SCUDDER PORTFOLIO TRUST/, 497, 1995-05-11

SCUDDER PORTFOLIO TRUST/
497, 1995-05-11

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This prospectus sets forth concisely the information about Scudder Balanced
Fund, a series of Scudder Portfolio Trust, an open-end management investment
company, that a prospective investor should know before investing. Please retain
it for future reference.

If you require more detailed information, a Statement of Additional Information
dated May 1, 1995, as amended from time to time, may be obtained without charge
by writing Scudder Investor Services, Inc., Two International Place, Boston, MA
02110-4103 or calling 1-800-225-2470. The Statement, which is incorporated by
reference into this prospectus, has been filed with the Securities and Exchange
Commission.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Contents--see page 4.

Scudder
Balanced
Fund

Prospectus
May 1, 1995

A pure no-load(TM) (no sales charges) mutual fund which seeks a balance of
growth and income, as well as long-term preservation of capital, from a
diversified portfolio of equity and fixed-income securities.
<PAGE>

Expense information

How to compare a Scudder pure no-load(TM) fund

This information is designed to help you understand the various costs and
expenses of investing in Scudder Balanced Fund (the "Fund"). By reviewing this
table and those in other mutual funds' prospectuses, you can compare the Fund's
fees and expenses with those of other funds. With Scudder's pure no-load(TM)
funds, you pay no commissions to purchase or redeem shares, or to exchange from
one fund to another. As a result, all of your investment goes to work for you.

1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.

Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE

2) Annual Fund operating expenses (after expense maintenance): Expenses paid
by the Fund before it distributes its net investment income, expressed as a
percentage of the Fund's average daily net assets for the fiscal year ended
December 31, 1994.

Investment management fee 0.23%**
12b-1 fees NONE
Other expenses 0.77%
----
Total Fund operating expenses 1.00%**
====

Example

Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$10 $32 $55 $122

See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.

* You may redeem by writing or calling the Fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."

** Until April 30, 1996, the Adviser has agreed to maintain the total
annualized expenses of the Fund at not more than 1.00% of average daily net
assets of the Fund. If the Adviser had not decided to maintain the Fund's
expenses, the total annualized expenses of the Fund would have amounted to
1.47% (of which 0.70% would have consisted of investment management fees)
for the fiscal year.

2
<PAGE>

Financial highlights

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.

If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated December 31, 1994 and may be obtained without charge
by writing or calling Scudder Investor Services, Inc.

FOR THE PERIOD
JANUARY 4, 1993
YEAR (COMMENCEMENT
ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1994 1993
------------ -----------------
<S> <C> <C>
Net asset value, beginning of period .................................... $12.23 $12.00
------ ------
Income from investment operations:
Net investment income(a) .............................................. .31 .26
Net realized and unrealized gain (loss) on investment transactions..... (.60) .23
------ ------
Total from investment operations ........................................ (.29) .49
------ ------
Less distributions from net investment income ........................... (.31) (.26)
------ ------
Net asset value, end of period .......................................... $11.63 $12.23
====== ======
TOTAL RETURN (%) (2.39) 4.12*
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) .................................. 66 64
Ratio of operating expenses, net to average daily net assets (%)(a) ..... 1.00 1.00
Ratio of net investment income to average daily net assets (%) .......... 2.66 2.43
Portfolio turnover rate (%) ............................................. 105.4 99.3
(a) Reflects a per share amount of management fee not imposed
by the Adviser of ................................................... $ .06 $ .06
Operating expense ratio including management fee not imposed (%)..... 1.47 1.53

* Not annualized
</TABLE>

3
<PAGE>

A message from Scudder's chairman

Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $90 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.

The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.

Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.

All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.

/s/ Daniel Pierce

Scudder Balanced Fund

Investment objectives

* a balance of growth and income from a diversified portfolio of equity and
fixed-income securities

* long-term preservation of capital through a quality-oriented investment
approach designed to reduce risk

Investment characteristics

* a broadly diversified program of seasoned stocks and investment-grade bonds

* balances growth potential of stocks with income and relative stability
provided by fixed- income securities

* appropriate for many IRA, 401(k), 403(b) and other retirement plans

* quarterly dividends

* daily liquidity at current net asset value

Contents

Investment objectives and policies ........................................ 5
Why invest in the Fund? ................................................... 7
Additional information about policies
and investments ........................................................ 7
Purchases ................................................................. 12
Exchanges and redemptions ................................................. 13
Distribution and performance information .................................. 14
Fund organization ......................................................... 15
Transaction information ................................................... 16
Shareholder benefits ...................................................... 19
Trustees and Officers ..................................................... 22
Investment products and services .......................................... 23
How to contact Scudder ............................................ Back cover

4
<PAGE>

Investment objectives and policies

Scudder Balanced Fund (the "Fund"), a diversified series of Scudder Portfolio
Trust, seeks a balance of growth and income from a diversified portfolio of
equity and fixed-income securities. The Fund also seeks long-term preservation
of capital through a quality-oriented investment approach that is designed to
reduce risk.

Except as otherwise indicated, the Fund's investment objectives and policies are
not fundamental and may be changed without a vote of shareholders. Shareholders
will receive written notice of any changes in the Fund's objectives. If there is
a change in investment objectives, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objectives will be
met.

Investments

In seeking its objectives of a balance of growth and income, as well as
long-term preservation of capital, the Fund invests in a diversified portfolio
of equity and fixed-income securities. The Fund invests, under normal
circumstances, 50% to 75% of its net assets in common stocks and other equity
investments. The Fund's remaining assets are allocated to investment-grade bonds
and other fixed-income securities, including cash reserves. For temporary
defensive purposes, the Fund may invest without limit in cash and in other money
market and short-term instruments.

The Fund will, on occasion, adjust its mix of investments among equity
securities, bonds and cash reserves. In reallocating investments, the Fund's
investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"), weighs the
relative values of different asset classes and expectations for future returns.
In doing so, the Adviser analyzes, on a global basis, the level and direction of
interest rates, capital flows, inflation expectations, anticipated growth of
corporate profits, monetary and fiscal policies around the world and other
related factors.

The Fund does not take extreme investment positions as part of an effort to
"time the market." Shifts between stocks and fixed-income investments are
expected to occur in generally small increments within the guidelines adopted in
this prospectus. The Fund is designed as a conservative long-term investment
program.

While the Fund emphasizes U.S. equity and debt securities, it may invest a
portion of its assets in foreign securities, including depositary receipts. The
Fund's foreign holdings will meet the criteria applicable to its domestic
investments. The international component of the Fund's investment program is
intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns.

In addition, the Fund may invest in securities on a when-issued or forward
delivery basis and may engage in strategic transactions. See "Additional
information about policies and investments" for more information.

Equity investments

The Fund normally invests at least 50%, but no more than 75%, of its net assets
in equity securities. The Fund's equity investments consist of common stocks,
preferred stocks, warrants and securities convertible into common stocks, of
companies that, in the Adviser's judgment, are of above-average financial
quality and offer the prospect for above-average growth in earnings, cash flow,
or assets relative to the overall market as defined by the Standard and Poor's
500 Composite Price Index ("S&P 500"). The Fund will invest primarily in

5
<PAGE>
securities issued by medium- to large-sized domestic companies with annual
revenues or market capitalization of at least $600 million and which, in the
opinion of the Adviser, offer above-average potential for price appreciation.
The Fund seeks to invest in companies that have relatively consistent and
above-average rates of growth; companies that are in a strong financial position
with high credit standings and profitability; firms with important business
franchises, leading products or dominant marketing and distribution systems;
companies guided by experienced and motivated managements; and companies selling
at attractive market valuations. The Adviser believes that companies with these
characteristics will be rewarded by the market with higher stock prices over
time and provide investment returns, on average, in excess of the S&P 500.

At least 65% of the value of the Fund's common stocks will be of issuers which
qualify, at the time of purchase, for one of the three highest equity earnings
and dividends ranking categories (A+, A, or A-) of Standard & Poor's ("S&P"), or
if not ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position and earnings prospects.

Fixed-income investments

To enhance income and stability, the Fund will normally invest 25% to 50% of its
net assets in investment-grade fixed-income securities. However, at least 25% of
the Fund's net assets will always be invested in fixed-income securities. The
Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, and preferred and convertible preferred securities. It may also purchase
U.S. Government securities and obligations of federal agencies and
instrumentalities that are not backed by the full faith and credit of the U.S.
Government, such as obligations of the Federal Home Loan Banks, Farm Credit
Banks and the Federal Home Loan Mortgage Corporation. The Fund may also invest
in obligations of international agencies, foreign debt securities (both U.S. and
non-U.S. dollar denominated), mortgage-backed and other asset-backed securities,
municipal obligations, zero coupon securities and restricted securities issued
in private placements.

For liquidity and defensive purposes, the Fund may invest in money market
securities such as commercial paper, bankers' acceptances and certificates of
deposit issued by domestic and foreign branches of U.S. banks. The Fund may also
enter into repurchase agreements with respect to U.S. Government securities.

At least 75% of the value of the Fund's debt securities will be high grade, that
is, rated within the three highest quality ratings categories of Moody's
Investors Service, Inc. ("Moody's") (Aaa, Aa and A) or S&P (AAA, AA and A), or,
if unrated, judged to be of equivalent quality as determined by the Adviser at
the time of purchase. Securities must also meet credit standards applied by the
Adviser. Moreover, the Fund does not purchase debt securities rated below Baa by
Moody's or BBB by S&P. Should the rating of a portfolio security be downgraded
the Adviser will determine whether it is in the best interest of the Fund to
retain or dispose of the security. More information about investment techniques
is provided under "Additional information about policies and investments."

6
<PAGE>

Why invest in the Fund?

The Fund is designed for individuals and institutions desiring a single
investment that provides access to a balanced portfolio of both stocks and
bonds. Many investors do not have the time or inclination to create a balanced
portfolio on their own as well as to continuously change their investments in
reaction to changing market conditions. The Adviser's professional management
team selects stock and bond investments and determines the amount of the Fund's
assets that should be invested in each category.

The Fund represents a conservative investment program that is intended,
generally, to have less risk than a fund investing exclusively in common stocks.
Common stocks in the Fund offer growth potential to help investors keep pace
with inflation. The Fund's bond holdings and other fixed-income investments,
however, are intended to provide income and a measure of principal stability to
help cushion the Fund's returns during periods of stock market volatility or
weakness. The stock and bond components of the Fund are intended to be
complementary, and provide diversification with the potential for less risk than
a portfolio of equity securities, yet higher long-term return potential than is
available from fixed-income investments alone.

The Adviser uses fundamental and quantitative research techniques in pursuit of
quality investments for the Fund. The Fund's stock component consists
principally of the equity securities of seasoned, financially-sound U.S.
companies with records of solid growth. As for its bond holdings, the Fund
invests primarily in high-grade securities and will not acquire junk bonds.

While the Fund emphasizes quality investments and maintains a balance of stocks
and bonds, investors should be aware that its price will fluctuate with changing
stock and bond market conditions. A balanced fund, by its very nature, is
designed for investors with a long-term investment horizon. The Fund may be
especially appropriate for IRAs, Keoghs, 401(k) and 403(b) plans, and other
tax-advantaged retirement vehicles. For many years, large pension plans have
successfully used a balanced investment strategy to produce attractive long-term
returns with moderate risk. The Adviser currently manages more than $9 billion
in balanced portfolios for over 3,000 institutional and private accounts.

In addition, the Fund offers all the benefits of the Scudder Family of Funds.
Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-load(TM)
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.

Additional information about policies and investments

Investment restrictions

The Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk.

The Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase agreements,
and may not make loans except through the lending of portfolio securities, the
purchase of debt securities or through repurchase agreements.

In addition, as a matter of nonfundamental policy, the Fund may not invest more
than 10% of its net assets in securities which are not readily marketable,
restricted securities and repurchase agreements maturing in more than seven
days. The Fund may not invest more than 5% of its total assets in restricted
securities.

A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund's Statement of Additional
Information.

7
<PAGE>

Mortgage and other asset-backed securities

The Fund may invest in mortgage-backed securities, which are securities
representing interests in pools of mortgage loans. These securities provide
shareholders with payments consisting of both interest and principal as the
mortgages in the underlying mortgage pools are paid off.

The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Fund shares. Also, GNMA and other
mortgage-backed securities may be purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs. In addition, the Fund may invest in mortgage-backed
securities issued by other issuers, such as the Federal National Mortgage
Association (FNMA), which are not guaranteed by the U.S. Government. Moreover,
the Fund may invest in debt securities which are secured with collateral
consisting of mortgage-backed securities and in other types of mortgage-related
securities.

The Fund may also invest in securities representing interests in
pools of certain other consumer loans, such as automobile loans or credit card
receivables. In some cases, principal and interest payments are partially
guaranteed by a letter of credit from a financial institution.

Dollar roll transactions

The Fund may enter into dollar roll transactions with selected banks and
broker/dealers. Dollar roll transactions are treated as reverse repurchase
agreements for purposes of the Fund's borrowing restrictions and consist of the
sale by the Fund of mortgage-backed securities, together with a commitment to
purchase similar, but not identical, securities at a future date at the same
price. In addition, the Fund is paid a fee as consideration for entering into
the commitment to purchase. Dollar rolls may be renewed after cash settlement
and initially may involve only a firm commitment agreement by the Fund to buy
the securities.

When-issued securities

The Fund may purchase securities on a when-issued or forward delivery basis, for
payment and delivery at a later date. The price and yield are generally fixed on
the date of commitment to purchase. During the period between purchase and
settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the securities may be more or less than the purchase price.

Repurchase agreements

As a means of earning income for periods as short as overnight, the Fund may
enter into repurchase agreements with selected banks and broker/dealers. Under a
repurchase agreement, the Fund acquires securities, subject to the seller's
agreement to repurchase them at a specified time and price. The Fund may enter
into repurchase commitments with any party deemed creditworthy by the Adviser,
including foreign banks and broker/dealers, if the transaction is entered into
for investment purposes and the counterparty's creditworthiness is at least
equal to that of issuers of securities which the Fund may purchase. Such
transactions may not provide the Fund with collateral marked-to-market during
the term of the commitment.

Convertible securities

The Fund may invest in convertible securities which may offer higher income than
the common stocks into which they are convertible. The convertible securities in

8
<PAGE>
which the Fund may invest include fixed-income or zero coupon debt securities,
which may be converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. Prior to their conversion, convertible
securities may have characteristics similar to both nonconvertible debt
securities and equity securities.

Convertible securities purchased by the Fund must be rated investment-grade, or
if unrated, judged to be of equivalent quality by the Adviser. Investment-grade
convertible securities are rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or
BBB by S&P.

Foreign securities

While the Fund generally emphasizes investments in companies domiciled in the
U.S., it may invest in listed and unlisted foreign securities that meet the same
criteria as the Fund's domestic holdings. The Fund may invest in foreign
securities when the anticipated performance of the foreign securities is
believed by the Adviser to offer more potential than domestic alternatives in
keeping with the investment objectives of the Fund. The Fund may invest in
certificates of deposit issued by foreign and domestic branches of U.S. banks.

Indexed securities

The Fund may invest in indexed securities, the value of which is linked to
currencies, interest rates, commodities, indices or other financial indicators
("reference instruments"). The interest rate or (unlike most fixed-income
securities) the principal amount payable at maturity of an indexed security may
be increased or decreased, depending on changes in the value of the reference
instrument.

Strategic Transactions and derivatives

The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio or to enhance potential gain. These
strategies may be executed 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,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").

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

9
<PAGE>
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.
Please refer to "Risk factors--Strategic Transactions and derivatives" for more
information.

Portfolio turnover

Recent economic and market conditions have necessitated more active trading,
resulting in a higher portfolio turnover rate for the Fund. A higher rate
involves greater transaction costs to the Fund and may result in the realization
of net capital gains, which would be taxable to shareholders when distributed.

Risk factors

The Fund's risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Fund may use from time to time.

Debt securities. Securities rated BBB by S&P or Baa by Moody's are neither
highly protected nor poorly secured. These securities normally pay higher yields
but involve potentially greater price variability than higher-quality
securities. These securities are regarded as having adequate capacity to repay
principal and pay interest, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to do so. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics.

Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, the Fund will bear the
market risk of the reference instrument.

Mortgage and other asset-backed securities. Unscheduled or early payments on the
underlying mortgages may shorten the securities' effective maturities and lessen
their growth potential. The Fund may agree to purchase or sell these securities
with payment and delivery taking place at a future date. A decline in interest
rates may lead to a faster rate of repayment of the underlying mortgages and
expose the Fund to a lower rate of return upon reinvestment. To the extent that
such mortgage-backed securities are held by the Fund, the prepayment right of
mortgagors may limit the increase in net asset value of the Fund because the
value of the mortgage-backed securities held by the Fund may not appreciate as
rapidly as the price of non-callable debt securities.

Asset-backed securities are subject to the risk of prepayment and the risk that
the underlying loans will not be repaid.

Dollar roll transactions. If the broker/dealer to whom the Fund sells the
securities underlying a dollar roll transaction becomes insolvent, the Fund's
right to purchase or repurchase the securities may be restricted; the value of
the securities may change adversely over the term of the dollar roll; the
securities that the Fund is required to repurchase may be worth less than the
securities that the Fund originally held, and the return earned by the Fund with
the proceeds of a dollar roll may not exceed transaction costs.

10
<PAGE>

Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted, or
the value of the securities may decline before the Fund is able to dispose of
them. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities. Convertible securities. While convertible securities generally
offer lower yields than nonconvertible debt securities of similar quality, their
prices may reflect changes in the value of the underlying common stock.
Convertible securities entail less credit risk than the issuer's common stock.

Foreign securities. Investments in foreign securities involve special
considerations due to limited information, higher brokerage costs, different
accounting standards, thinner trading markets as compared to domestic markets
and the likely impact of foreign taxes on the yield from debt securities. They
may also entail other risks, such as the possibility of one or more of the
following: imposition of dividend or interest withholding or confiscatory taxes;
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; less government supervision
and regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Purchases of foreign
securities are usually made in foreign currencies and, as a result, the Fund may
incur currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar.

Further, it may be more difficult for the Fund's agents to keep currently
informed about corporate actions which may affect the prices of portfolio
securities. Communications between the U.S. and foreign countries may be less
reliable than within the U.S., increasing the risk of delayed settlements of
portfolio transactions or loss of certificates for portfolio securities. The
Fund's ability and decisions to purchase and sell portfolio securities may be
affected by laws or regulations relating to the convertibility and repatriation
of assets.

Zero coupon securities. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities that make current cash distributions of interest.

(Continued on page 14)

11
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Purchases

<TABLE>
<S> <C>
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.

o By Mail Send your completed and signed application and check
Make checks
payable to "The
Scudder Funds." by regular mail to: or by express, registered,
or certified mail to:

The Scudder Funds The Scudder Funds
P.O. Box 2291 1099 Hingham Street
Boston, MA Rockland, MA
02107-2291 02370-1052

o By Wire Please see Transaction
information--Purchasing shares-- By
wire following these tables for
details, including the ABA wire
transfer number. Then call
1-800-225-5163 for instructions.

o In Person Visit one of our Funds
Centers to complete your
application with the help of a
Scudder representative. Funds
Center locations are listed under
Shareholder benefits.

Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.

Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.

o By Wire Please see Transaction information--Purchasing shares-- By wire following these
tables for details, including the ABA wire transfer number.

o In Person
Visit one of our Funds Centers to
make an additional investment in
your Scudder fund account. Funds
Center locations are listed under
Shareholder benefits.
o By Telephone
You may purchase additional shares
in an amount of $10,000 or more.
Please call 1-800-225-5163 for more
details.
o By Automatic
Investment Plan You may arrange to make investments on a regular basis through automatic
($50 minimum) deductions from your bank checking account. Please call 1-800-225-5163
for more information and an enrollment form.
</TABLE>

12
<PAGE>

Exchanges and redemptions

<TABLE>
<S> <C>
Exchanging Minimum investments: $1,000 to establish a new account; $100 to exchange among existing accounts
shares
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).

o By Mail
or Fax Print or type your instructions and include:

- the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into; and
- your signature(s) as it appears on your account and a daytime telephone
number.

Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:

The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 1099 Hingham Street
Boston, MA 02107-2291 Rockland, MA 02370-1052

Redeeming shares o By Telephone To speak with a service representative, call
1-800-225-5163 from 8 a.m. to 8 p.m. eastern time or to access
SAIL(TM), Scudder's Automated Information Line, call 1-800-343-2890 (24
hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to $50,000
sent to your address of record.
o By Mail
or Fax Send your instructions for redemption to the appropriate address or fax number
above and include:

- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem; and
- your signature(s) as it appears on your account and a daytime telephone
number.

A signature guarantee is required for redemptions over $50,000. See
Transaction information--Redeeming shares following these tables.

o By Automatic You may arrange to receive automatic cash payments periodically if the value of
Withdrawal Plan your account is $10,000 or more. Call 1-800-225-5163 for more information and
an enrollment form.
</TABLE>

13
<PAGE>

Additional information about policies and investments (cont'd)

(Continued from page 11)

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 contracts 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. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.

Distribution and performance information

Dividends and capital gains distributions

The Fund intends to distribute dividends from its net investment income
quarterly in April, July, October and December. The Fund intends to distribute
net realized capital gains after utilization of capital loss carryforwards, if
any, in November or December to prevent application of a federal excise tax. An
additional distribution may be made within three months of the Fund's fiscal
year end, if necessary. 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 will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared. According
to preference, shareholders may receive distributions in cash or have them
reinvested in additional shares of the Fund. If an investment is in the form of
a retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account.

Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable as
long-term capital gains regardless of the length of time a shareholder has owned
shares. Short-term capital gains and any other taxable income distributions are
taxable as ordinary income. A portion of dividends from ordinary income may
qualify for the dividends-received deduction for corporations. The Fund sends
detailed tax information about the amount and type of its distributions to its
shareholders by January 31 of the following year.

Performance information

From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature, or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance. The "yield" of the Fund refers
to income generated by an investment in the Fund over a specified 30-day (one
month) period. Yield is expressed as an annualized percentage. "Total return" is
the change in value of an investment in the Fund for a specified period. The
"average annual total return" of the Fund is the average annual compound rate of
return of an investment in the Fund assuming the investment has been held for
one year and the life of the Fund as of a stated ending date. "Cumulative total
return" represents the cumulative change in value of an investment in the Fund

14
<PAGE>

for various periods. Total return calculations assume that all dividends and
capital gains distributions during the period were reinvested in shares of the
Fund. "Capital change" measures return from capital, including reinvestment of
any capital gains distributions, but does not include the reinvestment of
dividends. Performance will vary based upon, among other things, changes in
market conditions and the level of the Fund's expenses.

Fund organization

Scudder Balanced Fund is a diversified series of Scudder Portfolio Trust (the
"Trust"), an open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as a
Massachusetts business trust in September 1984 and on December 31, 1984 assumed
the business of its predecessor, which was organized as a Massachusetts
corporation in 1928.

The Fund's activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to and has no current intention of
holding annual shareholder meetings, although special meetings may be called for
purposes such as electing or removing Trustees, changing fundamental investment
policies or approving an investment advisory contract. Shareholders will be
assisted in communicating with other shareholders in connection with removing a
Trustee as if Section 16(c) of the 1940 Act were applicable.

Investment adviser

The Fund retains the investment management firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, to manage the Fund's daily investment and business
affairs subject to the policies established by the Board of Trustees. The
Trustees have overall responsibility for the management of the Fund under
Massachusetts law.

The Fund pays the Adviser an annual fee of 0.70% of the Fund's average daily net
assets. The fee is payable monthly, provided that the Fund will make such
interim payments as may be requested by the Adviser not to exceed 75% of the
amount of the fee then accrued on the books of the Fund and unpaid.

The Adviser has agreed to maintain the annualized expenses of the Fund at not
more than 1.00% of average daily net assets of the Fund until April 30, 1996.

For the fiscal year ended December 31, 1994, the Adviser received an investment
management fee of 0.23% of the Fund's average daily net assets on an annual
basis.

All the Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment or administrative services.

Scudder, Stevens & Clark, Inc. is located at Two International Place, Boston,
Massachusetts.

Transfer agent

Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
wholly-owned subsidiary of the Adviser, is the transfer, shareholder servicing
and dividend-paying agent for the Fund.

Underwriter

Scudder Investor Services, Inc., a wholly-owned subsidiary of the Adviser, is
the Fund's principal underwriter. Scudder Investor Services, Inc. confirms, as
agent, all purchases of shares of the Fund. Scudder Investor Relations is a
telephone information service provided by Scudder Investor Services, Inc.

Custodian

State Street Bank and Trust Company is the Fund's custodian.

15
<PAGE>

Transaction information

Purchasing shares

Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent in Boston receives the purchase request in good order.
Purchases are made in full and fractional shares. (See "Share price.")

By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared,
which may take up to seven business days. If you purchase shares by federal
funds wire, you may avoid this delay. Redemption or exchange requests by
telephone prior to the expiration of the seven-day period will not be accepted.

By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent in Boston. Accounts cannot
be opened without a completed, signed application and a Scudder fund account
number. Contact your bank to arrange a wire transfer to:

The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552

Your wire instructions must also include:

- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).

The account will be established once the application and money order are
received in good order. You may also make additional investments of $100 or more
to your existing account by wire.

By telephone order. Existing shareholders may purchase shares at a certain day's
price by calling 1-800-225-5163 before the close of regular trading on the New
York Stock Exchange (the "Exchange"), normally 4 p.m. eastern time, on that day.
Orders must be for $10,000 or more and cannot be for an amount greater than four
times the value of your account at the time the order is placed. A confirmation
with complete purchase information is sent shortly after your order is received.
You must include with your payment the order number given at the time the order
is placed. If payment by check or wire is not received within seven business
days, the order will be canceled and the shareholder will be responsible for any
loss to the Fund resulting from this cancellation. Telephone orders are not
available for shares held in Scudder IRA accounts and most other Scudder
retirement plan accounts.

By exchange. Your new account will have the same registration and address as
your existing account. The exchange requirements for corporations, other
organizations, trusts, fiduciaries, agents, institutional investors and
retirement plans may be different from those for regular accounts. Please call
1-800-225-5163 for more information, including information about the transfer of
special account features.

You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.

Redeeming shares

The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.

16
<PAGE>

By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.

Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions. You can
also make redemptions from your Scudder fund account on SAIL, the Scudder
Automated Information Line, by calling 1-800-343-2890.

If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.

In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.

Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $50,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.

Telephone transactions

Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If 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 and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation, a wholly-owned subsidiary of the Adviser,
determines net asset value per share as of the close of regular trading on the
Exchange, normally 4 p.m. eastern time, on each day the Exchange is open for
trading. Net asset value per share is calculated by dividing the value of total
Fund assets, less all liabilities, by the total number of shares outstanding.

Processing time

All purchase and redemption requests received in good order by the Fund's
transfer agent in Boston by the close of regular trading on the Exchange are
executed at the net asset value per share calculated at the close of regular
trading that day.

Purchase and redemption requests received after the close of regular trading on
the Exchange will be executed the following business day.

17
<PAGE>

If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.

The Fund will normally send your redemption proceeds within one business day
following the redemption request, but may take up to seven days (or longer in
the case of shares recently purchased by check).

Short-term trading

Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to restrict
purchases of Fund shares (including exchanges) when a pattern of frequent
purchases and sales made in response to short-term fluctuations in the Fund's
share price appears evident.

Tax information

A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.

Tax identification number

Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. The Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
The Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.

Minimum balances

Shareholders should maintain a share balance worth at least $1,000, which amount
may be changed by the Board of Trustees. Scudder retirement plans have similar
or lower minimum share balance requirements. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
sub-minimum accounts, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account.
Reductions in value that result solely from market activity will not trigger an
involuntary redemption. The Fund will mail the proceeds of the redeemed account
to the shareholder. The shareholder may restore the share balance to $1,000 or
more during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.

Third party transactions

If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.

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. The Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, as a result

18
<PAGE>
of which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90-day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.

Shareholder benefits

Experienced professional management

Scudder, Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.

A team approach to investing

Scudder Balanced Fund is managed by a team of Scudder investment professionals,
who each play 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 Scudder's large staff of economists,
research analysts, traders and other investment specialists who work in
Scudder's offices across the United States and abroad. Scudder believes its team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.

Lead Portfolio Manager Bruce F. Beaty assumed responsibility for the Fund's
day-to-day management and investment strategies in January 1995. Mr. Beaty, who
has been a portfolio manager at Scudder since joining the firm in 1991,
specializes in the quality growth discipline of equity investing. Prior to
joining Scudder in 1991, Mr. Beaty spent 11 years in the securities brokerage
business. Michael K. Shields, Portfolio Manager, joined the Fund in May 1995.
Mr. Shields has been a portfolio manager on other equity funds at Scudder since
joining the firm in 1992, and has 13 years of experience in finance and banking.
Portfolio Manager William M. Hutchinson heads up the Fund's fixed-income
investment strategy and security selection. Mr. Hutchinson, who has been with
the Fund since its introduction and Scudder since 1986, has over 20 years of
investment experience.

SAIL(TM)--Scudder Automated Information Line

For touchtone access to account information, prices and yields, or to perform
transactions in existing Scudder fund accounts, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890. During periods of extreme
economic or market changes, or other conditions, it may be difficult for you to
effect telephone transactions in your account. In such an event you should write
to the Fund; please see "How to contact Scudder" for the address.

Investment flexibility

Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.

Dividend reinvestment plan

You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.

Shareholder statements

You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.

19
<PAGE>

Shareholder reports

In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes. To reduce the volume of mail you receive, only one copy of
most Fund reports, such as the Fund's Annual Report, may be mailed to your
household (same surname, same address). Please call 1-800-225-5163 if you wish
to receive additional shareholder reports.

Newsletters

Four times a year, Scudder sends you At the Helm, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.

Scudder Funds Centers

As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.

T.D.D. service for the hearing impaired

Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.

20
<PAGE>

Scudder tax-advantaged retirement plans

Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.

* Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of $2,000 per person for anyone with earned income. Many
people can deduct all or part of their contributions from their taxable
income, and all investment earnings accrue on a tax deferred basis. The
Scudder No-Fee IRA charges no annual custodial fee.

* 401(k) Plans. 401(k) plans allow employers and employees to make
tax-deductible retirement contributions. Scudder offers a full service
program that includes recordkeeping, prototype plan, employee
communications and trustee services, as well as investment options.

* Profit Sharing and Money Purchase Pension Plans. These plans allow
corporations, partnerships and people who are self-employed to make
annual, tax-deductible contributions of up to $30,000 for each person
covered by the plans. Plans may be adopted individually or paired to
maximize contributions. These are sometimes known as Keogh plans.

* 403(b) Plans. Retirement plans for tax-exempt organizations and school
systems to which employers and employees may both contribute.

* SEP-IRAs. Easily administered retirement plans for small businesses and
self-employed individuals. The maximum annual contribution to SEP-IRA
accounts is adjusted each year for inflation.

* Scudder Horizon Plan. A no-load variable annuity that lets you build assets
by deferring taxes on your investment earnings. You can start with $2,500
or more.

Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call
1-800-225-5163.

The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.

21
<PAGE>

Trustees and Officers

Daniel Pierce*
President and Trustee

Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation

Dudley H. Ladd*
Trustee

David S. Lee*
Vice President and Trustee

George M. Lovejoy, Jr.
Trustee; Chairman Emeritus,
Meredith & Grew, Incorporated

Wesley W. Marple, Jr.
Trustee; Professor of Business Administration,
Northeastern University

Jean C. Tempel
Trustee; Director, Executive Vice President and Manager, Safeguard
Scientifics, Inc.

Jerard K. Hartman*
Vice President

William M. Hutchinson*
Vice President

Thomas W. Joseph*
Vice President

Thomas F. McDonough*
Vice President, Secretary and
Assistant Treasurer

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Coleen Downs Dinneen*
Assistant Secretary

* Scudder, Stevens & Clark, Inc.

22
<PAGE>

Investment products and services
<TABLE>

<C> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder GNMA Fund
Scudder U.S. Treasury Money Fund Scudder Income Fund
Tax free money market+ Scudder International Bond Fund
Scudder Tax Free Money Fund Scudder Short Term Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Global Income Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Fund
Scudder Managed Municipal Bonds Scudder Global Small Company Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Value Fund
Scudder Balanced Fund The Japan Fund
Scudder Growth and Income Fund
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++

For complete information on any of the above Scudder funds, including management fees and expenses, call or
write for a free prospectus. Read it carefully before you invest or send money. +A portion of the income from
the tax-free funds may be subject to federal, state and local taxes. *Not available in all states. +++A no-load
variable annuity contract provided by Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc., are
traded on various stock exchanges. ++For information on Scudder Treasurers Trust(TM), an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call:
1-800-541-7703.
</TABLE>

23
<PAGE>

How to contact Scudder

<TABLE>
<C> <C>
Account Service and Information: Please address all correspondence to:

The Scudder Funds
For existing account service Scudder Investor Relations P.O. Box 2291
and transactions 1-800-225-5163 Boston, Massachusetts
02107-2291
For account updates, prices, Scudder Automated
yields, exchanges and Information Line (SAIL)
redemptions 1-800-343-2890

Investment Information: Or Stop by a Scudder Funds Center:

To receive information about Scudder Investor Relations Many shareholders enjoy the personal, one-on-one
the Scudder funds, for 1-800-225-2470 service of the Scudder Funds Centers. Check for a
additional applications and Funds Center near you--they can be found in the
prospectuses, or for following cities:
investment questions

For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale

For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*, funds
institutional cash management service for corporations, designed to meet the broad investment management and
non-profit organizations and trusts which utilizes service needs of banks and other institutions, call:
certain portfolios of Scudder Fund, Inc.* ($100,000 1-800-854-8525.
minimum), call: 1-800-541-7703.

Scudder Investor Relations and Scudder Funds Centers are services provided through Scudder Investor Services,
Inc., Distributor.

* Contact Scudder Investor Services, Inc., Distributor, to receive a prospectus with more complete
information, including management fees and expenses. Please read it carefully before you invest or send
money.
</TABLE>

<PAGE>
This prospectus sets forth concisely the information about Scudder Income Fund,
a series of Scudder Portfolio Trust, an open-end management investment company,
that a prospective investor should know before investing. Please retain it for
future reference.

Contents--see page 4.

Scudder
Income Fund

Prospectus
May 1, 1995

A pure no-load(TM) (no sales charges) mutual fund seeking a high level of income
consistent with the prudent investment of capital.

<PAGE>

Expense information

How to compare a Scudder pure no-load(TM) fund

This information is designed to help you understand the various costs and
expenses of investing in Scudder Income Fund (the "Fund"). By reviewing this
table and those in other mutual funds' prospectuses, you can compare the Fund's
fees and expenses with those of other funds. With Scudder's pure no-load(TM)
funds, you pay no commissions to purchase or redeem shares, or to exchange from
one fund to another. As a result, all of your investment goes to work for you.

1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.

Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE

2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the year ended December 31, 1994.

Investment management fee 0.62%
12b-1 fees NONE
Other expenses 0.35%
-----
Total Fund operating expenses 0.97%
=====
Example

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$10 $31 $54 $119

* You may redeem by writing or calling the Fund. If you wish to receive
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."

2
<PAGE>

Financial highlights

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements. If you would like more detailed information concerning the Fund's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by writing or calling Scudder Investor Services, Inc.

Years Ended December 31,
--------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period . . . . $13.71 $13.48 $13.91 $12.82 $12.89 $12.41 $12.40 $13.41 $12.82 $11.70
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income . . . .84 .90 .95 .93 1.03 1.05 1.07 1.08 1.22 1.29
Net realized and
unrealized gain (loss)
on investments . . . . . (1.45) .77 (.05) 1.22 (.01) .49 .01 (.99) .59 1.12
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations . . . . . . . (.61) 1.67 .90 2.15 1.02 1.54 1.08 .09 1.81 2.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income . . . . . . . . . (.76) (.87) (.93) (.92) (1.03) (1.06) (1.07) (1.10) (1.22) (1.29)
From paid-in capital. . . . -- -- -- -- (.06)(a) -- -- -- -- --
From net realized gains
on investment
transactions . . . . . . -- (.45) (.40) (.14) -- -- -- -- -- --
In excess of net
realized gains . . . . . (.02) (.12) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions . . . . (.78) (1.44) (1.33) (1.06) (1.09) (1.06) (1.07) (1.10) (1.22) (1.29)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period . . . . . . $12.32 $13.71 $13.48 $13.91 $12.82 $12.89 $12.41 $12.40 $13.41 $12.82
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) . . . . . . (4.43) 12.58 6.74 17.32 8.32 12.75 8.91 .74 14.75 21.80
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) . . . . 463 509 457 403 302 272 245 242 249 172
Ratio of operating
expenses to average
daily net assets (%) . . . .97 .92 .93 .97 .95 .93 .94 .94 .88 .91
Ratio of net investment
income to average
daily net assets (%) . . . 6.43 6.32 7.05 7.13 8.21 8.23 8.53 8.37 9.12 10.57
Portfolio turnover
rate (%) . . . . . . . . . 60.3 130.6 121.3 109.6 48.0 63.2 19.6 33.7 24.1 29.9

<FN>
(a) Distribution made (as a result of foreign currency related gains on the
disposition of foreign bonds) in order to avoid the payment of a 4% federal
excise tax under Internal Revenue Code section 4982.
</FN>
</TABLE>

3
<PAGE>

A message from Scudder's chairman

/s/Daniel Pierce
<PAGE>

Scudder Income Fund

Investment objective

* a high level of income, consistent with the prudent investment of capital

Investment characteristics

* a professionally managed portfolio of primarily high-grade bonds and other
fixed-income securities

* share price fluctuates as interest rates rise and fall

* invests in longer-term securities for higher income

* quarterly dividends

* daily liquidity at current net asset value

Contents

Investment objective and policies ................................ 5
Why invest in the Fund? .......................................... 6
Additional information about policies
and investments ............................................... 6
Investment results ............................................... 7
Distribution and performance information ......................... 11
Purchases ........................................................ 12
Exchanges and redemptions ........................................ 13
Fund organization ................................................ 14
Transaction information .......................................... 15
Shareholder benefits ............................................. 18
Trustees and Officers ............................................ 21
Investment products and services ................................. 22
How to contact Scudder ........................................... 23

4
<PAGE>

Investment objective and policies

Scudder Income Fund (the "Fund"), a diversified series of Scudder Portfolio
Trust, seeks a high level of income, consistent with the prudent investment of
capital, through a flexible investment program emphasizing high-grade bonds.

The Fund invests primarily in a broad range of high-grade, income-producing
securities such as corporate bonds and government securities. The Fund may
invest, from time to time, in municipal obligations. There is no limitation as
to the proportions of the portfolio which may be invested in each of these types
of securities.

Proportions among the types of securities vary, depending on the prospects for
income related to the outlook for the economy and the securities markets, the
quality of available investments, the level of interest rates and other factors.
However, it is a policy of the Fund to allocate investments among industries and
companies. The Fund changes its portfolio securities for investment
considerations, not for trading purposes.

To the extent the Fund invests in high-grade securities, it will be unable to
avail itself of opportunities for higher income which may be available with
lower grade investments.

Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. Shareholders
will receive written notice of any changes in the Fund's objective. If there is
a change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.

Investments

The majority of the Fund's assets are usually invested in intermediate- and
long-term fixed-income securities. Long-term bonds have remaining maturities of
longer than eight years and usually pay a higher rate of income than short-term
fixed-income securities and common stocks. The Fund, however, has the
flexibility to invest in securities within any maturity range and has
consistently held investments with short and intermediate maturities as well as
long maturities. The Fund may invest in bonds, notes, zero coupon securities,
adjustable rate bonds, convertible bonds, preferred and convertible preferred
securities, commercial paper, mortgage and asset-backed securities and other
money market instruments and restricted securities such as private placements.

The Fund may invest up to 25% of its assets in bonds rated Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's ("S&P"), or in
bonds of equivalent quality as determined by the Fund's investment adviser,
Scudder, Stevens & Clark, Inc. (the "Adviser").

The Fund may invest in zero coupon securities which pay no cash income and are
sold at substantial discounts from their maturity value. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the issue price and their maturity value.

The Fund may also invest in U.S. Government securities which include:

* securities issued and backed by the full faith and credit of the U.S.
Government, such as U.S. Treasury bills, notes and bonds;

* securities, including mortgage-backed securities, issued by an agency or
instrumentality of the U.S. Government, including those backed by the full
faith and credit of the U.S. Government and those issued by agencies and
instrumentalities which, while neither direct obligations of, nor
guaranteed by the U.S. Government, are backed by the credit of the issuer
itself and may be supported as well by the issuer's right to borrow from
the U.S. Treasury; and

5
<PAGE>

* securities of the U.S. Government, its agencies or instrumentalities on a
when-issued or forward delivery basis.

The Fund may invest in foreign securities and certificates of deposit issued by
foreign and domestic branches of U.S. banks. It may also invest in when-issued
or forward delivery securities and repurchase agreements, and may engage in
strategic transactions. More information about these investment techniques is
provided under "Additional information about policies and investments."

The Fund's share price fluctuates with changes in interest rates and market
conditions. These fluctuations may cause the value of an investor's shares to be
higher or lower than when purchased.

Why invest in the Fund?

Scudder Income Fund seeks to provide investment income from a professionally
managed portfolio consisting primarily of long-term, high-grade, fixed-income
securities. All bonds purchased by the Fund will be investment-grade bonds:
those rated Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P or those
of equivalent quality as determined by the Adviser. In return for accepting some
risk associated with intermediate- and long-term investment-grade fixed-income
securities, you may earn a greater return on your investment than from a money
market fund.

The Fund's emphasis on high-grade fixed-income securities along with the
Adviser's professional management experience are important advantages associated
with this Fund. The Fund does not purchase lower quality, so-called "junk
bonds," which are considered to be predominantly speculative. Also, the Fund's
Adviser seeks to further reduce risk through investment diversification and
ongoing research and analysis. By focusing primarily on intermediate- and
long-term securities, the Fund offers investors the possibility of earning a
higher rate of income than is generally available from funds investing in short-
and medium-term securities. However, the potential for price fluctuation is
generally greater for funds investing in long-term securities.

As America's oldest no-load mutual fund, the Fund has not missed a quarterly
dividend payment in over 60 years. In addition, the Fund offers all the benefits
of the Scudder Family of Funds. Scudder, Stevens & Clark, Inc. manages a diverse
family of pure no-load(TM) funds and provides a wide range of services to help
investors meet their investment needs. Please refer to "Investment products and
services" for additional information.

Additional information about policies and investments

Investment restrictions

The Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk.

6
<PAGE>

Investment results

Annual Capital Changes*
December 31, Net Asset Dividends Capital Gains Capital One Year Average
Value/Share Distributions Change Annual Total Return
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1984 $11.70
1985 12.82 $1.29 -- + 9.57% + 21.80%
1986 13.41 1.22 -- + 4.60 + 14.75
1987 12.40 1.10 -- - 7.53 + 0.74
1988 12.41 1.07 -- + 0.08 + 8.91
1989 12.89 1.06 -- + 3.87 + 12.75
1990 12.82 1.09 -- - 0.54 + 8.32
1991 13.91 0.92 $0.14 + 9.40 + 17.32
1992 13.48 0.93 0.40 - 0.23 + 6.74
1993 13.71 0.87 0.57 + 5.93 + 12.58
1994 12.32 0.76 0.02 - 10.00 - 4.43
- ---------------------------------------------------------------------------------------------------------------------
Growth of a $10,000 Total Return
Investment ----------------------------------
Years Ended Value of Cumulative Average
December 31, Initial $10,000 Annual
1994 Investment
-----------------------------------------------------------------------------------------
One Year $ 9,557 - 4.43% - 4.43%
Five Years 14,595 + 45.95 + 7.85
Ten Years 25,230 + 152.30 + 9.70

"Growth of a $10,000 Investment" includes reinvestment of dividends and capital gains distributions, if any. *For
definition of "capital change" please see "Distribution and performance information."

The investment return and principal value of the Fund's shares represent past performance and will vary due to
market conditions, and the shares may be worth more or less at redemption than at original purchase.
</TABLE>

A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund's Statement of Additional
Information.

Dollar roll transactions

Mortgage and other asset-backed securities

The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is

7
<PAGE>

Additional information about policies and investments (cont'd)

backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Fund shares. Also, GNMA and other
mortgage-backed securities may be purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs. In addition, the Fund may invest in mortgage-backed
securities issued by other issuers, such as the Federal National Mortgage
Association (FNMA), which are not guaranteed by the U.S. Government. Moreover,
the Fund may invest in debt securities which are secured with collateral
consisting of mortgage-backed securities and in other types of mortgage-related
securities.

The Fund may also invest in securities representing interests in pools of
certain other consumer loans, such as automobile loans or credit card
receivables. In some cases, principal and interest payments are partially
guaranteed by a letter of credit from a financial institution.

Indexed securities

When-issued securities

Repurchase agreements

As a means of earning income for periods as short as overnight, the Fund may
enter into repurchase agreements with selected banks and broker/ dealers. Under
a repurchase agreement the Fund acquires securities, subject to the seller's
agreement to repurchase them at a specified time and price. The Fund may enter
into repurchase commitments with any party deemed creditworthy by the Adviser,
including foreign banks and broker/dealers, if the transaction is entered into
for investment purposes and the counterparty's creditworthiness is at least
equal to that of issuers of securities which the Fund may purchase. Such
transactions may not provide the Fund with collateral marked-to-market during
the term of the commitment.

Foreign securities

While the Fund generally emphasizes investments in companies domiciled in the
U.S., it may invest in listed and unlisted foreign securities that meet the same
criteria as the Fund's domestic holdings. The Fund may invest in foreign
securities when the anticipated performance of foreign securities is believed by
the Adviser to offer more potential than domestic alternatives in keeping with
the investment objective of the Fund. The Fund may invest in certificates of
deposit issued by foreign and domestic branches of U.S. banks.

Strategic Transactions and derivatives

8
<PAGE>

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.

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 or currency exchange
rate 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. Please refer to "Risk
factors--Strategic Transactions and derivatives" for more information.

Portfolio turnover

Economic and market conditions in 1991, 1992 and 1993 necessitated more active
trading, resulting in a higher portfolio turnover rate. A higher rate involves
greater brokerage expenses to the Fund and may result in the realization of net
capital gains, which would be taxable to shareholders when distributed.

Risk factors

Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a

9
<PAGE>

Additional information about policies and investments (cont'd)

decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, the Fund will bear the
market risk of the reference instrument.

Mortgage and other asset-backed securities. Unscheduled or early payments on the
underlying mortgages may shorten the securities' effective maturities and lessen
their growth potential. The Fund may agree to purchase or sell these securities
with payment and delivery taking place at a future date. A decline in interest
rates may lead to a faster rate of repayment of the underlying mortgages, and
expose the Fund to a lower rate of return upon reinvestment. To the extent that
such mortgage-backed securities are held by the Fund, the prepayment right of
mortgagors may limit the increase in net asset value of the Fund because the
value of the mortgage-backed securities held by the Fund may not appreciate as
rapidly as the price of non-callable debt securities. Asset-backed securities
are subject to the risk of prepayment and the risk that the underlying loans
will not be repaid.

10
<PAGE>

Strategic Transactions and derivatives. 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 currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. 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 contracts 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. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.

Distribution and performance information

Dividends and capital gains distributions

Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are

(Continued on page 14)

11
<PAGE>

Purchases

Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.

o By Mail Send your completed and signed application and check
Make checks
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:

The Scudder Funds The Scudder Funds
P.O. Box 2291 1099 Hingham Street
Boston, MA Rockland, MA
02107-2291 02370-1052

o By Wire Please see Transaction information--Purchasing shares--
By wire following these tables for details, including the ABA wire
transfer number. Then call 1-800-225-5163 for instructions.

o In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.

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

Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.

o By Wire Please see Transaction information--Purchasing shares-- By wire
following these tables for details, including the ABA wire transfer
number.

o In Person Visit one of our Funds Centers to make an additional investment in your
Scudder fund account. Funds Center locations are listed under Shareholder
benefits.

o By Telephone You may purchase additional shares in an amount of $10,000 or more.
Please call 1-800-225-5163 for more details.

o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.

12
<PAGE>

Exchanges and redemptions

Exchanging Minimum investments: $1,000 to establish a new account; $100 to exchange among existing accounts
shares
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail
or Fax Print or type your instructions and include:
- the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into; and
- your signature(s) as it appears on your account and a daytime telephone
number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:

The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 1099 Hingham Street
Boston, MA 02107-2291 Rockland, MA 02370-1052

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

Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may have redemption
proceeds sent to your predesignated bank account, or redemption proceeds of up
to $50,000 sent to your address of record.

o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem; and
- your signature(s) as it appears on your account and a daytime telephone
number.

A signature guarantee is required for redemptions over $50,000. See Transaction
information--Redeeming shares following these tables.

</TABLE>

13
<PAGE>

Distribution and performance information (cont'd)

(Continued from page 11)

taxable as long-term capital gains regardless of the length of time shareholders
have owned shares. Short-term capital gains and any other taxable income
distributions are taxable as ordinary income.

The Fund sends detailed tax information about the amount and type of its
distributions to its shareholders by January 31 of the following year.

Performance information

From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. The "yield" of the Fund refers to
income generated by an investment in the Fund over a specified 30-day (one
month) period. Yield is expressed as an annualized percentage. "Total return" is
the change in value of an investment in the Fund for a specified period. The
"average annual total return" of the Fund is the average annual compound rate of
return of an investment in the Fund assuming the investment has been held for
one year, five years and ten years as of a stated ending date. "Cumulative total
return" represents the cumulative change in value of an investment in the Fund
for various periods. Total return calculations assume that all dividends and
capital gains distributions during the period were reinvested in shares of the
Fund. "Capital change" measures return from capital, including reinvestment of
any capital gains distributions but does not include the reinvestment of
dividends. Performance will vary based upon, among other things, changes in
market conditions and the level of the Fund's expenses.

Fund organization

Scudder Income Fund is a diversified series of Scudder Portfolio Trust (the
"Trust"), an open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as a
Massachusetts business trust in September 1984 and on December 31, 1984 assumed
the business of its predecessor, which was organized as a Massachusetts
corporation in 1928.

Investment adviser

The Adviser receives an investment management fee for these services. The fee is
graduated so that increases in the Fund's net assets may result in a lower fee
and decreases in the Fund's net assets may result in a higher fee. The fee is
payable monthly, provided that the Fund will make such

14
<PAGE>

interim payments as may be requested by the Adviser not to exceed 75% of the
amount of the fee then accrued on the books of the Fund and unpaid.

For the year ended December 31, 1994, the Adviser received an investment
management fee of 0.62% of the Fund's average daily net assets on an annual
basis.

All of the Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment or administrative services.

Scudder, Stevens & Clark, Inc. is located at Two International Place, Boston,
Massachusetts.

Transfer agent

Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
wholly-owned subsidiary of the Adviser, is the transfer, shareholder servicing
and dividend-paying agent for the Fund.

Underwriter

Custodian

State Street Bank and Trust Company is the Fund's custodian.

Transaction information

Purchasing shares

The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552

Your wire instructions must also include:

- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).

The account will be established once the application and money order are
received in good order.

You may also make additional investments of $100 or more to your existing
account by wire.

15
<PAGE>

Transaction information (cont'd)

is placed. If payment by check or wire is not received within seven business
days, the order will be canceled and the shareholder will be responsible for any
loss to the Fund resulting from this cancellation. Telephone orders are not
available for shares held in Scudder IRA accounts and most other Scudder
retirement plan accounts.

By exchange. Your new account will have the same registration and address as
your existing account.

The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.

You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.

Redeeming shares

The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.

You can also make redemptions from your Scudder fund account on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.

In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.

Telephone transactions

16
<PAGE>

reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If 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

Processing time

Purchase and redemption requests received after the close of regular trading on
the Exchange will be executed the following business day.

If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.

Short-term trading

Tax information

A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.

Tax identification number

Minimum balances

17
<PAGE>

Transaction information (cont'd)

to the shareholder. The shareholder may restore the share balance to $1,000 or
more during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.

Third party transactions

Redemption-in-kind

Shareholder benefits

Experienced professional management

A team approach to investing

Scudder Income Fund is managed by a team of Scudder investment professionals,
who each play 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 Scudder's large staff of economists,
research analysts, traders and other investment specialists who work in
Scudder's offices across the United States and abroad. Scudder believes its team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.

Lead Portfolio Manager William M. Hutchinson has been responsible for the Fund's
day-to-day operations and overall investment strategy since he joined Scudder in
1986. Mr. Hutchinson has over 20 years of investment experience. Stephen A.
Wohler, Portfolio Manager, joined the team in 1994 and is also responsible for
implementing the Fund's strategy. Mr. Wohler has over 15 years' experience
managing fixed-income investments and has been with Scudder since 1979.

SAIL(TM)--Scudder Automated Information Line

Investment flexibility

18
<PAGE>

prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.

Dividend reinvestment plan

You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.

Shareholder statements

Shareholder reports

Newsletters

Four times a year, Scudder sends you At the Helm, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.

Scudder Funds Centers

T.D.D. service for the hearing impaired

19
<PAGE>

Scudder tax-advantaged retirement plans

* 401(k)Plans. 401(k) plans allow employers and employees to make
tax-deductible retirement contributions. Scudder offers a full service
program that includes recordkeeping, prototype plan, employee
communications and trustee services, as well as investment options.

* Profit Sharing and Money Purchase Pension Plans. These plans allow
corporations, partnerships and people who are self-employed to make annual,
tax-deductible contributions of up to $30,000 for each person covered by
the plans. Plans may be adopted individually or paired to maximize
contributions. These are sometimes known as Keogh plans.

* 403(b) Plans. Retirement plans for tax-exempt organizations and school
systems to which employers and employees may both contribute.

* SEP-IRAs. Easily administered retirement plans for small businesses and
self-employed individuals. The maximum annual contribution to SEP-IRA
accounts is adjusted each year for inflation.

* Scudder Horizon Plan. A no-load variable annuity that lets you build assets
by deferring taxes on your investment earnings. You can start with $2,500
or more.

20
<PAGE>

Trustees and Officers

Daniel Pierce*
President and Trustee

Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation

Dudley H. Ladd*
Trustee

David S. Lee*
Vice President and Trustee

George M. Lovejoy, Jr.
Trustee; Chairman Emeritus, Meredith & Grew, Incorporated

Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University

Jean C. Tempel
Trustee; Director, Executive Vice President and Manager, Safeguard
Scientifics, Inc.

Jerard K. Hartman*
Vice President

William M. Hutchinson*
Vice President

Thomas W. Joseph*
Vice President

Thomas F. McDonough*
Vice President, Secretary and Assistant Treasurer

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Coleen Downs Dinneen*
Assistant Secretary

* Scudder, Stevens & Clark, Inc.

21
<PAGE>

Investment products and services

<TABLE>
<S> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder GNMA Fund
Scudder U.S. Treasury Money Fund Scudder Income Fund
Tax free money market+ Scudder International Bond Fund
Scudder Tax Free Money Fund Scudder Short Term Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Global Income Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Fund
Scudder Managed Municipal Bonds Scudder Global Small Company Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Value Fund
Scudder Balanced Fund The Japan Fund
Scudder Growth and Income Fund
- ------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
- ------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
- ------------------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including management fees and expenses, call or write for a
free prospectus. Read it carefully before you invest or send money. +A portion of the income from the tax-free funds may
be subject to federal, state and local taxes. *Not available in all states. +++A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc., are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust(TM), an institutional cash management service that utilizes certain portfolios
of Scudder Fund, Inc. ($100,000 minimum), call: 1-800-541-7703.
</TABLE>

22
<PAGE>

<TABLE>
How to contact Scudder

Account Service and Information: Please address all correspondence to:
<S> <C> <C>
For existing account service Scudder Investor The Scudder Funds
and transactions Relations P.O. Box 2291
1-800-225-5163 Boston, Massachusetts
02107-2291
For account updates, prices, Scudder Automated
yields, exchanges and Information Line
redemptions (SAIL)
1-800-343-2890

Investment Information: Or Stop by a Scudder Funds Center:

To receive information about Scudder Investor Many shareholders enjoy the personal, one-on-one service
the Scudder funds, for Relations of the Scudder Funds Centers. Check for a Funds Center
additional applications and 1-800-225-2470 near you--they can be found in the following cities:
prospectuses, or for investment
questions

For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale

For information on Scudder Treasurers Trust(tm), For information on Scudder Institutional Funds*,
an institutional cash management service for funds designed to meet the broad investment
corporations, non-profit organizations and trusts management and service needs of banks and other
which utilizes certain portfolios of Scudder Fund, institutions, call: 1-800-854-8525.
Inc.* ($100,000 minimum), call: 1-800-541-7703.

Scudder Investor Relations and Scudder Funds Centers are services provided through Scudder Investor Services,
Inc., Distributor.

23
<PAGE>
SCUDDER BALANCED FUND

A Pure No-Load(TM) (No Sales Charges) Diversified Mutual Fund,
which Seeks a Balance of Growth and Income, as well as
Long-Term Preservation of Capital, from
a Diversified Portfolio of Equity and
Fixed-Income Securities

and

SCUDDER INCOME FUND

A Pure No-Load(TM) (No Sales Charges) Diversified Mutual Fund,
Seeking a High Level of Income Consistent with the
Prudent Investment of Capital

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

STATEMENT OF ADDITIONAL INFORMATION

May 1, 1995

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

This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the prospectuses of Scudder Balanced Fund
and Scudder Income Fund each dated May 1, 1995, as amended from time to time,
copies of which may be obtained without charge by writing to Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103.

<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objectives and Policies of Scudder Balanced Fund..........................................1
Investments..................................................................................................1
Equity Investments...........................................................................................2
Fixed-Income Investments.....................................................................................2
General Investment Objective and Policies of Scudder Income Fund.............................................2
Investments and Investment Techniques........................................................................3
Investment Restrictions.....................................................................................18
Other Investment Policies...................................................................................19

PURCHASES............................................................................................................21
Additional Information About Opening An Account.............................................................21
Additional Information About Making Subsequent Investments..................................................21
Checks......................................................................................................21
Wire Transfer of Federal Funds..............................................................................22
Share Price.................................................................................................22
Share Certificates..........................................................................................22
Other Information...........................................................................................22

EXCHANGES AND REDEMPTIONS............................................................................................23
Exchanges...................................................................................................23
Redemption by Telephone.....................................................................................23
Redemption by Mail or Fax...................................................................................24
Redemption-In-Kind..........................................................................................25
Other Information...........................................................................................25

FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................26
The Pure No-Load(TM) Concept................................................................................26
Distribution Plans..........................................................................................27
Diversification.............................................................................................27
Scudder Funds Centers.......................................................................................27
Reports to Shareholders.....................................................................................28
Transaction Summaries.......................................................................................28

THE SCUDDER FAMILY OF FUNDS..........................................................................................28

SPECIAL PLAN ACCOUNTS................................................................................................31
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans
for Corporations and Self-Employed Individuals.........................................................31
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and
Self-Employed Individuals..............................................................................32
Scudder IRA: Individual Retirement Account.................................................................32
Scudder 403(b) Plan.........................................................................................33
Automatic Withdrawal Plan...................................................................................33
Group or Salary Deduction Plan..............................................................................33
Automatic Investment Plan...................................................................................34
Uniform Transfers/Gifts to Minors Act.......................................................................34
Scudder Trust Company.......................................................................................34

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................34

i
<PAGE>
TABLE OF CONTENTS (continued)
Page

PERFORMANCE INFORMATION..............................................................................................35
Average Annual Total Return.................................................................................35
Cumulative Total Return.....................................................................................35
Total Return................................................................................................36
Capital Change..............................................................................................36
Yield for Scudder Income Fund...............................................................................36
Comparison of Fund Performance..............................................................................37

ORGANIZATION OF THE FUNDS............................................................................................40

INVESTMENT ADVISER...................................................................................................41
Personal Investments by Employees of the Adviser............................................................44

TRUSTEES AND OFFICERS................................................................................................44

REMUNERATION.........................................................................................................46

DISTRIBUTOR..........................................................................................................47

TAXES................................................................................................................47

PORTFOLIO TRANSACTIONS...............................................................................................51
Brokerage Commissions.......................................................................................51
Portfolio Turnover..........................................................................................52

NET ASSET VALUE......................................................................................................52

ADDITIONAL INFORMATION...............................................................................................53
Experts.....................................................................................................53
Shareholder Indemnification.................................................................................53
Other Information...........................................................................................54

FINANCIAL STATEMENTS.................................................................................................55
Scudder Balanced Fund.......................................................................................55
Scudder Income Fund.........................................................................................55

APPENDIX
Ratings of Municipal and Corporate Bonds
Standard & Poor's Earnings and Dividend Rankings for Common Stocks

</TABLE>

ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES

(See "Investment objective and policies" and
"Additional information about policies and
investments" in each Funds' prospectus.)

Scudder Balanced Fund and Scudder Income Fund (each a "Fund,"
collectively, the "Funds"), are series of Scudder Portfolio Trust (the "Trust"),
a pure no-load(TM), diversified, open-end management investment company which
continuously offers and redeems its shares. It is a company of the type commonly
known as a mutual fund.

General Investment Objectives and Policies of Scudder Balanced Fund

Scudder Balanced Fund ("Balanced Fund") seeks a balance of growth and
income from a diversified portfolio of equity and fixed-income securities. The
Fund also seeks long-term preservation of capital through a quality-oriented
investment approach designed to reduce risk.

The Fund is intended to provide--through a single investment--access to
a wide variety of seasoned stock and investment-grade bond investments. Common
stocks and other equity investments provide long-term growth potential to help
offset the effects of inflation on an investor's purchasing power. Bonds and
other fixed-income investments provide current income and may, over time, help
reduce fluctuations in the Fund's share price. While the Fund maintains a
balanced investment program, its price can fluctuate daily with changes in stock
market levels, interest rates and other factors. There can be no assurance that
the Fund's objectives will be met.

Except as otherwise indicated, the Fund's investment objectives and
policies are not fundamental and may be changed by a vote of the Fund's Trustees
without a shareholder vote.

Investments

In seeking its objectives of a balance of growth and income as well as
long-term preservation of capital, the Fund invests in a diversified portfolio
of equity and fixed-income securities. The Fund invests, under normal
circumstances, 50% to 75% of its net assets in common stocks and other equity
investments. The Fund's remaining assets are allocated to investment-grade bonds
and other fixed-income securities, including cash reserves. For temporary
defensive purposes, the Fund may invest without limit in cash and in other money
market and short-term instruments.

The Fund will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Fund's
investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"), weighs the
relative values of different asset classes and expectations for future returns.
In doing so, the Adviser analyzes, on a global basis, the level and direction of
interest rates, capital flows, inflation expectations, anticipated growth of
corporate profits, monetary and fiscal policies around the world, and other
related factors.

The Fund does not take extreme investment positions as part of an
effort to "time the market." Shifts between stocks and fixed-income investments
are expected to occur in generally small increments within the guidelines
adopted in the Fund's prospectus and this Statement of Additional Information.
The Fund is designed as a conservative long-term investment program.

While the Fund emphasizes U.S. equity and debt securities, it may
invest a portion of its assets in foreign securities, including depositary
receipts. The Fund's foreign holdings will meet the criteria applicable to its
domestic investments. The international component of the Fund's investment
program is intended to increase diversification, thus reducing risk, while
providing the opportunity for higher returns.

In addition, the Fund may invest in securities on a when-issued or
forward delivery basis and may utilize various other strategic transactions.
Please refer to "Strategic Transactions and Derivatives" for more information.

<PAGE>
Equity Investments

The Fund normally invests at least 50%, but no more than 75%, of its
net assets in equity securities. The Fund's equity investments generally consist
of common stocks, preferred stocks, warrants and securities convertible into
common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow, or assets relative to the overall market as defined by
the Standard and Poor's 500 Composite Price Index ("S&P 500"). The Fund invests
primarily in securities issued by medium-to-large size domestic companies with
annual revenues or market capitalization of at least $600 million and, in the
opinion of the Adviser, offer above-average potential for price appreciation.
The Fund seeks to invest in companies that have relatively consistent and
above-average rates of growth; companies that are in a strong financial position
with high credit standings and profitability; firms with important business
franchises, leading products, or dominant marketing and distribution systems;
companies guided by experienced and motivated managements; and, companies
selling at attractive market valuations. The Adviser believes that companies
with these characteristics will be rewarded by the market with higher stock
prices over time and provide investment returns, on average, in excess of the
S&P 500.

At least 65% of the value of the Fund's common stocks will be of
issuers which qualify, at the time of purchase, for one of the three highest
equity earnings and dividends ranking categories (A+, A or A-) of Standard &
Poor's ("S&P"), or if not ranked by S&P, are judged to be of comparable quality
by the Adviser. S&P assigns earnings and dividends rankings to corporations
based on a number of factors, including stability and growth of earnings and
dividends. Rankings by S&P are not an appraisal of a company's creditworthiness,
as is true for S&P's debt security ratings, nor are these rankings intended as a
forecast of future stock market performance. In addition to using S&P's rankings
of earnings and dividends of common stocks, the Adviser conducts its own
analysis of a company's history, current financial position, and earnings
prospects.

Fixed-Income Investments

To enhance income and stability, the Fund normally invests 25% to 50%
of its net assets in investment-grade fixed-income securities. However, at least
25% of the Fund's net assets will always be invested in fixed-income securities.
The Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, and preferred and convertible preferred securities. It may also purchase
U.S. Government securities and obligations of federal agencies that are not
backed by the full faith and credit of the U.S. Government, such as obligations
of the Federal Home Loan Banks, Farm Credit Banks, and the Federal Home Loan
Mortgage Corporation. The Fund may also invest in obligations of international
agencies, foreign debt securities (both U.S. dollar and non-U.S. dollar
denominated), mortgage-backed and other asset-backed securities, municipal
obligations, zero coupon securities and restricted securities issued in private
placements.

For liquidity and defensive purposes, the Fund may invest in money
market securities such as commercial paper, banker's acceptances, and
certificates of deposit issued by domestic and foreign branches of U.S. banks.
The Fund may also enter into repurchase agreements with respect to U.S.
Government securities.

The Fund's fixed-income component is of high quality. At least 75% of
the value of the Fund's debt securities will be high grade, that is, rated
within the three highest quality ratings of Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa and A) or S&P (AAA, AA and A), or, if unrated, judged to be
of equivalent quality as determined by the Adviser at the time of purchase.
Securities must also meet credit standards applied by the Adviser. Moreover, the
Fund does not purchase debt securities rated below Baa by Moody's or BBB by S&P.
Should the rating of a portfolio security be downgraded the Adviser will
determine whether it is in the best interest of the Fund to retain or dispose of
the security. (See "APPENDIX.")

General Investment Objective and Policies of Scudder Income Fund

The investment objective of Scudder Income Fund ("Income Fund") is to
earn a high level of income, consistent with the prudent investment of capital,
through a flexible investment program emphasizing high-grade bonds.

2
<PAGE>
The Fund invests primarily in a broad range of high-grade
income-producing securities such as corporate bonds and government securities.
The Fund may invest, from time to time, in convertible bonds, preferred stock,
convertible preferred securities, fixed and adjustable rate bonds, debentures
(convertible and non-convertible), stripped coupons and bonds, zero coupon
securities, commercial paper and other money market instruments, asset-backed
bonds and certificates, mortgage bonds and pass-through certificates, corporate
notes (including convertible notes), equipment trust certificates, the bond
portion of units with stock, or warrants to buy stock attached. The Fund may
also invest, from time to time, in municipal obligations and restricted
securities such as private placements. Proportions among the types of securities
held by the Fund will vary from time to time depending on the judgment of the
Fund's Adviser, as to the prospects of income related to the outlook for the
economy and the securities markets, the quality of investments available, the
level of interest rates, and other factors. However, it is a policy of the Fund
to allocate its investments among industries and companies. The securities in
which the Fund may invest are further described below and under "Investment
objective and policies" and "Additional information about policies and
investments" in the Fund's prospectus.

Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes. The Fund cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Fund's shares will increase or decrease with
changes in the market prices of the Fund's investments and there is no assurance
that the Fund's objective will be achieved.

Except as otherwise indicated, the Fund's investment objective and
policies are not fundamental and may be changed by the Trustees without a
shareholder vote.

Investments and Investment Techniques

Zero Coupon Securities. Each Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.

Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Funds, most likely
will be deemed the beneficial holder of the underlying U.S. government
securities.

The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Funds will be able to have their beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.

3
<PAGE>
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself. (See "TAXES.")

Mortgage-Backed Securities and Mortgage Pass-Through Securities. Each Fund may
also invest in mortgage-backed securities, which are interests in pools of
mortgage loans, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks, and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related, and private organizations as further described below. The
Funds may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.

A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Funds to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by a
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities.

Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing, or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities such as
securities issued by the Government National Mortgage Association ("GNMA") are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.

The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of each Fund's shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.

Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.

FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.

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Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets each Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Funds may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Adviser determines that the
securities meet each Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.

Collateralized Mortgage Obligations ("CMO"s). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.

CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.

In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.

FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.

If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.

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Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.

Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. The Funds will not purchase mortgage-backed securities or any
other assets which, in the opinion of the Adviser, are illiquid if, as a result,
more than 10% of the value of each Fund's total assets will be illiquid. As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with each Fund's investment objectives, policies, and
quality standards, consider making investments in such new types of
mortgage-related securities.

Other Asset-Backed Securities. The securitization techniques used to develop
mortgaged-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with each Fund's investment objectives and policies, a
Fund may invest in these and other types of asset-backed securities that may be
developed in the future. In general, the collateral supporting these securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments with interest rate fluctuations.

Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile Receivables(SM) ("CARS(SM)").
CARS(SM) represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS(SM) are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARS(SM) may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.

Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.

Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Funds will not pay any additional or separate fees for
credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an investment in such a security.

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Each Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the Securities Act of 1933 may be subject to certain
restrictions on transferability and would be subject to each Fund's restriction
on restricted or illiquid securities. In addition, there may be no liquid market
for such securities.

The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Funds to dispose of any then existing holdings of such
securities.

Indexed Securities. Each 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 Funds 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.

When-Issued Securities. Each Fund may purchase securities on a "when-issued" or
"forward delivery" basis for payment and delivery at a later date. The price of
such securities, which is generally expressed in yield terms, is generally fixed
at the time the commitment to purchase is made, but delivery and payment for the
when-issued or forward delivery securities takes place at a later date. During
the period between purchase and settlement, no payment is made by the Funds to
the issuer and no interest on the when-issued or forward delivery securities
accrues to the Funds. To the extent that assets of the Funds are held in cash
pending the settlement of a purchase of securities, the Funds will earn no
income; however, it is the Funds' intention to be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, the Funds
intend to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the Funds
make the commitment to purchase a security on a when-issued or forward delivery
basis, they will record the transaction and reflect the value of the security in
determining their net asset values. At the time of settlement, the market value
of the when-issued or forward delivery securities may be more or less than the
purchase price. The Funds do not believe that their net asset values or income
will be adversely affected by their purchase of securities on a when-issued or
forward delivery basis.

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Municipal Obligations. Municipal obligations are issued by or on behalf of
states, territories, and possessions of the U.S., and their political
subdivisions, agencies, and instrumentalities, and the District of Columbia to
obtain funds for various public purposes. The interest on these obligations is
generally exempt from federal income tax in the hands of most investors. The two
principal classifications of municipal obligations are "notes" and "bonds." The
return on municipal obligations is ordinarily lower than that of taxable
obligations. The Funds may acquire municipal obligations when, due to
disparities in the debt securities markets, the anticipated total return on such
obligations is higher than that on taxable obligations. The Funds have no
current intention of purchasing tax-exempt municipal obligations that would
amount to greater than 5% of each Fund's total assets.

Repurchase Agreements. Each Fund may enter into repurchase agreements with
member banks of the Federal Reserve System and any 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 a Fund 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 or S&P.

A repurchase agreement provides a means for the Funds to earn income on
funds for periods as short as overnight. It is an arrangement under which the
Funds acquire a security ("Obligation") and the seller (i.e. the bank or the
broker-dealer) agrees, at the time of sale, to repurchase the Obligation at a
specified time and price. Obligations subject to a repurchase agreement are held
in a segregated account and the value of such obligations is 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 Funds, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to the Funds together with the repurchase price upon repurchase. In either
case, the income to the Funds is unrelated to the interest rate on the
Obligation itself. Obligations will be held by each Fund's custodian or in the
Federal Reserve Book Entry System.

For purposes of the Investment Company Act of 1940, as amended (the
"1940 Act"), a repurchase agreement is deemed to be a loan from the Funds to the
seller of the Obligation subject to the repurchase agreement and is therefore
subject to each Fund's investment restriction applicable to loans. It is not
clear whether a court would consider the Obligation purchased by the Funds
subject to a repurchase agreement as being owned by the Funds or as being
collateral for a loan by the Funds 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, the Funds may encounter delay and incur costs before being able to
sell the security. Delays may cause loss of interest or decline in price of the
Obligation. If the court characterizes the transaction as a loan and the Funds
have not perfected a security interest in the Obligation, the Funds 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, the Funds would be
at the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Funds, 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 Funds may incur a loss if the proceeds to the Funds of their sale of
the securities underlying the repurchase agreement to a third party are less
than the repurchase price. To protect against such potential loss, if the market
value (including interest) of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Funds will
direct the seller of the Obligation to deliver additional securities so that the
value (including interest) of all securities subject to the repurchase agreement
will equal or exceed the repurchase price. It is possible that the Funds will be
unsuccessful in seeking to impose on the seller a contractual obligation to
deliver additional securities.

Repurchase Commitments. Each Fund may enter into repurchase commitments with any
party deemed creditworthy by the Adviser, including foreign banks and
broker/dealers, if the transaction is entered into for investment purposes and
the counterparty's creditworthiness is at least equal to that of issuers of
securities which the Funds may purchase. Such transactions may not provide the
Funds with collateral marked-to-market during the term of the commitment.

Dollar Roll Transactions. Each Fund may enter into "dollar roll" transactions,
which consist of the sale by the Funds to a bank or broker/dealers (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the

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security while it is the holder. The Funds receive a fee from the counterparty
as consideration for entering into the commitment to purchase. Dollar rolls may
be renewed over a period of several months with a different purchase and
repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a
firm commitment agreement pursuant to which the Funds agree to buy a security on
a future date.

The Funds will not use such transactions for leveraging purposes and,
accordingly, will segregate cash, U.S. Government securities or other high grade
debt obligations in an amount sufficient to meet their purchase obligations
under the transactions. Each Fund will also maintain asset coverage of at least
300% for all outstanding firm commitments, dollar rolls and other borrowings.

Dollar rolls are treated for purposes of the 1940 Act as borrowings of
the Funds because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the Funds.
For example, while the Funds receive a fee as consideration for agreeing to
repurchase the security, the Funds forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Funds, thereby effectively
charging the Funds interest on their borrowing. Further, although the Funds can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of each Fund's borrowing.

The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Funds' right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Funds are able to purchase them.
Similarly, the Funds may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Funds, the security that the Funds
are required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Funds' use of the cash
that they receive from a dollar roll will provide a return that exceeds
borrowing costs.

The Trustees of the Funds have adopted guidelines to ensure that those
securities received are substantially identical to those sold. To reduce the
risk of default, the Funds will engage in such transactions only with
counterparties selected pursuant to such guidelines.

Lending of Portfolio Securities. Each Fund may seek to increase their income by
lending portfolio securities. Such loans may be made to registered
broker/dealers, and are required to be secured continuously by collateral in
cash, U.S. Government securities and high grade debt obligations, maintained on
a current basis at an amount at least equal to the market value and accrued
interest of the securities loaned. The Funds have the right to call a loan and
obtain the securities loaned on no more than five days' notice. During the
existence of a loan, the Funds continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans may be made only to firms deemed by the Adviser to be of good standing.
The value of the securities loaned will not exceed 30% of the value of each
Fund's total assets at the time any loan is made. The Funds have no current
intention of making loans of portfolio securities that would amount to greater
than 5% of each Fund's total assets.

Foreign Securities. While the Funds generally emphasize investments in companies
domiciled in the U.S., they may invest in listed and unlisted foreign securities
of the same types as the domestic securities in which the Funds may invest when
the anticipated performance of foreign securities is believed by the Adviser to
offer more potential than domestic alternatives in keeping with the investment
objectives of each Fund.

Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in U.S. securities and which may
favorably or unfavorably affect each Fund's performance. As foreign companies
are not generally subject to uniform accounting and auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic companies, there may be less publicly available information about a
foreign company than about a domestic company. Many foreign stock markets, while
growing in volume of trading activity, have substantially less volume than the
New York Stock Exchange (the "Exchange"), and securities of some foreign
companies are less liquid and more volatile than securities of domestic
companies. Similarly, volume and liquidity in most foreign bond markets are less

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<PAGE>
than the volume and liquidity in the U.S. and at times, volatility of price can
be greater than in the U.S. Further, foreign markets have different clearance
and settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Funds are
uninvested and no return is earned thereon. The inability of the Funds to make
intended security purchases due to settlement problems could cause the Funds to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in losses to the Funds
due to subsequent declines in value of the portfolio security or, if the Funds
have entered into a contract to sell the security, could result in possible
liability to the purchaser. Fixed commissions on some foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
Funds will endeavor to achieve the most favorable net results on their portfolio
transactions. Further, the Funds may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts. There is generally
less government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Funds' agents to keep currently informed about corporate
actions such as stock dividends or other matters which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of nationalization, expropriation, the imposition of withholding or
confiscatory taxes, political, social, or economic instability, or diplomatic
developments which could affect U.S. investments in those countries. Investments
in foreign securities may also entail certain risks, such as possible currency
blockages or transfer restrictions, and the difficulty of enforcing rights in
other countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.

These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance may be greater in these countries than in developed
countries. The management of each Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, a Fund will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Adviser, are
speculative.

Investments in foreign securities usually will involve currencies of
foreign countries. Moreover, the Funds may temporarily hold funds in bank
deposits in foreign currencies during the completion of investment programs and
the value of these assets for the Funds as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and the Funds may incur costs in connection
with conversions between various currencies. Although each Fund values its
assets daily in terms of U.S. dollars, it does not intend to convert its
holdings of foreign currencies, if any, into U.S. dollars on a daily basis. It
may do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Funds will conduct their foreign currency exchange
transactions, either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market or through forward foreign currency
exchange contracts. (See "Currency Transactions" for more information.)

To the extent that the Funds invest in foreign securities, each Fund's
share price could reflect the movements of both the different stock and bond
markets in which it is invested and the currencies in which the investments are
denominated; the strength or weakness of the U.S. dollar against foreign
currencies could account for part of that Funds' investment performance.

Convertible Securities

Balanced Fund may invest in convertible securities; that is, bonds,
notes, debentures, preferred stocks and other securities which are convertible
into common stock. Investments in convertible securities can provide an
opportunity for capital appreciation and/or income through interest and dividend
payments by virtue of their conversion or exchange features.

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The convertible securities in which the Fund may invest include
fixed-income or zero coupon debt securities which may be converted or exchanged
at a stated or determinable exchange ratio into underlying shares of common
stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.

As fixed-income securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed-income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.

Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.

Convertible securities may be issued as fixed-income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold
at substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.

Depositary Receipts

Balanced Fund may invest indirectly in securities of foreign issuers
through sponsored or unsponsored American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), International Depositary Receipts ("IDRs") and
other types of Depositary Receipts (which, together with ADRs, GDRs and IDRs are
hereinafter referred to as "Depositary Receipts"). Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of the stock of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of the Depositary Receipts. ADRs
are typically issued by a United States bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by United States banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally, Depositary Receipts in registered form are designed for use in the
United States securities markets and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. For purposes
of the Fund's investment policies, the Fund's investments in ADRs, GDRs and
other types of Depositary Receipts will be deemed to be investments in the
underlying securities. Depositary Receipts other than those denominated in U.S.

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dollars will be subject to foreign currency exchange rate risk. Certain
Depositary Receipts may not be listed on an exchange and therefore may be
illiquid securities.

Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities in a Fund's portfolio, or to
enhance potential gain. These strategies may be executed 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, a Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (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 a Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect a 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 a 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 a 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 a
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. Each 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 a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. 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 a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.

General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving

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options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each 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.

A 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. Each
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula price within seven days. Each Fund
expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.

Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each

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<PAGE>
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. Each 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 nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
Securities and Exchange Commission (the "SEC") currently takes the position that
OTC options purchased by a Fund, and portfolio securities "covering" the amount
of a Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
each Fund's limitation on investing no more than 10% of its assets in illiquid
securities.

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

Each Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible 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, currencies and futures
contracts. All calls sold by a Fund must be "covered" (i.e., a Fund must own the
securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though a Fund will receive the option premium to help protect it against
loss, a call sold by a Fund exposes that 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 that Fund to hold a security
or instrument which it might otherwise have sold.

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

General Characteristics of Futures. Each Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity 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 a Fund, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.

Each Fund's use of 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 a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction

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<PAGE>
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.

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

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

Currency Transactions. Each Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. Each Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.

Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.

Each Fund will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.

Each Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which that Fund has or in which that Fund
expects to have portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, each Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the

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commitment or option would not exceed the value of that Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, that Fund will comply with the asset
segregation requirements described below.

Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.

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

Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
each Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. Each Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. Each Fund 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 a Fund
may be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.

Each Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Funds believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Funds will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the

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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 a NRSRO or is determined to be of equivalent credit quality by the Adviser.
If there is a default by the Counterparty, a Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.

Eurodollar Instruments. Each 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 Funds 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 a 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 Funds segregate liquid high
grade assets with their custodian State Street Bank and Trust Company (the
"Custodian") to the extent that obligations of the Funds are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a 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 high grade 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 a Fund will require that Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high-grade
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a Fund on an index will require that Fund to
own portfolio securities which correlate with the index or to segregate liquid
high grade assets equal to the excess of the index value over the exercise price
on a current basis. A put option written by a Fund requires that Fund to
segregate liquid, high grade assets equal to the exercise price.

Except when a 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 a Fund to buy or sell currency
will generally require that Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to that Fund's obligations or to
segregate liquid high grade assets equal to the amount of that Fund's
obligation.

OTC options entered into by a 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 a
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 a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and that 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.

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In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating 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, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Fund's net obligation, if any.

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

Each 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.")

Investment Restrictions

Balanced Fund is under no restriction as to the amount of portfolio
securities which may be bought or sold. Unless specified to the contrary, the
following restrictions may not be changed without the approval of a majority of
the outstanding voting securities of each 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 present at a meeting, if
the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy; or (2) more than 50% of the outstanding
voting securities of the 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, a Fund.

As a matter of fundamental policy, each Fund may not:

(1) with respect to 75% of its total assets taken at market value
purchase more than 10% of the voting securities of any one
issuer; or invest more than 5% of the value of its total
assets in the securities of any one issuer, except obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and except securities of other investment
companies;

(2) 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;

(3) 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 that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of
the Fund's ownership of securities); or purchase or sell
physical commodities or contracts relating to physical
commodities;

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(4) act as an underwriter of 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
Fund;

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

(6) 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 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; and

(7) purchase any securities which 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,
provided that there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (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).

Income Fund has undertaken that if the Fund obtains an exemptive order
of the SEC which would permit the taking of action in contravention of any
policy which may not be changed without a shareholder vote, the Fund will not
take such action unless either (i) the applicable exemptive order permits the
taking of such action without a shareholder vote or (ii) the staff of the SEC
has issued to the Fund a "no action" or interpretive letter to the effect that
the Fund may proceed without a shareholder vote.

Other Investment Policies

The Trustees voluntarily adopted policies and restrictions which are
observed in the conduct of the Funds' affairs. These represent intentions of the
Trustees based upon current circumstances. They differ from fundamental
investment policies in that they may be changed or amended by action of the
Trustees without prior notice to or approval of shareholders.

As a matter of nonfundamental policy, 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 Fund or a member, officer,
director or trustee of the investment adviser of the Fund 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;

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<PAGE>
(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 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 5% of its total assets in restricted securities;

(f) purchase equity securities which are not readily marketable,
in the case of Balanced Fund, or purchase securities of any
issuer with a record of less than three years of continuous
operations, including predecessors, except U.S. Government
securities, municipal obligations and obligations issued or
guaranteed by any foreign government or its agencies or
instrumentalities, if such purchase would cause the
investments of each Fund in all such issuers to exceed 5% of
the total assets of the Fund taken at market value;

(g) 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;

(h) 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, however,
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;

(i) 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);

(j) borrow money in excess of 5% of its total assets (taken at
market value), except for temporary or emergency purposes, or
borrow other than from banks; however, in the case of reverse
repurchase agreements, the Fund may invest in such agreements
with other than banks subject to total asset coverage of 300%
for such agreements and all borrowings;

(k) 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);

(l) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the
time any loan is made; all loans of portfolio securities will
be fully collateralized and marked to market daily. The Fund
has no current intention of making loans of portfolio
securities that would amount to greater than 5% of the Fund's
total assets; and

(m) purchase or sell real estate limited partnership interests.

In addition, as a matter of nonfundamental policy, Income Fund may not:

(1) purchase more than 10% of the voting securities of any one
issuer, except securities issued by the U.S. Government, its
agencies or instrumentalities;

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<PAGE>
The foregoing restrictions with respect to repurchase agreements shall
be construed to be for repurchase agreements entered into for the investment of
available cash consistent with Income Fund's repurchase agreement procedures,
not repurchase commitments entered into for general investment purposes.

PURCHASES

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

Additional Information About Opening An Account

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, if they prefer, subscribe initially for at least $1,000 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX or telephone.

Shareholders of other Scudder funds who have submitted an account
application and have a certified taxpayer 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 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 ($1,000 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, Boston, MA 02101, ABA Number 011000028, DDA
Account Number: 9903-5552. The investor must give the Scudder fund name, account
name and new account number. Finally, the investor must send the completed and
signed application to the Fund promptly.

The minimum initial purchase amount is less than $1,000 under certain
special plan accounts.

Additional Information About Making Subsequent Investments

Subsequent purchase orders for $10,000 or more, and for an amount not
greater than four times the value of the shareholder's account, may be placed by
telephone, fax, etc. by members of the NASD, by banks, and by established
shareholders [except by Scudder Individual Retirement Account (IRA), Scudder
Profit Sharing and Money Purchase Pension Plans, Scudder 401(k) and Scudder
403(b) Plan holders]. Orders placed in this manner may be directed to any office
of the Distributor listed in the Funds' prospectuses. A two-part invoice of the
purchase will be mailed out promptly following receipt of a request to buy.
Payment should be attached to a copy of the invoice for proper identification.
Federal regulations require that payment be received within seven business days.
If payment is not received within that time, the shares may be canceled. In the
event of such cancellation or cancellation at the purchaser's request, the
purchaser will be responsible for any loss incurred by the Fund or the principal
underwriter by reason of such cancellation. If the purchaser is a shareholder,
the Fund 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. Net losses on such transactions which are not recovered from
the purchaser will be absorbed by the principal underwriter. Any net profit on
the liquidation of unpaid shares will accrue to the Fund.

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 are purchased by a check which proves to be uncollectible,
the 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 will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse a 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.

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Wire Transfer of Federal Funds

To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to a Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).

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 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.

Share Price

Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on the Exchange on
each day during which the Exchange is open for trading. Orders received after
the close of regular trading on the Exchange will receive the next business
day's net asset value. If the order has been placed by a member of the NASD,
other than the Distributor, it is the responsibility of that member broker,
rather than a Fund, to forward the purchase order to the Funds' transfer agent
in Boston by the close of regular trading on the Exchange.

Share Certificates

Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Funds.
With respect to Income Fund, share certificates now in a shareholder's
possession may be sent to Scudder Service Corporation (the "Transfer Agent"),
for cancellation and credit to such shareholder's account. Shareholders who
prefer may hold the certificates in their possession until they wish to exchange
or redeem such shares. (See "Redeeming shares" in Income Fund's prospectus.)

Other Information

If purchases or redemptions of the Funds' shares are arranged and
settlement is made at the 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 have the right to limit
the amount of purchases by and to refuse to sell to any person. The Trustees and
the Distributor each may suspend or terminate the offering of shares of either
Fund at any time.

The Tax Identification Number section of each Fund's 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) will be
returned to the investor.

The Trust may issue shares of either 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.

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<PAGE>
EXCHANGES AND REDEMPTIONS

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

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 another fund. When an exchange involves a new account, the new
account will be 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 will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $1,000. 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' prospectuses.

Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset value 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 through Scudder's Automatic Exchange
Program. Exchanges must be for a minimum of $50. Shareholders may add this free
feature over the phone or in writing. Automatic exchanges will continue until
the shareholder requests by phone 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.

There is no charge 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. Each 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 Funds do not follow such
procedures, they may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Funds 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.

Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.

Redemption by Telephone

Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $50,000 and have the proceeds mailed
to their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the

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<PAGE>
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.

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

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

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

If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be 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 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 banks 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.

Each 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 a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund 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 the Trust and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared, which may take up to seven
business days.

Redemption by Mail or Fax

Any existing share certificates for Income Fund representing shares
being redeemed must accompany a request for redemption and be duly endorsed or
accompanied by a proper stock assignment form with signature(s) guaranteed as
explained in that Fund's prospectus.

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 share certificates for Income
Fund or shares registered in other than individual names contact the Transfer
Agent prior to 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 will be sent within five 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 days for

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<PAGE>
shares tendered for repurchase or redemption may result but only until the
purchase check has cleared.

The requirements for IRA redemptions are different from those for
regular accounts. For more information please call 1-800-225-5163.

Redemption-In-Kind

The Trust 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 a
Fund and valued as they are for purposes of computing a 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 into cash. The Trust
has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which a Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of that Fund at the beginning of the
period.

Other Information

Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct repurchase requests to the
Trust through the Distributor at Two International Place, Boston, Massachusetts
02110-4103 by letter, fax, TWX or telephone. A two-part confirmation will be
mailed out promptly after receipt of the redemption request. A written request
in good order as described above, and any certificates with a proper signature
guarantee(s) for Income Fund, as described in that Fund's prospectus under
"Transaction information--Redeeming shares--Signature guarantees", should be
sent with a copy of the invoice to Scudder Service Corporation, Confirmed
Processing Department, Two International Place, Boston, Massachusetts
02110-4103. Failure to deliver shares or required documents (see above) by the
settlement date may result in cancellation of the trade and the shareholder will
be responsible for any loss incurred by a Fund or the principal underwriter by
reason of such cancellation. The Trust will have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse a Fund or the
principal underwriter for the loss incurred. Net losses on such transactions
which are not recovered from the shareholder will be absorbed by the principal
underwriter. Any net gains so resulting will accrue to a Fund. For this group,
repurchases will be carried out at the net asset value next computed after such
repurchase requests have been received. The arrangements described in this
paragraph for repurchasing shares are discretionary and may be discontinued at
any time.

If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive 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 the shareholder's cost
depending on the net asset value at the time of redemption or repurchase. The
Funds do not impose a redemption or repurchase charge although a wire charge may
be applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including an exchange into 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.")

Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.

The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefor 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, (c) an
emergency exists as a result of which disposal by the Trust of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or (d) a governmental body
having jurisdiction over the Fund 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), (c) or (d) exist.

If transactions at any time reduce a shareholder's account balance in a
Fund to below $1,000 in value, the Trust may notify the shareholder that, unless
the account balance is brought up to at least $1,000, the Trust will redeem all

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<PAGE>
shares and close the account by making payment to the shareholder. The
shareholder has sixty days to bring the account balance up to $1,000 before any
action will be taken by the Trust. No transfer from an existing account to a new
fund account may be for less than $1,000 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'
prospectuses.)

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.

26
<PAGE>
<TABLE>
<CAPTION>
Scudder Load Fund with 0.75% No-Load Fund with 0.25%
YEARS Pure No-Load(tm) Fund 8.50% Load Fund 12b-1 Fee 12b-1 Fee
----- --------------------- --------------- --------- ---------
<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>

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

Distribution Plans

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 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 Prospectuses for the address.

Reinvestment is usually made at the closing net asset value determined
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 a Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation Statements will be mailed to shareholders as
notification that distributions have been deposited.

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.

Diversification

Your investment represents an interest in a large, diversified
portfolio of carefully selected securities. Diversification may protect you
against the possible risks of concentrating in fewer securities or in a specific
market sector.

Scudder Funds Centers

Investors may visit any of the Funds Centers maintained by The
Distributor. The Centers are designed to provide individuals with services
during any business day. Investors may pick up literature or obtain assistance
with opening an account, adding monies or special options to existing accounts,

27
<PAGE>
making exchanges within the Scudder Family of Funds, redeeming shares, or
opening retirement plans. Checks should not be mailed to the Centers but to "The
Scudder Funds" at the address listed under "How to Contact Scudder" in the
prospectuses.

Reports to Shareholders

The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Funds presently intend to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a summary of the Funds' performance and portfolio holdings.

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 each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.

MONEY MARKET

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 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.

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

28
<PAGE>
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.

Scudder Short Term Global Income Fund seeks to provide high current
income from a portfolio of high-grade money market instruments and
short-term bonds denominated in foreign currencies and the U.S. dollar.

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 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 investment-grade
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
long-term municipal securities with an emphasis on high quality.

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.

29
<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 Capital Growth Fund seeks to maximize long-term growth of
capital through a broad and flexible investment program emphasizing
common stocks.

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 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 Global Small Company 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 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.

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

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

30
<PAGE>
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.

Scudder Quality Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.

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.

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.

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
Scudder Service Representative; easy telephone exchanges into Scudder money
market, tax free, income, and growth funds; shares redeemable at net asset value
at any time.

SPECIAL PLAN ACCOUNTS

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

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 each Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Funds'
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.

Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals

Shares of either Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Code will be
greatly facilitated if it is in such approved form. Under certain circumstances,
the IRS will assume that a plan, adopted in this form, after special notice to
any employees, meets the requirements of Section 401(a) of the Code.

31
<PAGE>
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals

Shares of either Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.

Scudder IRA: Individual Retirement Account

Shares of either Fund may be purchased as the underlying investment for
an Individual Retirement Account which meets the requirements of Section 408(a)
of the Code.

A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.

An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,250 for married couples if one spouse has earned income of no
more than $250). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.

The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)

<TABLE>
<CAPTION>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution

- ---------------------------- ------------------------- -------------------------- -------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------------------------------
Contributions 5% 10% 15%
- ---------------------------- ------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)

32
<PAGE>
<TABLE>
<CAPTION>
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket

Scudder 403(b) Plan

Shares of each Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Code. In general, employees of tax-exempt organizations described in Section
501(c)(3) of the Code (such as hospitals, churches, religious, scientific, or
literary organizations and educational institutions) or a public school system
are eligible to participate in a 403(b) plan.

Automatic Withdrawal Plan

Non-retirement plan shareholders who currently own or purchase $10,000
or more of shares of a 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. Payments are mailed at the
end of each month. 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. Requests for increases in withdrawal amounts or to change 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 each Fund's prospectus. Any such requests must
be received by the Funds' transfer agent by the 15th of the month in which such
change is to take effect. 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 a 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.

Group or Salary Deduction Plan

An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Trust and its agents reserve the right to establish a maintenance
charge in the future depending on the services required by the investor.

The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.

33
<PAGE>
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 regular 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. 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.

Scudder Trust Company

Annual service fees are paid by each Fund to Scudder Trust Company, an
affiliate of the Adviser, for certain retirement plan accounts and are included
in the fees paid to the Transfer Agent.

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

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

Each Fund intends to follow the practice of distributing substantially
all of its investment company taxable income, which includes any excess of net
realized short-term capital gains over net realized long-term capital losses. A
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,
each Fund may retain all or part of such gain for reinvestment, after paying the
related federal taxes for which shareholders may then be able to claim a credit
against their federal tax liability. If a Fund does not distribute the amount of
capital gain and/or ordinary income required to be distributed by an excise tax
provision of the Code, that Fund may be subject to that excise tax. In certain
circumstances, a Fund may determine that it is in the interest of shareholders
to distribute less than the required amount. (See "TAXES.")

Each Fund intends to distribute investment company taxable income,
exclusive of net short-term capital gains in excess of net long-term capital
losses, in April, July, October and December each year. Distributions of net
capital gains realized during each fiscal year will be made annually before the
end of each Fund's fiscal year on December 31. Additional distributions,
including distributions of net short-term capital gains in excess of net
long-term capital losses, may be made within three months of each Fund's fiscal
year end, if necessary.

Both types of distributions will be made in shares of that Fund and
confirmation will be mailed to each shareholder unless a shareholder has elected
to receive cash, in which case a check will be sent.

34
<PAGE>
PERFORMANCE INFORMATION

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

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 are calculated in the following manners:

Average Annual Total Return

Average annual total return is the average annual compound rate of
return for periods of one year, five years, and ten years (or such shorter
periods as may be applicable dating from the commencement of a Fund's
operation), all ended on the last day of a recent calendar quarter. Average
annual total return quotations reflect changes in the price of a Fund's 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 December 31, 1994

One Year Life of Fund(1)
-------- ---------------
Balanced Fund -2.39%* 0.82%*

One Year Five Years Ten Years
-------- ---------- ---------
Income Fund -4.43% 7.85% 9.70%

(1) For the period beginning January 4, 1993 (commencement of operations).

* The Adviser maintained Fund expenses for the period January 4, 1993
(commencement of operations) through December 31, 1993 and for the
fiscal year ended December 31, 1994. The Average Annual Total Return
for one year and for the life of the Fund, had the Adviser not
maintained Fund expenses, would have been lower.

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 changes 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):

35
<PAGE>
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.

Cumulative Total Return for periods ended December 31, 1994

One Year Life of Fund(1)
-------- ---------------
Balanced Fund -2.39%* 1.64%*

One Year Five Years Ten Years
-------- ---------- ---------
Income Fund -4.43% 45.95% 152.30%

(1) For the period beginning January 4, 1993 (commencement of operations)

* The Adviser maintained Fund expenses for the period January 4, 1993
(commencement of operations) through December 31, 1993 and for the
fiscal year ended December 31, 1994. The Cumulative Total Return for
one year and for the life of the Fund, had the Adviser not maintained
Fund expenses, would have been lower.

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.

Capital Change

Capital Change measures the return from invested capital including
reinvested capital gains distributions. Capital change does not include the
reinvestment of income dividends.

Yield for Scudder Income Fund

Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming 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.
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.

For the period ended December 31, 1994, the Fund's 30-day yield was 7.15%.

36
<PAGE>
Quotations of a Fund's performance are based on historical earnings,
show the performance of a hypothetical investment, and are not intended to
indicate future performance of that Fund. An investor's shares when redeemed may
be worth more or less than their original cost. Performance of a Fund will vary
based on changes in market conditions and the level of that Fund's expenses. In
periods of declining interest rates a Fund's quoted yield will tend to be
somewhat higher than prevailing market rates, and in periods of rising interest
rates that Fund's quoted yield will tend to be somewhat lower.

Comparison of Fund 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 Funds'
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
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.

37
<PAGE>
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 may 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.

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.

38
<PAGE>
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/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue'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 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.

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.

Smart Money, 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.

39
<PAGE>
USA Today, a leading national daily newspaper.

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

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 put out 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'
prospectuses.)

The Funds are separate series of Scudder Portfolio Trust, formerly
Scudder Income Fund, a Massachusetts business trust established under a
Declaration of Trust dated September 20, 1984, as amended. The Trust's
predecessor was organized as a Massachusetts corporation in 1928 by the
investment counsel firm of Scudder, Stevens & Clark.

On November 4, 1987, the par value of the shares of beneficial interest
of the Trust was changed from no par value to $0.01 par value per share. The
Trust's authorized capital consists of an unlimited number of shares of
beneficial interest of $0.01 par value, all of which are of one class and have
equal rights as to voting, dividends, and liquidation. The Trustees have the
authority to issue two or more series of shares and to designate the relative
rights and preferences as between the different series. If more than one series
of shares were issued and a series were unable to meet its obligations, the
remaining series might have to assume the unsatisfied obligations of that
series. All shares issued and outstanding will be fully paid and non-assessable
by the Trust, and redeemable as described in this combined Statement of
Additional Information and in each Fund's prospectus.

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 a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. 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 a series into different classes, permitting shares of different classes to be
distributed by different methods. Although shareholders of different classes of

40
<PAGE>
a series would 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 would require a Fund first to obtain an exemptive
order from the SEC), nor of changing the method of distribution of shares of a
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 will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify 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
office.

INVESTMENT ADVISER

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

Scudder, Stevens & Clark, Inc., an investment counsel firm, acts as
investment adviser to each Fund. This organization is one of the most
experienced investment management firms in the U.S. It was established 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 Scudder introduced Scudder International Fund, Inc., the first
mutual fund available in the U.S. investing internationally in securities of
issuers 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
Development Fund, 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 State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, Scudder World Income Opportunities Fund,
Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The First Iberian 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 $11 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.

The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. In this work, the Adviser
utilizes certain reports and statistics from a wide variety of sources,
including brokers and dealers who may execute portfolio transactions for the
Fund and other clients of the Adviser, but conclusions are based primarily on
investigations and critical analyses by the Adviser's own research specialists.

Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for a Fund 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 date. In

41
<PAGE>
such events, such transactions will be 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 Agreement (the "Agreement") between the
Trust, on behalf of Balanced Fund, and the Adviser was last approved by the
Trustees on August 9, 1994 and by the sole shareholder of the Fund on December
30, 1992. The Agreement between the Trust, on behalf of Income Fund, and the
Adviser was last approved by the Trustees on August 9, 1994 and by the
shareholders of the Fund on November 13, 1990. The Balanced Fund Agreement dated
December 28, 1992 and the Income Fund Agreement dated November 14, 1990 will
continue in effect until September 30, 1995 and from year to year thereafter
only if their continuance is approved annually by the vote of a majority of
those Trustees who are not parties to such Agreement 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 a majority of the Trust's
Trustees or of the outstanding voting securities of that Fund. Each Agreement
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 each Agreement, the Adviser provides a Fund with continuing
investment management for that Fund's portfolio consistent with the Fund's
investment objective, policies, and restrictions, and determines what securities
will be purchased for the portfolio of that Fund, what portfolio securities will
be held or sold by a Fund, and what portion of a Fund's assets will be held
uninvested, subject always to the provisions of a Fund's Declaration of Trust,
By-Laws, the 1940 Act, the Code, a Fund's investment objective, 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 a Fund in taking such steps 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 a Fund.

The Adviser also renders significant administrative services (not
otherwise provided by third parties) necessary for a Fund'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 the
Funds is (such as the Funds' 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 the Funds'
federal, state, and local tax returns; preparing and filing the Funds' 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 the Funds under applicable federal and
state securities laws; maintaining the Funds' books and records to the extent
not otherwise maintained by a third party; assisting in establishing accounting
policies of the Funds; assisting in the resolution of accounting and legal
issues; establishing and monitoring the Funds' operating budget; processing the
payment of the Funds' bills; assisting the Funds in, and otherwise arranging
for, the payment of distributions and dividends; and otherwise assisting the
Funds in the conduct of its business, subject to the direction and control of
the Trustees.

The Adviser pays the compensation and expenses (except those for
attending Board and committee meetings outside New York, New York and Boston,
Massachusetts) of all Trustees, officers, and executive employees of the Trust
affiliated with the Adviser, and makes available, without expense to the Trust,
the services of such Trustees, officers, and employees of the Adviser as may
duly be elected officers or Trustees 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 the Adviser's services, Balanced Fund pays the Adviser 0.70%,
payable monthly, provided the Fund will make such interim payments as may be
requested by Scudder not to exceed 75% of the amount of the fee then accrued on
the books of the Fund and unpaid. For the period January 4, 1993 (commencement
of operations) to December 31, 1993, the Adviser did not impose a portion of its
management fee amounting to $269,463, and the fee imposed amounted to $86,917.
The Adviser has voluntarily agreed to waive management fees or reimburse the
Fund to the extent necessary so that the total annualized expenses of the Fund
do not exceed 1.00% of the average daily net assets until April 30, 1996. The
Adviser retains the ability to be repaid by the Fund if expenses fall below the
specified limit prior to the end of the fiscal year. These expense limitation
arrangements can decrease the Fund's expenses and improve its performance.
During the fiscal year ended December 31, 1994, these agreements resulted in a

42
<PAGE>
reduction in management fees paid by the Fund of $303,520. For the fiscal year
ended December 31, 1994, the Adviser imposed a portion of its management fee
amounting to $152,798.

For the Adviser's services, Income Fund pays the Adviser a fee equal to
0.65 of 1% on the first $200 million of the Funds' average daily net assets,
0.60 of 1% on the next $300 million of such net assets and 0.55 of 1% on such
net assets in excess of $500 million. The fee is payable monthly, provided the
Fund will make such interim payments as may be requested by the Adviser not to
exceed 75% of the amount of the fee then accrued on the books of the Fund and
unpaid. For the years ended December 31, 1994, 1993 and 1992 the Adviser charged
the Fund aggregate fees pursuant to its then effective investment advisory
agreement of $3,047,819, $3,089,226 and $2,658,550, respectively.
Net assets as of December 31, 1994 were $463,228,399.

Under each Agreement a Fund is responsible for all of its other
expenses including fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing and
accounting expenses; the calculation of net asset value; taxes and governmental
fees; the fees and expenses of the transfer agent; the cost of preparing share
certificates and any other expenses including clerical expenses of issue,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees,
officers and employees of the Trust who are not affiliated with the Adviser; the
cost of printing and distributing reports and notices to shareholders; and the
fees and disbursements of custodians. The Trust may arrange to have third
parties assume all or part of the expenses of sale, underwriting and
distribution of shares of the Funds. The Funds are also responsible for 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. The Agreement expressly provides that the Adviser shall not be required
to pay a pricing agent of a Fund for portfolio pricing services, if any.

Each Agreement requires the Adviser to reimburse the Funds for annual
expenses in excess of the lowest expense limitation imposed by any state in
which a Fund is at the time offering its shares for sale, although no payments
are required to be made by the Adviser pursuant to this reimbursement provision
in excess of the annual fee paid by a Fund to the Adviser. Management has been
advised that the lowest such limitation is presently 2 1/2% of average net
assets up to $30 million, 2% of the next $70 million of such net assets and 1
1/2% of such net assets in excess of that amount. Certain expenses such as
brokerage commissions, taxes, extraordinary expenses and interest are excluded
from such limitations. For the period January 4, 1993 (commencement of
operations) to December 31, 1993 and for the fiscal year ended December 31,
1994, expenses subject to such expense limitation equaled 1.00% of the average
net assets of Balanced Fund. For the years ended December 31, 1994, 1993 and
1992 expenses subject to such expense limitation equaled 0.97%, 0.92% and 0.93%,
respectively, of the average net assets of Income Fund. If reimbursement is
required, it will be made as promptly as practicable after the end of the Funds'
fiscal year. However, no fee payment will be made to the Adviser during any
fiscal year which will cause year to date expenses to exceed the cumulative
pro-rata expense limitation at the time of such payment. No reimbursements have
ever been required to be paid by the Adviser to the Funds.

Each Agreement also provides that the Trust and a Fund may use any name
derived from the name "Scudder, Stevens & Clark" only as long as the Agreement
or any extension, renewal or amendment thereof remains in effect.

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

Each Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with matters to which each 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 Funds' custodian bank. 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 Fund
relationships.

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<PAGE>
None of the officers or Trustees of the Trust may have dealings with
the Trust as principals in the purchase or sale of securities, except as
individual subscribers or holders of shares of that Fund.

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.

<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Position with Scudder Investor
Name and Address Fund Principal Occupation** Services, Inc.
- ---------------- ---- ---------------------- --------------
<S> <C> <C> <C>
Daniel Pierce+*= President and Trustee Chairman of the Board and Vice President,
Managing Director of Director and Assistant
Scudder, Stevens & Clark, Treasurer
Inc.

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

Dudley H. Ladd+* Trustee Managing Director of Senior Vice President
Scudder, Stevens & Clark, and Director
Inc.

David S. Lee+*= Trustee and Vice Managing Director of President, Director
President Scudder, Stevens & Clark, and Assistant Treasurer
Inc.

George M. Lovejoy, Jr.= Trustee Chairman Emeritus, Meredith --
160 Federal Street & Grew, Incorporated (a real
Boston, MA estate service company)

Wesley W. Marple, Jr. Trustee Professor of Business --
413 Hayden Hall Administration, Northeastern
360 Huntington Ave. University, College of
Boston, MA Business Administration

Jean C. Tempel Trustee Director, Executive Vice --
Ten Post Office Square President and Manager,
Suite 1325 Safeguard Scientifics, Inc.
Boston, MA

44
<PAGE>
Position with
Underwriter,
Position with Scudder Investor
Name and Address Fund Principal Occupation** Services, Inc.
- ---------------- ---- ---------------------- --------------
Jerard K. Hartman# Vice President Managing Director of --
Scudder, Stevens & Clark,
Inc.

William M. Hutchinson+ Vice President Principal of Scudder, --
Stevens & Clark, Inc.

Thomas W. Joseph+ Vice President Principal of Scudder, Vice President,
Stevens & Clark, Inc. Director, Treasurer
and Assistant Clerk

Thomas F. McDonough+ Vice President, Principal of Scudder, Clerk
Secretary and Stevens & Clark, Inc.
Assistant Treasurer

Pamela A. McGrath+ Vice President Principal of Scudder, --
and Treasurer Stevens & Clark, Inc.

Edward J. O'Connell# Vice President Principal of Scudder, Assistant Treasurer
and Assistant Stevens & Clark, Inc.
Treasurer

Coleen Downs Dinneen+ Assistant Vice President of Scudder, Assistant Clerk
Secretary Stevens & Clark, Inc.
</TABLE>

* Messrs. Ladd, Lee and Pierce are considered by the Trust and its counsel to
be persons who are "interested persons" of the Adviser or of the Trust
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
= Messrs. Lee, Lovejoy, Marple 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: Two International Place, Boston, Massachusetts
# Address: 345 Park Avenue, New York, New York

As of April 1, 1995, 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) 1,799,048 shares, or 31.8% of the shares of the Balanced Fund.

As of April 1, 1995, 298,823 shares in the aggregate, 5.3% of the
outstanding shares of the Balanced Fund were held in the name of Moore Company,
36 Beach Street, Westerly, RI 02891, who may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.

As of April 1, 1995, 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) 797,599 shares, or 2.1% of the shares of the Income Fund.

Certain accounts for which the Adviser acts as investment adviser owned
3,445,984 shares in the aggregate, or 9.1% of the outstanding shares of the
Income Fund on April 1, 1995. The Adviser may be deemed to be the beneficial
owner of such shares, but disclaims any beneficial interest in such shares.

45
<PAGE>

To the best of the Trust's knowledge, as of April 1, 1995 no person
owned beneficially more than 5% of a Funds' outstanding shares except as stated
above.

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

REMUNERATION

Several of the officers and Trustees of the Trust may be officers or
employees 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 the fees
paid by the Trust. The Trust pays no direct remuneration to any officer of the
Trust. However, each of the Trust's 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 an annual Trustee's fee of $4,000 plus $300
for attending each Trustees' meeting, audit committee meeting or meeting held
for the purpose of considering arrangements between the Fund and the Adviser or
any of its affiliates. Each unaffiliated Trustee also receives $100 per
committee meeting attended other than those set forth above. For the year ended
December 31, 1994, such fees aggregated $38,952 for Balanced Fund and $38,828
for Income Fund.

The following Compensation Table provides, in tabular form, the following data:

Column (1): all Trustees who receive compensation from the Trust.
Column (2): aggregate compensation received by a Trustee from all the series of
the Trust.
Columns (3) and (4): pension or retirement benefits accrued or proposed be paid
by the Trust. Scudder Portfolio Trust does not pay its Trustees such benefits.
Column (5): total compensation received by a Trustee from the Trust, plus
compensation received from all funds for which a Trustee serves in a fund
complex. The total number of funds from which a Trustee receives such
compensation is also provided.

<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1994

(1) (2) (3) (4) (5)
Pension or Total Compensation
Retirement Estimated From Scudder
Name of Aggregate Compensation Benefits Accrued Annual Benefits Portfolio Trust
Person, from Scudder As Part of Fund Upon and Fund Complex
Position Portfolio Trust* Expenses Retirement Paid to Trustee
- -------- ---------------- -------- ---------- ---------------
<S> <C> <C> <C> <C>

Henry P. Becton, Jr., $18,600 N/A N/A $90,597
Trustee (15 funds)

Amey A. DeFriez,** $15,000 N/A N/A $84,125
Trustee (15 funds)

George M. Lovejoy, $19,000 N/A N/A $117,450
Trustee (12 funds)

Wesley W. Marple, Jr., $18,800 N/A N/A $100,093
Trustee (15 funds)

Jean C. Tempel, $3,800 N/A N/A $15,968
Trustee (15 funds)

* Scudder Portfolio Trust consists of two Funds: Scudder Balanced Fund and Scudder Income Fund.

** For 1994, Amey A. DeFriez served as Trustee from January to her retirement on October 1.

</TABLE>

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<PAGE>
DISTRIBUTOR

The Trust has an underwriting agreement with Scudder Investor Services,
Inc., a Massachusetts corporation, which is a wholly-owned subsidiary of the
Adviser. The Trust's underwriting agreement dated October 13, 1992 will remain
in effect until September 30, 1995 and from year to year thereafter only if its
continuance is approved annually by a majority of the Trustees who are not
parties to such agreement or interested persons of any such party and either by
vote of a majority of the Board of Trustees or a majority of the outstanding
voting securities of a Fund. The underwriting agreement was last approved by the
Trustees on August 9, 1994.

Under the 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 the Funds; 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
customer 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 a Fund and the Distributor.

The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of a Fund's shares
to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of each Fund to the
public. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
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 a Fund, unless a Rule 12b-1 plan is in effect which provides
that a Fund will bear some or all of such expenses. As agent, the Distributor
currently offers the Funds' shares on a continuous basis to investors in all
states. The underwriting agreement provides that the Distributor accepts orders
for shares at net asset value and no sales commission or load is charged the
investor. The Distributor has made no firm commitment to acquire shares of each
Fund.

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

TAXES

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

Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute, and has qualified as
such since its inception. Each intends to continue to qualify for such
treatment. Such qualification does not involve governmental supervision or
management of investment practices or policy.

A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.

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 the Fund to distribute to shareholders during a calendar year an amount
equal to at least 98% of a Fund's ordinary income for the calendar year, at
least 98% of the excess of its capital gains over capital losses (adjusted for

47
<PAGE>
certain ordinary losses) realized during the one-year period ending October 31
during such year, and all ordinary income and capital gains for prior years that
were not previously distributed. Investment companies with taxable years ending
on November 30 or December 31 may make an irrevocable election to measure the
required capital gain distribution using their actual taxable year, and the
Funds will consider making such an election.

The Funds' investment company taxable income includes dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of a Fund.

At December 31, 1994, Balanced Fund had a net tax basis capital loss
carryforward of approximately $127,000 which may be applied against any realized
net taxable capital gains of each succeeding year until fully utilized or until
December 31, 2001, the expiration date. In addition, from November 1, 1994
through December 31, 1994, the Fund incurred approximately $330,000 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 ended
December 31, 1995.

At December 31, 1994, Income Fund had a net tax basis capital loss
carryforward of approximately $11,478,000 which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until December 31, 2002, the expiration date. In addition, from November 1,
1994 through December 31, 1994, the Fund incurred approximately $1,805,000 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
ended December 31, 1995.

If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by a Fund, each Fund intends to 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 relative share of federal income taxes paid by a
Fund on such gains as a credit against personal federal income tax liability,
and will be entitled to increase the adjusted tax basis on Fund shares by the
difference between a pro rata share of such gains owned and the individual tax
credit.

Distributions of investment company taxable income are taxable to
shareholders as ordinary income.

Dividends from domestic corporations are not expected to comprise a
substantial part of Income Fund's gross income, but are expected to comprise a
substantial part of Balanced Fund's gross income. To the extent that dividends
from domestic corporations constitute a portion of a Fund's gross income, a
portion of the income distributions of a Fund may be eligible for the deduction
for dividends received by corporations. Shareholders will be informed of the
portion of dividends which so qualify. The dividends-received deduction is
reduced to the extent the shares of a Fund with respect to which the dividends
are received are treated as debt-financed under federal income tax law, and
eliminated if either those shares or the shares of a Fund are deemed to have
been held by a Fund or the shareholder, as the case may be, for less than 46
days.

Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time the shares of a Fund have been held by
such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.

Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will 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 investment company taxable income and net realized
capital gains, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November, or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.

48
<PAGE>
Redemptions of shares, 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.

An individual may make a deductible IRA contribution of up to $2,000
or, if less, the amount of the individuals earned income for any taxable year
only if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year, if the spouse
elects to be treated as having no earnings (for IRA contribution purposes) for
the year.

Distributions by a Fund result in a reduction in the net asset value of
that 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 as ordinary income or capital gain 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 will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.

If a Fund invests in stock of certain passive foreign investment
companies, the Fund may be subject to U.S. federal income taxation on a portion
of any "excess distribution" with respect to, or gain from the disposition of,
such stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Funds' holding period for the stock. The distribution
or gain so allocated to any taxable year of the Fund, other than the taxable
year of the excess distribution or disposition, would be taxed to the Fund at
the highest ordinary income rate in effect for such year, and the tax would be
further increased by an interest charge to reflect the value of the tax deferral
deemed to have resulted from the ownership of the foreign company's stock. Any
amount of distribution or gain allocated to the taxable year of the distribution
or disposition would be included in the Funds' investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.

Proposed regulations have been issued which may allow a Fund to make an
election to mark to market its shares of these foreign investment companies in
lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Fund would report as ordinary
income the amount by which the fair market value of the foreign company's stock
exceeds the Fund's adjusted basis in these shares. No mark to market losses
would be recognized. The effect of the election would be to treat excess
distributions and gain on dispositions as ordinary income which is not subject
to a fund level tax. Alternatively, a Fund may elect to include as income and
gain its share of the ordinary earnings and net capital gain of certain foreign
investment companies in lieu of being taxed in the manner described above.

Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by a Fund will
be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by a Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on a Fund's holding period for the option and, in the case of an
exercise of a put option, on a Fund's holding period for the underlying
security. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or substantially identical security in a Fund's portfolio.
If a Fund writes a put or call option, no gain is recognized upon its receipt of
a premium. If the option lapses or is closed out, any gain or loss is treated as
a short-term capital gain or loss. If a call option is exercised, any resulting
gain or loss is a short-term or long-term capital gain or loss depending on the
holding period of the underlying stock. The exercise of a put option written by
a Fund is not a taxable transaction for that Fund.

49
<PAGE>
Many futures and forward contracts entered into by a Fund and all
listed nonequity options written or purchased by a Fund (including covered call
options written on debt securities and options purchased or written on futures
contracts) will be 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 will be treated as 60% long-term and 40% short-term capital
gain or loss, and on the last trading day of the Funds' fiscal year (and,
generally on October 31 for purposes of the 4% excise tax), all outstanding
Section 1256 positions will be 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 Section 988 of the Code, discussed below, foreign currency
gain or loss from foreign currency-related forward contracts, certain futures
and options, and similar financial instruments entered into or acquired by a
Fund will be treated as ordinary income. 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 a Fund's portfolio.

Subchapter M of the Code requires that a Fund realize less than 30% of
its annual gross income from the sale or other disposition of stock, securities
and certain options, futures and forward contracts held for less than three
months. Options, futures and forward activities of a Fund may increase the
amount of gains realized by a Fund that are subject to the 30% limitation.
Accordingly, the amount of such activities that a Fund may engage in may be
limited.

Positions of a Fund which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes a Fund's risk of loss with respect to such stock could
be treated as a "straddle" which is governed by Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for any
"qualified covered call options" on stock written by a Fund.

Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures or forward contract or nonequity option
governed by Section 1256 which substantially diminishes a Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or eliminate the
operation of these rules. The Funds will monitor their transactions in options
and futures and may make certain tax elections in connection with these
investments.

Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues receivables or
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency, and on disposition of certain futures
contracts, forward contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the Funds'
investment company taxable income to be distributed to its shareholders as
ordinary income.

A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to the Fund each year, even though the Fund will not receive cash
interest payments from these securities. This original issue discount (imputed
income) will comprise a part of the investment company taxable income of the
Fund which must be distributed to shareholders in order to maintain the
qualification of the Fund as a regulated investment company and to avoid federal
income tax at the level of the Fund. Shareholders will be subject to income tax
on such original issue discount, whether or not they elect to receive their
distributions in cash.

Each Fund will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as 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 may
be subject to withholding of federal income tax at the rate of 31% in the case
of non-exempt 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. Withholding may also be required if a

50
<PAGE>
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, will be reduced by the amounts required to be
withheld.

Shareholders may be subject to state and local taxes on distributions
received from a Fund and on redemptions of each Fund's shares. Each distribution
is accompanied by a brief explanation of the form and character of the
distribution. In January of each year, each Fund issues to each shareholder a
statement of the federal income tax status of all distributions.

Each Fund is organized as a series of a Massachusetts business trust
and is not liable for any income or franchise tax in the Commonwealth of
Massachusetts, providing each Fund continues to be treated as a regulated
investment company under Subchapter M of the Code.

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. 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, where such amounts are treated as income
from U.S. sources under the Code.

Dividend and interest income received by a Fund from sources outside
the U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.

Shareholders should consult their tax advisers about the application of
the provisions of tax law in light of their particular tax situations.

PORTFOLIO TRANSACTIONS

Brokerage Commissions

To the maximum extent feasible the Adviser places orders for portfolio
transactions through the Distributor which in turn places orders on behalf of a
Fund with 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.

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 (negotiable
in the case of U.S. national securities exchange transactions) where applicable,
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.

The Funds' purchases and sales of fixed-income 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 a Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made which will include an underwriting fee paid to
the underwriter. Portfolio transactions in debt securities may also be placed on
an agency basis, with a commission being charged.

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 the custodian of the Funds for
appraisal purposes, or who supply research, market and statistical information

51
<PAGE>
to a Fund. 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 not 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 brokers or dealers on the
basis that the broker or 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.

Subject also to obtaining the most favorable net results, the Adviser
may place brokerage transactions through the Custodian and a credit against the
custodian fee due to State Street Bank and Trust Company equal to one-half of
the commission on any such transaction will be given on any such transaction.
Except for implementing the policy stated above, there is no intention to place
portfolio transactions with particular broker/dealers or groups thereof.

Although certain research, market and statistical information from
broker/dealers may be useful to a Fund 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 a Fund and not all such information is used by the Adviser in
connection with a Fund. 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 a Fund.

For the period January 4, 1993 (commencement of operations) to December
31, 1993 and for the fiscal year ended December 31, 1994 Balanced Fund paid
brokerage commissions of $97,504 and $113,223, respectively. In the fiscal year
ended December 31, 1994, Balanced Fund paid $101,769 (90% of the total brokerage
commissions), resulting from orders placed, consistent with the policy of
seeking to obtain the most favorable net results, for transactions placed with
brokers and dealers who provided supplementary research, market and statistical
information to the Trust or Adviser. The amount of such transactions aggregated
$74,722,011 (87% of all brokerage transactions). The balance of such brokerage
was not allocated to any particular broker or dealer or with regard to the
above-mentioned or any other special factors.

For the fiscal years ended December 31, 1994, 1993 and 1992, Income
Fund paid no brokerage commissions.

The Trustees of the Trust review from time to time whether the
recapture for the benefit of a Fund of some portion of the brokerage commissions
or similar fees paid by a Fund on portfolio transactions is legally permissible
and advisable. Within the past three years no such recapture has been effected.

Portfolio Turnover

Each Fund's average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. A higher rate
involves greater brokerage and transaction expenses to a Fund and may result in
the realization of net capital gains, which would be taxable to shareholders
when distributed. Purchases and sales are made for a Fund's portfolio whenever
necessary, in management's opinion, to meet each Fund's objective. For the
period January 4, 1993 (commencement of operations) to December 31, 1993 and for
the fiscal year ended December 31, 1994 the portfolio turnover rate for Balanced
Fund was 99.3% and 105.4%, respectively. For the years ended December 31, 1993
and 1994 the portfolio turnover rate for Income Fund was 130.6% and 60.3%,
respectively.

NET ASSET VALUE

The net asset value of shares of each Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, 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 the Fund, less all liabilities, by the total
number of shares outstanding.

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<PAGE>
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at its most recent sale price. Lacking any sales, the security is valued
at the high or "inside" bid quotation. The value of an equity security not
quoted on the NASDAQ System, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.

Debt securities, other than short-term securities, are valued at prices
supplied by the Funds' pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are 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 it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.

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

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

If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee most fairly
reflects 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 portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.

ADDITIONAL INFORMATION

Experts

The Financial Highlights of each Fund included in each Fund's
Prospectus and the Financial Statements incorporated by reference in this
combined 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, Massachusetts, 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 a Fund's property or the
acts, obligations or affairs of the Trust. The Declaration of Trust also

53
<PAGE>
provides for indemnification out of a 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 a Fund itself would be unable to meet its
obligations.

Other Information

The CUSIP number of the Balanced Fund is 811192-20-2.

The CUSIP number of the Income Fund is 811192-10-3.

Each Fund has a fiscal year end of December 31.

Many of the investment changes in a Fund will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of a Fund. These transactions will reflect investment
decisions made by the Adviser in light of each Fund's objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.

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 Dechert Price & Rhoads is counsel to each Fund.

The name "Scudder Portfolio Trust" is the designation of the Trust for
the time being under a Declaration of Trust dated September 20, 1984, as amended
from time to time, and all persons dealing with a Fund must look solely to the
property of a Fund for the enforcement of any claims against a Fund as neither
the Trustees, officers, agents, shareholders nor other series of the Trust
assume any personal liability for obligations entered into on behalf of a Fund.
No other series of the Trust assumes any liabilities for obligations entered
into on behalf of a Fund. Upon the initial purchase of shares, the shareholder
agrees to be bound by the Trust's Declaration of Trust, as amended from time to
time. The Declaration of Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts.

Costs of $47,994.42 incurred by Balanced Fund in conjunction with its
organization are amortized over five years beginning January 4, 1993.

Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts 02110-4103, a wholly-owned subsidiary of the Adviser, computes net
asset value for the Funds. Balanced and Income Fund each pay Scudder Fund
Accounting Corporation an annual fee equal to 0.025% of the first $150 million
of average daily net assets, 0.0075% of such assets in excess of $150 million
and 0.0045% of such assets in excess of $1 billion, plus holding and transaction
charges for this service.

Scudder Service Corporation (the "Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a wholly-owned subsidiary of the Adviser, is
the transfer, dividend-paying and shareholder service agent for each Fund and
also provides subaccounting and recordkeeping services for shareholder accounts
in certain retirement and employee benefit plans. Each Fund pays Service
Corporation an annual fee of $20.40 for each account maintained for a
participant which is $10.03 for its services as transfer and dividend disbursing
agent and $10.37 for its services as shareholder service agent. The Service
Corporation fees incurred for the year ended December 31, 1994 for Balanced Fund
amounted to $228,361, of which $21,196 was unpaid at December 31, 1994 and
$1,131,464, of which $101,853 was unpaid at December 31, 1994 for Income Fund.

The Funds' prospectuses and this combined Statement of Additional
Information omit certain information contained in the Registration Statement and
its amendments which the Funds have 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. The
Registration Statement and its amendments are available for inspection by the
public at the SEC in Washington, D.C.

54
<PAGE>
FINANCIAL STATEMENTS

Scudder Balanced Fund

The financial statements, including the investment portfolio of Scudder
Balanced Fund together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements are incorporated by reference and
attached hereto on pages 9 through 25, inclusive, in the Annual Report to the
Shareholders of the Fund dated December 31, 1994, and are hereby deemed to be
part of this combined Statement of Additional Information.

Scudder Income Fund

The financial statements, including the investment portfolio of Scudder
Income Fund, together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements are incorporated by reference and
attached hereto in pages 10 through 22 inclusive in the Annual Report to the
Shareholders of the Fund dated December 31, 1994 and are hereby deemed to be a
part of this combined Statement of Additional Information.

55
<PAGE>
APPENDIX

The following is a description of the ratings given by Moody's and
Standard & Poor's to corporate and municipal bonds.

Ratings of Municipal and Corporate Bonds

Standard & Poor's:

Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. Debt rated A has a strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.

Moody's:

Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.

Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Standard & Poor's Earnings and Dividend Rankings for Common Stocks

The investment process involves assessment of various factors--such as
product and industry position, corporate resources and financial policy--with
results that make some common stocks more highly esteemed than others. In this
assessment, Standard & Poor's believes that earnings and dividend performance is
the end result of the interplay of these factors and that, over the long run,
the record of this performance has a considerable bearing on relative quality.
The rankings, however, do not pretend to reflect all of the factors, tangible or
intangible, that bear on stock quality.

Relative quality of bonds or other debt, that is, degrees of protection
for principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.

Growth and stability of earnings and dividends are deemed key elements
in establishing Standard & Poor's earnings and dividend rankings for common
stocks, which are designed to capsulize the nature of this record in a single
symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications deemed desirable in
establishing such rankings.

<PAGE>
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years--a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.

Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.

The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:

A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower

NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.

The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.

A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management changes,
internal company policies not yet fully reflected in the earnings and dividend
record, public relations standing, recent competitive shifts, and a host of
other factors that may be relevant to investment status and decision.
<PAGE>

This information must be preceded or accompanied by a current prospectus.

Portfolio changes should not be considered recommendations for action by
individual investors.

Scudder Balanced Fund

Annual Report
December 31, 1994

* A fund that seeks a balance of growth and income, as well as long-term
preservation of capital, from a diversified portfolio of equity and
fixed-income securities.

* A pure no-load(tm) fund with no commissions to buy, sell, or exchange
shares.

CONTENTS

2 Highlights
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
9 Investment Portfolio
17 Financial Statements
20 Financial Highlights
21 Notes to Financial Statements
25 Report of Independent Accountants
26 Tax Information
29 Officers and Trustees
30 Investment Products and Services
31 How to Contact Scudder

HIGHLIGHTS

* Reflecting 1994's challenging environment for stocks and bonds,
Scudder Balanced Fund's net asset value declined. The Fund provided a
total return of -2.39% for the year ended December 31, 1994,
reflecting the price change and income distributions of $0.31 per
share.

* Stock holdings accounted for 63% of the Fund's assets on December 31,
while fixed-income securities and cash equivalents equaled 37%.

* The strong performance of select healthcare stocks benefited the Fund
during the year.

* The Fund's telecommunications holdings, including cellular telephone,
cable television, and broadcasting companies, benefited from the
continuing growth potential of this industry.

* The Fund remained focused on globally positioned companies, including
Duracell and PepsiCo in the consumer area and Intel and Microsoft in
the global technology arena.

LETTER FROM THE FUND'S PRESIDENT

Dear Shareholders,

The world's financial markets were shaken repeatedly in 1994 by a
variety of events. Rising global interest rates, losses for investors in
highly leveraged derivatives, and unsettling developments around the world
combined to create a challenging environment for stock and bond investors.
Masking the market volatility, however, many broad indexes ended the year
little changed.

The events of the past year have put a new face on an old challenge
for stock and bond funds: to provide shareholders with long-term returns
that compensate for the risks inherent in these investments. At times like
these, it is useful to remember that stocks historically have outperformed
income investments over longer periods. Bonds in turn have outpaced
short-term investments such as money market funds -- a trend not likely
altered by one year of poor performance.

In the coming year, we expect a combination of factors, including
central bank tightening efforts, to keep the world economy and inflation on
a moderate course. Meanwhile, corporate profits continue to grow and
business investment is at an all-time high, which should translate into
expanded economic capacity down the road. These developments ultimately
should be viewed as favorable for the financial markets, and we expect
investors to begin focusing on positive long-term fundamentals rather than
short-term uncertainties.

The team responsible for managing your Fund's investment portfolio has
recently changed. Bruce F. Beaty, who has played a key role in managing
your Fund since its inception, assumed responsibility for the Fund's
day-to-day management and investment strategies in January 1995. William M.
Hutchinson, who has also been with the Fund since its introduction,
continues to head up the Fund's fixed-income strategy and security
selection. Howard Ward, formerly lead portfolio manager of your Fund, has
left Scudder. We thank him for his contributions and wish him well in the
future.

If you have questions about your Fund or your investments, please
contact a Scudder Investor Relations representative at 1-800-225-2470. Page
31 provides more information on how to contact Scudder. Thank you for
choosing Scudder Balanced Fund to help meet your investment needs.

Sincerely

/s/Daniel Pierce
Daniel Pierce
President,
Scudder Balanced Fund

<PAGE>
Scudder Balanced Fund
Performance Update as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Scudder Balanced Fund
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,761 -2.39% -2.39%
Life of
Fund* $10,164 1.64% .82%

S&P 500 Index (60%) and LBAB Index (40%)
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,997 -.03% -.03%
Life of
Fund* $10,865 8.65% 4.44%

*The Fund commenced operations on January 4, 1993.
Index comparisons begin January 31, 1993.

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

Scudder Balanced Fund
Year Amount
- ----------------------
1/31/93 10000
6/93 9876
12/93 10395
6/94 9823
12/94 10147

S&P 500 Index
Year Amount
- ----------------------
1/31/93 10000
6/93 10401
12/93 10916
6/94 10547
12/94 11061

LBAB Index
Year Amount
- ----------------------
1/31/93 10000
6/93 10488
12/93 10768
6/94 10352
12/94 10454

The Standard & Poor's (S&P) 500 Index is a capitalization-
weighted measure of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange, and Over-The-Counter
market and The Lehman Brothers Aggregate Bond (LBAB) Index is a market
value-weighted measure of treasury issues, agency issues, corporate bond
issues and mortgage securities. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.

- -------------------------------------------------------------------
Returns and Per Share Information
- -------------------------------------------------------------------

A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.

<TABLE>
<S> <C> <C>
1993* 1994
---------------
Net Asset Value... $12.23 $11.63
Income Dividends.. $ .26 $ .31
Fund Total
Return (%)........ 4.12 -2.39
Index Total
Return (%)........ 8.56 -.03
</TABLE>

Performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
If the Adviser had not maintained the Fund's expenses, the average annual
total return for the 1 Year and Life of Fund would have been lower.

Portfolio Summary as of December 31, 1994
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------
Common Stocks 63%
Fixed Income Holdings 25% The Fund focused on companies likely to
Cash Equivalents 12% benefit from growth in capital spending,
---- the primary catalyst of the current
100% economic expansion.
====

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

- --------------------------------------------------------------------------
Equity Holdings
- --------------------------------------------------------------------------
Consumer Staples 15% Five Largest Equity Holdings
Financial 12% -----------------------------------------
Health 11% 1. American Telephone & Telegraph Co.
Technology 10% Telecommunication services and
Manufacturing 10% business systems
Durables 9% 2. General Electric Co. Leading producer
Energy 8% of electrical equipment
Other 25% 3. Mellon Bank Corp. Multi-bank holding
---- company
100% 4. PepsiCo Inc. Soft drinks, snack foods,
==== and food services
5. Eli Lilly Co. Leading pharmaceutical
company

We increased the Fund's exposure to healthcare stocks that we believed were
well-positioned and represented good value.

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

- --------------------------------------------------------------------------
Fixed Income Holdings (Excludes Cash Equivalents)
- --------------------------------------------------------------------------
Type Quality
- ----------------------------------- ---------------------------
U.S. Gov't & Agencies 50% AAA 71%
Corporate Bonds 25% AA 6%
U.S. Gov't Mortgages 18% A 15%
Foreign - U.S. $ Denominated 4% BBB 8%
Asset-Backed Securities 3% ----
---- 100%
100% ====
====

As rising interest rates slowed mortgage refinancings, income from
mortgage-backed securities became more stable and the portion of these
securities in the Fund was increased.

For more complete details about the Fund's Investment Portfolio,
see page 9.
A monthly investment portfolio summary is available upon request.

<PAGE>

SCUDDER BALANCED FUND

PORTFOLIO MANAGEMENT DISCUSSION

Dear Shareholders,

For investors in the United States and abroad, 1994 was one of the
most challenging years in over a decade. A nearly year-long pattern of
globally rising interest rates helped push U.S. and many foreign bond
prices down across all maturities, while most stock markets remained
volatile throughout the year.

Scudder Balanced Fund closed the year with a net asset value of $11.63
per share, down from $12.23 on December 31, 1993. Offsetting the decline
somewhat, the Fund paid shareholders a total of $0.31 per share in income
during the period. The price change and distribution generated a -2.39%
total return for the year. By comparison, the unmanaged Standard & Poor's
500 Index and the unmanaged Lehman Brothers Aggregate Bond Index posted
returns of 1.32% and -2.92%, respectively.

Scudder Balanced Fund is designed to invest between 50% and 75% of
its assets in common stocks to offer investors participation in quality
companies with long-term growth potential. The remainder of the Fund's net
assets are generally invested in fixed-income securities. The Fund's
investment parameters reflect the fact that, historically, stocks have
provided higher returns over the long term than bonds and cash equivalents
and, moreover, have generated returns greater than the inflation rate.

Equity Strategy Focused on Earnings Growth

Our equity strategy includes taking positions in financially strong
companies with a history of rising earnings. At the same time, we invest in
smaller companies that we believe offer the potential for above-average
earnings growth and price appreciation. As of December 31, 63% of the
portfolio was invested in stocks.

One of the major investment themes in 1994 centered on healthcare.
Although efforts to pass new federal healthcare legislation in 1994 failed,
many healthcare companies took action on their own to improve their
competitive positions by way of alliances, acquisitions, and
restructurings. We increased the Fund's exposure to healthcare stocks that
we believed were well positioned and represented good value.
Better-than-expected earnings reports from holdings such as
Schering-Plough, Baxter International, and United Healthcare benefited the
Fund during the year through stock price appreciation. Also, the
acquisition of American Cyanamid by American Home Products and the purchase
of McKesson's PCS division by Eli Lilly boosted Fund returns, as we held
shares of both American Cyanamid and McKesson.

Another major theme was the continuing growth potential of the
telecommunications industry, including cellular telephone, cable
television, and broadcasting companies. During the year the Fund benefited
from such holdings as Motorola and Nokia in cellular communications; CBS
and Capital Cities in broadcasting; and Viacom, Time Warner, and Disney in
diversified entertainment. Additionally, holdings in Sprint and MCI were
sold as price competition for long-distance service reduced earnings.

The portfolio also focused during the period on companies likely to
benefit from growth in capital spending, which has been the primary
catalyst of the current economic expansion. Manufacturing capacity is
strained in many countries, and both domestic and foreign companies are
building new facilities to meet the burgeoning demand for capital
equipment. The Fund's recent investments in this sector include new
positions or increased holdings in General Electric, Emerson Electric,
Minnesota Mining and Manufacturing, and Dover Corp.

Although historically the Fund's stock holdings have been largely
domestic, it has the flexibility to invest without limit abroad to ensure
an adequate level of diversification. This diversification proved helpful
in early 1994. The portfolio benefited from its holdings in foreign
companies, reflecting investor interest in emerging markets. As the year
progressed, however, positions in some of these stocks were sold as they
became fully valued and as the near-term outlook for certain emerging
markets became less sanguine. Positions in Compania de Telefonos de Chile,
Telefonos de Mexico, and Hong Kong Telephone, for example, were all sold
completely and at a profit. At the same time, the Fund remained focused on
larger multinationals including Duracell, Gillette, McDonald's, and
PepsiCo, as well as such global technology companies as Intel, Microsoft,
Texas Instruments, and Oracle Systems.

Emphasis on High-Quality Fixed-Income Securities

The Fund invests under normal circumstances between 25% and 50% of its
net assets in fixed-income securities. Because of the Fund's overall
quality emphasis, we do not invest in "junk" bonds. As of December 31,
1994, approximately 32% of the Fund's assets were invested primarily in
U.S. government and agency securities and corporate bonds.

We continued to concentrate holdings in both short and long maturities
throughout 1994. In an environment where short-term interest rates were
rising faster than long-term rates, this strategy benefited the Fund by
exposing it to the relatively higher income of long-term bonds and the
relatively higher price stability provided by short-term securities. On
December 31, 55% of the fixed-income portion of the portfolio was invested
in bonds with less than five years to maturity, while 22% was invested in
bonds with effective maturities of more than 15 years. As an added
defensive measure, we reduced the portfolio's average effective maturity
from approximately 13 years at the start of the year to approximately nine
years on December 31, 1994.

During the year, we maintained the Fund's emphasis on corporate
non-callable bonds (bonds that cannot be redeemed at the option of the
issuer) to sustain the Fund's income stream and provide a measure of
portfolio stability. Although non-callable bonds offer somewhat lower
income than callable bonds, they help us regulate the Fund's overall income
level, since they have no chance of being redeemed prior to maturity.

Lastly, we all but eliminated the Fund's mortgage-backed securities in
the first half of the year in favor of 10-year Treasuries. However, we
brought mortgage-backed securities back into the portfolio in the final
months of 1994 as rising interest rates slowed refinancings by homeowners,
making the higher income from these securities more stable.

Looking Ahead

For the equity portion of Scudder Balanced Fund, we believe low
relative inflation, a moderately expanding global economy, and stronger
corporate profits should help support stock prices in the coming months. At
Scudder, we remain committed to our quality-growth philosophy, which has
historically provided attractive returns to investors over time. As for the
income portion of the portfolio, we believe the events of the past year
have produced some attractive values in bonds. Still, the risk of
additional volatility in stocks and bonds remains, especially if global
competition continues to raise inflationary fears and the pressure on
interest rates remains upward. We believe Scudder Balanced Fund is well
positioned to achieve a positive total return over the long haul and
weather the interim volatility in the financial markets.

Sincerely,

Your Portfolio Management Team

/s/Bruce F. Beaty /s/William M. Hutchinson
Bruce F. Beaty William M. Hutchinson

Scudder Balanced Fund:
A Team Approach to Investing

Scudder Balanced Fund is managed by a team of Scudder investment
professionals who each play 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 Scudder's
large staff of economists, research analysts, traders, and other investment
specialists who work in Scudder's offices across the United States and
abroad. We believe our team approach benefits Fund investors by bringing
together many disciplines and leveraging Scudder's extensive resources.

Lead Portfolio Manager Bruce F. Beaty assumed responsibility for the
Fund's day-to-day management and investment strategies in January 1995.
Bruce, who has been a portfolio manager at Scudder since joining the firm
in 1991, specializes in the quality growth discipline of equity investing.
Prior to joining Scudder in 1991, Bruce spent 11 years in the securities
brokerage business. Portfolio Manager William M. Hutchinson heads up the
Fund's fixed-income investment strategy and security selection. Bill, who
has been with the Fund since its introduction and Scudder since 1986, has
over 20 years of investment experience.

<PAGE>

<PAGE>
INVESTMENT PORTFOLIO as of December 31, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% of Principal Market
Portfolio Amount ($) Value ($)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
3.6% REPURCHASE AGREEMENTS

2,429,000 Repurchase Agreement with Donaldson, Lufkin
and Jenrette dated 12/30/94 at 5.875% to
be repurchased at $2,430,586 on
1/3/95, collateralized by a $2,447,000
U.S. Treasury Note, 4.25%, 7/31/95
(Cost $2,429,000)................................... 2,429,000
---------

8.7% SHORT-TERM NOTES

3,800,000 Federal Home Loan Mortgage Corp. Discount
Note, 5.85%, 1/4/95................................. 3,798,147
2,000,000 Federal Home Loan Mortgage Corp. Discount
Note, 5.75%, 1/31/95................................ 1,990,417
---------
TOTAL SHORT-TERM NOTES (Cost $5,788,564)............. 5,788,564
---------

12.4% U.S. GOVERNMENT & AGENCIES

500,000 U.S. Treasury Bond, 7.875%, 2/15/21.................. 493,750
1,000,000 U.S. Treasury Note, 5.125%, 11/15/95................. 982,970
250,000 U.S. Treasury Note, 8%, 10/15/96..................... 251,328
250,000 U.S. Treasury Note, 8.5%, 4/15/97.................... 253,750
1,250,000 U.S. Treasury Note, 5.5%, 9/30/97.................... 1,179,888
500,000 U.S. Treasury Note, 5.125%, 4/30/98.................. 460,780
500,000 U.S. Treasury Note, 6.375%, 1/15/99.................. 474,685
2,000,000 U.S. Treasury Note, 6.875%, 7/31/99.................. 1,925,000
600,000 U.S. Treasury Note, 5.75%, 8/15/03................... 521,436
3,200,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 5/15/09 (8.026% (b))........ 1,032,736
700,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 11/15/10 (8.051% (b))....... 199,983
1,000,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 8/15/14 (8.078% (b))........ 211,430
2,000,000 U.S. Treasury Separate Trading Registered
Interest and Principal, 8/15/18 (8.073% (b))........ 308,380
---------
TOTAL U.S. GOVERNMENT & AGENCIES
(Cost $8,758,045)................................... 8,296,116
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.

<PAGE>

SCUDDER BALANCED FUND

1,001,172 Government National Mortgage Association
Pass-thru, 8%, 6/15/24 (d).......................... 957,050
29,886 Government National Mortgage Association
Pass-thru, 9.5%, 8/15/19............................ 30,861
---------
TOTAL U.S. GOV'T GUARANTEED MORTGAGES
(Cost $1,006,682)................................... 987,911
---------

2.9% U.S. GOVERNMENT AGENCY PASS-THRUS

1,000,000 Federal National Mortgage Association,
9%, 1/1/99 (c)...................................... 1,005,000
995,267 Federal National Mortgage Association,
7.5%, 10/1/24 (d)................................... 929,330
---------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS
(Cost $1,957,219)................................... 1,934,330
---------

0.9% FOREIGN BONDS-- U.S. $ DENOMINATED

661,000 United Mexican States Tesobonos,
U.S. Dollar Linked, 8/17/95 (Cost $633,296)......... 606,269
---------

0.7% ASSET-BACKED SECURITIES
AUTOMOBILE RECEIVABLES
500,000 Capital Automobile Receivable Asset Trust,
Series A6, 4.9%, 2/15/98 (Cost $499,848)............ 491,875
---------

6.1% CORPORATE BONDS

FINANCIAL 1.4%
250,000 American General Finance Corp.
Senior Note, 8.375%, 1/15/95........................ 250,098
200,000 Norwest Financial Inc. Senior Note,
8.875%, 7/1/96...................................... 202,502

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------

% of Principal Market
Portfolio Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
500,000 World Savings & Loan Association of Oakland,
CA, Medium Term Note, 5.25%, 2/15/96................ 488,685
---------
941,285
---------

MEDIA 1.2%
375,000 News America Holdings Inc., 9.25%, 2/1/13............ 364,789
500,000 Time Warner Inc., 9.125%, 1/15/13.................... 450,470
---------
815,259
---------

DURABLES 1.4%

250,000 Boeing Co., 6.875%, 10/15/43......................... 196,755
500,000 Ford Motor Co., 8.875%, 1/15/22...................... 504,950
250,000 Ford Motor Credit Co., 6.25%, 2/26/98................ 235,508
---------
937,213
---------
MANUFACTURING 1.4%
500,000 Dow Chemical Co., 9%, 4/1/21......................... 505,010
500,000 Nova Corp. of Alberta, 7.875%, 4/1/23................ 453,475
---------
958,485
---------

TECHNOLOGY 0.7%
500,000 Loral Corp., 8.375%, 6/15/24......................... 462,140
---------
TOTAL CORPORATE BONDS (Cost $4,513,966).............. 4,114,382
---------

63.2% COMMON STOCKS
Shares
----------------------------------------------------------------------------

CONSUMER DISCRETIONARY 4.0%

Department &
Chain Stores 3.1% 16,366 Home Depot, Inc. .................................... 752,828
6,000 J.C. Penney Inc. .................................... 267,750
30,200 Wal-Mart Stores Inc. ................................ 641,750
10,200 Walgreen Co. ........................................ 446,250
---------
2,108,578
---------

Restaurants 0.6% 13,300 McDonald's Corp. .................................... 389,025
---------
Specialty Retail 0.3% 6,800 Toys "R" Us Inc.*.................................... 207,400
---------
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SCUDDER BALANCED FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSUMER STAPLES 9.8%

Consumer Electronic &
Photographic Products 0.8% 5,400 Duracell International Inc. ......................... 234,225
5,700 Whirlpool Corp. ..................................... 289,275
---------
523,500
---------

Food & Beverage 6.6% 10,800 Albertson's Inc. .................................... 313,200
15,500 CPC International Inc. .............................. 825,375
14,500 ConAgra Inc. ........................................ 453,125
12,400 General Mills, Inc. ................................. 706,800
5,500 Kellogg Co. ......................................... 319,688
32,700 PepsiCo Inc. ........................................ 1,185,375
24,300 Sara Lee Corp. ...................................... 613,575
---------
4,417,138
---------

Package Goods/
Cosmetics 2.4% 6,000 Colgate-Palmolive Co. ............................... 380,250
4,500 Gillette Co. ........................................ 336,375
14,300 Procter & Gamble Co. ................................ 886,600
---------
1,603,225
---------
HEALTH 7.2%

Health Industry Services 0.8% 6,000 U.S. HealthCare, Inc. ............................... 247,500
6,000 United Healthcare Corp. ............................. 270,750
---------
518,250
---------

Hospital Management 1.0% 18,000 Columbia/HCA Healthcare Corp. ....................... 657,000
---------
Pharmaceuticals 5.4% 8,600 Abbott Laboratories.................................. 280,575
16,500 Baxter International Inc. ........................... 466,125
17,200 Eli Lilly Co. ....................................... 1,128,750
4,000 Johnson & Johnson.................................... 219,000
10,700 Schering-Plough Corp. ............................... 791,800
9,800 Warner-Lambert Co. .................................. 754,600
---------
3,640,850
---------

COMMUNICATIONS 2.4%

Cellular Telephone 0.3% 6,200 AirTouch Communications.............................. 180,575
---------
Telephone/
Communications 2.1% 28,300 American Telephone & Telegraph Co. .................. 1,422,075
---------
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------

% of Market
Portfolio Shares Value ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL 7.4%

Banks 4.0% 11,717 Banc One Corp. ...................................... 297,319
42,200 Mellon Bank Corp. ................................... 1,292,375
24,400 Norwest Corp. ....................................... 570,350
19,800 State Street Boston Corp. ........................... 566,775
---------
2,726,819
---------

Insurance 2.3% 8,400 American International Group, Inc. .................. 823,200
8,500 EXEL, Ltd. .......................................... 335,750
6,500 MBIA Inc. ........................................... 364,813
---------
1,523,763
---------
Other Financial
Companies 1.1% 10,000 Federal National Mortgage Association................ 728,750
---------

MEDIA 5.1%

Advertising 0.5% 11,400 Interpublic Group of Companies Inc. ................. 366,225
---------

Broadcasting &
Entertainment 3.7% 7,500 CBS Inc. ............................................ 415,313
4,700 Capital Cities/ABC Inc. ............................. 400,675
13,500 Time Warner Inc. .................................... 474,188
10,200 Turner Broadcasting System Inc. "B".................. 167,025
10,300 Viacom Inc. "B"*..................................... 418,438
13,300 Walt Disney Co. ..................................... 613,463
---------
2,489,102
---------

Cable Television 0.7% 8,800 Comcast Corp. "A".................................... 138,050
15,000 Tele-Communications Inc. "A"*........................ 326,250
---------
464,300
---------

Print Media 0.2% 2,300 News Corp. Ltd. (ADR)................................ 31,913
4,600 News Corp. Ltd. (New) (ADR)*......................... 71,875
---------
103,788
---------
SERVICE INDUSTRIES 2.0%

EDP Services 1.5% 7,800 Automatic Data Processing, Inc. ..................... 456,300
5,900 First Data Corp. .................................... 279,513
6,100 General Motors Corp. "E"............................. 234,850
---------
970,663
---------

Miscellaneous Commercial
Services 0.3% 8,500 Sysco Corp. ......................................... 218,875
---------
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SCUDDER BALANCED FUND

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

% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Printing/Publishing 0.2% 3,400 Reuters Holdings PLC "B" (ADR)....................... 149,175
---------
DURABLES 5.7%

Aerospace 0.5% 6,600 Boeing Co. .......................................... 308,550
---------
Automobiles 1.8% 9,600 Chrysler Corp. ...................................... 470,400
14,600 Ford Motor Co. ...................................... 408,800
8,100 Magna International, Inc. "A"........................ 310,838
---------
1,190,038
---------

Construction/
Agricultural Equipment 1.2% 9,200 Caterpillar Inc. .................................... 507,150
5,000 Deere & Co. ......................................... 331,250
---------
838,400
---------

Telecommunications
Equipment 1.8% 8,000 L.M. Ericsson Telephone Co. "B" (ADR)................ 441,000
10,200 Nokia Corp. (ADR)*................................... 765,000
---------
1,206,000
---------
Tires 0.4% 10,400 Cooper Tire & Rubber Co.............................. 245,700
---------

MANUFACTURING 6.5%

Diversified Manufacturing 4.0% 4,400 Dover Corp........................................... 227,150
27,700 General Electric Co.................................. 1,412,700
15,900 Minnesota Mining & Manufacturing Co.................. 848,663
3,000 TRW Inc.............................................. 198,000
---------
2,686,513
---------

Electrical Products 1.7% 5,200 ASEA AB (ADR)* ...................................... 375,050
12,500 Emerson Electric Co.................................. 781,250
---------
1,156,300
---------

Machinery/Components/
Controls 0.8% 10,900 Parker-Hannifin Group................................ 495,950
---------
TECHNOLOGY 6.4%

Computer Software 1.0% 6,600 Microsoft Corp.* .................................... 403,425
3,400 Oracle Systems Corp.*................................ 150,025
2,200 Sybase Inc.* ........................................ 114,400
---------
667,850
---------

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

INVESTMENT PORTFOLIO

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diverse Electronic
Products 2.5% 19,300 General Motors Corp. "H"..................... 673,088
17,000 Motorola Inc................................. 983,875
----------
1,656,963
----------
Electronic Components/
Distributors 0.2% 5,000 Molex Inc. "A" .............................. 155,000
----------
Electronic Data Processing 1.2% 8,300 Compaq Computers Corp.*...................... 327,850
5,000 Hewlett-Packard Co. ......................... 499,375
----------
827,225
----------
Office/Plant Automation 0.3% 5,200 Cisco Systems, Inc.*......................... 182,650
----------
Semiconductors 1.2% 4,800 Intel Corp. ................................. 306,600
6,100 Texas Instruments Inc. ...................... 456,738
----------
763,338
----------
ENERGY 5.3%

Engineering 1.4% 12,500 Fluor Corp. ................................. 539,063
12,700 Foster Wheeler Corp. ........................ 377,825
----------
916,888
----------
Oil Companies 2.9% 9,000 Chevron Corp. ............................... 401,625
7,000 Exxon Corp. ................................. 425,250
6,000 Mobil Corp. ................................. 505,500
3,900 Royal Dutch Petroleum Co. ................... 419,250
8,000 Unocal Corp.................................. 218,000
----------
1,969,625
----------
Oil/Gas Transmission 1.0% 22,600 Enron Corp. ................................. 689,300
----------

METALS AND MINERALS 0.9%

Steel & Metals 10,000 Allegheny Ludlum Corp. ...................... 187,500
7,900 Nucor Corp. ................................. 438,450
----------
625,950
CONSTRUCTION 0.5% ----------

Forest Products 12,000 Louisiana Pacific Corp. ..................... 327,000
----------
TOTAL COMMON STOCKS (Cost $42,606,139) ...... 42,318,316
----------

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

TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $68,192,759)(a)....................... 66,966,763
==========
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SCUDDER BALANCED FUND
- --------------------------------------------------------------------------------

(a) The cost for federal income tax purposes was $68,349,729. At December
31, 1994, net unrealized depreciation for all securities based on tax
cost was $1,382,966. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $1,835,372 and aggregate gross unrealized
depreciation for all securities in which there was an excess tax cost
over market value of $3,218,338.

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

(d) At December 31, 1994, these pools in whole or in part have been
segregated to cover Mortgage Dollar Rolls (See Note A in Notes to
Financial Statements).

* Non-income producing security.

The accompanying notes are an integral part of the financial statements.

<PAGE>

FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>

STATEMENT OF ASSETS AND LIABILITIES

DECEMBER 31, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS

Investments, at market (identified cost $68,192,759)
(Note A) ............................................. $ 66,966,763
Other receivables:
Fund shares sold ..................................... 8,235
Dividends and interest ............................... 339,719
Deferred organization expenses (Note A).................. 28,875
------------
Total assets ......................................... 67,343,592

LIABILITIES
Payables:
Investments purchased ................................ $ 96,120
Investments purchased-mortgage dollar rolls (Note A).. 1,010,938
Fund shares redeemed ................................. 132,401
Accrued management fee (Note C)....................... 21,309
Other accrued expenses (Note C)....................... 50,573
----------
Total liabilities..................................... 1,311,341
------------
Net assets, at market value.............................. $ 66,032,251
============
NET ASSETS
Net assets consist of:
Accumulated net investment loss ...................... $ (11,510)
Accumulated net realized loss......................... (613,801)
Unrealized depreciation on investments................ (1,225,996)
Shares of beneficial interest......................... 56,801
Additional paid-in capital............................ 67,826,757
------------
Net assets, at market value $ 66,032,251
NET ASSET VALUE, offering and redemption price per ============
share ($66,032,251 -:- 5,680,135 outstanding
shares of beneficial interest, $.01 par value,
unlimited number of shares authorized)................ $11.63
======
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SCUDDER BALANCED FUND
- --------------------------------------------------------------------------------

STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME

Interest ............................................. $ 1,435,109
Dividends (net of withholding taxes of $9,111)........ 938,465
-----------
2,373,574

Expenses:
Management fee (Note C)............................... $ 152,798
Services to shareholders (Note C)..................... 259,463
Trustees' fees (Note C)............................... 38,952
Custodian fees........................................ 88,094
Auditing.............................................. 23,081
Legal................................................. 16,626
Reports to shareholders............................... 36,326
State registration.................................... 15,127
Federal registration.................................. 3,227
Amortization of organization expense (Note A)......... 10,260
Other................................................. 5,263 649,217
-------------------------------
Net investment income................................. 1,724,357
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENT
TRANSACTIONS
Net realized loss from:
Investments........................................ (377,447)
Foreign currency related transactions.............. (23,729) (401,176)
-----------
Net unrealized depreciation during the period on:
Investments........................................ (2,936,953)
Foreign currency related transactions.............. (264) (2,937,217)
----------- -----------
Net loss on investment transactions................... (3,338,393)
-----------
$(1,614,036)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.. ===========

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 4, 1993
YEAR (COMMENCEMENT
ENDED OF OPERATIONS)
DECEMBER 31, TO DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income............................. $ 1,724,357 $ 1,237,191
Net realized loss from investment
transactions................................... (401,176) (277,196)
Net unrealized appreciation (depreciation) on
investment transactions during the period...... (2,937,217) 1,711,221
------------ ------------
Net increase (decrease) in net assets
resulting from operations...................... (1,614,036) 2,671,216
------------ ------------
Distributions to shareholders from net
investment income ($.31 and $.26 per
share, respectively)........................... (1,678,241) (1,231,250)
------------ ------------
Fund share transactions:
Proceeds from shares sold......................... 23,615,096 82,201,024
Net asset value of shares issued to
shareholders in reinvestment of distributions.. 1,621,585 1,195,922
Cost of shares redeemed........................... (19,948,276) (20,801,989)
------------ ------------
Net increase in net assets from Fund share
transactions................................... 5,288,405 62,594,957
------------ ------------
INCREASE IN NET ASSETS............................ 1,996,128 64,034,923
Net assets at beginning of period................. 64,036,123 1,200
------------ ------------
NET ASSETS AT END OF PERIOD (including
accumulated net investment loss
of $11,510 at December 31, 1994)............... $ 66,032,251 $ 64,036,123
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period......... 5,235,193 100
------------ ------------
Shares sold....................................... 1,976,188 6,881,770
Shares issued to shareholders in
reinvestment of distributions.................. 139,036 99,389
Shares redeemed................................... (1,670,282) (1,746,066)
------------ ------------
Net increase in Fund shares....................... 444,942 5,235,093
------------ ------------
Shares outstanding at end of period............... 5,680,135 5,235,193
============ ============

</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

SCUDDER BALANCED FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>

* Not annualized
</TABLE>

<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------

Scudder Balanced Fund (the "Fund") is a diversified series of Scudder Portfolio
Trust (the "Trust"). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The policies described
below are followed by the Fund in the preparation of its financial statements in
conformity with generally accepted accounting principles.

SECURITY VALUATION. Portfolio securities which are traded on U.S. or foreign
stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale occurred,
the security is then valued at the calculated mean between the most recent bid
and asked quotations. If there are no such bid and asked quotations, the most
recent bid quotation is used. Securities quoted on the National Association of
Securities Dealers Automatic Quotation ("NASDAQ") System, for which there have
been sales, are valued at the most recent sale price reported on such system. If
there are no such sales, the value is the high or "inside" bid quotation.
Securities which are not quoted on the NASDAQ System but are traded in another
over-the- counter market are valued at the most recent sale price on such
market. If no sale occurred, the security is then valued at the calculated
mean between the most recent bid and asked quotations. If there are no such bid
and asked quotations, the most recent bid quotation shall be used.

Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which 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.
Short-term investments having a 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.

<PAGE>

SCUDDER BALANCED FUND
- --------------------------------------------------------------------------------

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
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, depending on the maturity of the repurchase
agreement and the underlying collateral, is equal to at least 100.5% of the
resale price.

MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar rolls in which
the Fund sells mortgage securities for delivery in the current month and
simultaneously contracts to repurchase similar, but not identical, securities
at the same price on a fixed date. The Fund receives compensation as
consideration for entering into the commitment to repurchase.

The compensation is recorded as deferred income and amortized to income over the
roll period. The counterparty receives all principal and inter- est payments,
including prepayments, made in respect of the security while it is the holder.
Mortgage dollar rolls may be renewed with a new purchase and repurchase price
fixed 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 which are applicable to regulated investment companies
and to distribute all of its taxable income to its shareholders. The Fund
accordingly paid no federal income taxes and no provision for federal income
taxes was required.

At December 31, 1994, the Fund had a net tax basis capital loss carryforward
of approximately $127,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until December 31,
2001, the expiration date. In addition, from November 1, 1994 through December
31, 1994, the Fund incurred approximately $330,000 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 ended December 31,
1995.

<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income are
made quarterly. During any particular year, 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. An additional distribution may be made to the extent necessary to
avoid the payment of a four percent federal excise tax.

The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences relate primarily to investments in foreign denominated investments
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 reclassifications among certain of its capital
accounts without impacting the net asset value of the Fund.

The Fund uses the specific identified cost method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.

ORGANIZATION COST. Costs incurred by the Fund in connection with its
organization and initial registration of shares have been deferred and are being
amortized on a straight-line basis over a five-year period.

OTHER. Investment security transactions are accounted for on a trade date basis.
Dividend income and distributions to shareholders are recorded on the ex-
dividend date. Interest income is recorded on the accrual basis.

B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------

For the year ended December 31, 1994, purchases and sales of investment
securities (excluding short-term investments and U.S. Government obligations)
aggregated $58,015,007 and $56,776,065, respectively. Purchases and sales of
U.S. Government obligations aggregated $7,466,449 and $6,080,563, respectively.

<PAGE>

SCUDDER BALANCED FUND
- --------------------------------------------------------------------------------

C. RELATED PARTIES
- --------------------------------------------------------------------------------

Under the Investment Management Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Adviser directs the investments of
the Fund in accordance with its investment objectives, policies, and
restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides certain
administrative services in accordance with the Agreement. The management fee
payable under the Agreement is equal to an annual rate of 0.70% of the Fund's
average daily nets assets, computed and accrued daily and payable monthly. The
Agreement also provides that if the Fund's expenses exceed specified limits,
such excess, up to the amount of the management fee, will be paid by the
Adviser. In addition, the Adviser has agreed not to impose all or a portion of
its management fee until April 30, 1995 to maintain the annualized expenses of
the Fund at not more than 1.00% of average daily net assets. For the year ended
December 31, 1994, the Adviser imposed fees amounting to $152,798 and the
portion not imposed amounted to $303,520.

Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend paying and shareholder service agent for the Fund. For
the year ended December 31, 1994, the amount charged to the Fund by SSC
aggregated $228,361, of which $21,196 is unpaid at December 31, 1994.

The Fund pays each Trustee not affiliated with the Adviser $4,000 annually, plus
specified amounts for attended board and committee meetings. For the year ended
December 31, 1994, Trustees' fees aggregated $38,952.

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------

TO THE TRUSTEES OF SCUDDER PORTFOLIO TRUST AND SHAREHOLDERS OF SCUDDER BALANCED
FUND:

We have audited the accompanying statement of assets and liabilities of Scudder
Balanced Fund including the investment portfolio, as of December 31, 1994, and
the related statements of operations for the year then ended, and changes in net
assets for the year then ended and for the period January 4, 1993 (commencement
of operations) to December 31, 1993, and the financial highlights for the year
then ended and for the period January 4, 1993 (commencement of operations) to
December 31, 1993. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Balanced Fund as of December 31, 1994, the results of its operations for
the year then ended, the changes in its net assets for the year then ended and
for the period January 4, 1993 (commencement of operations) to December 31,
1993, and the financial highlights for the year then ended and for the period
January 4, 1993 (commencement of operations) to December 31, 1993 in conformity
with generally accepted accounting principles.

Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 3, 1995

<PAGE>

SCUDDER BALANCED FUND
TAX INFORMATION
- --------------------------------------------------------------------------------

By now shareholders to which year-end tax reporting is required by the IRS
should have received their Form 1099-DIV and tax information letter from the
Fund. For corporate shareholders, 51.9% of the income dividends paid during the
Fund's fiscal year ended December 31, 1994 qualified for the dividends received
deduction.

In many states the amount of income you received from obligations of the U.S.
Government is exempt from your state income taxes. The percentage of the Fund's
1994 income which was derived from direct obligations of the U.S. Government was
21.3%.

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 Scudder Fund account, please call a Scudder Investor Relations
Representative at 1-800-225-5163.

<PAGE>

OFFICERS AND TRUSTEES

Daniel Pierce*
President and Trustee

Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation

Dudley H. Ladd*
Trustee

David S. Lee*
Vice President and Trustee

George M. Lovejoy, Jr.
Trustee; Chairman Emeritus, Meredith & Grew, Incorporated

Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University

Jean C. Tempel
Trustee; Director, Executive Vice President and Manager, Safeguard
Scientifics, Inc.

Jerard K. Hartman*
Vice President

William M. Hutchinson*
Vice President

Thomas W. Joseph*
Vice President

Thomas F. McDonough*
Vice President, Secretary and Assistant Treasurer

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Coleen Downs Dinneen*
Assistant Secretary

*Scudder, Stevens & Clark, Inc.

INVESTMENT PRODUCTS AND SERVICES

The Scudder Family of Funds

Money market
Scudder Cash Investment Trust
Scudder U.S. Treasury Money Fund
Tax free money market+
Scudder Tax Free Money Fund
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
Tax free+
Scudder California Tax Free Fund*
Scudder High Yield Tax Free Fund
Scudder Limited Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder Massachusetts Limited Term Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder Medium Term Tax Free Fund
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
Growth and Income
Scudder Balanced Fund
Scudder Growth and Income Fund
Income
Scudder Emerging Markets Income Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder International Bond Fund
Scudder Short Term Bond Fund
Scudder Short Term Global Income Fund
Scudder Zero Coupon 2000 Fund
Growth
Scudder Capital Growth Fund
Scudder Development Fund
Scudder Global Fund
Scudder Global Small Company Fund
Scudder Gold Fund
Scudder Greater Europe Growth Fund
Scudder International Fund
Scudder Latin America Fund
Scudder Pacific Opportunities Fund
Scudder Quality Growth Fund
Scudder Value Fund
The Japan Fund

Retirement Plans and Tax-Advantaged Investments
IRAs
Keogh Plans
Scudder Horizon Plan+++* (a variable annuity)
401(k) Plans
403(b) Plans
SEP-IRAs
Profit Sharing and Money Purchase Pension Plans

Closed-end Funds#
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder World Income Opportunities Fund, Inc.

Institutional Cash Management
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(tm)++

For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from
the tax-free funds may be subject to federal, state and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc., are traded on various stock exchanges.
++For information on Scudder Treasurers Trust(tm), an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call: 1-800-541-7703.

HOW TO CONTACT SCUDDER

Account Service and Information

For existing account service and transactions

SCUDDER INVESTOR RELATIONS
1-800-225-5163

For account updates, prices, yields, exchanges and redemptions

SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890

Investment Information

To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions

SCUDDER INVESTOR RELATIONS
1-800-225-2470

For establishing 401(k) and 403(b) plans

SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105

Please address all correspondence to

THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291

Or stop by a Scudder Funds Center

Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you_they can be
found in the following cities:

Boca Raton
Boston
Chicago
Cincinnati
Los Angeles
New York
Portland, OR
San Diego
San Francisco
Scottsdale

For information on Scudder Treasurers Trust(tm), an institutional cash
management service for corporations, non-profit organizations and trusts
which utilizes certain portfolios of Scudder Fund, Inc.* ($100,000
minimum), call: 1-800-541-7703.

For information on Scudder Institutional Funds,* funds designed to meet the
broad investment management and service needs of banks and other
institutions, call: 1-800-854-8525.

Scudder Investor Relations and Scudder Funds Centers are services
provided through Scudder Investor Services, Inc., Distributor.

* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees
and expenses. Please read it carefully before you invest or send
money.

Celebrating 75 Years of Serving Investors

Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment
counsel firm in the United States. Since its birth, Scudder's pioneering
spirit and commitment to professional long-term investment management have
helped shape the investment industry. In 1928, we introduced the nation's
first no-load mutual fund. Today we offer 36 pure no load(tm) funds,
including the first international mutual fund offered to U.S. investors.

Over the years, Scudder's global investment perspective and dedication
to research and fundamental investment disciplines have helped Scudder
become one of the largest and most respected investment managers in the
world. Though times have changed since our beginnings, we remain committed
to our longstanding principles: managing money with integrity and
distinction, keeping the interests of our clients first; providing access
to investments and markets that may not be easily available to individuals;
and making investing as simple and convenient as possible through friendly,
comprehensive service.

<PAGE>
This information must be preceded or accompanied by a current prospectus.

Portfolio changes should not be considered recommendations for action by
individual investors.

Scudder Income Fund

Annual Report
December 31, 1994

* Offers opportunities for a high level of income consistent with the
prudent investment of capital.

* A pure no-load(tm) fund with no commissions to buy, sell, or exchange
shares.

CONTENTS

2 Highlights
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
14 Financial Statements
17 Financial Highlights
18 Notes to Financial Statements
22 Report of Independent Accountants
23 Tax Information
25 Officers and Trustees
26 Investment Products and Services
27 How to Contact Scudder

HIGHLIGHTS

* Interest rates rose sharply in 1994, contributing to bond price
declines across all maturities. In this challenging investment
environment, Scudder Income Fund provided a total return of -4.43% for
the year ended December 31, 1994.

* Scudder Income Fund provided a 30-day net annualized yield of 7.15%,
up from 5.93% on December 31, 1993. During 1994, Scudder Income Fund
distributed a total of $0.76 per share in income dividends and $0.02
per share in capital gains.

* The Fund's management team shifted assets from mortgage-backed
securities to U.S. government bonds earlier in the year, but then
rebuilt mortgage-backed holdings later in the year as home
refinancings slowed and income from these securities stabilized.

* The Fund currently features a mix of short- and long-term holdings to
provide a combination of high relative income, investment flexibility,
and a measure of price stability.

* The Fund's average effective maturity declined to below 10 years in
1994.

LETTER FROM THE FUND'S PRESIDENT

Dear Shareholders,

The United States Federal Reserve raised interest rates six times in
1994 in an effort to bring economic growth down to a more sustainable
level. Investors, generally underestimating the scope and speed with which
interest rates rose, sent prices lower on a broad range of fixed-income
securities, resulting in the worst bond market since the 1920s. The Orange
County bankruptcy and Mexican peso crisis added to the bond market's woes.

The rise in interest rates poses a classic challenge for income funds:
to provide shareholders with the higher income now available from bonds
while protecting against an inordinate amount of price erosion. Although
the worst is probably over, interest rates may rise somewhat further in
1995. However, in the year ahead, we believe a combination of factors,
including the Federal Reserve's tightening efforts, will keep the economy
and inflation on a moderate course, which should ease the upward pressure
on rates. These developments ultimately should be viewed as favorable for
the financial markets, and we expect investors to begin focusing on
positive long-term fundamentals rather than short-term uncertainties.

Additional increases in interest rates may, of course, spark periods
of difficult adjustment for fixed-income markets. At times like these, it
is more important than ever to have a sound investment plan that can
weather market storms. The past year has demonstrated that virtually all
financial instruments, whether conservative or aggressive, are susceptible
to poor performance. But experience tells us that over the long term,
investors who have participated in the stock and bond markets have
accumulated far more wealth than those who have chosen to protect their
savings above all else.

If you have questions about your Fund or your investments, please
contact a Scudder Investor Relations representative at 1-800-225-2470. Page
27 provides more information on how to contact Scudder. Thank you for
choosing Scudder Income Fund to help meet your investment needs.

Sincerely,

/s/Daniel Pierce
Daniel Pierce
President,
Scudder Income Fund

Scudder Income Fund
Performance Update as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Scudder Income Fund
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,557 -4.43% -4.43%
5 Year $14,595 45.95% 7.85%
10 Year $25,230 152.30% 9.70%

LB Aggregate Bond Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,708 -2.92% -2.92%
5 Year $14,464 44.64% 7.66%
10 Year $25,847 158.47% 9.96%

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

Yearly periods ended December 31

Scudder Income Fund
Year Amount
- ----------------------
84 10000
85 12180
86 13976
87 14079
88 15333
89 17287
90 18726
91 21968
92 23449
93 26399
94 25230

LB Aggregate Bond Index
Year Amount
- ----------------------
84 10000
85 12210
86 14074
87 14462
88 15602
89 17869
90 19471
91 22586
92 24258
93 26623
94 25847

The Lehman Brothers (LB) Aggregate Bond Index is a market
value-weighted measure of treasury issues, agency issues,
corporate bond issues and mortgage securities. Index returns
assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.

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Returns and Per Share Information
- -------------------------------------------------------------------

A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.

Yearly periods ended December 31
- ----------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------------------------------------------------------------------------------
Net Asset Value... $12.82 $13.41 $12.40 $12.41 $12.89 $12.82 $13.91 $13.48 $13.71 $12.32
Income Dividends.. $ 1.29 $ 1.22 $ 1.10 $ 1.07 $ 1.06 $ 1.03 $ .92 $ .93 $ .87 $ .76
Capital Gains
and Paid-In Capital
Distributions..... $ -- $ -- $ -- $ -- $ -- $ .06 $ .14 $ .40 $ .57 $ .02
Fund Total
Return (%)........ 21.80 14.75 0.74 8.91 12.75 8.32 17.32 6.74 12.58 -4.43
Index Total
Return (%)........ 22.10 15.26 2.76 7.88 14.53 8.96 16.00 7.40 9.75 -2.92
</TABLE>

Portfolio Summary as of December 31, 1994
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------
Corporate Bonds 31%
U.S. Gov't & Agencies 22%
Cash Equivalents 14% As home refinancings slowed,
U.S. Gov't Agency the portfolio's share of mortgage-
Pass-Thrus 14% backed securities increased as their
Foreign Bonds - U.S. yields improved.
$ Denominated 9%
Collateralized Mortgage
Obligations 5%
Asset-Backed Securities 5%
----
100%
====

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

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Quality
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AAA * 60%
AA 10% The Fund focuses on high-quality
A 15% issues, with more than two-thirds
BBB 15% of the portfolio invested in bonds
---- rated AA or better
100%
====

Weighted Average Quality: AA
* Category includes cash equivalents

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

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Effective Maturity
- --------------------------------------------------------------------------
Less than 1 year 23%
1 to 5 years 26% Nearly half the portfolio is invested
5 to 8 years 10% in bonds with less than five years to
8 to 15 years 18% maturity, an increase from 40% a year
Greater than 15 years 23% ago.
----
100%
====

Weighted average effective maturity: 9 years

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

For more complete details about the Fund's Investment Portfolio,
see page 10.
A monthly investment portfolio summary is available upon request.