the  Exchange,  normally  4:00 p.m.
eastern time, and receive that day's price.  Please call 1-800-854-8525 for more
information,  including the dividend  treatment and method and manner of payment
for Fund shares.
    

Additional Information About Making Subsequent Investments by AutoBuy

         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 AutoBuy  program,  may purchase shares of the Fund by telephone.  Through
this service  shareholders  may purchase up to $250,000.  To purchase  shares by
AutoBuy,  shareholders  should call before 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

                                       30
<PAGE>

value per share  calculated  at the close of  trading  on the day of your  call.
AutoBuy  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 AutoBuy 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.  AutoBuy
transactions  are not  available for most  retirement  plan  accounts.  However,
AutoBuy transactions are available for Scudder IRA accounts.

         In order to  request  purchases  by  AutoBuy,  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  AutoBuy may so indicate on the application.
Existing  shareholders  who wish to add  AutoBuy to their  account  may do so by
completing an AutoBuy  Enrollment  Form.  After  sending in an  enrollment  form
shareholders should allow for 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.

Share Price

         Purchases  are filled  without sales charge at the net asset value next
computed after receipt of the purchase order in good order.  Net asset value per
share for Scudder  California  Tax Free Money Fund normally is computed  twice a
day,  as of twelve  o'clock  noon and the close of  regular  trading on each day
during  which the  Exchange is open for  trading.  Net asset value per share for
Scudder  California  Tax Free Fund  normally is  computed  once a day, as of the
close of  regular  trading  on each day during  which the  Exchange  is open for
trading.  Orders received after the close of regular trading on the Exchange are
executed  at the next  business  day's  net asset  value.  If the order has been
placed by a member of the NASD other than Scudder Investor Services, Inc., it is
the  responsibility  of that member  broker,  rather than a Fund, to forward the
purchase order to the Funds'  Transfer Agent by the close of regular  trading on
the Exchange.

Share Certificates

         Due  to  the  desire  of  the  Trust  to  afford  ease  of  redemption,
certificates are not issued to indicate ownership in a Fund.

Other Information

         If purchases or  redemptions of Fund shares are arranged and settlement
is made, at an investor's  election  through a member of the NASD other than the
Distributor, that member may, at its discretion, charge a fee for that service.

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

         The  Tax  Identification  Number  section  of the  application  must be
completed when opening an account.  Applications  and purchase  orders without a
certified  tax  identification  number and certain other  certified  information
(e.g.,  from  exempt  organizations,  certification  of  exempt  status)  may be
returned to the investor.

         The  Trust  may  issue  shares  of each  Fund  at net  asset  value  in
connection with any merger or  consolidation  with, or acquisition of the assets
of, any  investment  company (or series  thereof) or personal  holding  company,
subject to the requirements of the 1940 Act.

                                       31
<PAGE>


                            EXCHANGES AND REDEMPTIONS

                (See "Exchanges and redemptions" and "Transaction
                information" in the Funds' prospectus.) Exchanges

         Exchanges  are  comprised of a  redemption  from one Scudder fund and a
purchase  into another  Scudder  fund.  The purchase side of the exchange may be
either an additional  investment into an existing account or may involve opening
a new account in the other fund.  When an exchange  involves a new account,  the
new  account  is  established  with the same  registration,  tax  identification
number,  address,  telephone redemption option,  "Scudder Automated  Information
Line"  (SAIL)  transaction  authorization  and  dividend  option as the existing
account.  Other  features do not carry over  automatically  to the new  account.
Exchanges  to a new  fund  account  must be for a  minimum  of  $2,500.  When an
exchange  represents  an additional  investment  into an existing  account,  the
account  receiving the exchange proceeds must have identical  registration,  tax
identification number,  address, and account  options/features as the account of
origin.  Exchanges  into an existing  account  must be for $100 or more.  If the
account  receiving  the  exchange  proceeds is  different  in any  respect,  the
exchange  request  must be in writing  and must  contain an  original  signature
guarantee as described  under  "Transaction  information -- Redeeming  shares --
Signature guarantees" in the Funds' prospectus.

         Exchange  orders  received  before the close of regular  trading on the
Exchange on any business day  ordinarily  are executed at  respective  net asset
values  determined  on that day.  Exchange  orders  received  after the close of
regular trading on the Exchange will be executed on the following business day.

         Investors  may also  request,  at no extra  charge,  to have  exchanges
automatically  executed on a predetermined  schedule from one Scudder fund to an
existing  account in another  Scudder  fund at current net asset  value  through
Scudder's  Automatic  Exchange Program.  Exchanges must be for a minimum of $50.
Shareholders  may add this  free  feature  over  the  telephone  or in  writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the  feature  removed,  or until the  originating  account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.

         No commission is charged to the shareholder for any exchange  described
above.  An exchange  into another  Scudder fund is a redemption  of shares,  and
therefore may result in tax  consequences  (gain or loss) to the shareholder and
the  proceeds  of such  exchange  may be  subject  to backup  withholding.  (See
"TAXES.")

         Investors currently receive the exchange privilege,  including exchange
by  telephone,  automatically  without  having  to elect it.  The Trust  employs
procedures,  including recording  telephone calls,  testing a caller's identity,
and sending  written  confirmation of telephone  transactions,  designed to give
reasonable  assurance that  instructions  communicated by telephone are genuine,
and to  discourage  fraud.  To the extent  that the Trust  does not follow  such
procedures,  it may be liable  for  losses  due to  unauthorized  or  fraudulent
telephone   instructions.   The  Trust  will  not  be  liable  for  acting  upon
instructions  communicated  by  telephone  that  it  reasonably  believes  to be
genuine.  The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.

         The Scudder funds into which  investors may make an exchange are listed
under  "THE  SCUDDER  FAMILY  OF  FUNDS"  herein.  Before  making  an  exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated.

Redemption by Telephone

         Shareholders currently receive the right,  automatically without having
to elect  it,  to redeem up to  $50,000  and have the  proceeds  mailed to their
address of record. Shareholders may request to have the proceeds mailed or wired
to  their  predesignated  bank  account.  In  order to  request  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.

                                       32
<PAGE>

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

         (b)      EXISTING   SHAREHOLDERS   who  wish  to  establish   telephone
                  redemption to a designated  bank account or who want to change
                  the bank account  previously  designated to receive redemption
                  proceeds  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.

         If a request for redemption to a shareholder's  bank account is made by
telephone or fax,  payment will be made 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 $5.00
charge for all wire redemptions.

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

         Redemption requests by telephone (technically a repurchase by agreement
between  a Fund and the  shareholder)  of  shares  purchased  by  check  are not
accepted until the purchase check has cleared.

Redemption By AutoSell

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

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

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

                                       33
<PAGE>

Redemption by Mail or Fax

         In order to ensure proper  authorization  before redeeming shares,  the
Transfer Agent may request additional  documents such as, but not restricted to,
stock  powers,  trust  instruments,   certificates  of  death,  appointments  as
executor/executrix,  certificates  of  corporate  authority  and  waivers of tax
(required in some states when settling estates).

         It is suggested that shareholders  holding shares or share certificates
registered in other than  individual  names contact the Transfer  Agent prior to
any  redemptions to ensure that all necessary  documents  accompany the request.
When  shares  are held in the name of a  corporation,  trust,  fiduciary  agent,
attorney or partnership,  the Transfer Agent requires,  in addition to the stock
power,  certified  evidence of authority to sign.  These  procedures are for the
protection  of  shareholders  and should be followed to ensure  prompt  payment.
Redemption  requests  must  not  be  conditional  as to  date  or  price  of the
redemption.  Proceeds of a redemption  are sent within seven business days after
receipt by the Transfer Agent of a request for redemption that complies with the
above  requirements.  Delays in  payment of more than  seven  business  days for
shares  tendered for  repurchase or redemption  may result  because the purchase
check has not yet cleared.

Redemption by Write-A-Check

         All new investors and existing  shareholders of Scudder  California Tax
Free  Money Fund who apply to the  Custodian  for checks may use them to pay any
person,  provided  that  each  check is for at least  $100 and not more  than $5
million. By using the checks, the shareholder  receives daily dividend credit on
his or her shares until the check has cleared the banking system.  Investors who
purchased  shares by check may write checks against those shares only after they
have been on the Fund's books for seven business days. Shareholders who use this
service  may also use other  redemption  procedures.  No  shareholder  may write
checks against certificated shares.  Scudder California Tax Free Money Fund pays
the bank charges for this service.  However,  Scudder  California Tax Free Money
Fund  reviews  the cost of  operation  periodically  and  reserves  the right to
determine if direct charges to the persons who avail  themselves of this service
are appropriate.

         Checks are returned by the Custodian if there are  insufficient  shares
to meet the withdrawal amount.  Possible  fluctuations in the per share value of
the Fund,  although not  anticipated,  should be considered in  determining  the
amount of the  check.  An  investor  should  not  attempt to close an account by
check,  because the exact  balance at the time the check clears  cannot be known
when the check is written.  The Trust, on behalf of Scudder  California Tax Free
Money Fund, the Transfer Agent, and the Custodian each reserves the right at any
time to suspend or terminate the "Write-A-Check" procedure.

   
Redemption-in-kind

         The Fund  reserves  the  right,  if  conditions  exist  which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily  marketable  securities  chosen by
the Fund and valued as they are for purposes of  computing  the Fund's net asset
value (a  redemption-in-kind).  If payment is made in securities,  a shareholder
may incur transaction expenses in converting these securities to cash.
    

Other Information

         If a  shareholder  redeems all shares in the  account  after the record
date of a dividend, the shareholder receives, in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than a shareholder's  cost depending upon the
net asset  value at the time of  redemption  or  repurchase.  The Trust does not
impose a  redemption  charge,  although  a wire  charge  may be  applicable  for
redemption proceeds wired to an investor's bank account.  Redemptions of shares,
including  an exchange  for shares of another  Scudder  fund,  may result in tax
consequences  (gain  or  loss)  to the  shareholder  and  the  proceeds  of such
redemptions may be subject to backup withholding. (See "TAXES.")

         The  determination  of net asset value may be  suspended at times and a
shareholder's  right to redeem shares and to receive payment may be suspended at
times during which (a) the Exchange is closed,  other than customary weekend and
holiday closings,  (b) trading on the Exchange is restricted for any reason, (c)
an emergency  exists as a result of which disposal by a Fund of securities owned

                                       34
<PAGE>

by it is not reasonably  practicable or it is not reasonably  practicable  for a
Fund  fairly to  determine  the value of its net  assets,  or (d) the SEC may by
order permit such a suspension for the  protection of the Trust's  shareholders;
provided that  applicable  rules and  regulations  of the SEC (or any succeeding
governmental  authority) shall govern as to whether the conditions prescribed in
(b) or (c) exist.

   
         If transactions  at any time reduce a shareholder's  account balance in
the Fund to below  $2,500 in value,  such Fund  notifies the  shareholder  that,
unless the  account  balance is  brought up to at least  $2,500,  the Trust will
redeem all  shares,  close the  account,  and send  redemption  proceeds  to the
shareholder.  The  shareholder has sixty days to bring the account balance up to
$2,500  before any action is taken by the Trust.  No  transfer  from an existing
account to a new fund  account  may be for less than  $2,500 or the new  account
will be redeemed as described  above.  (This  policy  applies to accounts of new
shareholders, but does not apply to certain Special Plan Accounts.) The Trustees
have the authority to change the minimum account size.
    

                   FEATURES AND SERVICES OFFERED BY THE FUNDS

              (See "Shareholder benefits" in the Funds' prospectus)

The Pure No-Load(TM) Concept

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

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

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

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

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

         The  following  chart  shows  the  potential   long-term  advantage  of
investing  $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50%  front-end load, a load fund that collects
only a 0.75% 12b-1 and/or  service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The  hypothetical  figures in the chart show the value
of an  account  assuming  a constant  10% rate of return  over the time  periods
indicated and reinvestment of dividends and distributions.


                                       35
<PAGE>
<TABLE>
<CAPTION>

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

<S>       <C>                  <C>                    <C>                    <C>                    <C>     
          10                   $ 25,937               $ 23,733               $ 24,222               $ 25,354
- -------------------------------------------------------------------------------------------------------------------

          15                    41,772                 38,222                 37,698                 40,371
- -------------------------------------------------------------------------------------------------------------------

          20                    67,275                 61,557                 58,672                 64,282
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

   
Internet access

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

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

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

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

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

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

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

         Investors  are  encouraged  to review  the fee  tables on page 2 of the
Funds'  prospectus  for  more  specific  information  about  the  rates at which
management fees and other expenses are assessed.
    

                                       36
<PAGE>

Dividend and Capital Gain Distribution Options

         Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions  from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment  must be  received by the  Transfer  Agent at least five days prior to a
dividend record date.  Shareholders also may change their dividend option either
by calling  1-800-225-5163  or by sending  written  instructions to the Transfer
Agent. Please include your account number with your written request. See "How to
contact Scudder" in the prospectus for the address.

         Reinvestment  is usually  made on the day  following  the record  date.
Investors may leave standing  instructions  with the Transfer Agent  designating
their  option  for  either  reinvestment  or  cash  distribution  of any  income
dividends or capital gains distributions.  If no election is made, dividends and
distributions will be invested in additional shares of a Fund.

         Investors  may also  have  dividends  and  distributions  automatically
deposited   to   their    predesignated    bank   account   through    Scudder's
DistributionsDirect  Program.  Shareholders  who  elect  to  participate  in the
DistributionsDirect  Program, and whose predesignated checking account of record
is with a member bank of the  Automated  Clearing  House  Network (ACH) can have
income and capital gain distributions  automatically deposited to their personal
bank  account  usually  within  three  business  days  after  the Fund  pays its
distribution.  A  DistributionsDirect  request  form can be  obtained by calling
1-800-225-5163.

         Investors  choosing to  participate in Scudder's  Automatic  Withdrawal
Plan must  reinvest any dividends or capital  gains.  For most  retirement  plan
accounts, the reinvestment of dividends and capital gains is also required.

   
Scudder Investor Centers

         Investors may visit any of the Investor  Centers  maintained by Scudder
Investor  Services,  Inc. and listed in the Funds'  prospectus.  The Centers are
designed to provide individuals with services during any business day. Investors
may pick up  literature,  or find  assistance  with  opening an account,  adding
monies or special  options to existing  accounts,  making  exchanges  within the
Scudder Family of Funds,  redeeming shares or opening  retirement plans.  Checks
should not be mailed to the Centers but should be mailed to "The Scudder  Funds"
at the address listed under "How to Contact Scudder" in the prospectus.
    

Reports to Shareholders

         Each  Fund  issues  to  shareholders  semiannual  financial  statements
including a list of investments  held and statements of assets and  liabilities,
operations, changes in net assets and financial highlights for each Fund.

Transaction Summaries

         Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.

                           THE SCUDDER FAMILY OF FUNDS

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

   
         The Scudder  Family of Funds is America's  first family of mutual funds
and the nation's oldest family of no-load mutual funds.  To assist  investors in
choosing a Scudder fund,  descriptions of the Scudder funds' objectives  follow.
Initial purchases in most Scudder funds must be at least $2,500 or $1,000 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.  The minimum initial  purchase  required
for the Cash Fund's Premium  Shares is $25,000 and subsequent  purchases must be
for $1,000 or more.  The  minimum  initial  required  purchase  for each  Fund's
Managed Shares is $100,000 and subsequent  purchases must be for $1,000 or more.
The minimum  initial  purchase  required  for a Fund's  Institutional  Shares is
    

                                       37
<PAGE>

   
$1,000,000  and  there  is  no  minimum  subsequent  purchase.  Please  see  the
respective  prospectuses  for these  classes of shares for  further  information
regarding minimum balance requirements.
    

MONEY MARKET

         Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
         stability of capital and consistent therewith to provide current income
         through  investment in a supervised  portfolio of U.S.  Government  and
         U.S. Government guaranteed obligations with maturities of not more than
         762 calendar  days. The Fund intends to seek to maintain a constant net
         asset value of $1.00 per share,  although in certain circumstances this
         may not be possible.

         Scudder Cash Investment  Trust ("SCIT") seeks to maintain the stability
         of capital,  and  consistent  therewith,  to maintain the  liquidity of
         capital  and  to  provide  current  income  through   investment  in  a
         supervised  portfolio of short-term  debt  securities.  SCIT intends to
         seek to  maintain  a  constant  net  asset  value of $1.00  per  share,
         although in certain circumstances this may not be possible.

   
         Scudder Money Market Series seeks to provide  investors  with as high a
         level of current income as is consistent  with its  investment  polices
         and with  preservation  of  capital  and  liquidity.  The Fund seeks to
         maintain a  constant  net asset  value of $1.00 per share and  declares
         dividends daily. The institutional  class of shares of this Fund is not
         within the Scudder Family of Funds.

         Scudder  Government Money Market Series seeks to provide investors with
         as high a level of current income as is consistent  with its investment
         polices  and with  preservation  of  capital  and  liquidity.  The Fund
         invests  exclusively  in  obligations  issued or guaranteed by the U.S.
         Government  or its agencies or  instrumentalities  that have  remaining
         maturities  of not more than 397 calendar  days and certain  repurchase
         agreements.  The  institutional  class of  shares  of this  Fund is not
         within the Scudder Family of Funds.
    

INCOME

         Scudder  Emerging  Markets  Income Fund seeks to provide  high  current
         income  and,   secondarily,   long-term  capital  appreciation  through
         investments  primarily  in  high-yielding  debt  securities  issued  in
         emerging markets.

         Scudder Global Bond Fund seeks to provide total return with an emphasis
         on  current   income  by  investing   primarily  in  high-grade   bonds
         denominated in foreign  currencies and the U.S. dollar.  As a secondary
         objective, the Fund will seek capital appreciation.

         Scudder GNMA Fund seeks to provide  investors  with high current income
         from a portfolio of high-quality GNMA securities.

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

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

         Scudder  International  Bond  Fund  seeks  to  provide  income  from  a
         portfolio of high-grade bonds denominated in foreign  currencies.  As a
         secondary objective, the Fund seeks protection and possible enhancement
         of  principal  value by  actively  managing  currency,  bond market and
         maturity exposure and by security selection.

         Scudder  Short Term Bond Fund seeks to provide a higher and more stable
         level of income than is normally provided by money market  investments,
         and  more  price  stability  than  investments  in  intermediate-   and
         long-term bonds.

                                       38
<PAGE>

         Scudder  Zero Coupon  2000 Fund seeks to provide as high an  investment
         return over a selected period as is consistent with the minimization of
         reinvestment  risks  through  investments   primarily  in  zero  coupon
         securities.

TAX FREE MONEY MARKET

         Scudder Tax Free Money Fund ("STFMF") is designed to provide  investors
         with  income  exempt  from  regular  federal  income tax while  seeking
         stability  of  principal.  STFMF seeks to maintain a constant net asset
         value of $1.00 per share,  although in certain  circumstances  this may
         not be possible.

         Scudder Tax Free Money Market Series seeks to provide investors with as
         high a level of current  income  that  cannot be  subjected  to federal
         income  tax  by  reason  of  federal  law  as is  consistent  with  its
         investment policies and with preservation of capital and liquidity. The
         institutional  class of shares of this Fund is not within  the  Scudder
         Family of Funds.

         Scudder  California  Tax  Free  Money  Fund*  is  designed  to  provide
         California  taxpayers  income exempt from California  state and regular
         federal  income  taxes,   and  seeks   stability  of  capital  and  the
         maintenance of a constant net asset value of $1.00 per share,  although
         in certain circumstances this may not be possible.

         Scudder  New York Tax Free Money  Fund* is designed to provide New York
         taxpayers  income exempt from New York state, New York City and regular
         federal  income  taxes,   and  seeks   stability  of  capital  and  the
         maintenance of a constant net asset value of $1.00 per share,  although
         in certain circumstances this may not be possible.

TAX FREE

         Scudder  High Yield Tax Free Fund seeks to provide high income which is
         exempt  from  regular  federal  income tax by  investing  in  municipal
         securities.

         Scudder  Limited Term Tax Free Fund seeks to provide as high a level of
         income exempt from regular  federal income tax as is consistent  with a
         high degree of principal stability.

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

         Scudder  Medium  Term Tax Free Fund  seeks to  provide a high  level of
         income free from regular  federal  income taxes and to limit  principal
         fluctuation  by  investing  in  high-grade   municipal   securities  of
         intermediate maturities.

         Scudder  California  Tax Free Fund* seeks to provide income exempt from
         both   California   and  regular   federal  income  taxes  through  the
         professional  and  efficient  management  of a portfolio  consisting of
         California state, municipal and local government obligations.

         Scudder  Massachusetts  Limited Term Tax Free Fund* seeks to provide as
         high a level of income exempt from  Massachusetts  personal and regular
         federal  income tax as is  consistent  with a high degree of  principal
         stability.

         Scudder  Massachusetts  Tax Free Fund* seeks to provide  income  exempt
         from both  Massachusetts  and regular  federal income taxes through the
         professional  and  efficient  management  of a portfolio  consisting of
         Massachusetts state, municipal and local government obligations.

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


                                       39
<PAGE>

         Scudder New York Tax Free Fund* seeks to provide income exempt from New
         York state,  New York City and regular federal income taxes through the
         professional  and  efficient  management  of a portfolio  consisting of
         investments  in  New  York  state,   municipal  and  local   government
         obligations.

         Scudder  Ohio Tax Free Fund* seeks to provide  income  exempt from both
         Ohio and regular  federal  income taxes  through the  professional  and
         efficient management of a portfolio consisting of Ohio state, municipal
         and local government obligations.

         Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
         both  Pennsylvania and regular federal income taxes through a portfolio
         consisting  of  Pennsylvania  state,  municipal  and  local  government
         obligations.

GROWTH AND INCOME

         Scudder  Balanced Fund seeks to provide a balance of growth and income,
         as  well as  long-term  preservation  of  capital,  from a  diversified
         portfolio of equity and fixed income securities.

         Scudder  Growth and Income  Fund seeks to provide  long-term  growth of
         capital,  current  income,  and  growth of income  through a  portfolio
         invested  primarily  in common  stocks and  convertible  securities  by
         companies  which offer the prospect of growth of earnings  while paying
         current dividends.

GROWTH

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

         Scudder  Development Fund seeks to achieve  long-term growth of capital
         primarily  through  investments in marketable  securities,  principally
         common stocks,  of relatively small or little-known  companies which in
         the opinion of  management  have  promise of  expanding  their size and
         profitability  or of gaining  increased  market  recognition  for their
         securities, or both.

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

         Scudder Global Discovery Fund seeks above-average  capital appreciation
         over the long term by investing  primarily in the equity  securities of
         small companies located throughout the world.

         Scudder Global Fund seeks long-term growth of capital primarily through
         a diversified  portfolio of marketable equity securities  selected on a
         worldwide  basis.  It may also invest in debt  securities  of U.S.  and
         foreign issuers. Income is an incidental consideration.

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

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

   
         Scudder  International  Fund seeks long-term  growth of capital through
         investment  principally in a diversified portfolio of marketable equity
         securities  selected  primarily  to permit  participation  in  non-U.S.
         companies and economies with  prospects for growth.  It also invests in
         fixed-income  securities of foreign  governments and companies,  with a
         view toward total investment return.
    


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

                                       40
<PAGE>

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

         Scudder Large Company Growth Fund seeks to provide  long-term growth of
         capital through investment primarily in equity securities of large U.S.
         growth companies.

         Scudder Large Company  Value Fund seeks to maximize  long-term  capital
         appreciation   through  a  broad  and   flexible   investment   program
         emphasizing common stocks.

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

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

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

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

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

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

         The Japan Fund, Inc. seeks capital  appreciation  through investment in
         Japanese securities, primarily in common stocks of Japanese companies.

   
ASSET ALLOCATION

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

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

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

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

         The net asset  values of most  Scudder  Funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder  Funds," and in
other leading newspapers  throughout the country.  Investors will notice the net
asset value and offering  price are the same,  reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder Funds.  The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the  "Money-Market  Funds" section of The Wall Street Journal.  This
information  also may be obtained by calling the Scudder  Automated  Information
Line (SAIL) at 1-800-343-2890.

                                       41
<PAGE>

         The Scudder  Family of Funds  offers many  conveniences  and  services,
including:  active  professional  investment  management;  broad and diversified
investment  portfolios;  pure no-load funds with no  commissions  to purchase or
redeem  shares or Rule 12b-1  distribution  fees;  individual  attention  from a
service  representative  of  Scudder  Investor  Relations;  and  easy  telephone
exchanges into other Scudder funds.

                              SPECIAL PLAN ACCOUNTS

    (See "Scudder tax-advantaged retirement plans," "Purchases--By Automatic
    Investment Plan" and "Exchanges and redemptions--By Automatic Withdrawal
                        Plan" in the Fund's prospectus.)

         Detailed  information  on any Scudder  investment  plan,  including the
applicable  charges,   minimum  investment  requirements  and  disclosures  made
pursuant to Internal Revenue Service (the "IRS")  requirements,  may be obtained
by contacting Scudder Investor Services,  Inc., Two International Place, Boston,
Massachusetts  02110-4103  or  by  calling  toll  free,  1-800-225-2470.  It  is
advisable  for an  investor  considering  the  funding of the  investment  plans
described  below to consult with an attorney or other  investment or tax adviser
with respect to the suitability requirements and tax aspects thereof.

   
         Shares  of the Fund may also be a  permitted  investment  under  profit
sharing  and  pension  plans and IRA's  other than  those  offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
    

         None of the plans  assures a profit or  guarantees  protection  against
depreciation, especially in declining markets.

Automatic Withdrawal Plan

   
         Non-retirement  plan shareholders who currently own or purchase $10,000
or more of shares of the Fund may establish an Automatic  Withdrawal  Plan.  The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed.  The check amounts
may be based on the  redemption  of a fixed dollar  amount,  fixed share amount,
percent of account  value or  declining  balance.  The Plan  provides for income
dividends  and  capital  gains  distributions,  if  any,  to  be  reinvested  in
additional  shares.  Shares are then  liquidated  as  necessary  to provide  for
withdrawal  payments.  Since the  withdrawals  are in  amounts  selected  by the
investor and have no relationship to yield or income,  payments  received cannot
be  considered  as  yield  or  income  on  the   investment  and  the  resulting
liquidations may deplete or possibly  extinguish the initial  investment and any
reinvested dividends and capital gains distributions.  Requests for increases in
withdrawal  amounts or to change the payee must be submitted in writing,  signed
exactly as the account is  registered,  and contain  signature  guarantee(s)  as
described   under    "Transaction    information--Redeeming    shares--Signature
guarantees" in the Fund's prospectus.  Any such requests must be received by the
Fund's  transfer  agent  ten  days  prior  to the  date of the  first  automatic
withdrawal.  An Automatic  Withdrawal  Plan may be terminated at any time by the
shareholder,  the Trust or its agent on written  notice,  and will be terminated
when all shares of the Fund under the Plan have been  liquidated or upon receipt
by the Trust of notice of death of the shareholder.
    

         An  Automatic  Withdrawal  Plan request form can be obtained by calling
1-800-225-5163.

Cash Management System - Group Sub-Accounting Plan
for Trust Accounts, Nominees and Corporations

         To   minimize   record-keeping   by   fiduciaries   and   corporations,
arrangements  have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund or Portfolio.

   
         In its  discretion,  a Fund may accept minimum  initial  investments of
less than $2,500 (per Portfolio) as part of a continuous  group purchase plan by
fiduciaries and others (e.g., brokers, bank trust departments,  employee benefit
    
                                       42
<PAGE>

   
plans)  provided that the average single account in any one Fund or Portfolio in
the  group  purchase  plan  will be  $2,500  or more.  A Fund may also  wire all
redemption proceeds where the group maintains a single designated bank account.
    

         Shareholders  who withdraw  from the group  purchase plan through which
they were  permitted  to initiate  accounts  under $2,500 will be subject to the
minimum account restrictions  described under "EXCHANGES AND  REDEMPTIONS--Other
Information."

Automatic Investment Plan

         Shareholders may arrange to make periodic investments through automatic
deductions  from  checking  accounts  by  completing  the  appropriate  form and
providing the necessary  documentation  to establish  this service.  The minimum
investment is $50.

         The Automatic  Investment  Plan involves an investment  strategy called
dollar cost averaging.  Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular  intervals.  By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more  shares  than when the share  price is  higher.  Over a period of time this
investment  approach may allow the  investor to reduce the average  price of the
shares purchased.  However, this investment approach does not assure a profit or
protect  against  loss.  This type of  investment  program may be  suitable  for
various investment goals such as, but not limited to, college planning or saving
for a home.

Uniform Transfers/Gifts to Minors Act

         Grandparents, parents or other donors may set up custodian accounts for
minors.  The minimum  initial  investment  is $1,000  unless the donor agrees to
continue to make  regular  share  purchases  for the account  through  Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.

         The Trust  reserves  the  right,  after  notice  has been  given to the
shareholder and custodian,  to redeem and close a  shareholder's  account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.

                    DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

                (See "Distribution and performance information--
            Dividends and capital gains distributions" in the Funds'
                                  prospectus.)

         Each Fund follows the practice of distributing  substantially  all, and
in no  event  less  than  90%  of  its  net  investment  income  (defined  under
"ADDITIONAL  INFORMATION--Glossary")  and any excess of net realized  short-term
capital gains over net realized  long-term capital losses.  Each Fund may follow
the practice of distributing the entire excess of net realized long-term capital
gains over net realized short-term capital losses.  However, if it appears to be
in the best interest of a Fund and its shareholders, such Fund may retain all or
part of such gain for reinvestment.

         Dividends  are declared  daily and  distributions  from net  investment
income are made monthly.  Any dividends or capital gains distributions  declared
in October,  November  or  December  with a record date in such a month and paid
during the following  January are treated by shareholders for federal income tax
purposes  as  if  received  on  December  31  of  the  calendar  year  declared.
Distributions  from net  short-term  and net long-term  capital  gains  realized
during each fiscal year, if any, are made annually within three months after the
end of the Funds'  fiscal year end. An additional  distribution  may be made (or
treated as made) in November or  December if  necessary  to avoid the excise tax
described under "TAXES." Both types of  distributions  are made in shares of the
Funds and confirmations are mailed to each shareholder  unless a shareholder has
elected to receive cash, in which case a check is sent.

         Each distribution is accompanied by a brief explanation of the form and
character of the  distribution.  The  characterization  of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Fund issues to each  shareholder  a  statement  of the
federal  income tax status of all  distributions,  including a statement  of the

                                       43
<PAGE>

percentage  of the  prior  calendar  year's  distributions  which  the  Fund has
designated as tax-exempt  and the  percentage of such  tax-exempt  distributions
treated as a tax-preference item for purposes of the alternative minimum tax.

                             PERFORMANCE INFORMATION

                       (See "Distribution and performance
                  information--Performance information" in the
                               Funds' prospectus.)

         From time to time, quotations of the Funds' performance may be included
in  advertisements,  sales  literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:

Average Annual Total Return

         Average  Annual Total  Return is the average  annual  compound  rate of
return for the periods of one year,  five years and the life of the Fund,  where
applicable,  all  ended on the last day of a recent  calendar  quarter.  Average
annual total return quotations reflect changes in the price of the Funds' shares
and  assume  that all  dividends  and  capital  gains  distributions  during the
respective  periods were reinvested in Fund shares.  Average annual total return
is  calculated  by finding  the  average  annual  compound  rates of return of a
hypothetical  investment over such periods,  according to the following  formula
(average annual total return is then expressed as a percentage):

                                       T = (ERV/P)^1/n - 1
         Where:
                  P   =    a  hypothetical  initial  investment of $1,000 
                  T   =    average annual total return 
                  n   =    number of years
               ERV    =    ending  redeemable  value:  ERV  is the value, at the
                           end  of  the  applicable  period,  of a  hypothetical
                           $1,000  investment  made  at  the  beginning  of  the
                           applicable period.

                  Average Annual Total Return for periods ended March 31, 1997

   
<TABLE>
<CAPTION>


                                                           One             Five              Ten            Life of
                                                          Year             Years            Years            Fund
                                                          ----             -----            -----            ----

<S>                                                       <C>              <C>                                <C>   
Scudder California Tax Free Money Fund                    2.87%            2.62%                              3.62%*
Scudder California Tax Free Fund                          5.44%            7.23%            7.16%             8.41%
</TABLE>
    

         *    For the period beginning May 28, 1987 (commencement of operations)

Cumulative Total Return

         Cumulative  Total  Return  is  the  cumulative  rate  of  return  on  a
hypothetical  initial  investment of $1,000 for a specified  period.  Cumulative
total return  quotations  reflect the change in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares.  Cumulative total return is calculated by finding the
cumulative  rates of  return of a  hypothetical  investment  over such  periods,
according to the following formula (cumulative total return is then expressed as
a percentage):

                                          C = (ERV/P)-1
         Where:

                  C   =    Cumulative Total Return
                  P   =    a hypothetical initial investment of $1,000
               ERV    =    ending  redeemable  value: ERV   is the value, at the
                           end  of  the  applicable  period,  of a  hypothetical
                           $1,000  investment  made  at  the  beginning  of  the
                           applicable period.


                                       44
<PAGE>

                    Cumulative Total Return for periods ended March 31, 1997
   
<TABLE>
<CAPTION>
                                                           One             Five              Ten            Life of
                                                          Year             Years            Years            Fund
                                                          ----             -----            -----            ----

<S>                                                       <C>             <C>                              <C>     
Scudder California Tax Free Money Fund                    2.87%           13.83%                           41.95% *
Scudder California Tax Free Fund                          5.44%           41.78%           99.76%
</TABLE>
    
    
  *        For the period beginning May 28, 1987 (commencement of operations)

Total Return

         Total  Return is the rate of return on an  investment  for a  specified
period of time calculated in the same manner as Cumulative Total Return.

Yield

   
         Yield for Scudder  California Tax Free Money Fund is the net annualized
yield based on a specified  seven  calendar days  calculated at simple  interest
rates.  Yield is calculated by determining the net change,  exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the  beginning of the period,  subtracting  a  hypothetical  charge
reflecting deductions from shareholder accounts,  and dividing the difference by
the value of the account at the  beginning of the base period to obtain the base
period return.  The yield is annualized by multiplying the base period return by
365/7. The yield figure is stated to the nearest  hundredth of one percent.  The
yield of the Fund for the seven-day period ended March 31, 1997 was 2.82%.
    

         Yield for Scudder  California  Tax Free Fund is the SEC net  annualized
yield based on a specified  30-day or one month)  period  assuming a  semiannual
compounding of income. Yield is calculated by dividing the net investment income
per share earned  during the period by the maximum  offering  price per share on
the last day of the period, according to the following formula:

                           YIELD = 2[(a-b/cd + 1)^6-1]
  Where:
   a  =     dividends  and  interest  earned  during the period
            including  the  amortization  of  market  premium  or
            accretion of market discount.
   b   =    expenses accrued for the period (net of reimbursements).
   c   =    the average daily number of shares  outstanding during the period 
            that were entitled to receive dividends.
   d   =    the maximum offering price per share on the last day of the period.

         The SEC 30-day net  annualized  yield of the Fund for the period  ended
March 31, 1997 was 4.73%.

Effective Yield

         Effective  Yield for Scudder  California Tax Free Money Fund is the net
annualized  yield for a specified seven calendar days assuming a reinvestment of
the income or  compounding.  Effective yield is calculated by the same method as
yield except the yield figure is compounded by adding one,  raising the sum to a
power  equal to 365  divided  by seven,  and  subtracting  one from the  result,
according to the following formula:

              Effective Yield = [(Base Period Return + 1)^365/7] - 1

   
         The effective  yield of the Fund for the  seven-day  period ended March
31, 1997 was 2.82%.
    

                                       45
<PAGE>

Tax-Equivalent Yield

         Tax-Equivalent  Yield for Scudder California Tax Free Money Fund is the
net annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified  seven day period assuming a reinvestment of
all  dividends  paid during such period.  Tax-equivalent  yield is calculated by
dividing that portion of the Fund's yield (as computed in the yield  description
above) which is  tax-exempt by one minus a stated income tax rate and adding the
product  to  that  portion,  if  any,  of the  yield  of the  Fund  that  is not
tax-exempt.

   
         Thus,  taxpayers with an effective combined marginal income tax rate of
45.22%  would  need to earn a taxable  yield of 5.15% to receive  the  after-tax
income equal to the 2.82%  tax-free  effective  yield of Scudder  California Tax
Free Money Fund for the seven-day period ended March 31, 1997.

         Tax-Equivalent  Yield for Scudder  California  Tax Free Fund is the net
annualized  taxable  yield needed to produce a specified  tax-exempt  yield at a
given tax rate  based on a  specified  30-day  (or one  month)  period  assuming
semiannual compounding of income. Tax-equivalent yield is calculated by dividing
that portion of the Fund's yield (as  computed in the yield  description  above)
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt.  Thus,
taxpayers with an effective  combined  marginal  income tax rate of 45.22% would
have to earn 8.63% to receive the after-tax  income equal to the 4.73%  tax-free
yield of Scudder  California Tax Free Fund for the 30-day period ended March 31,
1997.
    

         Quotations of a Fund's performance are historical, show the performance
of  a  hypothetical   investment  and  are  not  intended  to  indicate   future
performance.  Performance  of the Fund  will  vary  based on  changes  in market
conditions  and the level of the Fund's  expenses.  An  investor's  shares  when
redeemed may be worth more or less than their original cost.

         Investors  should  be aware  that  the  principal  of each  Fund is not
insured.

Comparison of Portfolio Performance

         A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there  are  different  methods  of  calculating  performance,  investors  should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with  performance  quoted with respect to other investment
companies or types of investments.

   
         In  connection  with   communicating  its  performance  to  current  or
prospective  shareholders,  a  Fund  also  may  compare  these  figures  to  the
performance of unmanaged  indices which may assume  reinvestment of dividends or
interest  but  generally  do  not  reflect  deductions  for  administrative  and
management  costs.  Examples  include,  but are  not  limited  to the Dow  Jones
Industrial  Average,  the Consumer Price Index,  Standard & Poor's 500 Composite
Stock  Price  Index  (S&P  500),  the Nasdaq  OTC  Composite  Index,  the Nasdaq
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
    

         From time to time, in advertising  and marketing  literature,  a Fund's
performance  may be compared to the  performance of broad groups of mutual funds
with similar investment goals, as tracked by independent  organizations such as,
Investment  Company  Data,  Inc.  ("ICD"),   Lipper  Analytical  Services,  Inc.
("Lipper"), CDA Investment Technologies,  Inc. ("CDA"), Morningstar, Inc., Value
Line  Mutual  Fund  Survey  and  other  independent  organizations.  When  these
organizations'  tracking  results  are  used,  a Fund  will be  compared  to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the  appropriate  volatility  grouping,  where  volatility  is a measure of a
fund's risk.  For instance,  a Scudder  growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund  category;  and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.

         From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management  team may be  depicted  and quoted to give  prospective  and  current
shareholders  a better sense of the outlook and approach of those who manage the
Funds. In addition,  the amount of assets that the Adviser has under  management

                                       46
<PAGE>

in  various  geographical  areas  may be  quoted in  advertising  and  marketing
materials.

         The Funds  may be  advertised  as an  investment  choice  in  Scudder's
college planning program. The description may contain illustrations of projected
future  college  costs  based on assumed  rates of  inflation  and  examples  of
hypothetical fund performance, calculated as described above.

         Statistical and other  information,  as provided by the Social Security
Administration,  may be used in marketing  materials  pertaining  to  retirement
planning  in order to  estimate  future  payouts  of social  security  benefits.
Estimates may be used on demographic and economic data.

         Marketing and other Fund  literature  may include a description  of the
potential  risks and rewards  associated  with an investment  in the Funds.  The
description  may include a  "risk/return  spectrum"  which compares the Funds to
other Scudder funds or broad categories of funds, such as money market,  bond or
equity funds,  in terms of potential  risks and returns.  Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating  yield.
Share  price,  yield and total return of a bond fund will  fluctuate.  The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank  products,  such as  certificates  of deposit.  Unlike
mutual  funds,  certificates  of deposit  are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.

         Because bank products  guarantee  the principal  value of an investment
and money  market funds seek  stability  of  principal,  these  investments  are
considered  to be less risky than  investments  in either bond or equity  funds,
which may involve the loss of principal.  However,  all  long-term  investments,
including investments in bank products,  may be subject to inflation risk, which
is the risk of erosion of the value of an investment  as prices  increase over a
long time period.  The  risks/returns  associated  with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity,  credit quality of the securities  held, and interest rate  movements.
For equity funds,  factors include a fund's overall  investment  objective,  the
types of equity securities held and the financial position of the issuers of the
securities.  The  risks/returns  associated with an investment in  international
bond or equity funds also will depend upon currency exchange rate fluctuation.

         A risk/return  spectrum  generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds.  Shorter-term  bond funds  generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase  higher  quality  securities  relative to bond funds that purchase
lower  quality  securities.   Growth  and  income  equity  funds  are  generally
considered  to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.

         Risk/return  spectrums  also  may  depict  funds  that  invest  in both
domestic and foreign securities or a combination of bond and equity securities.
       

         Evaluation  of  Fund   performance   or  other   relevant   statistical
information  made by  independent  sources  may  also be used in  advertisements
concerning the Funds,  including reprints of, or selections from,  editorials or
articles  about  these  Funds.  Sources  for Fund  performance  information  and
articles about the Funds include the following:

American Association of Individual  Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.

Asian Wall Street  Journal,  a weekly Asian  newspaper  that often  reviews U.S.
mutual funds investing internationally.

Banxquote,  an on-line source of national  averages for leading money market and
bank CD interest  rates,  published  on a weekly  basis by  Masterfund,  Inc. of
Wilmington, Delaware.

                                       47
<PAGE>

Barron's,  a Dow Jones and  Company,  Inc.  business and  financial  weekly that
periodically reviews mutual fund performance data.

Business  Week,  a  national  business  weekly  that  periodically  reports  the
performance rankings and ratings of a variety of mutual funds investing abroad.

CDA Investment  Technologies,  Inc., an organization which provides  performance
and ranking  information  through  examining the dollar results of  hypothetical
mutual fund investments and comparing these results against  appropriate  market
indices.

Consumer  Digest, a monthly  business/financial  magazine that includes a "Money
Watch" section featuring financial news.

Financial Times,  Europe's business newspaper,  which features from time to time
articles on international or country-specific funds.

Financial World, a general  business/financial  magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.

Forbes,  a national  business  publication  that from time to time  reports  the
performance of specific investment companies in the mutual fund industry.

Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.

The  Frank  Russell  Company,  a  West-Coast  investment  management  firm  that
periodically  evaluates  international stock markets and compares foreign equity
market performance to U.S. stock market performance.

Global  Investor,   a  European   publication  that  periodically   reviews  the
performance of U.S. mutual funds investing internationally.

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

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

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

Investor's Business Daily, a daily newspaper that features financial,  economic,
and business news.

Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.

Lipper Analytical  Services,  Inc.'s Mutual Fund Performance  Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.

Money,  a monthly  magazine that from time to time features both specific  funds
and the mutual fund industry as a whole.

Morgan  Stanley  International,  an  integrated  investment  banking  firm  that
compiles statistical information.

Mutual Fund Values,  a biweekly  Morningstar,  Inc.  publication  that  provides
ratings  of  mutual  funds  based  on  fund  performance,   risk  and  portfolio
characteristics.

                                       48
<PAGE>

The New York Times, a nationally  distributed  newspaper which regularly  covers
financial news.

The No-Load Fund Investor,  a monthly  newsletter,  published by Sheldon Jacobs,
that includes mutual fund  performance data and  recommendations  for the mutual
fund investor.

No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund  performance,  rates funds and discusses  investment
strategies for the mutual fund investor.

Personal  Investing  News,  a monthly  news  publication  that often  reports on
investment opportunities and market conditions.

Personal  Investor,  a monthly investment  advisory  publication that includes a
"Mutual Funds Outlook" section  reporting on mutual fund  performance  measures,
yields, indices and portfolio holdings.

SmartMoney,  a national personal finance magazine published monthly by Dow Jones
and  Company,  Inc.  and The  Hearst  Corporation.  Focus is placed on ideas for
investing, spending and saving.

Success,  a monthly magazine  targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.

United Mutual Fund Selector, a semi-monthly investment newsletter,  published by
Babson United  Investment  Advisors,  that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.

USA Today, a leading national daily newspaper.

U.S. News and World Report,  a national  news weekly that  periodically  reports
mutual fund performance data.

Value Line  Mutual  Fund  Survey,  an  independent  organization  that  provides
biweekly performance and other information on mutual funds.

The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.

Wiesenberger  Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds,  management policies, salient features,  management results,
income and dividend records and price ranges.

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

Worth,  a national  publication  issued 10 times per year by Capital  Publishing
Company,  a  subsidiary  of  Fidelity  Investments.  Focus is placed on personal
financial journalism.

                            ORGANIZATION OF THE FUNDS

               (See "Fund organization" in the Funds' prospectus.)

         The Funds are series of Scudder California Tax Free Trust. The Trust is
a Massachusetts  business trust  established  under a Declaration of Trust dated
May 3, 1983.  Such  Declaration of Trust was amended and restated on December 8,
1987.  Its  authorized  capital  consists  of an  unlimited  number of shares of
beneficial interest of $.01 par value. The shares are currently divided into two
series.  Each share of each Fund has equal  rights with each other share of that
Fund as to voting,  dividends and  liquidation.  Shareholders  have one vote for
each share held on matters on which they are entitled to vote. All shares issued
and outstanding are fully paid and nonassessable by the Trust, and redeemable as
described  in  this  Statement  of  Additional  Information  and in  the  Funds'
prospectus.

                                       49
<PAGE>

         The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the  rights of  creditors,  are  specifically  allocated  to such  series and
constitute the underlying  assets of such series.  The underlying assets of each
series are  segregated  on the books of account,  and are to be charged with the
liabilities  in  respect  to such  series  and with its  equitable  share of the
general  liabilities of the Trust, as determined by the Trustees.  Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective  series except where  allocations of direct expenses can
otherwise  be fairly  made.  The  officers of the Trust,  subject to the general
supervision of the Trustees,  have the power to determine which  liabilities are
allocable  to a given  series,  or which are general or allocable to two or more
series.  In the  event of the  dissolution  or  liquidation  of the Trust or any
series,  the  holders of the shares of any series are  entitled  to receive as a
class the  underlying  assets  of such  shares  available  for  distribution  to
shareholders.

         Shares  of the  Trust  entitle  their  holders  to one vote per  share;
however,  separate  votes  are  taken by each  series on  matters  affecting  an
individual series. For example, a change in investment policy for a series would
be  voted  upon  only by  shareholders  of the  series  involved.  Additionally,
approval  of the  investment  advisory  agreement  is a matter to be  determined
separately  by each  series.  Approval  by the  shareholders  of one  series  is
effective as to that series  whether or not enough  votes are received  from the
shareholders  of the other  series to  approve  such  agreement  as to the other
series.

         The Trustees, in their discretion, may authorize the division of shares
of the Fund (or shares of a series) into different classes  permitting shares of
different classes to be distributed by different methods.  Although shareholders
of  different  classes of a series  have an interest  in the same  portfolio  of
assets,  shareholders  of  different  classes  may bear  different  expenses  in
connection with different methods of distribution.  The Trustees have no present
intention  of taking the action  necessary to effect the division of shares into
separate  classes  (which under present  regulations  requires the Fund first to
obtain an exemptive order of the SEC), or of changing the method of distribution
of shares of the Fund.

         The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees  individually but only upon the property of the Trust,
that the Trustees and officers are not liable for errors of judgment or mistakes
of fact or law, and that the Trust indemnifies its Trustees and officers against
liabilities  and expenses  incurred in connection  with litigation in which they
may be  involved  because  of their  offices  with  the  Trust  except  if it is
determined in the manner provided in the Declaration of Trust that they have not
acted in good faith in the reasonable belief that their actions were in the best
interests of the Trust. However, nothing in the Declaration of Trust protects or
indemnifies  a  Trustee  or  officer  against  any  liability  to which he would
otherwise  be  subject  by reason  of  willful  misfeasance,  bad  faith,  gross
negligence,  or reckless  disregard of the duties involved in the conduct of his
or her office.

                               INVESTMENT ADVISER

     (See "Fund organization-Investment adviser" in the Funds' prospectus.)

         Scudder,  Stevens & Clark,  Inc., an investment  counsel firm,  acts as
investment  adviser  to  the  Funds.  This  organization  is  one  of  the  most
experienced investment management firms in the United States. It was established
as a  partnership  in 1919 and  pioneered  the practice of providing  investment
counsel to individual  clients on a fee basis.  In 1928, it introduced the first
no-load  mutual fund to the public.  In 1953,  the  Adviser  introduced  Scudder
International  Fund,  the first  mutual  fund  available  in the U.S.  investing
internationally  in  several  foreign  countries.  The firm  reorganized  from a
partnership to a corporation on June 28, 1985.

   
         The  principal  source of the  Adviser's  income is  professional  fees
received from providing  continuous  investment  advice, and the firm derives no
income  from  brokerage  or  underwriting  of  securities.  Today,  it  provides
investment  counsel for many individuals and institutions,  including  insurance
companies,   colleges,  industrial  corporations,   and  financial  and  banking
organizations.  In addition,  it manages  Montgomery  Street Income  Securities,
Inc., Scudder California Tax Free Trust,  Scudder Cash Investment Trust, Scudder
Equity Trust,  Scudder Fund,  Inc.,  Scudder Funds Trust,  Scudder  Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust,  Scudder  Institutional  Fund,
Inc.,  Scudder  International  Fund, Inc.,  Scudder  Investment  Trust,  Scudder
Municipal  Trust,  Scudder  Mutual  Funds,  Inc.,  Scudder New Asia Fund,  Inc.,
Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities Trust,
Scudder  State Tax Free Trust,  Scudder  Tax Free Money  Fund,  Scudder Tax Free
Trust,  Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund,
    

                                       50
<PAGE>
   
Scudder World Income  Opportunities  Fund,  Inc., The Argentina Fund,  Inc., The
Brazil Fund, Inc.,  Scudder Spain and Portugal Fund, Inc., The Korea Fund, Inc.,
The Japan Fund,  Inc. and The Latin America Dollar Income Fund, Inc. Some of the
foregoing companies or trusts have two or more series.
    

         The Adviser also provides  investment  advisory  services to the mutual
funds  which  comprise  the  AARP  Investment  Program  from  Scudder.  The AARP
Investment  Program  from  Scudder has assets over $13 billion and  includes the
AARP Growth Trust,  AARP Income Trust,  AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.

   
         Pursuant  to an  Agreement  between  Scudder,  Stevens  &  Clark,  Inc.
("Scudder")  and AMA  Solutions,  Inc.,  a subsidiary  of the  American  Medical
Association  (the  "AMA"),  dated May 9, 1997,  Scudder has  agreed,  subject to
applicable state regulations,  to pay AMA Solutions, Inc. royalties in an amount
equal to 5% of the  management  fee  received by Scudder  with respect to assets
invested  by  AMA  members  in  Scudder  funds  in   connection   with  the  AMA
InvestmentLinkSM  Program.  Scudder will also pay AMA Solutions,  Inc. a general
monthly fee,  currently in the amount of $833. The AMA and AMA  Solutions,  Inc.
are not engaged in the  business of providing  investment  advice and neither is
registered as an investment  adviser or broker/dealer  under federal  securities
laws. Any person who participates in the AMA InvestmentLinkSM  Program will be a
customer  of  Scudder  (or of a  subsidiary  thereof)  and  not  the  AMA or AMA
Solutions, Inc. AMA InvestmentLinkSM is a service mark of AMA Solutions, Inc.
    

         In  selecting  the  securities  in which  the  Funds  may  invest,  the
conclusions  and  investment  decisions of the Adviser with respect to the Funds
are based primarily on the analyses of its own research department.  The Adviser
receives   published  reports  and  statistical   compilations  of  the  issuers
themselves,  as well as analyses from  broker/dealers  who may execute portfolio
transactions  for the  Adviser's  clients.  However,  the Adviser  regards  this
information and material as an adjunct to its own research activities.

         Certain  investments  may be appropriate  for a Fund and also for other
clients  advised by the Adviser.  Investment  decisions  for the Funds and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings,  availability
of cash for investment and the size of their investments generally.  Frequently,
a particular  security may be bought or sold for only one client or in different
amounts  and at  different  times for more  than one but less than all  clients.
Likewise,  a particular  security may be bought for one or more clients when one
or more other clients are selling the security. In addition,  purchases or sales
of the same  security  may be made for two or more  clients on the same day.  In
such  event,  such  transactions  are  allocated  among the  clients in a manner
believed by the Adviser to be equitable to each. In some cases,  this  procedure
could have an adverse effect on the price or amount of the securities  purchased
or sold by a Fund.  Purchase  and sale  orders for a Fund may be  combined  with
those of other  clients of the  Adviser in the  interest of  achieving  the most
favorable net results to a Fund.

         The Investment  Management  Agreements (the "Agreements") for each Fund
are dated December 12, 1990. The Agreements  were most recently  approved by the
Trustees on August 11,  1996 and will  continue in effect  until  September  30,
1997. The Agreements  will continue in effect  thereafter by its terms from year
to year  only so long as its  continuance  is  specifically  approved  at  least
annually by the vote of a majority of those Trustees who are not parties to such
Agreements or "interested persons" of the Adviser or the Trust cast in person at
a meeting  called for the purpose of voting on such  approval and either by vote
of the  majority  of the  Trustees  or a  majority  of  the  outstanding  voting
securities of each Fund.  The  Agreements  may be terminated at any time without
payment  of  penalty  by  either  party  on  sixty  days'  written  notice,  and
automatically terminates in the event of its assignment.

         Under the  Agreements,  the Adviser  regularly  provides each Fund with
continuing   investment   management  consistent  with  each  Fund's  investment
objectives,  policies and  restrictions  and determines what securities shall be
purchased for each Fund's  portfolio,  what securities  shall be held or sold by
each Fund,  and what  portion of each Fund's  assets  shall be held  uninvested,
subject  always  to the  provisions  of the  Trust's  Declaration  of Trust  and
By-Laws,  of the  1940  Act  and of the  Code  and  to  each  Fund's  investment
objectives,  policies and restrictions, and subject further to such policies and
instructions as the Trustees of the Trust may from time to time  establish.  The
Adviser  also advises and assists the officers of the Trust in taking such steps

                                       51
<PAGE>

as are necessary or  appropriate  to carry out the decisions of its Trustees and
the appropriate committees of the Trustees regarding the conduct of the business
of the Trust.

         Under the Agreements,  the Adviser renders  significant  administrative
services (not  otherwise  provided by third  parties)  necessary for the Trust's
operations  as an open-end  investment  company  including,  but not limited to,
preparing  reports and notices to the  Trustees and  shareholders;  supervising,
negotiating  contractual  arrangements with, and monitoring various  third-party
service  providers to each Fund (such as the  Transfer  Agent,  pricing  agents,
Custodian,  accountants  and others);  preparing and making filings with the SEC
and other regulatory  agencies;  assisting in the preparation and filing of each
Fund's  federal,  state and local tax returns;  preparing and filing each Fund's
federal  excise tax  returns;  assisting  with  investor  and  public  relations
matters; monitoring the valuation of securities and the calculation of net asset
value;  monitoring  the  registration  of shares of each Fund  under  applicable
federal and state securities laws;  maintaining each Fund's books and records to
the extent not otherwise maintained by a third party;  assisting in establishing
accounting policies of each Fund;  assisting in the resolution of accounting and
legal  issues;   establishing  and  monitoring  each  Fund's  operating  budget;
processing  the  payment  of each  Fund's  bills;  assisting  each Fund in,  and
otherwise  arranging  for,  the  payment  of  distributions  and  dividends  and
otherwise  assisting  each Fund in the conduct of its  business,  subject to the
direction and control of the Trustees.

         The  Adviser  pays  the  compensation  and  expenses  (except  those of
attending  Board and committee  meetings  outside New York, New York and Boston,
Massachusetts) of all affiliated  Trustees,  officers and executive employees of
the Trust and makes  available,  without  expense to the Trust,  the services of
such of the Adviser's  directors,  officers and employees as may duly be elected
officers of the Trust,  subject to their individual  consent to serve and to any
limitations   imposed  by  law,  and  provides  the  Trust's  office  space  and
facilities.

         For these services, Scudder California Tax Free Fund pays an annual fee
of 0.625 of 1% of the first $200  million  of  average  daily net assets of such
Fund and 0.60 of 1% of such net assets in excess of $200  million,  and  Scudder
California  Tax Free Money Fund pays an annual fee of 0.50 of 1% of the  average
daily net assets of such Fund.

   
         For the fiscal years ended March 31, 1997, 1996 and 1995 the investment
management  fees incurred by Scudder  California Tax Free Fund were  $1,800,657,
$1,842,488,  and $1,861,185,  respectively,  and the investment  management fees
incurred by Scudder California Tax Free Money Fund were $210,030,  $193,014, and
$180,098, respectively.

         With respect to Scudder California Tax Free Money Fund, the Adviser has
agreed to continue not to impose all or a portion of its  management  fee and to
take other action,  (to the extent  necessary)  until July 31, 1998,  and during
such time to maintain the annualized  expenses at not more than 0.60% of average
daily net assets.  For the fiscal year ended March 31, 1997, the Adviser did not
impose a portion of the fee which would have amounted to $128,299.
    

         Under the Agreements,  the Funds are responsible for all of their other
expenses,  including fees and expenses incurred in connection with membership in
investment  company  organizations;  brokers'  commissions;  legal,  auditing or
accounting  expenses;  taxes and governmental fees; the fees and expenses of the
Transfer Agent; any other expenses,  including clerical expenses of issue, sale,
underwriting,  distribution, redemption or repurchase of shares; the expenses of
and fees  for  registering  or  qualifying  securities  for  sale;  the fees and
expenses  of the  Trustees,  officers  and  employees  of the  Fund  who are not
affiliated with the Adviser;  the cost of printing and distributing  reports and
notices to shareholders;  and the fees or disbursements of custodians. Each Fund
may arrange to have third  parties  assume all or part of the  expenses of sale,
underwriting  and  distribution  of  shares  of such  Fund.  The  Trust  is also
responsible for its expenses incurred in connection with litigation, proceedings
and claims and the legal  obligation  it may have to indemnify  its officers and
Trustees with respect thereto.

         Each  Agreement  requires  the  Adviser to return to each Fund all or a
portion of advances of its management fee to the extent annual  expenses of such
Fund  (including  the  management  fee  stated  above)  exceed  the  limitations
prescribed by any state in which such Fund's shares are offered for sale.

         Any such fee  advance  required to be returned to a Fund is returned as
promptly as practicable after the end of the Funds' fiscal year. However, no fee
payment is made to the Adviser during any fiscal year which causes year- to-date
expenses to exceed the  cumulative  pro rata expense  limitation  at the time of
such payment.
       


                                       52
<PAGE>

         The  Agreements  also  provide  that the Trust may use any name derived
from the name  "Scudder,  Stevens & Clark" only as long as the Agreements or any
extension, renewal or amendment thereof remains in effect.

         In reviewing the terms of each  Agreement and in  discussions  with the
Adviser concerning the Agreements,  Trustees who are not "interested persons" of
the Adviser are represented by independent counsel at the Trust's expense.

         Each Agreement provides that the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by a Fund in connection with
matters to which the Agreement  relates,  except a loss  resulting  from willful
misfeasance,  bad faith or gross  negligence  on the part of the  Adviser in the
performance  of its  duties or from  reckless  disregard  by the  Adviser of its
obligations and duties under the Agreement.

         Officers  and  employees  of the  Adviser  from  time to time  may have
transactions  with various banks,  including the Custodian.  It is the Adviser's
opinion that the terms and conditions of those  transactions which have occurred
were  not  influenced  by  existing  or  potential   custodial  or  other  Trust
relationships.

         None of the  Trustees or officers of the Trust may have  dealings  with
the  Trust as  principals  in the  purchase  or sale of  securities,  except  as
individual subscribers to or holders of shares of the Funds.

 Personal Investments by Employees of the Adviser

         Employees  of the Adviser are  permitted  to make  personal  securities
transactions,  subject  to  requirements  and  restrictions  set  forth  in  the
Adviser's  Code  of  Ethics.   The  Code  of  Ethics  contains   provisions  and
requirements  designed to identify  and address  certain  conflicts  of interest
between personal investment  activities and the interests of investment advisory
clients  such as the  Funds.  Among  other  things,  the Code of  Ethics,  which
generally  complies  with  standards   recommended  by  the  Investment  Company
Institute's  Advisory Group on Personal  Investing,  prohibits  certain types of
transactions  absent prior approval,  imposes time periods during which personal
transactions may not be made in certain securities,  and requires the submission
of  duplicate  broker   confirmations   and  monthly   reporting  of  securities
transactions.  Additional  restrictions  apply to portfolio  managers,  traders,
research  analysts  and others  involved  in the  investment  advisory  process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.

                              TRUSTEES AND OFFICERS

   
<TABLE>
<CAPTION>

                                                                                                 Position with
                                                                                                 Underwriter, 
                                                              Principal Occupation**             Scudder Investor 
Name, Age and Address                Position with Trust      and Affiliations                   Services, Inc.
- ---------------------                -------------------      ----------------                   --------------
<S>                                  <C>                      <C>                                <C> 
David S. Lee (63)*++@                President and Trustee    Managing Director of Scudder,      Director, President
                                                              Stevens & Clark, Inc.              and Assistant
                                                                                                 Treasurer

Henry P. Becton, Jr. (53)++          Trustee                  President and General Manager,              --
WGBH                                                          WGBH Educational Foundation
125 Western Avenue
Allston, MA  02134

Dawn-Marie Driscoll (50)             Trustee                  Executive Fellow, Center for                --
4909 SW 9th Place                                             Business Ethics and President,
Cape Coral, FL 33914                                          Driscoll Associates
    
                                       53
<PAGE>
   
                                                                                                 Position with
                                                                                                 Underwriter, 
                                                              Principal Occupation**             Scudder Investor 
Name, Age and Address                Position with Trust      and Affiliations                   Services, Inc.
- ---------------------                -------------------      ----------------                   --------------

Peter B. Freeman (64)++              Trustee                  Corporate Director and Trustee               --
100 Alumni Avenue
Providence, RI 02906

George M. Lovejoy, Jr. (67)          Trustee                  President and Director                       --
                                                              Fifty Associates (Real Estate
                                                              Corporation)

Daniel Pierce (62)*++@               Trustee                  Chairman of the Board and          Director, Vice
                                                              Managing Director of Scudder,      President and
                                                              Stevens & Clark, Inc.              Assistant Treasurer

Olin Barrett (59)                    Vice President           Managing Director of Scudder,                --
333 South Hope Street                                         Stevens & Clark, Inc.
Los Angeles, CA 90071

Donald C. Carleton (63)@             Vice President           Managing Director of Scudder,                --
                                                              Stevens & Clark, Inc.

Jerard K. Hartman (64)+              Vice President           Managing Director of Scudder,                --
                                                              Stevens & Clark, Inc.

Thomas W. Joseph (58)@               Vice President           Principal of Scudder, Stevens &    Director, Vice
                                                              Clark, Inc.                        President, Treasurer
                                                                                                 and Assistant Clerk

Thomas F. McDonough (50)@            Vice President and       Principal of Scudder, Stevens &    Clerk
                                     Secretary                Clark, Inc.

Pamela A. McGrath (43)@              Vice President and       Managing Director of Scudder,                --
                                     Treasurer                Stevens & Clark, Inc.

Edward J. O'Connell (52)+            Vice President and       Principal of Scudder, Stevens &    Assistant Treasurer
                                     Assistant Treasurer      Clark, Inc.

Jeremy L. Ragus (45)                 Vice President           Principal of Scudder, Stevens &              --
                                                              Clark, Inc.

Rebecca L. Wilson (35)               Vice President           Assistant Vice President of                  --
                                                              Scudder, Stevens & Clark, Inc.
</TABLE>


*        Messrs.  Lee and Pierce are  considered by the Trust and its counsel to
         be  Trustees  who are  "interested  persons"  of the  Adviser or of the
         Trust, within the meaning of the 1940 Act.
    
**       Unless otherwise stated, all officers and Trustees have been associated
         with  their  respective  companies  for more  than  five  years but not
         necessarily in the same capacity.
++       Messrs.  Becton,  Freeman,  Lee and Pierce are members of the Executive
         Committee which has the power to declare dividends from ordinary income
         and  distributions  of realized capital gains to the same extent as the
         Board is so empowered.
+        Address: 345 Park Avenue, New York, New York 10154
@        Address: Two International Place, Boston, Massachusetts 02110

                                       54
<PAGE>

   
         As of June 30, 1997,  all Trustees and officers of the Trust as a group
owned  beneficially (as defined in Section 13(d) of the Securities  Exchange Act
of 1934)  2.76% of  Scudder  California  Tax Free Money Fund and less than 1% of
Scudder California Tax Free Fund.

         As of June 30, 1997,  2,125,280 shares,  in the aggregate,  or 7.62% of
the outstanding shares of Scudder California Tax Free Fund were held in the name
of Charles Schwab, 101 Montgomery Street, San Francisco, CA 94101-4122,  who may
be deemed to be the  beneficial  owner of certain of these shares but  disclaims
any beneficial ownership therein.

         Certain accounts for which the Adviser acts as investment adviser owned
7,026,717  shares  in the  aggregate,  or 10.67%  of the  outstanding  shares of
Scudder  California  Tax Free Money  Fund.  The  Adviser may be deemed to be the
beneficial  owner of such shares but disclaims any beneficial  ownership in such
shares.

         To the best of the Funds'  knowledge,  as of June 30,  1997,  no person
owned  beneficially  more than 5% of each Fund's  outstanding  shares  except as
stated above.
    

         The Trustees and officers of the Trust also serve in similar capacities
with other Scudder Funds.

                                  REMUNERATION

   
Responsibilities of the Board--Board and Committee Meetings

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

         The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational  matters,  including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually,  the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder  services.  In this regard, they evaluate,  among other things, each
Funds' investment  performance,  the quality and efficiency of the various other
services  provided,  costs  incurred  by the  Adviser  and its  affiliates,  and
comparative  information  regarding fees and expenses of competitive funds. They
are assisted in this process by each Fund's  independent  public accountants and
by independent legal counsel selected by the Independent Trustees.

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

         The Independent Trustees met ten times during 1996, including Board and
Committee meetings and meetings to review each Fund's  contractual  arrangements
as described  above. All of the Independent  Trustees  attended 98% of all such
meetings.
    

Compensation of Officers and Trustees

   
         Several of the  officers  and  Trustees of the Trust may be officers of
the Adviser, or of the Distributor, the Transfer Agent, Scudder Trust Company or
Scudder Fund Accounting  Corporation from whom they receive  compensation,  as a
result of which they may be deemed to participate in fees paid by the Trust. The
Trust pays no direct remuneration to any officer of the Trust.  However, each of
the Trustees who is not affiliated  with the Adviser will be compensated for all
expenses  relating to Trust business  (specifically  including  travel  expenses
relating to Trust  business).  Each of these  unaffiliated  Trustees  receives a
revised  annual  Trustee's fee of $1,800 for  California Tax Free Money Fund and
$3,600 for  California Tax Free Fund from the Trust plus $100 for attending each
Trustees'  meeting,  audit committee  meeting or meeting held for the purpose of
    
                                       55
<PAGE>

   
considering  arrangements  between the Trust on behalf of a Fund and the Adviser
or any affiliates.  Each  unaffiliated  Trustee also receives $100 per committee
meeting,  other than those set forth above,  attended. For the fiscal year ended
March 31, 1997,  fees totaled  $14,242 for Scudder  California Tax Free Fund and
$14,241 for Scudder California Tax Free Money Fund.
    

         No  additional  compensation  is paid to any  Independent  Trustee  for
travel  time to  meetings,  attendance  at  directors'  educational  seminars or
conferences,  service on industry or association  committees,  participation  as
speakers at directors'  conferences,  service on special  trustee task forces or
subcommittees or service as lead or liaison trustee. Independent Trustees do not
receive any employee benefits such as pension, retirement or health insurance.

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

   
<TABLE>

             Name                 Scudder California Tax Free Trust*      All Scudder Funds
             ----                 ----------------------------------      -----------------
<S>                                             <C>                      <C>     
Henry P. Becton, Jr., Trustee                   $8,900                   $91,012 (16 funds)

Dawn-Marie Driscoll, Trustee                    $9,500                   $103,000 (16 funds)

Peter B. Freeman, Trustee                       $9,500                   $131,734 (33 funds)

George M. Lovejoy, Jr., Trustee                   0                      $124,512 (13 funds)
</TABLE>
    

*        Scudder  California  Tax Free  Trust  consists  of two  Funds:  Scudder
         California Tax Free Money Fund and California Tax Free Fund.

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

                                   DISTRIBUTOR

   
         The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor") a Massachusetts  corporation,  which is a subsidiary of
the Adviser, a Delaware  corporation.  The Trust's underwriting  agreement dated
June 1, 1987,  will remain in effect until  September 30, 1997, and from year to
year thereafter  only if its  continuance is approved  annually by a majority of
the members of the Board of Trustees  who are not parties to such  agreement  or
interested  persons of any such  party and  either by vote of a majority  of the
Board of Trustees  or a majority of the  outstanding  voting  securities  of the
Trust.  The  underwriting  agreement was last approved by the Trustees on August
13, 1996.
    

         Under the principal  underwriting  agreement,  the Trust is responsible
for: the payment of all fees and expenses in connection with the preparation and
filing  with  the  SEC of 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  Trust  as  a
broker/dealer in 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 a Fund; the cost
of  printing  and  mailing   confirmations   of  purchases  of  shares  and  the
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 Trust and the
Distributor.

                                       56
<PAGE>

         The  Distributor  pays for printing and  distributing  prospectuses  or
reports  prepared  for its use in  connection  with the  offering  of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising  in connection  with the offering of shares of a Fund to the public.
The Distributor pays all fees and expenses in connection with its  qualification
and  registration as a broker/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 each Fund,  unless a Rule 12b-1 plan is in effect  which  provides  that each
Fund shall bear some or all of such expenses.

Note:    Although  the  Trust  does  not  currently  have a 12b-1  Plan  and the
         Trustees have no current intention of adopting one, the Trust will also
         pay those  fees and  expenses  permitted  to be paid or  assumed by the
         Trust  pursuant to a 12b-1  Plan,  if any,  were  adopted by the Trust,
         notwithstanding any other provision to the contrary in the underwriting
         agreement.

         As agent  the  Distributor  currently  offers  shares of each Fund on a
continuous  basis to  investors  in all states in which  shares of each Fund 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 either Fund.

                                      TAXES

       (See "Transaction information--Tax information, tax identification
       number" and "Distribution and performance information -- Dividends
           and capital gains distributions" in the Funds' prospectus.)

         Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional  Information
in light of their particular tax situation.

         Certain  political  events,  including  federal  elections  and  future
amendments to federal income tax laws, may affect the  desirability of investing
in the Funds.

Federal Taxation

         Each Fund within the Trust is separate for  investment  and  accounting
purposes,  and is treated as a separate  taxable  entity for federal  income tax
purposes.  Each Fund  therefore  has  qualified  and  elected to be treated as a
separate regulated investment company under Subchapter M of the Code and intends
to continue to so qualify.

         As a regulated  investment company qualifying under Subchapter M of the
Code,  each Fund is required to distribute to its  shareholders  at least 90% of
its taxable net investment  income  (including  net  short-term  capital gain in
excess of net  long-term  capital loss) and at least 90% of its  tax-exempt  net
investment income and is not subject to federal income tax to the extent that it
distributes  annually all of its taxable net investment  income and net realized
capital gains in accordance with the timing  requirements of the Code. Each Fund
intends to distribute at least annually  substantially all, and in no event less
than 90% of its taxable and tax-exempt  net  investment  income and net realized
capital gains.

         If any net realized  long-term  capital gains in excess of net realized
short-term  capital  losses are retained by a Fund for  reinvestment,  requiring
federal  income taxes to be paid thereon by a Fund, the Fund will elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term  capital gains,  will be
able to claim a share of federal  income taxes paid by a Fund on such gains as a
credit against any personal  federal income tax liability,  and will be entitled
to  increase  the  adjusted  tax basis of Fund  shares  owned by the  difference
between the pro rata share of such gains and any tax credit.

         Each  Fund is  subject  to a 4%  nondeductible  excise  tax on  amounts
required  to be but not  distributed  under a  prescribed  formula.  The formula
requires  payment  to  shareholders  during  a  calendar  year of  distributions
representing  at least 98% of a Fund's taxable  ordinary income for the calendar
year and at least 98% of the excess of its  capital  gains over  capital  losses

                                       57
<PAGE>

realized during the one-year period ending October 31 during such year, together
with any  undistributed,  untaxed  amounts of ordinary  income and capital gains
from the  previous  calendar  year.  Each  Fund has  adjusted  its  distribution
policies  to  minimize  any  adverse  impact  from  this  tax or  eliminate  its
application.

   
         Net  investment  income  is made up of  dividends  and  interest,  less
expenses.  Net realized  capital  gains for a fiscal year are computed by taking
into account any capital loss  carryforward or post-October loss of a Fund. Each
Fund  intends to offset  realized  capital  gains by using  their  capital  loss
carryforwards  before  distributing  any capital gains.  In addition,  each Fund
intends to offset realized capital gains by using its post-October losses before
distributing any capital gains. As of March 31, 1997 Scudder California Tax Free
Money  Fund had a net tax  basis  capital  loss  carryforward  of  approximately
$95,000,  which may be applied against any realized net taxable capital gains of
each  succeeding  year until fully  utilized or until March 31, 2000  ($14,000),
March 31, 2002 ($7,000), March 31, 2003 ($55,000), March 31, 2004 ($18,000), and
March 31, 2005 ($1,000) the respective expiration dates, whichever occurs first.
As of March  31,  1997,  Scudder  California  Tax Free  Fund had a net tax basis
capital loss  carryforward  of  approximately  $6,884,000,  which may be applied
against any realized net taxable  capital  gains of each  succeeding  year until
fully  utilized  or until  March  31,  2003  ($6,492,000)  and  March  31,  2004
($392,000), the respective expiration dates, whichever occurs first.
    

         Distributions  of taxable net  investment  income and the excess of net
short-term  capital  gain  over  net  long-term  capital  loss  are  taxable  to
shareholders as ordinary income.

         Subchapter M of the Code permits the character of  tax-exempt  interest
distributed  by a regulated  investment  company to flow  through as  tax-exempt
interest  to its  shareholders,  provided  that at least 50% of the value of its
assets at the end of each  quarter of its  taxable  year is  invested  in state,
municipal  and other  obligations  the interest on which is excluded  from gross
income under Section  103(a) of the Code.  Each Fund intends to satisfy this 50%
requirement in order to permit its  distributions  of tax-exempt  interest to be
treated  as  such  for  federal   income  tax  purposes  in  the  hands  of  its
shareholders. Distributions to shareholders of tax-exempt interest earned by the
Fund for the  taxable  year are  therefore  not  subject to federal  income tax,
although they may be subject to the individual and corporate alternative minimum
taxes described  below. A portion of discount from certain  stripped  tax-exempt
obligations or their coupons, however, may be taxable.

         The Revenue  Reconciliation  Act of 1993 requires that market  discount
recognized on a tax-exempt bond is taxable as ordinary income. This rule applies
only for disposals of bonds  purchased  after April 30, 1993. A market  discount
bond is a bond acquired in the secondary  market at a price below its redemption
value.  Under prior law, the treatment of market discount as ordinary income did
not apply to  tax-exempt  obligations.  Instead,  realized  market  discount  on
tax-exempt  obligations was treated as capital gain.  Under the new law, gain on
the  disposition  of a tax-exempt  obligation or any other market  discount bond
that is acquired for a price less than its  principal  amount will be treated as
ordinary  income  (instead  of capital  gain) to the  extent of  accrued  market
discount. This rule is effective only for bonds purchased after April 30, 1993.

         Since no portion of either Fund's income is comprised of dividends from
domestic  corporations,  none of the income distributions of a Fund are eligible
for the  dividends-received  deduction  available for certain taxable  dividends
received by corporations.

   
         Properly  designated  distributions  of the  excess  of  net  long-term
capital gains over net short-term  capital loss are taxable to  shareholders  as
long-term  capital  gain,  regardless of the length of time the shares of a Fund
have  been  held  by  such   shareholders.   Such   distributions  to  corporate
shareholders  of a Fund are not eligible for the  dividends-received  deduction.
Any loss realized upon the  redemption of shares within six months from the date
of their  purchase are treated as a long-term  capital loss to the extent of any
amounts treated as distributions of long-term capital gains with respect to such
shares.
    

         Any loss realized upon the  redemption of shares within six months from
the date of their  purchase  are  disallowed  to the  extent  of any  tax-exempt
dividends  received  with  respect to such  shares,  although  the period may be
reduced under Treasury  regulations  to be prescribed.  Any loss realized on the
redemption  of shares of Scudder  California  Tax Free Fund may be disallowed if
shares  of  such  Fund  are  purchased  within  30 days  before  or  after  such
redemption.

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<PAGE>

         Distributions  derived from interest exempt from regular federal income
tax may subject  corporate  shareholders  to, or increase their liability under,
the 20% corporate  alternative  minimum tax. A portion of such distributions may
constitute a tax preference  item for  shareholders  and may subject them to, or
increase their liability under, the two-tiered  26%/28%  individual  alternative
minimum  tax,  but normally no more than 20% of a Fund's net assets are invested
in  securities  the  interest  on  which  is  such  a tax  preference  item  for
individuals.

         Distributions of taxable net investment income and net realized capital
gains are taxable as  described  above,  whether  received in shares or in cash.
Shareholders  electing to receive distributions in the form of additional shares
have a cost basis for  federal  income tax  purposes  in each share so  received
equal to the net asset value of a share on the reinvestment date.

         All  distributions  of taxable net  investment  income and net realized
capital gains,  whether  received in shares or in cash, must be reported by each
shareholder  on a  federal  income  tax  return.  Dividends  and  capital  gains
distributions  declared and payable to  shareholders of record as of a specified
date in  October,  November  or  December  are deemed to have been  received  by
shareholders  in  December  if  paid  during  January  of  the  following  year.
Shareholders  are also required to report  tax-exempt  interest.  Redemptions of
shares of Scudder  California Tax Free Fund,  including  exchanges for shares of
another  Scudder  fund,  may  result in tax  consequences  (gain or loss) to the
shareholder and are also subject to these reporting requirements.

         Interest  which is  tax-exempt  for  federal  income  tax  purposes  is
included as income for purposes of determining  the amount of social security or
railroad retirement benefits subject to tax.

         Interest on indebtedness  incurred by shareholders to purchase or carry
shares of a Fund is not deductible for federal income tax purposes.  Under rules
used by the IRS to  determine  when  borrowed  funds are used for the purpose of
purchasing  or  carrying  particular  assets,  the  purchase  of  shares  may be
considered to have been made with borrowed  funds even though the borrowed funds
are not directly traceable to the purchase of shares.

         Section  147(a)  of the  Code  prohibits  exemption  from  taxation  of
interest on certain  Governmental  obligations  to persons who are  "substantial
users" (or persons related thereto) of facilities  financed by such obligations.
The Trust has not undertaken any investigation as to the users of the facilities
financed by bonds in a Fund's portfolio.

         Distributions by Scudder California Tax Free Fund result in a reduction
in the net asset value of the Fund's shares.  Should a  distribution  reduce the
net asset  value  below a  shareholder's  cost basis,  such  distribution  would
nevertheless  be taxable to the  shareholder,  to the extent it is derived  from
other than tax-exempt interest, as ordinary income or capital gains as described
above, even though, from an investment  standpoint,  it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to a distribution.  The price of shares purchased at
that time includes the amount of the forthcoming distribution.  Those purchasing
just  prior to a  distribution  receive a partial  return  of  capital  upon the
distribution,  which,  to the  extent it is derived  from other than  tax-exempt
interest, is nevertheless taxable to them.

         All futures contracts entered into by Scudder  California Tax Free Fund
and all listed  nonequity  options  written or purchased by that Fund (including
options on futures contracts and options on securities  indices) are governed by
Section 1256 of the Code.  Absent a tax election to the  contrary,  gain or loss
attributable  to the lapse,  exercise  or closing out of any such  position  are
treated as 60% long-term  and 40%  short-term  capital gain or loss,  and on the
last  trading  day of the Fund's  fiscal  year,  all  outstanding  Section  1256
positions are marked to market (i.e.  treated as if such  positions  were closed
out at  their  closing  price on such  day),  with  any  resulting  gain or loss
recognized  as 60%  long-term  and 40%  short-term  capital gain or loss.  Under
certain  circumstances,  entry into a futures  contract  to sell a security  may
constitute a short sale for federal  income tax purposes,  causing an adjustment
in the holding period of the underlying  security or a  substantially  identical
security in the Fund's portfolio.

         Positions of Scudder California Tax Free Fund which consist of at least
one debt security not governed by Section 1256 and at least one futures contract
or nonequity option governed by Section 1256 which substantially  diminishes the
Fund's  risk of loss with  respect  to such debt  security  will be treated as a
"mixed  straddle."  Mixed straddles are subject to the straddle rules of Section
1092 of the  Code,  the  operation  of  which  may  cause  deferral  of  losses,

                                       59
<PAGE>

adjustments  in the holding  periods of securities  and conversion of short-term
capital losses into long-term  capital losses.  Certain tax elections,  however,
exist for them which reduce or eliminate the operation of these rules. The Trust
monitors the Fund's transactions in options and futures and may make certain tax
elections  in  order to  mitigate  the  operation  of these  rules  and  prevent
disqualification  of the Fund as a  regulated  investment  company  for  federal
income tax purposes.

         Under the  federal  income tax law,  each Fund is required to report to
the IRS all distributions of taxable income and capital gains as well, as in the
case of Scudder  California Tax Free Fund, gross proceeds from the redemption or
exchange  of Fund  shares,  except in the case of certain  exempt  shareholders.
Under  the  backup   withholding   provisions  of  Section  3406  of  the  Code,
distributions  of  taxable  income  and  capital  gains  and  proceeds  from the
redemption  or  exchange  of the shares of a  regulated  investment  company are
generally subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt  shareholders who fail to furnish the investment  company with
their taxpayer identification numbers and with required certifications regarding
their  status  under the  federal  income  tax law.  Under a special  exception,
distributions  of taxable  income and capital gains of a Fund are not subject to
backup withholding if the Fund reasonably  estimates that at least 95% of all of
its distributions  consist of tax-exempt  interest.  However,  in this case, the
proceeds  from the  redemption  or  exchange  of shares may be subject to backup
withholding.  Under another special  exception,  proceeds from the redemption or
exchange  of Fund  shares are exempt from  withholding  if the Fund  maintains a
constant net asset value per share.  Withholding  may also be required if a Fund
is  notified  by the IRS or a broker  that the  taxpayer  identification  number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding  provisions are
applicable,  any  such  distributions  and  proceeds,  whether  taken in cash or
reinvested  in  additional  shares,  are reduced by the  amounts  required to be
withheld.

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

State Taxation

         The Trust is organized as a Massachusetts  business trust,  and neither
the Trust  nor the  Funds are  liable  for any  income or  franchise  tax in the
Commonwealth of  Massachusetts  provided that each Fund qualifies as a regulated
investment company.

   
         In any  year  in  which  the  Funds  qualify  as  regulated  investment
companies under Subchapter M of the Code and are exempt from federal income tax,
the Funds will also be relieved of liability for California  state franchise and
corporate  income tax to the extent  their  earnings  are  distributed  to their
shareholders.  Each  Fund  may be  taxed  on its  undistributed  taxable  income
(including interest income on California  municipal securities for franchise tax
purposes).  If for any year either of the Funds does not qualify for the special
tax treatment afforded regulated investment  companies,  then all of such Fund's
taxable  income may be subject to  California  state  franchise or income tax at
regular corporate rates.
    

         If at the close of each  quarter of its taxable  year,  at least 50% of
the value of the total  assets of a  regulated  investment  company  (or  series
thereof)  consists  of  obligations  the  interest  on  which,  if  held  by  an
individual, is exempt from taxation by California, then the regulated investment
company (or series  thereof)  will be  qualified  to pay  dividends  exempt from
California   personal  income  tax  (hereinafter   referred  to  as  "California
exempt-interest  dividends").  Each of the Funds  intends to  qualify  under the
above requirements so it can pay California exempt-interest dividends.  However,
if a Fund fails to so qualify,  then no part of its  dividends  to  shareholders
will be exempt from California personal income tax.

         Within  60 days  after the close of its  taxable  year,  each Fund will
notify each  shareholder  of the portion of the dividends  paid by the Fund with
respect to such  taxable  year which is exempt from  California  state  personal
income tax.  Interest on obligations of Puerto Rico and other U.S.  Possessions,
as well as interest on  obligations  of the State of California or its political
subdivisions,  may be distributed as California  tax-exempt  interest dividends.
Distributions  from the Funds which are attributable to sources other than those

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<PAGE>

described in the preceding  sentence  generally are taxable to such shareholders
as  ordinary  income.  However,  distributions  derived  from  interest  on U.S.
Government obligations,  if any, may also be designated by a Fund and treated by
shareholders as exempt under the California personal income tax provided the 50%
requirement of the preceding paragraph is satisfied.

         In cases  where  shareholders  of a Fund  are  "substantial  users"  or
"related  persons" with respect to California  municipal  securities held by the
Fund,  such  shareholders  should  consult  their own tax  advisers to determine
whether  California  exempt-interest  dividends paid by the Fund with respect to
such securities  retain  California state personal income tax exclusion for such
shareholders.  In this connection, rules similar to those regarding the possible
unavailability  of exempt  interest  treatment of Fund dividends to "substantial
users"  (or  persons  related  thereto)  for  federal  income tax  purposes  are
applicable for California state tax purposes. See "Federal Taxation" above.

         To the extent,  if any,  dividends paid to  shareholders  of a Fund are
derived  from the excess of net  long-term  capital  gains  over net  short-term
capital losses,  such dividends will not constitute  California  exempt-interest
dividends.  Such dividends  will  generally be taxed as long-term  capital gains
under rules similar to those  regarding the treatment of capital gain  dividends
for federal  income tax purposes;  provided that  California has not adopted the
federal rule that allows a regulated  investment  company to elect to treat such
capital  gains as having been  distributed  even though no capital gain dividend
has actually  been paid.  See "Federal  Taxation"  above.  In the case where the
Funds make this election for federal income tax purposes, any such capital gains
may be subject to tax at the Fund level for  California  franchise  or corporate
income tax purposes.

         Shares of the Funds are not subject to the California property tax.

         Interest on  indebtedness  incurred or  continued  by  shareholders  to
purchase or carry shares of a Fund are not deductible  for  California  personal
income tax purposes.  In addition,  any loss realized by a shareholder of a Fund
upon the sale of shares  held for six  months or less may be  disallowed  to the
extent of any  exempt-interest  dividends  received with respect to such shares.
Moreover, any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains  distribution  on such shares is treated as long-term  capital loss to the
extent of such long-term capital gains distribution.  Finally, any loss realized
upon the  redemption  shares within 30 days before or after the  acquisition  of
other shares of the same Fund may be disallowed under the "wash sale" rules.

         The  foregoing  is only a summary of some of the  important  California
state personal income tax considerations generally affecting the Funds and their
shareholders.  No  attempt  is made to  present a  detailed  explanation  of the
California   state  personal   income  tax  treatment  of  the  Funds  or  their
shareholders,  and this  discussion is not intended as a substitute  for careful
planning.  Further,  it should be noted that the  portion of any Fund  dividends
constituting California  exempt-interest  dividends is excludable for California
state personal  income tax only. Any dividends paid to  shareholders  subject to
California  state  franchise  or  California  state  corporate  income  tax  may
therefore be taxed as ordinary  dividends to such  shareholders  notwithstanding
that all or a portion of  dividends  is exempt from  California  state  personal
income  tax.  Accordingly,   potential  investors  in  a  Fund,  excluding,   in
particular,  corporate  investors  which may be  subject  to  either  California
franchise  tax or  California  corporate  income tax,  should  consult their tax
advisers  with respect to the  application  of such taxes to the receipt of Fund
dividends and as to their own California state tax situation, in general.

                             PORTFOLIO TRANSACTIONS

Brokerage Commissions

         To the maximum extent feasible, the Adviser places orders for portfolio
transactions  for each Fund through the Distributor  which in turn places orders
on behalf of a Fund with  issuers,  underwriters  or other  broker/dealers.  The
Distributor  receives no commissions,  fees or other remuneration from the Funds
for this service. Allocation of brokerage is supervised by the Adviser.

         Each Fund's  purchases and sales of portfolio  securities are generally
placed by the Adviser with primary  market makers for these  securities on a net
basis,  without any brokerage  commission being paid by the Fund.  Trading does,

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<PAGE>

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 involve an underwriting  fee paid to
the underwriter.

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

   
     When it can be done  consistently  with the  policy of  obtaining  the most
favorable net results,  it is the  Adviser's  practice to place such orders with
broker/dealers   who  supply  market   quotations  to  Scudder  Fund  Accounting
Corporation  for  appraisal   purposes  or  who  supply  research,   market  and
statistical information to the Trust or the Adviser. The term "research,  market
and statistical information" includes advice as to the value of securities;  the
advisability of investing in, purchasing or selling securities; the availability
of securities or purchasers or sellers of  securities;  and analyses and reports
concerning  issuers,  industries,   securities,  economic  factors  and  trends,
portfolio  strategy and the performance of accounts.  The Adviser is authorized,
when placing  portfolio  transactions for a Fund, to pay a brokerage  commission
(to the extent  applicable)  in excess of that which another broker might charge
for  executing  the same  transaction,  solely  on  account  of the  receipt  of
research,  market or statistical information.  The Adviser does not place orders
with broker/dealers on the basis that a 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.
    

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

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

Portfolio Turnover

         Each Fund's  portfolio  experiences  turnover.  The portfolio  turnover
rates of Scudder  California  Tax Free Fund  (defined by the SEC as the ratio of
the lesser of sales or purchases of securities  to the monthly  average value of
the portfolio, excluding all securities with remaining maturities at the time of
acquisition  of one year or less) for the fiscal  years ended March 31, 1997 and
1996, were 70.8% and 49.2%, respectively.

                                 NET ASSET VALUE

Scudder  California  Tax Free Fund. The net asset value of shares of the Fund is
computed  as of the close of  regular  trading on the  Exchange  on each day the
Exchange is open for trading (the "Value Time"). The Exchange is scheduled to be
closed on the following holidays:  New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset
value per share is  determined  by dividing  the value of the total  assets of a
Fund, less all liabilities, by the total number of shares outstanding.

   
         An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. 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"). If there
are no bid and asked  quotations,  the security is valued at the most recent bid
quotation.  An  unlisted  equity  security  which is traded on The Nasdaq  Stock
    
                                       62
<PAGE>

   
Market  ("Nasdaq") is valued at the most recent sale price. If there are no such
sales, the security is valued at the most recent bid quotation.  The value of an
equity  security  not  quoted  on the  Nasdaq  System,  but  traded  in  another
over-the-counter  market,  is the most recent  sale price.  If there are no such
sales,  the security is valued at the Calculated Mean. If there is no Calculated
Mean, the security is valued at the most recent bid quotation.
    

         Debt securities, other than short-term securities, are valued at prices
supplied  by the Fund's  pricing  agent  which  reflect  broker/dealer  supplied
valuations and  electronic  data  processing  techniques.  Short-term  purchased
securities  with  remaining  maturities of sixty days or less shall be valued by
the amortized cost method,  which the Board believes  approximates market value.
If it is not  possible to value a  particular  debt  security  pursuant to these
valuation  methods,  the value of such security is the most recent bid quotation
supplied by a bona fide marketmaker.  If no such bid quotation is available, the
Adviser may calculate the price of that debt  security,  subject to  limitations
established by the Board.

         Option contracts on securities, currencies, futures and other financial
instruments  traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported,  the value is the Calculated Mean, or if
the Calculated Mean is not available,  the most recent bid quotation in the case
of purchased options,  or the most recent asked quotation in the case of written
options.  Option contracts traded over-the-counter are valued at the most recent
bid  quotation  in the case of  purchased  options and at the most recent  asked
quotation in the case of written  options.  Futures  contracts are valued at the
most recent settlement  price.  Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.

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

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

Scudder California Tax Free Money Fund. The net asset value per share of Scudder
California  Tax Free Money Fund is determined  (twice daily as of twelve o'clock
noon and the close of trading on the  Exchange) on each day when the Exchange is
open for trading (as noted  above).  Net asset value per share is  determined by
dividing the total assets of the Fund, less all of its liabilities, by the total
number of shares of the Fund outstanding.  The valuation of the Fund's portfolio
securities is based upon their  amortized  cost which does not take into account
unrealized securities gains or losses. This method involves initially valuing an
instrument  at its cost and  thereafter  amortizing  to maturity any discount or
premium,  regardless of the impact of  fluctuating  interest rates on the market
value of the instrument.  While this method provides certainty in valuation,  it
may result in periods  during which value,  as determined by amortized  cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
During periods of declining  interest  rates,  the quoted yield on shares of the
Fund may tend to be higher than a like computation made by a fund with identical
investments  utilizing  a method of  valuation  based  upon  market  prices  and
estimates of market  prices for all of its portfolio  instruments.  Thus, if the
use of amortized cost by the Fund resulted in a lower aggregate  portfolio value
on a particular day, a prospective  investor in the Fund would be able to obtain
a somewhat  higher  yield if he purchased  shares of the Fund on that day,  than
would result from  investment  in a fund  utilizing  solely market  values,  and
existing  investors  in the Fund  would  receive  less  investment  income.  The
converse  would apply in a period of rising  interest  rates.  Other  assets for
which market  quotations  are not readily  available are valued in good faith at
fair value using methods  determined by the Trustees and applied on a consistent
basis.  For example,  securities with remaining  maturities of more than 60 days
for which market quotations are not readily available are valued on the basis of
market quotations for securities of comparable  maturity,  quality and type. The
Trustees  review the  valuation  of the  Fund's  securities  through  receipt of
regular   reports   from  the  Adviser  at  each  regular   Trustees'   meeting.
Determinations  of net  asset  value  made  other  than as of the  close  of the

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<PAGE>

Exchange may employ  adjustments  for changes in interest rates and other market
factors.

                             ADDITIONAL INFORMATION

Experts

         The Financial  highlights of each Fund included in the  prospectus  and
the  Financial  Statements  incorporated  by  reference  in  this  Statement  of
Additional  Information  have been so included or  incorporated  by reference in
reliance on the report of Coopers & Lybrand  L.L.P.  , One Post  Office  Square,
Boston, MA 02109,  independent  accountants,  and given on the authority of that
firm as experts in accounting and auditing.

Shareholder Indemnification

         The  Trust  is  an  organization  of  the  type  commonly  known  as  a
Massachusetts  business trust. Under  Massachusetts law,  shareholders of such a
trust may, under certain  circumstances,  be held personally  liable as partners
for the  obligations of the Trust.  The Declaration of Trust contains an express
disclaimer of shareholder  liability in connection  with each Fund's property or
the acts,  obligations  or affairs of the Trust.  The  Declaration of Trust also
provides  for  indemnification  out of the  respective  Fund's  property  of any
shareholder  held  personally  liable for the claims and  liabilities to which a
shareholder  may become subject by reason of being or having been a shareholder.
Thus,  the  risk  of a  shareholder  incurring  financial  loss  on  account  of
shareholder liability is limited to circumstances in which the Fund itself would
be unable to meet its obligations.

Ratings of Municipal Obligations

         The six highest  ratings of Moody's for municipal bonds are Aaa, Aa, A,
Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be of the best  quality.
Bonds rated Aa are judged to be of high quality by all standards.  Together with
the Aaa group,  they comprise what are generally  known as  high-quality  bonds.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal  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.  Securities rated
Baa are considered  medium grade,  with factors giving security to principal and
interest adequate at present but may be unreliable over any period of time. Such
bonds have  speculative  elements as well as  investment-grade  characteristics.
Securities rated Ba or below by Moody's are considered  below investment  grade,
with  factors  giving   security  to  principal  and  interest   inadequate  and
potentially  unreliable  over any period of time.  Such  securities are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.

         Moody's  ratings for  municipal  notes and other  short-term  loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences  between short-term and long-term credit risk. Loans bearing the
designation  MIG1  are  of the  best  quality,  enjoying  strong  protection  by
establishing  cash  flows of funds for their  servicing  or by  established  and
broad-based  access to the market for  refinancing,  or both.  Loans bearing the
designation MIG2 are of high quality,  with margins of protection ample although
not as large as in the preceding group.

         The six highest ratings of S&P for municipal bonds are AAA (Prime),  AA
(High-grade),  A  (Good-grade),  BBB  (Investment-grade)  and  BB  and B  (Below
investment-grade).  Bonds rated AAA have the highest rating assigned by S&P to a
municipal obligation.  Capacity to pay interest and repay principal is extremely
strong.  Bonds rated AA have a very strong  capacity to pay  interest  and repay
principal and differ from the highest rated issues only in a small degree. Bonds
rated A have a strong capacity to pay principal and interest,  although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions.  Bonds rated BBB have an adequate capacity to pay principal
and interest.  Adverse economic conditions or changing  circumstances are likely
to lead to a weakened  capacity to pay interest and repay principal for bonds of
this category than for bonds of higher rated categories.  Securities rated BB or
below by S&P are considered below investment grade, with factors giving security
to principal and interest inadequate and potentially  unreliable over any period

                                       64
<PAGE>

of time.  Such  securities are commonly  referred to as "junk" bonds and as such
they carry a high margin of risk.

         S&P's top ratings for  municipal  notes  issued after July 29, 1984 are
SP-1 and SP-2.  The  designation  SP-1  indicates a very strong  capacity to pay
principal  and interest.  A "+" is added for those issues  determined to possess
overwhelming  safety   characteristics.   An  "SP-2"  designation   indicates  a
satisfactory capacity to pay principal and interest.

         The six highest  ratings of Fitch for  municipal  bonds are AAA, AA, A,
BBB, BB and B. 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 rates.
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 effects on these bonds,  and therefore
impair timely payment.  The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with greater ratings. Securities
rated BB or below by Fitch are considered below investment  grade,  with factors
giving security to principal and interest inadequate and potentially  unreliable
over any period of time.  Such  securities  are  commonly  referred to as "junk"
bonds and as such they carry a high margin of risk.

Commercial Paper Ratings

         Commercial  paper  rated  A-1  or  better  by  S&P  has  the  following
characteristics:  liquidity  ratios  are  adequate  to meet  cash  requirements;
long-term  senior  debt is rated "A" or better,  although  in some  cases  "BBB"
credits  may be  allowed;  the  issuer  has  access to at least  two  additional
channels of  borrowing;  and basic  earnings  and cash flow have an upward trend
with allowance made for unusual circumstances.  Typically, the issuer's industry
is well  established  and the issuer has a strong  position within the industry.
The reliability and quality of management are unquestioned.

         The rating Prime-1 is the highest  commercial  paper rating assigned by
Moody's.  Among the factors  considered by Moody's in assigning  ratings are the
following:  (1)  evaluation  of the  management  of  the  issuer;  (2)  economic
evaluation  of  the  issuer's   industry  or  industries  and  an  appraisal  of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's  products in relation to competition and customer  acceptance;  (4)
liquidity;  (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten  years;  (7)  financial  strength  of a parent  company  and the
relationship which exists with the issuer; and (8) recognition by the management
of obligations  which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.

         The rating F-1+ is the  highest  rating  assigned  by Fitch.  Among the
factors  considered  by Fitch in  assigning  this rating are:  (1) the  issuer's
liquidity;  (2) its standing in the industry;  (3) the size of its debt; (4) its
ability to service its debt;  (5) its  profitability;  (6) its return on equity;
(7) its  alternative  sources of  financing;  and (8) its  ability to access the
capital markets.  Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1+.

         Relative  strength or weakness of the above  factors  determine how the
issuer's commercial paper is rated within the above categories.

                                       65
<PAGE>

Glossary

1.       Bond

         A contract by an issuer  (borrower)  to repay the owner of the contract
         (lender)  the face  amount of the bond on a  specified  date  (maturity
         date) and to pay a stated rate of interest until maturity.  Interest is
         generally  paid  semi-annually  in amounts equal to one half the annual
         interest rate.

2.       Debt Obligation

         A  general  term  which   includes   fixed  income  and  variable  rate
         securities,  obligations  issued  at a  discount  and  other  types  of
         securities which evidence a debt.

3.       Discount and Premium

         A discount  (premium)  bond is a bond  selling in the market at a price
         lower (higher) than its face value.  The amount of the market  discount
         (premium) is the difference between market price and face value.

4.       Maturity

         The date on which the principal  amount of a debt obligation  comes due
         by the terms of the instrument.

5.       Municipal Obligation

         Obligations  issued  by  or  on  behalf  of  states,   territories  and
         possessions of the U.S.,  their  political  subdivisions,  agencies and
         instrumentalities,  the  District of Columbia  and other  issuers,  the
         interest  from which is, at the time of issuance in the opinion of bond
         counsel for the issuers, exempt from regular federal income tax.

6.       Net Asset Value Per Share

         The  value  of  each  share  of  a  Fund  for  purposes  of  sales  and
redemptions.

7.       Net Investment Income

         The net  investment  income of each Fund is  comprised  of its interest
         income,  including  amortizations  of original  issue  discounts,  less
         amortizations of premiums and expenses paid or accrued.

8.       Unit Investment Trust

         An  investment  company  organized  under a trust or similar  agreement
         which  does  not  have a  board  of  trustees  and  which  issues  only
         redeemable securities each of which represents an undivided interest in
         a portfolio of specified securities.

Other Information

         The  CUSIP  number  of  Scudder  California  Tax  Free  Money  Fund  is
811115-20-3.   The  CUSIP  number  of  Scudder   California  Tax  Free  Fund  is
811115-10-4.

         Each Fund has a fiscal year ending on March 31.

         Portfolio  securities of each Fund are held  separately,  pursuant to a
custodian  agreement,  by the  Funds'  custodian,  State  Street  Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02101.

         The law firm of Willkie Farr & Gallagher is counsel for the Trust.

                                       66
<PAGE>


         The name "Scudder  California Tax Free Trust" is the designation of the
Trustees for the time being under an Amended and Restated  Declaration  of Trust
dated  December 8, 1987, as amended from time to time,  and all persons  dealing
with a Fund must look solely to the property of that Fund for the enforcement of
any  claims  against  a Fund  as  neither  the  Trustees,  officers,  agents  or
shareholders  assume any  personal  liability  for  obligations  entered into on
behalf of a Fund.  No series of the Trust is liable for the  obligations  of any
other series of the Trust. Upon the initial purchase of shares,  the shareholder
agrees to be bound by the Fund's  Declaration of Trust,  as amended from time to
time.  The  Declaration  of Trust of the  Trust is on file at the  Massachusetts
Secretary of State's Office in Boston, Massachusetts. All persons dealing with a
Fund must look only to the assets of that Fund for the enforcement of any claims
against such Fund as no other series of the Trust  assumes any  liabilities  for
obligations entered into on behalf of a Fund.

   
         Scudder Fund Accounting  Corporation,  Two International Place, Boston,
Massachusetts  02110-4103, a subsidiary of the Adviser, computes net asset value
for the  Funds.  Scudder  California  Tax Free  Money  Fund  pays  Scudder  Fund
Accounting  Corporation an annual fee equal to 0.0200% of the first $150 million
of the  average  daily  net  assets,  0.0060%  of such  assets in excess of $150
million and 0.0035% of such  assets in excess of $1  billion,  plus  holding and
transaction  charges.  Scudder  California  Tax  Free  Fund  pays  Scudder  Fund
Accounting  Corporation  an annual fee equal to 0.024% of the first $150 million
of the average daily net assets, 0.007% of such assets in excess of $150 million
and 0.004% of such assets in excess of $1 billion,  plus holding and transaction
charges for this  service.  For the fiscal year ended  March 31,  1995,  Scudder
California  Tax Free Money Fund and Scudder  California  Tax Free Fund  incurred
fees to Scudder Fund Accounting  Corporation amounting to $203,558 and $188,774,
respectively.  For the fiscal year ended March 31, 1996,  Scudder California Tax
Free Money Fund and Scudder  California  Tax Free Fund  incurred fees to Scudder
Fund Accounting Corporation amounting to $30,000 and $66,107,  respectively. For
the fiscal year ended March 31, 1997, Scudder California Tax Free Money Fund and
Scudder  California  Tax Free Fund  incurred  fees to  Scudder  Fund  Accounting
Corporation amounting to $30,000 and $66,630,  respectively, of which $2,500 and
$5,640 were unpaid at March 31, 1997, respectively.

         Scudder Service Corporation (the "Service Corporation"), P.O. Box 2291,
Boston,  Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
shareholder  service  and  dividend-paying  agent  for the  Funds  and  provides
subaccounting  and  recordkeeping  services for shareholder  accounts in certain
retirement  and employee  benefit plans.  Scudder  California Tax Free Fund pays
Service  Corporation  an annual fee of $29.00 for each account  maintained for a
shareholder.  Scudder California Tax Free Money Fund pays Service Corporation an
annual  fee  of  $34.50.  The  Service  Corporation  fees  incurred  by  Scudder
California  Tax Free Money Fund and Scudder  Tax Free Fund for the fiscal  years
ended March 31, 1997, 1996 and 1995 amounted to $67,597, $71,043 and $84,167 and
$159,122, $164,689 and $188,744,  respectively, of which $5,620 and $13,336 were
unpaid at March 31, 1997, respectively.
    

         The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration  Statement which the Trust has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration  Statement for further information with respect to the Funds
and the securities offered hereby. This Registration  Statement is available for
inspection by the public at the SEC in Washington, D.C.

                              FINANCIAL STATEMENTS

Scudder California Tax Free Money Fund

         The  financial  statements,  including  the  investment  portfolio,  of
Scudder California Tax Free Money Fund,  together with the Report of Independent
Accountants,  Financial  Highlights and the Notes to Financial Statements in the
Annual  Report  to the  Shareholders  of the Fund  dated  March  31,  1997,  are
incorporated  herein by  reference  and are  hereby  deemed to be a part of this
Statement of Additional Information.

Scudder California Tax Free Fund

         The  financial  statements,  including  the  investment  portfolio,  of
Scudder  California  Tax Free  Fund,  together  with the  Report of  Independent
Accountants,  Financial  Highlights and the Notes to Financial Statements in the
Annual  Report  to the  Shareholders  of the Fund  dated  March  31,  1997,  are
incorporated  herein by  reference  and are  hereby  deemed to be a part of this
Statement of Additional Information.

                                       67
<PAGE>


     Supplement to Statement of Additional Information dated August 1, 1997
                            California Tax Free Trust

The following text replaces the last paragraph  under the  "Responsibilities  of
the Board--Board and Committee Meetings" in the REMUNERATION section:

The  Independent  Trustees  met ten  times  during  1996,  including  Board  and
Committee meetings and meetings to review each Fund's  contractual  arrangements
as described  above.  All of the Independent  Trustees  attended 98% of all such
meetings.






August 5, 1997

<PAGE>



         Pursuant to Rule 497(c) under the  Securities  Act of 1933, as amended,
please accept this letter as  certification  that the annual report for the Fund
does not differ from that  contained  in  Post-Effective  Amendment  No. 16 (the
"Amendment") to the Trust's Registration  Statement on Form N-1A. This Amendment
was filed electronically on July 30, 1997.








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