[LOGO] Scudder Investments(SM)
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BOND
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Scudder GNMA Fund
Annual Report
September 30, 2000
The fund seeks to produce a high level of income while actively seeking to
reduce downside risk compared with other GNMA mutual funds.
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Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
9 Portfolio Management Discussion
15 Investment Portfolio
17 Financial Statements
20 Financial Highlights
22 Notes to Financial Statements
32 Report of Independent Accountants
33 Tax Information
34 Shareholder Meeting Results
35 Officers and Trustees
36 Investment Products and Services
38 Account Management Resources
2 Scudder GNMA Fund
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Scudder GNMA Fund
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Class AARP ticker symbol AGNMX fund number 193
Class S ticker symbol SGMSX fund number 006
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Date of o In the face of high levels of volatility in the fixed
Inception: fund number 006 income markets, GNMA securities
11/30/84 performed relatively well over the past 12 months,
thanks in part to their high quality, government
backing, and the fact that relatively few homeowners
Total Net refinanced their properties.
Assets as of
9/30/00 -- o The fund's Class AARP shares' total return of 6.62%
was lower than that of the fund's benchmark, the
Class AARP: unmanaged Lehman Brothers GNMA Index, but higher than
$3,703.4 million the average return of comparable mutual funds
investing in GNMA securities.
Class S:
$305.6 million o Reflecting a rising interest rate environment, the of
fund's SEC 30-day yield rose from 6.10% to 6.51% over
the 12-month period.
o The fund continued to provide attractive returns on a
risk-adjusted basis as the fund maintained its 4-star
overall Morningstar Rating(TM) among 1,741 taxable
bond funds as of September 30, 2000.^1
^1 Morningstar proprietary ratings reflect historical risk-adjusted performance
as of September 30, 2000. Ratings are subject to change every month and are
calculated for the fund's three-, five-, and ten-year average annual returns
in excess of the 90-day Treasury bill return with appropriate fee adjustments
and a risk factor that reflects fund performance below 90-day T-bill returns.
In its broad asset class, 10% of funds receive 5 stars, the next 22.5%
receive 4 stars, and the next 35% receive 3 stars. In the taxable bond
category, the fund received a 4-star rating for the three- and five-year
periods, and a 3-star rating for the ten-year period among 1741, 1300, and
386 funds, respectively. Past performance is no guarantee of future results.
Morningstar ratings are for the Class AARP shares only.
3 Scudder GNMA Fund
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Letter from the Fund's President
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Dear Shareholders,
This past year was marked by exceptional volatility in interest rates. On the
inflation front, overall consumer prices were relatively tame, although crude
oil prices soared past $35 a barrel, raising concerns among economists about the
inflationary impact of high heating oil prices and natural gas shortages. In the
bond market, short-term rates rose as the Federal Reserve Board tightened credit
to reduce the likelihood of future inflation while long-term interest rates fell
in response to the Treasury's debt buyback program. This resulted in an unusual
situation where interest rates on long-term Treasuries were lower than rates on
short-term instruments -- the first time this has happened since the mid-1990s.
At the same time, mortgage interest rates for consumers reached their highest
levels in five years, increasing the income potential of new GNMA (Government
National Mortgage Association) securities. In addition, with the rise in
mortgage rates, relatively few homeowners refinanced their mortgages, helping
boost the performance of previously issued GNMA securities, while keeping their
price volatility less than that of long-term Treasuries.
Although the return of the Class AARP shares of the fund did lag that of its
benchmark, it was ahead of the average GNMA fund. While the fund seeks to exceed
the performance of its benchmark
4 Scudder GNMA Fund
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and peers in rising markets and to decline less in falling markets, we believe
the Scudder GNMA Fund's risk-adjusted 4-star Morningstar Rating(TM) illustrates
the fund's success in delivering attractive returns. For a detailed discussion
of management's investment strategy and portfolio positioning, see page 9.
Thank you for your continued interest in Scudder GNMA Fund. If you have any
questions about your investment, please call Scudder Investor Information at
1-800-SCUDDER (1-800-728-3337) or visit our Web site at www.scudder.com.
Sincerely,
/s/ Lin Coughlin
Linda C. Coughlin
President
Scudder GNMA Fund
5 Scudder GNMA Fund
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Performance Update
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September 30, 2000
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Growth of a $10,000 Investment
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A GRAPH IN THE FORM OF A LINE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
<TABLE>
<S> <C> <C> <C>
Scudder GNMA Fund Lehman Brothers
-- Class AARP GNMA Index*
90 10000 90 10000
91 11412 91 11660
92 12689 92 12993
93 13436 93 13850
94 13181 94 13682
95 14540 95 15606
96 15236 96 16523
97 16529 97 18221
98 17919 98 19746
99 18096 99 20218
00 19291 00 21773
</TABLE>
Yearly periods ended September 30
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Fund Index Comparison
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<TABLE>
<S> <C> <C> <C>
Total Return
Growth of Average
Period ended 9/30/2000 $10,000 Cumulative Annual
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Scudder GNMA Fund -- Class AARP
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1 year $ 10,662 6.62% 6.62%
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5 year $ 13,270 32.70% 5.82%
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10 year $ 19,294 92.94% 6.79%
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Lehman Brothers GNMA Index*
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1 year $ 10,769 7.69% 7.69%
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5 year $ 13,952 39.52% 6.88%
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10 year $ 21,773 117.73% 8.08%
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</TABLE>
6 Scudder GNMA Fund
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Returns and Per Share Information
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THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE ILLUSTRATING THE FUND TOTAL
RETURN (%) AND INDEX^* TOTAL RETURN (%)
Yearly periods ended September 30
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Fund Total
Return (%) 14.12 11.19 5.89 -1.90 10.31 4.79 8.49 8.40 .99 6.62
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Index Total
Return (%) 16.60 11.43 6.59 -1.21 14.06 5.88 10.27 8.37 2.39 7.69
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Net Asset
Value ($) 15.72 16.19 15.96 14.73 15.19 14.91 15.16 15.40 14.61 14.60
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Income
Dividends ($) 1.26 1.22 1.15 .93 1.01 .99 .98 .99 .94 .94
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</TABLE>
* The unmanaged Lehman Brothers GNMA Index is a market value-weighted measure
of all fixed-rate securities backed by mortgage pools of the Government
National Mortgage Association. Index returns assume reinvestment of dividends
and, unlike fund returns, do not reflect any fees or expenses.
On July 17, 2000, existing shares of the Fund were redesignated as Class AARP
shares. In addition, the Fund commenced offering Class S shares. The total
return information provided is for the Fund's Class AARP shares.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may
be worth more or less than when purchased.
7 Scudder GNMA Fund
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Portfolio Summary
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September 30, 2000
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Diversification
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS SHOWN BELOW.
The fund has had a high
Government National concentration of assets
Mortgage Association 95% in GNMAs, which we felt
U.S. Treasury Obligations 5% could better help us
Cash Equivalents, net 0% meet our objectives of
-------------------------------- high current income and
100% less price volatility.
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GNMA Coupons*
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS SHOWN BELOW.
Over the past several
0-Less than 7% 25% months, management has
7-Less than 8% 49% increased the fund's
8% or greater 26% position in GNMAs with
------------------------------------ coupons of 7% or greater.
100%
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*Excludes Cash Equivalents and
U.S. Treasury Obligations
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Effective Maturity
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS SHOWN BELOW.
We have positioned
0-5 years 4% the fund to place
5-8 years 30% greater emphasis on
Greater than 8 years 66% intermediate-term GNMAs
------------------------------------ to maximize income
100% potential, while giving
------------------------------------ us the flexibility to
respond to change in the
interest rate climate.
For more complete details about the Fund's investment portfolio, see page 15. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8 Scudder GNMA Fund
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Portfolio Management Discussion
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September 30, 2000
In the following interview, portfolio managers Richard L. Vandenberg, Scott E.
Dolan, and John E. Dugenske discuss their strategy for the fund and the market
environment.
Q: How did the government bond market behave between September 1999 and
September 2000?
A: Strong economic growth prompted the Federal Reserve Board (the Fed)
to raise its short-term interest-rate target by 125 basis points
(1.25%) to 6.50%. However, between September 30, 1999 and September 30,
2000, long-term Treasury bond prices fell. This resulted in an
"inverted" yield curve where interest rates on long-term Treasuries
were lower than rates on short-term -- the first time this has happened
since the mid-1990s. By September 30, 2000, three-month Treasury bills
yielded 6.20%, some 40 basis points (0.40%) more than 10-year Treasury
bonds. Mortgage interest rates for consumers reached their highest
levels in five years, increasing the income potential of mortgage
securities. Meanwhile, crude oil prices soared past $35 a barrel, and
while overall consumer prices were relatively tame, as the fiscal year
drew to a close, many economists remained concerned about the
inflationary impact of high heating oil prices and natural gas
shortages.
This past winter, the mortgage market in general was negatively
affected by comments from the Treasury that appeared to bring into
question the implicit government guarantees associated with securities
issued by the Federal National Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage Corporation (Freddie Mac), two of the
largest private mortgage market participants. GNMA securities, which
are backed by the full faith and credit of the U.S. Treasury,
outperformed Fannie Mae and Freddie Mac securities and other forms of
mortgage debt as investors became more risk-averse between September
and March.
9 Scudder GNMA Fund
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Q: How did the fund perform in this environment?
A: The fund's Class AARP shares' total return of 6.62% was lower than
its benchmark, but higher than the average return of comparable mutual
funds investing in GNMA securities for the 12-month period ended
September 30, 2000. The unmanaged Lehman Brothers GNMA Index rose 7.69%
for the period, while the average GNMA fund rose 6.53%. While we are
pleased that the fund outperformed the average GNMA fund -- in other
words, that its total return exceeded that of the average fund -- our
goal is to be in the top 25% of GNMA funds over the long term.
Q: What have you been doing to help reach your goal of being in the top
25% of GNMA funds?
A: First, let's talk about how we manage the fund. We strive to provide
high current income and safety of principal for the fund, while also
seeking total return. We use a "top-down" approach to pursue this
objective, focusing on the portfolio's sensitivity to changes in
interest rates, the fund's positioning with respect to the yield curve,
and the allocation between GNMAs and Treasury securities. During much
of the past year, we have maintained a high concentration of assets in
GNMAs, which we felt could provide more current income than Treasuries.
Within the GNMA universe, we have emphasized intermediate-term GNMAs,
which we believe can help us earn attractive levels of income compared
to shorter-term securities. Also, we believe our emphasis on
intermediate-term GNMAS gives us greater flexibility to shift either to
shorter- or longer-term securities in the event of a change in the
interest rate climate than if we focused on longer-duration issues.
Although we are not completely satisfied with our performance for the
fiscal year, and while the fund may be challenged over shorter time
periods, we believe our disciplined investment process should provide
stronger risk-adjusted returns over the long term.
10 Scudder GNMA Fund
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GNMA securities in a nutshell
Government National Mortgage Association (GNMA) securities, commonly called
"Ginnie Mae" securities, are backed by the full faith and credit of the U.S.
government with respect to the timely payment of interest and principal. Each
GNMA represents a pool of mortgages from which investors receive principal
and interest payments each month. If interest rates fall, homeowners tend to
refinance and pay off their existing mortgages early, and mortgage-backed
investors are forced to reinvest the proceeds at lower prevailing rates. If
interest rates rise, principal tends to be repaid more slowly, but GNMA
investors may receive lower total returns as previously issued securities
with lower coupon rates are worth less. As a result, GNMA funds tend to
perform best in environments when interest rates are not changing
significantly.
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Q: How do you select securities for the fund?
A: To identify securities with the highest potential returns, we
undertake an extensive analysis of the prepayment expectations -- the
rate at which homeowners might pay off their mortgages early or
refinance mortgages to take advantage of lower interest rates -- of
individual GNMAs. We try to manage the fund's exposure to prepayment
risk by analyzing refinancing possibilities. This includes adjusting
the fund's weighting between seasoned, or older mortgages, which tend
to have more predictable prepayment characteristics, and those that
have been issued more recently. We also invest in Treasury securities,
which have lower yields but tend to provide better performance when
interest rates are declining.
Q: The Federal Reserve Board hasn't raised interest rates since May.
What impact has this had on the markets?
A: First, the yield curve has steepened, which means short-term
interest rates have declined more than long-term rates. This may
indicate some investor concern about long-term trends in inflation or
government spending. Second, the fluctuation in spreads (the difference
in interest rates) between 10-year Treasuries and comparable maturity
GNMA securities has narrowed. In
11 Scudder GNMA Fund
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the first half of the fiscal year, yield spreads ranged from 120 to 180
basis points (1.20 to 1.80 percentage points). In the second half, the
trading range was more narrow, with GNMAs yielding from 160 to 180
basis points (1.60 to 1.80 percentage points) more than Treasuries.
This is an indication that investors are asking to be paid more for the
slight additional risk of GNMAs compared to Treasuries. In July, short-
and intermediate-term securities began outperforming long-term
securities, partly reversing the strong performance we had been getting
from longer-term bonds.
Q: Is there any way to estimate how much a given change in interest
rates can affect total return from bonds?
A: Generally, a 100-basis-point increase in interest rates translates
into a price decline of slightly more than 1.00% for a bond or
fixed-income mutual fund that has a duration of one year. Bond prices
and fixed-income mutual fund net asset values are also affected by
market factors such as credit risk and, for GNMA securities, the risk
that borrowers will prepay loans. (Operating expenses also have an
effect on mutual fund net asset values.) We think a period of stable
interest rates would be beneficial for the fund. Typically, GNMAs
outperform Treasuries in a stable rate environment because investors
are more willing to assume some risk in exchange for higher yield. We
believe the fund's GNMA position may serve us well in such an
environment.
Q: What's your outlook for the year ahead?
A: While it appears that the Fed has tamed inflation expectations and
that U.S. economic growth is slowing, a lot of variables remain that
could cause a resurgence in interest rates, particularly energy,
national fiscal policy, and relatively high levels of consumer
consumption. Higher oil prices usually translate into increased
inflation risk. However, we are encouraged by other strong trends in
the economy that have been supportive of low inflation, particularly
high productivity levels. In addition, as a result
12 Scudder GNMA Fund
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of tax increases and nine years of economic growth, the U.S. government
posted a record budget surplus of $237 billion for its fiscal year
ended September 30, 2000, which may enable it to pay off some of the
nation's debt. When Washington borrows less and repays debt, it frees
up resources that generally can be put to more productive use in the
private sector.
At the start of the fund's fiscal year, 10-year Treasuries yielded
5.88%, 92 basis points (0.92%) higher than six-month Treasury bills,
which were yielding 4.96%. By September 30, 2000, the yield curve had
inverted so that six-month Treasury bills yielded more than any other
segment of the curve. While we believe the Treasury's buyback program
should support long-term Treasury prices in the coming months, history
has shown that the yield curve does not remain inverted for an extended
period. While an investment in the fund is not guaranteed, we continue
to believe that the fund's competitive returns and risk-adjusted
performance should provide some level of comfort to investors seeking
income and a relatively conservative holding for their portfolio.
13 Scudder GNMA Fund
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Scudder GNMA Fund:
A Team Approach to Investing
Scudder GNMA Fund is managed by a team of Scudder Kemper Investments,
Inc. (the "Adviser") professionals, each of whom plays an important
role in the fund's management process. Team members work together to
develop investment strategies and select securities for the fund's
portfolio. They are supported by the Adviser's large staff of
economists, research analysts, traders, and other investment
specialists who work in offices across the United States and abroad.
The Adviser believes that a team approach benefits fund investors by
bringing together many disciplines and leveraging the firm's extensive
resources.
Lead portfolio manager Richard L. Vandenberg joined the Adviser as a
portfolio manager in 1996. Mr. Vandenberg joined the fund team in 1998
and is responsible for setting the fund's investment strategy and
overseeing security selection for the fund's portfolio. Mr. Vandenberg
has over 24 years of investment management experience.
Portfolio manager Scott E. Dolan joined the Adviser in 1989. Mr. Dolan
joined the fund team in 1997 and has over 10 years of investment
industry experience.
Portfolio manager John E. Dugenske joined the Adviser in 1998. Mr.
Dugenske joined the fund team in 2000 and has 10 years of investment
industry experience.
14 Scudder GNMA Fund
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Investment Portfolio as of September 30, 2000
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<TABLE>
<S> <C> <C>
Principal
Amount ($) Value ($)
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Repurchase Agreements 5.5%
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Chase Securities, Inc., 6.6%, to be repurchased
at $60,066,000 on 10/5/2000*.................... 60,000,000 60,000,000
Morgan Stanley, Inc., 6.6%, to be repurchased
at $70,038,500 on 10/2/2000*.................... 70,000,000 70,000,000
Morgan Stanley, Inc., 6.55%, to be repurchased
at $100,090,972 on 10/4/2000*................... 100,000,000 100,000,000
State Street Bank and Trust Company, 6.48%, to be
repurchased at $3,078,662 on 10/2/2000*......... 3,077,000 3,077,000
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Total Repurchase Agreements (Cost $233,077,000) 233,077,000
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U.S. Treasury Obligations 5.1%
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U.S. Treasury Bond, 6.5%, 2/15/2010................ 86,100,000 89,718,783
U.S. Treasury Bond, 8%, 11/15/2021 (d)............. 52,000,000 63,505,000
U.S. Treasury Note, 5.5%, 1/31/2003................ 22,000,000 21,769,660
U.S. Treasury Note, 6.75%, 5/15/2005............... 42,000,000 43,509,480
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Total U.S. Treasury Obligations (Cost $219,004,699) 218,502,923
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Government National Mortgage Association 89.4%**
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6% with various maturities to 3/1/2029 (c)......... 38,742,019 36,362,252
6.5% with various maturities to 10/1/2030 (b)(c)... 859,110,956 829,065,199
7% with various maturities to 10/1/2030 (b)(c...... 1,102,783,768 1,087,959,493
7.5% with various maturities to 10/1/2030 (b)(c)... 860,218,853 863,282,318
8% with various maturities to 10/1/2030 (b)(c)..... 557,171,466 567,136,837
8.5% with various maturities to 8/15/2030 (c)...... 144,859,902 148,907,402
9% with various maturities to 10/1/2030 (b)(c)..... 237,478,092 246,134,900
9.5% with various maturities to 1/15/2021 (c)...... 38,403 40,071
10.5% with various maturities to 1/20/2021(c)...... 4,520,841 4,889,220
11.5% with various maturities to 2/15/2016 (c)..... 1,273,275 1,401,883
12% with various maturities to 7/15/2015 (c)....... 2,347,640 2,610,331
12.5% with various maturities to 8/15/2015 (c)..... 1,993,622 2,239,269
13% with various maturities to 7/15/2015 (c)....... 238,268 270,278
13.5% with various maturities to 10/15/2014 (c).... 344,656 395,211
14% with various maturities to 12/15/2014 (c)...... 206,601 238,035
14.5% with various maturities to 10/15/2014 (c).... 62,928 73,841
The accompanying notes are an integral part of the financial statements.
15 Scudder GNMA Fund
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Principal
Amount ($) Value ($)
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15% with various maturities to 10/15/2012 (c)...... 164,598 193,200
16% with various maturities to 2/15/2012 (c)....... 47,917 56,619
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Total Government National Mortgage Association (Cost $3,798,449,825) 3,791,256,359
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Total Investment Portfolio -- 100.0% (Cost $4,250,531,524) (a) 4,242,836,282
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</TABLE>
(a) The cost for federal income tax purposes was $4,250,531,524. At September
30, 2000, net unrealized depreciation for all securities based on tax cost
was $7,695,242. This consisted of aggregate gross unrealized appreciation
for all investments in which there was an excess of value over tax cost of
$15,877,485 and an aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value of
$23,572,727.
(b) When-issued or forward delivery pools included.
(c) At September 30, 2000, this security, in part or in whole, has been
segregated to cover when-issued or forward delivery securities.
(d) At September 30, 2000, this security has been pledged to cover, in whole
or in part, initial margin requirements for open futures contracts.
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At September 30, 2000, open futures contracts sold short were as follows:
<TABLE>
<S> <C> <C> <C> <C>
Aggregate
Face
Futures Expiration Contracts Value ($) Value ($)
------------------------------- ---------- --------- ------------ ------------
U.S. Treasury Bond............. 12/19/2000 1,750 171,933,886 172,648,438
------------
Total unrealized depreciation on open futures contracts sold short... $(714,552)
------------
</TABLE>
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<TABLE>
<S> <C> <C>
Call Options Contracts Premiums
Received ($)
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Outstanding at September 30, 1999 -- --
Written 1,150 987,781
Exercised (1,081) (938,601)
Expired (69) (49,180)
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Outstanding at September 30, 2000 $ -- $ --
--------------- --------------
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</TABLE>
* Repurchase agreements are fully collateralized by U.S. Treasury or Government
agency securities.
** The investments in mortgage-backed securities of the Government National
Mortgage Association are interests in separate pools of mortgages. All
separate investments in each of these issues which have similar coupon rates
have been aggregated for presentation purposes in the Investment Portfolio.
Effective maturities of these investments will be shorter than stated
maturities due to prepayments.
The accompanying notes are an integral part of the financial statements.
16 Scudder GNMA Fund
<PAGE>
Financial Statements
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Statement of Assets and Liabilities as of September 30, 2000
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<TABLE>
<S> <C>
Assets
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Investments in securities, at value (cost $4,250,531,524)........ $4,242,836,282
Cash............................................................. 810
Receivable for investments sold.................................. 373,137,119
Interest receivable.............................................. 26,503,543
Receivable for Fund shares sold.................................. 16,344,366
Due from Adviser................................................. 74,755
Other assets..................................................... 214,472
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Total assets..................................................... 4,659,111,347
Liabilities
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Payable for when-issued and forward delivery securities.......... 505,683,491
Payable for investments purchased-- mortgage dollar rolls........ 114,534,293
Dividends payable................................................ 21,726,004
Payable for Fund shares redeemed................................. 4,789,355
Payable for daily variation margin on open futures contracts..... 273,437
Accrued management fee........................................... 1,374,992
Accrued Trustees' fees and expenses.............................. 156,509
Other accrued expenses and payables.............................. 1,555,987
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Total liabilities................................................ 650,094,068
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Net assets, at value $4,009,017,279
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Net Assets
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Net assets consist of:
Accumulated distributions in excess of net investment income..... (13,539,752)
Net unrealized appreciation (depreciation) on:
Investments.................................................... (7,695,242)
Futures........................................................ (714,552)
Accumulated net realized gain (loss)............................. (514,475,038)
Paid-in capital ................................................. 4,545,441,863
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Net assets, at value $4,009,017,279
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Net Asset Value
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Class AARP
NetAsset Value, offering and redemption price per share
($3,703,418,402 / 253,629,228 outstanding shares of
beneficial interest, $.01 par value, unlimited number ---------------
of shares authorized)......................................... $ 14.60
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Class S
NetAsset Value, offering and redemption price per share
($305,598,877 / 20,915,373 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ---------------
authorized)................................................... $ 14.61
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The accompanying notes are an integral part of the financial statements
17 Scudder GNMA Fund
<PAGE>
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Statement of Operations for the year ended September 30, 2000
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Investment Income
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Income:
Interest......................................................... $ 285,223,072
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Expenses:
Management fee................................................... 15,825,702
Services to shareholders......................................... 8,692,129
Custodian and accounting fees.................................... 760,100
Administration fee............................................... 2,503,254
Auditing......................................................... 67,228
Legal............................................................ 53,541
Trustees' fees and expenses...................................... 179,873
Reports to shareholders.......................................... 617,465
Registration fees................................................ 5,500
Other............................................................ 154,082
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Total expenses, before expense reductions........................ 28,858,874
Expense reductions............................................... (245,165)
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Total expenses, after expense reductions......................... 28,613,709
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Net investment income (loss) 256,609,363
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Realized and unrealized gain (loss) on investment transactions
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Net realized gain (loss) from:
Investments...................................................... (50,583,302)
Futures.......................................................... (14,966,040)
Written options.................................................. (258,306)
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(65,807,648)
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Net unrealized appreciation (depreciation) during the period on:
Investments...................................................... 60,075,341
Futures.......................................................... (393,566)
---------------
59,681,775
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Net gain (loss) on investment transactions (6,125,873)
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Net increase (decrease) in net assets resulting from operations $ 250,483,490
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</TABLE>
The accompanying notes are an integral part of the financial statements
18 Scudder GNMA Fund
<PAGE>
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Statements of Changes in Net Assets
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<TABLE>
<S> <C> <C>
Years Ended September 30,
Increase (Decrease) in Net Assets 2000 1999
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Operations:
Net investment income (loss)..................... $ 256,609,363 $ 277,893,827
Net realized gain (loss) on investment
transactions.................................. (65,807,648) (85,953,788)
Net unrealized appreciation (depreciation) on
investment transactions during the period..... 59,681,775 (150,350,281)
--------------- ---------------
Net increase (decrease) in net assets resulting
from operations............................... 250,483,490 41,589,758
--------------- ---------------
Distributions to shareholders from:
Net investment income:
Class AARP..................................... (252,758,004) (277,954,441)
--------------- ---------------
Class S........................................ (3,998,399) --
--------------- ---------------
Fund share transactions:
Proceeds from shares sold........................ 172,945,088 402,322,579
Net assets acquired in tax-free reorganization... 298,604,668 --
Reinvestment of distributions.................... 143,801,796 163,591,362
Cost of shares redeemed.......................... (816,123,629) (706,543,959)
--------------- ---------------
Net increase (decrease) in net assets from Fund
share transactions............................ (200,772,077) (140,630,018)
--------------- ---------------
Increase (decrease) in net assets................ (207,044,990) (376,994,701)
Net assets at beginning of period................ 4,216,062,269 4,593,056,970
Net assets at end of period (including
accumulated distributions in excess of net
investment income of $13,539,752 and --------------- ---------------
$8,915,536, respectively)..................... $4,009,017,279 $4,216,062,269
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements
19 Scudder GNMA Fund
<PAGE>
Financial Highlights
--------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Class AARP (a)
<TABLE>
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
Years Ended September 30, 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------
Net asset value, beginning of period $14.61 $15.40 $15.16 $14.91 $15.19
--------------------------------------------
------------------------------------------------------------------------------------
Income (loss) from investment
operations:
------------------------------------------------------------------------------------
Net investment income (loss) .94 .94 .99 .98 .99
------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.01) (.79) .24 .25 (.28)
--------------------------------------------
------------------------------------------------------------------------------------
Total from investment operations .93 .15 1.23 1.23 .71
------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------
Net investment income (.94) (.94) (.99) (.98) (.99)
------------------------------------------------------------------------------------
Net asset value, end of period $14.60 $14.61 $15.40 $15.16 $14.91
--------------------------------------------
------------------------------------------------------------------------------------
Total Return (%) 6.62 .99 8.40 8.49 4.79
------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 3,703 4,216 4,593 4,584 4,904
------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) .74(c) .65 .61 .65 .64
------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) .73(c) .65 .61 .65 .64
------------------------------------------------------------------------------------
Ratio of net investment income (loss)
(%) 6.52 6.25 6.52 6.51 6.55
------------------------------------------------------------------------------------
Portfolio turnover rate (%) 264(b) 245(b) 160 87 83
------------------------------------------------------------------------------------
</TABLE>
(a) On July 17, 2000, existing shares of the Fund were redesignated as Class
AARP Shares.
(b) The portfolio turnover rates including mortgage dollar roll transactions
were 337% and 258% for the periods ended September 30, 2000 and 1999,
respectively.
(c) The ratios of operating expenses excluding costs incurred in connection with
the reorganization before and after expense reductions were .73% and .73%,
respectively (see Notes to Financial Statements).
20 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements.
Class S
<TABLE>
<S> <C>
------------------------------------------------------------------------------------
2000(a)
------------------------------------------------------------------------------------
Net asset value, beginning of period $14.45
----------
------------------------------------------------------------------------------------
Income (loss) from investment operations:
------------------------------------------------------------------------------------
Net investment income (loss) .19
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .16
----------
------------------------------------------------------------------------------------
Total from investment operations .35
------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------
Net investment income (.19)
------------------------------------------------------------------------------------
Net asset value, end of period $14.61
----------
------------------------------------------------------------------------------------
Total Return (%) 2.72**
------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 306
------------------------------------------------------------------------------------
Ratio of expenses (%) .68(c)*
------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.64*
------------------------------------------------------------------------------------
Portfolio turnover rate (%) 264(b)
------------------------------------------------------------------------------------
</TABLE>
(a)For the period from July 17, 2000 (commencement of sale of Class S) to
September 30, 2000.
(b)The portfolio turnover rate including mortgage dollar roll transactions was
337% for the period ended September 30, 2000.
(c)The ratio of operating expenses includes a one-time reduction in
reorganization expenses. The ratio without this reduction was .71%.
* Annualized
** Not annualized
21 Scudder GNMA Fund
<PAGE>
Notes to Financial Statements
--------------------------------------------------------------------------------
A. Significant Accounting Policies
Scudder GNMA Fund (the "Fund"), formerly AARP GNMA and U.S. Treasury Fund, a
series of AARP Income Trust, is a series of Scudder Income Trust (the "Trust"),
which is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment company and is organized as a
Massachusetts business trust.
On July 17, 2000, the Fund was reorganized from AARP GNMA and U.S. Treasury Fund
into Class AARP of Scudder GNMA Fund. Shares of Class AARP are especially
designed for members of AARP. In addition, all of the net assets acquired from
the merger with Scudder GNMA Fund were designated as Class S shares (see Note
G). The two classes of shares provide investors with different purchase options.
Investment income, realized and unrealized gains and losses, certain fund-level
expenses and expense reductions, if any, are borne pro rata on the basis of
relative net assets by the holders of all classes of shares, except that each
class bears certain expenses unique to that class such as reorganization
expenses (see Note F). Differences in class expenses may result in payment of
different per share dividends by class. All shares of the Fund have equal rights
with respect to voting subject to class-specific arrangements. Effective July
17, 2000, there are no class-specific expenses.
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
use of management estimates. The policies described below are followed
consistently by the Fund in the preparation of its financial statements.
Security Valuation. Portfolio debt securities purchased with an original
maturity greater than sixty days are valued by pricing agents approved by the
officers of the Fund, whose quotations reflect broker/dealer-supplied valuations
and electronic data processing techniques. If the pricing agents are unable to
provide such quotations, the most recent bid quotation supplied by a bona fide
market maker shall be used. Money market instruments purchased with an original
maturity of sixty days or less are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees.
When-Issued and Forward Delivery Securities. The Fund may purchase securities
with delivery or payment to occur at a later date beyond the normal settlement
period. At the time the Fund enters into a commitment to purchase
22 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
a security, the transaction is recorded and the value of the security is
reflected in the net asset value. The value of the security may vary with market
fluctuations. No interest accrues to the Fund until payment takes place. At the
time the Fund enters into this type of transaction it is required to segregate
cash or other liquid assets at least equal to the amount of the commitment.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian or
sub-custodian bank, receives delivery of the underlying securities, the amount
of which at the time of purchase and each subsequent business day is required to
be maintained at such a level that the market value is equal to at least the
principal amount of the repurchase price plus accrued interest.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of a financial
instrument at a specified price on a specific date (settlement date). During the
period, the Fund purchased interest rate futures to manage the duration of the
portfolio. In addition, the Fund also sold interest rate futures to hedge
against declines in the value of portfolio securities.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund dependent upon
the daily fluctuations in the value of the underlying security and are recorded
for financial reporting purposes as unrealized gains or losses by the Fund. When
entering into a closing transaction, the Fund will realize a gain or loss equal
to the difference between the value of the futures contract to sell and the
futures contract to buy. Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures contracts, including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with the changes in the value of
the securities or currencies hedged. When utilizing futures contracts to hedge,
the Fund gives up the opportunity to profit from favorable price movements in
the hedged positions during the term of the contract.
Options. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
23 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the
period, the Fund purchased put options on securities and wrote call options on
securities as a hedge against potential adverse price movements in the value of
portfolio assets and as a temporary substitute for selling selected investments.
In addition, during the period, the Fund purchased call options on securities
and wrote put options on securities to lock in the purchase price of a security
which it expects to purchase in the near future and as a temporary substitute
for purchasing selected investments and to enhance potential gain.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
prices or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations. Gain or loss is recognized when the
option contract expires or is closed.
If the Fund writes a covered call option, the Fund foregoes, in exchange for the
premium, the opportunity to profit during the option period from an increase in
the market value of the underlying security above the exercise price. If the
Fund writes a put option it accepts the risk of a decline in the market value of
the underlying security below the exercise price. Over-the-counter options have
the risk of the potential inability of counterparties to meet the terms of their
contracts. The Fund's maximum exposure to purchased options is limited to the
premium initially paid. In addition, certain risks may arise upon entering into
option contracts including the risk that an illiquid secondary market will limit
the Fund's ability to close out an option contract prior to the expiration date
and that a change in the value of the option contract may not correlate exactly
with changes in the value of the securities or currencies hedged.
Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in which
the Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase similar, but not identical, securities on
a fixed date. The Fund receives compensation as consideration for entering into
the commitment to repurchase. The compensation is paid in the form of a fee
which is recorded as deferred income and amortized to income over the roll
period, or alternatively, a lower price for the security
24 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
upon its repurchase. Mortgage dollar rolls may be renewed with a new sale and
repurchase price and a cash settlement made at each renewal without physical
delivery of the securities subject to the contract.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
At September 30, 2000, the Fund had a net tax basis capital loss carryforward of
approximately $336,431,000, which may be applied against any realized net
taxable capital gains of each succeeding year until fully utilized or until
September 30, 2003 ($243,324,000) and September 30, 2008 ($93,107,000), the
respective expiration dates, whichever occurs first.
In addition, the Fund inherited approximately $34,165,000 of capital losses from
its merger (see Note G) with Scudder GNMA Fund, which can be used to offset
gains in future years, or until September 30, 2002 ($18,025,000), September 30,
2006 ($9,280,000) and September 30, 2007 ($6,860,000), the respective expiration
dates, subject to certain limitations imposed by Section 382 of the Internal
Revenue Code.
In addition, from November 1, 1999 through September 30, 2000, the Fund incurred
approximately $57,000,000 of net realized capital losses. As permitted by tax
regulations, the Fund intends to elect to defer these losses and treat them as
arising in the fiscal year ending September 30, 2001.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a daily dividend and is distributed to shareholders monthly. Net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed, and, therefore,
will be distributed to shareholders at least annually.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from accounting principles generally accepted in the United
States of America. These differences primarily relate to investments in futures,
mortgage backed securities, and certain securities sold at a loss. As a result,
net investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Fund may periodically make
25 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Original issue discount on securities are accreted for both tax and
financial reporting purposes. Realized gains and losses from investment
transactions are recorded on an identified cost basis.
B. Purchases and Sales of Securities
During the year ended September 30, 2000, purchases and sales of investment
securities (excluding short-term investments, mortgage dollar rolls, and U.S.
Government obligations) aggregated $7,562,652,696 and $7,972,571,216,
respectively. Purchases and sales of U.S. Government obligations aggregated
$2,861,019,787 and $2,915,370,322, respectively. Purchases and sales of mortgage
dollar roll transactions aggregated $2,875,304,997 and $2,878,220,977,
respectively.
C. Related Parties
As described in Note F, Scudder Kemper Investments, Inc. has initiated a
restructuring program for most of its Scudder no-load, open-end funds. As part
of this reorganization, the Fund adopted a new Investment Management Agreement
and entered into an Administrative Agreement. Both of these agreements were
effective July 17, 2000. The terms of the newly adopted and the pre-existing
agreements are set out below.
Management Agreement. Prior to July 17, 2000, under the investment management
agreement (the "Management Agreement") between AARP Income Trust, on behalf of
the Fund, and Scudder Kemper Investments, Inc. ("Scudder Kemper" or the
"Adviser"), the management fee consisted of two elements: a Base Fee and an
Individual Fund Fee. The Base Fee was calculated as a percentage of the combined
net assets of all of the AARP Funds ("Program Assets") except the AARP
Diversified Income with Growth and the AARP Diversified Growth Portfolios, and
each AARP Fund paid, as its portion of the Base Fee, an amount equal to the
ratio of its daily net assets to the daily net assets of all of the AARP Funds
(excluding the AARP Diversified Income with Growth and the AARP Diversified
Growth Portfolios). The Annual Base Fee was calculated as follows: 0.35% of the
first $2,000,000,000 of such net assets, 0.33% of the next $2,000,000,000 of
such net assets,
26 Scudder GNMA Fund
<PAGE>
0.30% of the next $2,000,000,000 of such net assets, 0.28% of the next
$2,000,000,000 of such net assets, 0.26% of the next $3,000,000,000 of such net
assets, 0.25% of the next $3,000,000,000 of such net assets and 0.24% of such
net assets thereafter. In addition to the Base Fee, the Fund agreed to pay the
Adviser a flat Individual Fund Fee based on the average daily net assets of the
Fund. The Individual Fund Fee Rate recognized the different characteristics of
the Fund, and the varying levels of complexity of investment research and
securities trading required to manage the Fund. The Individual Fund Fee Rate was
calculated at 0.12% of the average daily net assets of the Fund. As manager of
the assets of the Fund, the Adviser directed the investments of the Fund in
accordance with its investment objectives, policies and restrictions. In
addition to portfolio management services, the Adviser, under the Management
Agreement, provided certain administrative services in accordance with such
Agreement. The Adviser also had a Member Services Agreement with AARP Financial
Services Corp. ("AFSC"), a subsidiary of AARP, and paid portions of its
investment management fee to AFSC.
Effective July 17, 2000, the Fund, as approved by the Fund's Board of Trustees,
adopted a new Investment Management Agreement (the "Agreement") with Scudder
Kemper. As manager of the assets of the Fund, the Adviser directs the
investments of the Fund in accordance with its investment objectives, policies
and restrictions. In addition to portfolio management services, the Adviser,
under the Agreement, will provide certain administrative services in accordance
with such Agreement. The management fee payable under the Agreement is equal to
an annual rate of 0.400% on the first $5,000,000,000 of average daily net
assets, 0.385% on the next $1,000,000,000 of such net assets and 0.370% of such
net assets in excess of $6,000,000,000, computed and accrued daily and payable
monthly.
Accordingly, for the year ended September 30, 2000, the fees pursuant to the
Management Agreement and the Agreement amounted to $15,825,702, which was
equivalent to an annual effective rate of 0.40% of the Fund's average daily net
assets.
Administrative Fee. Effective July 17, 2000, the Fund, as approved by the Fund's
Board of Trustees, adopted an Administrative Agreement (the "Administrative
Agreement") with Scudder Kemper. Under the Administrative Agreement the Adviser
provides or pays others to provide substantially all of the administrative
services required by the Fund (other than those provided by Scudder Kemper under
its Agreement with the Fund, as described above) in exchange for the payment by
the Fund of an administrative services fee (the
27 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
"Administrative Fee") of 0.30% of average daily net assets. As of the effective
date of the Administrative Agreement, each service provider will continue to
provide the services that it currently provides to the Fund (i.e., fund
accounting, shareholder services, custody, audit and legal) under the current
arrangements, except that Scudder Kemper will pay these entities for the
provision of their services to the Fund and will pay most other Fund expenses,
including insurance, registration, printing and postage fees. Certain expenses
of the Fund will not be borne by Scudder Kemper under the Administrative
Agreement, such as taxes, brokerage, interest and extraordinary expenses, and
the fees and expenses of the Independent Trustees (including the fees and
expenses of their independent counsel). For the period July 17, 2000 through
September 30, 2000, the Administrative Agreement expense charged to the Fund
amounted to $2,503,254, of which $1,018,031 is unpaid at September 30, 2000.
Other Fees. Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is
the transfer, dividend-paying and shareholder service agent for the Fund. Prior
to July 17, 2000, the amount charged to the Fund by SSC aggregated $4,950,328,
of which $258,521 is unpaid at September 30, 2000.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. Prior to July 17, 2000, the amount
charged to the Fund by STC aggregated $31,865.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. Prior to July 17,
2000, the amount charged to the Fund by SFAC aggregated $657,144, of which
$35,182 is unpaid at September 30, 2000.
Effective July 17, 2000, the above fees will be paid by the Adviser in
accordance with the Administrative Agreement.
Trustees' Fees and Expenses. The Fund pays each Trustee not affiliated with the
Adviser an annual retainer plus specified amounts for attended board and
committee meetings. For the year ended September 30, 2000, Trustees' fees and
expenses aggregated $30,362. In addition, a one-time fee of $149,511 was
accrued, by Class AARP prior to July 17, 2000, for payment to those Trustees not
affiliated with the Adviser who did not stand for re-election under the
reorganization discussed in Note F. Inasmuch as the Adviser will
28 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
also benefit from administrative efficiencies of a consolidated Board, the
Adviser has agreed to bear $74,755 of such costs.
Other Related Parties. Effective July 17, 2000, Scudder Kemper has agreed to pay
a fee to AARP and/or its affiliates in return for advice relating to investments
by AARP members in Class AARP shares of the Fund. This fee is calculated on a
daily basis as a percentage of the combined net assets of the AARP classes of
all funds managed by Scudder Kemper. The fee rates, which decrease as the
aggregate net assets of the AARP classes become larger, are as follows: 0.07%
for the first $6,000,000,000 of net assets, 0.06% for the next $10,000,000,000
of such net assets and 0.05% of such net assets thereafter.
D. Expense Off-Set Arrangements
The Fund has entered into arrangements with its custodian and transfer agent
whereby credits realized as a result of uninvested cash balances were used to
reduce a portion of the Fund's expenses. During the year ended September 30,
2000, the Fund's custodian fees were reduced by $43,097. Prior to July 17, 2000,
transfer agent fees were reduced by $127,313.
Effective July 17, 2000, transfer agent credits will no longer be used to reduce
Fund expenses.
E. Line of Credit
The Fund and several other Scudder Funds (the "Participants") share in a $1
billion revolving credit facility with Chase Manhattan Bank for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. The Participants are
charged an annual commitment fee which is allocated, pro rata based upon net
assets, among each of the Participants. Interest is calculated based on the
market rates at the time of the borrowing. The Fund may borrow up to a maximum
of 33 percent of its net assets under the agreement.
F. Reorganization
In early 2000, Scudder Kemper initiated a restructuring program for most of its
Scudder no-load open-end funds in response to changing industry conditions and
investor needs. The program proposes to streamline the management and operations
of most of the no-load open-end funds Scudder Kemper advises principally through
the liquidation of several small funds, mergers of certain funds with similar
investment objectives, the creation of one Board of Directors/Trustees and the
adoption of an administrative fee
29 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
covering the provision of most of the services currently paid for by the
affected funds. Costs incurred in connection with this restructuring initiative
are being borne jointly by Scudder Kemper and certain of the affected funds.
G. Acquisition of Assets
On July 14, 2000, the Fund acquired all of the net assets of Scudder GNMA Fund
pursuant to a plan of reorganization approved by shareholders on July 13, 2000.
The acquisition was accomplished by a tax-free exchange of 20,660,722 shares of
the Class S shares of the Fund for 21,114,873 shares of Scudder GNMA Fund
outstanding on July 14, 2000. Scudder GNMA Fund's net assets at that date
($298,604,668), including $3,279,529 of unrealized depreciation, were combined
with those of the Fund. The aggregate net assets of the Fund immediately before
the acquisition were $3,730,839,567. The combined net assets of the Fund
immediately following the acquisition were $4,029,444,235.
30 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
H. Share Transactions
The following tables summarize share and dollar activity in the Fund:
<TABLE>
<S> <C> <C> <C> <C>
Year Ended Year Ended
September 30, 2000 September 30, 1999
-----------------------------------------------------------------
Shares Dollars Shares Dollars
Shares sold
------------------------------------------------------------------------------------
Class AARP*........ 10,701,294 $ 154,313,547 26,723,352 $ 402,322,579
Class S**.......... 1,287,552 18,631,541 -- --
--------------- ---------------
$ 172,945,088 $ 402,322,579
--------------- ---------------
Shares issued to shareholders in tax-free reorganization
------------------------------------------------------------------------------------
Class AARP*........ -- $ -- -- $ --
Class S**.......... 20,660,722 298,604,668 -- --
--------------- ---------------
$ 298,604,668 $ --
--------------- ---------------
Shares issued to shareholders in reinvestment of distributions
------------------------------------------------------------------------------------
Class AARP*........ 9,763,929 $ 140,875,589 10,939,317 $ 163,591,362
Class S**.......... 200,855 2,926,207 -- --
--------------- ---------------
$ 143,801,796 $ 163,591,362
--------------- ---------------
Shares redeemed
------------------------------------------------------------------------------------
Class AARP*........ (55,430,027) $ (798,258,929) (47,285,576) $ (706,543,959)
Class S**.......... (1,233,756) (17,864,700) -- --
--------------- ---------------
$ (816,123,629) $ (706,543,959)
--------------- ---------------
Net increase (decrease)
------------------------------------------------------------------------------------
Class AARP*........ (34,964,804) $ (503,069,793) (9,622,907) $ (140,630,018)
Class S**.......... 20,915,373 302,297,716 -- --
--------------- ---------------
$ (200,772,077) $ (140,630,018)
--------------- ---------------
</TABLE>
* On July 17, 2000, existing shares of the Fund were redesignated as Class AARP
shares.
** For the period from July 17, 2000 (commencement of sale of Class S) to
September 30, 2000.
31 Scudder GNMA Fund
<PAGE>
Report of Independent Accountants
--------------------------------------------------------------------------------
To the Trustees of Income Trust and the Shareholders of Scudder GNMA
Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Scudder GNMA Fund (formerly AARP GNMA and U.S. Treasury Fund) (the
"Fund") at September 30, 2000, the results of its operations, the
changes in its net assets and the financial highlights for each of the
periods indicated therein, in conformity with accounting principles
generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards
generally accepted in the United States of America which require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation
of securities at September 30, 2000 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
Boston, Massachusetts PricewaterhouseCoopers LLP
November 29, 2000
32 Scudder GNMA Fund
<PAGE>
Tax Information (Unaudited)
--------------------------------------------------------------------------------
Please consult a tax adviser if you have questions about federal or
state income tax laws, or on how to prepare your tax returns. If you
have specific questions about your account, please call 1-800-SCUDDER.
33 Scudder GNMA Fund
<PAGE>
Shareholder Meeting Results (Unaudited)
--------------------------------------------------------------------------------
A Special Meeting of Shareholders (the "Meeting") of Scudder GNMA Fund (the
"fund"), a series of Scudder Income Trust, formerly AARP GNMA and U.S. Treasury
Fund, a series of AARP Income Trust, was held on July 11, 2000, at the office of
Scudder Kemper Investments, Inc., Two International Place, Boston, Massachusetts
02110. At the Meeting the following matters were voted upon by the shareholders
(the resulting votes for each matter are presented below).
1. To elect Trustees of AARP Income Trust.
<TABLE>
<S> <C> <C>
Number of Votes:
Trustee For Withheld
------------------------------------------------------------------------------------
Henry P. Becton, Jr. 14,158,172 501,378
Linda C. Coughlin 14,149,930 509,621
Dawn-Marie Driscoll 14,163,978 495,572
Edgar R. Fiedler 14,143,749 515,802
Keith R. Fox 14,142,750 516,800
Joan E. Spero 14,151,582 505,045
Jean Gleason Stromberg 14,154,506 505,045
Jean C. Tempel 14,158,596 500,955
Steven Zaleznick 14,154,690 504,860
------------------------------------------------------------------------------------
</TABLE>
2. To approve a new investment management agreement between the fund and Scudder
Kemper Investments, Inc.
<TABLE>
<S> <C> <C> <C>
Number of Votes:
For Against Abstain Broker
Non-Votes*
------------------------------------------------------------------------------------
12,703,644 631,414 465,044 859,489
------------------------------------------------------------------------------------
</TABLE>
3. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants for the fund for the fiscal year ending September 30, 2000.
<TABLE>
<S> <C> <C> <C> <C>
Number of Votes:
For Against Abstain Broker
Non-Votes*
------------------------------------------------------------------------------------
14,103,228 231,627 324,696 0
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
* Broker non-votes are proxies received by the fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
34 Scudder GNMA Fund
<PAGE>
Officers and Trustees
--------------------------------------------------------------------------------
Linda C. Coughlin* Scott E. Dolan*
o President and Trustee o Vice President
Henry P. Becton, Jr. John E. Dugenske*
o Trustee; President, WGBH o Vice President
Educational Foundation
William F. Glavin*
Dawn-Marie Driscoll o Vice President
o Trustee; President, Driscoll
Associates; Executive Fellow, James E. Masur*
Center for Business Ethics, o Vice President
Bentley College
Ann M. McCreary*
Edgar R. Fiedler o Vice President
o Trustee; Senior Fellow and
Economic Counsellor, The Howard S. Schneider*
Conference Board, Inc. o Vice President
Keith R. Fox Richard L. Vandenberg*
o Trustee; General Partner, o Vice President
The Exeter Group of Funds
John Millette*
Joan E. Spero o Vice President and Secretary
o Trustee; President, The Doris
Duke Charitable Foundation Kathryn L. Quirk*
o Vice President and
Jean Gleason Stromberg Assistant Secretary
o Trustee; Consultant
John R. Hebble*
Jean C. Tempel o Treasurer
o Trustee; Managing Director,
First Light Capital, LLC Brenda Lyons*
o Assistant Treasurer
Steven Zaleznick
o Trustee; President and Caroline Pearson*
Chief Executive Officer, o Assistant Secretary
AARP Services, Inc.
Thomas V. Bruns* *Scudder Kemper Investments, Inc.
o Vice President
35 Scudder GNMA Fund
<PAGE>
Investment Products and Services
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Scudder Funds
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Money Market U.S. Growth
Scudder U.S. Treasury Money Fund Value
Scudder Cash Investment Trust Scudder Large Company Value Fund
Scudder Money Market Series -- Scudder Value Fund
Prime Reserve Shares Scudder Small Company Value Fund
Premium Shares
Managed Shares Growth
Scudder Tax Free Money Fund Scudder Classic Growth Fund
Scudder Capital Growth Fund
Tax Free Scudder Large Company Growth Fund
Scudder Medium Term Tax Free Fund Scudder Select 1000 Growth Fund
Scudder Managed Municipal Bonds Scudder Development Fund
Scudder High Yield Tax Free Fund Scudder Small Company Stock Fund
Scudder California Tax Free Fund Scudder 21st Century Growth Fund
Scudder Massachusetts Tax Free Fund
Scudder New York Tax Free Fund Global Equity
Worldwide
U.S. Income Scudder Global Fund
Scudder Short Term Bond Fund Scudder International Fund
Scudder GNMA Fund Scudder Global Discovery Fund
Scudder Income Fund Scudder Emerging Markets Growth Fund
Scudder Corporate Bond Fund Scudder Gold Fund
Scudder High Yield Bond Fund
Regional
Global Income Scudder Greater Europe Growth Fund
Scudder Global Bond Fund Scudder Pacific Opportunities Fund
Scudder Emerging Markets Income Fund Scudder Latin America Fund
The Japan Fund, Inc.
Asset Allocation
Scudder Pathway Conservative Portfolio Industry Sector Funds
Scudder Pathway Balanced Portfolio Scudder Health Care Fund
Scudder Pathway Growth Portfolio Scudder Technology Fund
U.S. Growth and Income
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
36 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
Retirement Programs and Education Accounts
--------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA IRA for Minors
Inherited IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
--------------------------------------------------------------------------------
Closed-End Funds
--------------------------------------------------------------------------------
The Argentina Fund, Inc. Montgomery Street Income Securities, Inc.
The Brazil Fund, Inc. Scudder Global High Income Fund, Inc.
The Korea Fund, Inc. Scudder New Asia Fund, Inc.
</TABLE>
Scudder funds are offered by prospectus only. For more complete information on
any fund or variable annuity registered in your state, including information
about a fund's objectives, strategies, risks, advisory fees, distribution
charges, and other expenses, please order a free prospectus. Read the prospectus
before investing in any fund to ensure the fund is appropriate for your goals
and risk tolerance. There is no assurance that the objective of any fund will be
achieved, and fund returns and net asset values fluctuate. Shares are redeemable
at current net asset value, which may be more or less than their original cost.
A money market mutual fund investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although a
money market mutual fund seeks to preserve the value of your investment at $1
per share, it is possible to lose money by investing in such a fund.
The services and products described should not be considered a solicitation to
buy or an offer to sell a security to any person in any jurisdiction where such
offer, solicitation, purchase, or sale would be unlawful under the securities
laws of such jurisdiction.
Scudder Investor Services, Inc.
37 Scudder GNMA Fund
<PAGE>
Account Management Resources
--------------------------------------------------------------------------------
For shareholders of Scudder funds including those in the AARP Investment Program
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly
to regularly purchase fund shares and "dollar cost
average" -- buy more shares when the fund's price is
lower and fewer when it's higher, which can reduce
your average purchase price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to
purchase shares -- use distributions from one Scudder
fund to purchase shares in another, automatically
(accounts with identical registrations or the same
social security or tax identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of
your transactions is electronically debited from a
previously designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government
checks -- invested in up to four Scudder funds at one
time.
* Dollar cost averaging involves continuous
investment in securities regardless of price
fluctuations and does not assure a profit or
protect against loss in declining markets.
Investors should consider their ability to
continue such a plan through periods of low
price levels.
Around-the- Automated Information Lines
clock electronic
account Scudder Class S Shareholders:
service and Call SAIL(TM) -- 1-800-343-2890
information,
including some AARP Investment Program Shareholders:
transactions Call Easy-Access Line -- 1-800-631-4636
Personalized account information, the ability to
exchange or redeem shares, and information on other
Scudder funds and services via touchtone telephone.
Web Site
Scudder Class S Shareholders --
www.scudder.com
AARP Investment Program Shareholders --
aarp.scudder.com
Personal Investment Organizer: Offering account
information and transactions, interactive worksheets,
prospectuses and applications for all Scudder funds,
plus your current asset allocation, whenever you need
them. Scudder's site also provides news about Scudder
funds, retirement planning information, and more.
38 Scudder GNMA Fund
<PAGE>
--------------------------------------------------------------------------------
Those who Automatic Withdrawal Plan
depend on
investment You designate the bank account, determine the
proceeds for schedule (as frequently as once a month) and amount
living expenses of the redemptions, and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into
automated the bank account you designate within three business
withdrawal days after each distribution is paid.
programs
QuickSell
Provides speedy access to your money by
electronically crediting your redemption proceeds to
the bank account you previously designated.
For more Scudder Class S Shareholders:
information
about these Call a Scudder representative at
services 1-800-SCUDDER
AARP Investment Program Shareholders:
Call an AARP Investment Program representative at
1-800-253-2277
Please address For Scudder Class S Shareholders:
all written
correspondence The Scudder Funds
to PO Box 2291
Boston, Massachusetts
02107-2291
For AARP Investment Program Shareholders:
AARP Investment Program from Scudder
PO Box 2540
Boston, Massachusetts
02208-2540
39 Scudder GNMA Fund
<PAGE>
About the Fund's Advisor
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $290 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded over 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich
Kemper Investments, Inc., with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in New York, Scudder Kemper
Investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies. With its global investment resources and
perspective, the firm seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Financial Services Group. The Zurich Financial Services Group is
an internationally recognized leader in financial services, including
property/casualty and life insurance, reinsurance, and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
[LOGO] Scudder Investments (SM)
AARP Investment
Program from Scudder
PO Box 2540
Boston, MA 02208-2540
1-800-253-2277
aarp.scudder.com
Scudder Funds
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
A member of the [LOGO] Zurich Financial Services Group
