SCUDDER PORTFOLIO TRUST/, 485BPOS, 1998-04-30

SCUDDER PORTFOLIO TRUST/
485BPOS, 1998-04-30

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Filed electronically with the Securities and Exchange Commission
on April 30, 1998.

File No. 2-13627
File No. 811-42

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.

Post-Effective Amendment No. 72
----
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 33
----

Scudder Portfolio Trust
-----------------------
(Exact Name of Registrant as Specified in Charter)

Two International Place, Boston, MA 02110-4103
----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (617) 295-2567

Thomas F. McDonough
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
-----------------------------------------
(Name and Address of Agent for Service)

It is proposed that this filing will become effective

immediately upon filing pursuant to paragraph (b)
---
X on May 1, 1998 pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)(i)
---
on __________ pursuant to paragraph (a)(i)
---

75 days after filing pursuant to paragraph (a)(ii)
---
on __________ pursuant to paragraph (a)(ii) of Rule 485.
---

<PAGE>

SCUDDER PORTFOLIO TRUST
SCUDDER INCOME FUND
CROSS-REFERENCE SHEET

Items Required By Form N-1A
---------------------------
PART A
- ------
<TABLE>
<S> <C> <C>
<CAPTION>

Item No. Item Caption Prospectus Caption
-------- ------------ ------------------

1. Cover Page COVER PAGE

2. Synopsis EXPENSE INFORMATION

3. Condensed Financial FINANCIAL HIGHLIGHTS
Information DISTRIBUTION AND PERFORMANCE INFORMATION

4. General Description of INVESTMENT OBJECTIVE AND POLICIES
Registrant WHY INVEST IN THE FUND?
ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION

5. Management of the Fund FINANCIAL HIGHLIGHTS
A MESSAGE FROM SCUDDER'S CHAIRMAN
FUND ORGANIZATION--Investment adviser, Transfer agent
SHAREHOLDER BENEFITS--A team approach to investing
TRUSTEES AND OFFICERS

5A. Management's Discussion of NOT APPLICABLE
Fund Performance

6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION-- Dividends and capital
Securities gains distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL(TM)--Scudder Automated Information Line,
Dividend reinvestment plan, T.D.D. service for the hearing
impaired
HOW TO CONTACT SCUDDER

7. Purchase of Securities PURCHASES
Being Offered FUND ORGANIZATION--Underwriter
TRANSACTION INFORMATION--Purchasing shares, Share price, Processing
time, Minimum balances, Third party transactions
SHAREHOLDER BENEFITS--Dividend reinvestment plan
SCUDDER TAX-ADVANTAGED RETIREMENT PLANS
INVESTMENT PRODUCTS AND SERVICES

8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares, Tax identification
number, Minimum balances

9. Pending Legal Proceedings NOT APPLICABLE

<PAGE>

SCUDDER INCOME FUND
CROSS-REFERENCE SHEET
(continued)

PART B
- ------

Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------

10. Cover Page COVER PAGE

11. Table of Contents TABLE OF CONTENTS

12. General Information and History FUND ORGANIZATION

13. Investment Objectives and THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
Policies PORTFOLIO TRANSACTIONS--Brokerage Commissions, Portfolio Turnover

14. Management of the Fund INVESTMENT ADVISER
TRUSTEES AND OFFICERS
REMUNERATION

15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities

16. Investment Advisory and Other INVESTMENT ADVISER
Services DISTRIBUTOR
ADDITIONAL INFORMATION--Experts, Other Information

17. Brokerage Allocation and Other PORTFOLIO TRANSACTIONS--Brokerage Commissions, Portfolio Turnover
Practices

18. Capital Stock and Other FUND ORGANIZATION
Securities DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

19. Purchase, Redemption and PURCHASES
Pricing of Securities Being EXCHANGES AND REDEMPTIONS
Offered FEATURES AND SERVICES OFFERED BY THE FUND--
Dividend and Capital Gain Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE

20. Tax Status DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
TAXES

21. Underwriters DISTRIBUTOR

22. Calculation of Performance Data PERFORMANCE INFORMATION

23. Financial Statements FINANCIAL STATEMENTS

<PAGE>

SCUDDER PORTFOLIO TRUST
SCUDDER BALANCED FUND
CROSS-REFERENCE SHEET

Items Required By Form N-1A
---------------------------

PART A
- ------

Item No. Item Caption Prospectus Caption
-------- ------------ ------------------

1. Cover Page COVER PAGE

2. Synopsis EXPENSE INFORMATION

3. Condensed Financial FINANCIAL HIGHLIGHTS
Information DISTRIBUTION AND PERFORMANCE INFORMATION

4. General Description of INVESTMENT OBJECTIVES AND POLICIES
Registrant WHY INVEST IN THE FUND?
ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION

5A. Management's Discussion NOT APPLICABLE
of Fund Performance

6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION--
Securities Dividends and capital gains distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL(TM)--Scudder Automated
Information Line, Dividend reinvestment plan, T.D.D. service
for the hearing impaired
HOW TO CONTACT SCUDDER

7. Purchase of Securities PURCHASES
Being Offered FUND ORGANIZATION--Underwriter
TRANSACTION INFORMATION--Purchasing shares, Share
price, Processing time, Minimum balances, Third party transactions
SHAREHOLDER BENEFITS--Dividend reinvestment plan
SCUDDER TAX-ADVANTAGED RETIREMENT PLANS
INVESTMENT PRODUCTS AND SERVICES

8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares, Tax
identification number, Minimum balances

9. Pending Legal Proceedings NOT APPLICABLE

<PAGE>

SCUDDER BALANCED FUND
CROSS-REFERENCE SHEET
(continued)

PART B
- ------

Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------

10. Cover Page COVER PAGE

11. Table of Contents TABLE OF CONTENTS

12. General Information and History FUND ORGANIZATION

13. Investment Objectives and THE FUND'S INVESTMENT OBJECTIVES AND POLICIES
Policies PORTFOLIO TRANSACTIONS--Brokerage Commissions, Portfolio Turnover

14. Management of the Fund INVESTMENT ADVISER
TRUSTEES AND OFFICERS
REMUNERATION

15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities

16. Investment Advisory and Other INVESTMENT ADVISER
Services DISTRIBUTOR
ADDITIONAL INFORMATION--Experts, Other Information

17. Brokerage Allocation and Other PORTFOLIO TRANSACTIONS--Brokerage Commissions, Portfolio Turnover
Practices

18. Capital Stock and Other FUND ORGANIZATION
Securities DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

20. Tax Status DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
TAXES

21. Underwriters DISTRIBUTOR

22. Calculation of Performance Data PERFORMANCE INFORMATION

23. Financial Statements FINANCIAL STATEMENTS

<PAGE>

SCUDDER PORTFOLIO TRUST
SCUDDER HIGH YIELD BOND FUND
CROSS-REFERENCE SHEET

Items Required By Form N-1A
---------------------------
PART A
- ------

Item No. Item Caption Prospectus Caption
-------- ------------ ------------------

1. Cover Page COVER PAGE

2. Synopsis EXPENSE INFORMATION

3. Condensed Financial FINANCIAL HIGHLIGHTS
Information DISTRIBUTION AND PERFORMANCE INFORMATION

4. General Description of INVESTMENT OBJECTIVE AND POLICIES
Registrant WHY INVEST IN THE FUND?
ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION

5A. Management's Discussion of NOT APPLICABLE
Fund Performance

8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares, Tax identification
number, Minimum balances

9. Pending Legal Proceedings NOT APPLICABLE

<PAGE>

SCUDDER HIGH YIELD BOND FUND
CROSS-REFERENCE SHEET
(continued)

PART B
- ------

Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------

10. Cover Page COVER PAGE

11. Table of Contents TABLE OF CONTENTS

12. General Information and History FUND ORGANIZATION

13. Investment Objectives and THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
Policies PORTFOLIO TRANSACTIONS--Brokerage Commissions, Portfolio Turnover

14. Management of the Fund INVESTMENT ADVISER
TRUSTEES AND OFFICERS
REMUNERATION

15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities

16. Investment Advisory and Other INVESTMENT ADVISER
Services DISTRIBUTOR
ADDITIONAL INFORMATION--Experts, Other Information

17. Brokerage Allocation and Other PORTFOLIO TRANSACTIONS--Brokerage Commissions, Portfolio Turnover
Practices

18. Capital Stock and Other FUND ORGANIZATION
Securities DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

20. Tax Status DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
TAXES

21. Underwriters DISTRIBUTOR

22. Calculation of Performance Data PERFORMANCE INFORMATION

23. Financial Statements FINANCIAL STATEMENTS

</TABLE>
<PAGE>
This prospectus sets forth concisely the information about Scudder Balanced
Fund, a diversified 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, 1998, 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 and is available along with other related materials on the SEC's
Internet Web site (http://www.sec.gov).

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.

- -------------------------------
NOT FDIC- / MAY LOSE VALUE
INSURED / NO BANK GUARANTEE
- -------------------------------

SCUDDER (logo)

Scudder
Balanced
Fund

Prospectus
May 1, 1998

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 Family of Funds 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: 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,
1997.

Investment management fee 0.70%**
12b-1 fees NONE
Other expenses 0.67%
----
Total Fund operating expenses 1.37%**
====

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
------ ------- ------- --------
$14 $43 $75 $165

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."

** From January 1, 1997 through October 31, 1997, the Adviser had agreed to
waive a portion of its fee to the extent necessary so that the total
annualized expenses of the Fund did not exceed 1.00% of average daily net
assets and from November 1, 1997 until April 30, 1998 the Adviser had
agreed to waive a portion of its fee to the extent necessary so that the
total annualized expenses of the Fund did not exceed 1.10% of average daily
net assets. Expenses shown above are restated to reflect what the Fund
would have paid for the fiscal year ended December 31, 1997 if the Adviser
had not waived a portion of its fee during these periods. Actual expenses
for the fiscal year ended December 31, 1997 were: investment management fee
0.35%, other expenses 0.67%, and total Fund operating expenses 1.02% for
the fiscal year ended December 31, 1997.

<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, 1997, which may be obtained without
charge by writing or calling Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
For the Period
January 4, 1993
(commencement
of operations) to
Years Ended December 31, December 31,
1997(a) 1996(a) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
Net asset value, beginning of period .. $14.60 $14.12 $11.63 $12.23 $12.00
Income from investment operations: ---------------------------------------------------------------------------------
Net investment income ................. .38 .36 .32 .31 .26
Net realized and unrealized gain
(loss) on investments .............. 2.91 1.25 2.74 (.60) .23
---------------------------------------------------------------------------------
Total from investment operations ...... 3.29 1.61 3.06 (.29) .49
Less distributions from: ---------------------------------------------------------------------------------
Net investment income ................. (.36) (.34) (.32) (.31) (.26)
Net realized gains on investment
transactions ....................... (.68) (.79) (.25) -- --
---------------------------------------------------------------------------------
Total distributions ................... (1.04) (1.13) (.57) (.31) (.26)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Net asset value, end of period ........ $16.85 $14.60 $14.12 $11.63 $12.23
---------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total Return (%) ...................... 22.78 11.54 26.48 (2.39) 4.12*
Ratios and Supplemental Data
Net assets, end of period
($ millions) ....................... 159 110 90 66 64
Ratio of operating expenses, net to
average daily net assets (%) ....... 1.02 1.00 1.00 1.00 1.00
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............... 1.37 1.37 1.40 1.47 1.53
Ratio of net investment income to
average daily net assets (%) ....... 2.32 2.42 2.51 2.66 2.43
Portfolio turnover rate (%) ........... 43.2 69.7 103.3 105.4 99.3
Average commission rate paid (b) ...... $.0552 $.0551 $ -- $ -- $ --
</TABLE>

(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years ending on or after December 31, 1996.
* Not Annualized

3
<PAGE>

A message from the President

Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $200 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts. It is one of the ten
largest mutual fund companies in the U.S.

We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also 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 numerous other open- and closed-end funds that invest in this
country and other 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 shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.

Funds or fund classes in the Scudder Family of Funds are offered without
commissions to purchase or redeem 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/ Edmond D. Villani

Scudder Balanced Fund

Investment objectives

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

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

Investment characteristics

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

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

o may be appropriate for many IRA, 401(k), 403(b) and other retirement plans

o quarterly dividends

Contents

Investment objectives and policies 5
Why invest in the Fund? 7
Additional information about policies
and investments 7
Distribution and performance information 12
Fund organization 13
Transaction information 14
Shareholder benefits 18
Purchases 20
Exchanges and redemptions 21
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 (the "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. 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 liquidity and temporary defensive purposes, the Fund may invest without
limit in cash and in other money market and short-term instruments. It is
impossible to accurately predict for how long such alternate strategies may be
utilized.

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 Kemper Investments, 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 invests, under normal circumstances, 50% to 75% of its net assets in
common stocks and other equity investments. 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

5
<PAGE>

the Standard and Poor's Corporation 500 Composite Price Index ("S&P 500").

The Fund will invest primarily in 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 Corporation
("S&P"), or if not ranked by S&P, 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 convertible preferred securities of varying maturities. Longer-term bonds
generally are more volatile than bonds with shorter maturities. 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, debt securities issued by real estate investment trusts
("REITs"), zero coupon securities, indexed securities, illiquid securities and
reverse repurchase agreements, and engage in dollar roll transactions.

The value of fixed-income investments will fluctuate with changes in interest
rates and bond market conditions, tending to rise as interest rates decline and
decline as interest rates rise. For liquidity and temporary defensive purposes,
the Fund may invest without limit in cash and in other money market securities
such as commercial paper, bankers' acceptances and certificates of deposit
issued by domestic and foreign branches of U.S. banks and in other short-term
investments. 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
Investor Services, 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

6
<PAGE>

Moody's or BBB by S&P. These debt securities generally offer less current yield
than securities of lower quality, but lower-quality securities generally have
less liquidity, greater credit and market risk, and consequently more price
volatility. Should the rating of a portfolio security be downgraded after being
purchased by the Fund, the Adviser will determine whether it is in the best
interest of the Fund to retain or dispose of the security. More information
about investment techniques is provided under "Additional information about
policies and investments."

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 the Fund's share 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. As of December 31, 1997, the Adviser was
responsible for managing more than $200 billion in assets globally.

Additional information about policies and investments

Investment restrictions

The Fund has certain investment restrictions which are designed to reduce the
Fund's investment risk. Fundamental investment restrictions may not be changed
without a vote of shareholders; non-fundamental investment restrictions may be
changed by a vote of the Trust's Board of Trustees.

As a matter of fundamental policy, the Fund may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Fund may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes, although the Fund may engage up to 5% of
total assets in reverse repurchase agreements or dollar rolls.

As a matter of fundamental policy, the Fund may not make loans except through
the lending of portfolio securities, the purchase of debt securities or

7
<PAGE>

interests in indebtedness or through repurchase agreements. The Fund has adopted
a non-fundamental policy restricting the lending of portfolio securities to no
more than 5% of total assets.

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

Common stocks

Common stock is issued by companies to raise cash for business purposes and
represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer the greatest potential for
gain on investment, compared to other classes of financial assets such as bonds
or cash equivalents.

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.

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 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.

8
<PAGE>

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
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.

Zero coupon securities

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.

Illiquid securities

The Fund may invest in securities for which there is not an active trading
market, or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities, but carry the
risk that the Fund may not be able to dispose of them at an advantageous time or
price. Some restricted securities, however, may be considered liquid despite
resale restrictions, since they can be sold to other qualified institutional
buyers under a rule of the Securities and Exchange Commission (Rule 144A). The
Trust's Board of Trustees has delegated to the Adviser the authority to
determine those Rule 144A securities that will be considered liquid.

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

9
<PAGE>

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 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 fixed-income
securities in 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 to create leveraged exposure in the Fund. Please refer to "Risk
factors--Strategic Transactions and derivatives" for more information.

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.

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. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield

10
<PAGE>

volatility than traditional debt securities.

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. Repurchase commitment transactions may not provide the Fund with
collateral marked-to-market during the term of the commitment.

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 generally 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.

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.

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.

Illiquid securities. The absence of a trading market can make it difficult to
ascertain a market value for these investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.

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<PAGE>

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 combined
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 March, June, September 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, if necessary. Any dividends or capital
gains distributions declared in October, November or December with a record date
in such a month and paid 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 to
individual shareholders at a maximum 20% or 28% capital gains rate (depending on
the Fund's holding period for the assets giving rise to the gain), 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.

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<PAGE>

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 "SEC yield" of the Fund is
an annualized expression of the net income generated by the Fund over a
specified 30-day (one month) period, as a percentage of the Fund's share price
on the last day of that period. This yield is calculated according to methods
required by the Securities and Exchange Commission (the "SEC"), and therefore
may not equate to the level of income paid to shareholders. "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
for various periods. All types of total return calculations assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund.

Fund organization

Scudder Balanced Fund is a diversified series of Scudder Portfolio 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 Kemper Investments,
Inc., a Delaware corporation formerly known as Scudder, Stevens & Clark, Inc.,
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.

Scudder, Stevens & Clark, Inc. ("Scudder"), and Zurich Insurance Company
("Zurich"), an international insurance and financial services organization, have
formed a new global investment organization by combining Scudder's business with
that of Zurich's subsidiary, Zurich Kemper Investments, Inc. and Scudder has
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owns approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.

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.

13
<PAGE>

From January 1, 1997 until April 30, 1998 the Adviser waived a portion of its
fee. As a result, for the fiscal year ended December 31, 1997, the Adviser
received an investment management fee of 0.35% 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 Kemper Investments, Inc. is located at Two International Place, Boston,
Massachusetts.

Like other mutual funds and financial and business organizations worldwide, the
Fund could be adversely affected if computer systems on which the Fund relies,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to correctly process date-related information on
and after January 1, 2000. This risk is commonly called the Year 2000 Issue.
Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the Fund's business and
operations. The Adviser has commenced a review of the Year 2000 Issue as it may
affect the Fund and is taking steps it believes are reasonably designed to
address the Year 2000 Issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 Issue will not have an adverse effect on the companies whose securities are
held by the Fund or on global markets or economies generally.

Transfer agent

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

Underwriter

Scudder Investor Services, Inc., a 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.

Fund accounting agent

Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.

Custodian

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

Transaction information

Purchasing shares

Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent 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. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
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. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:

14
<PAGE>

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 three business
days, the order is subject to cancellation 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 "QuickBuy." If you elected "QuickBuy" for your account, you can call
toll-free to purchase shares. The money will be automatically transferred from
your predesignated bank checking account. Your bank must be a member of the
Automated Clearing House for you to use this service. If you did not elect
"QuickBuy," call 1-800-225-5163 for more information.

To purchase additional shares, call 1-800-225-5163. Purchases may not be for
more than $250,000. Proceeds in the amount of your purchase will be transferred
from your bank checking account in two or three business days following your
call. For requests received by the close of regular trading on the Exchange,
shares will be purchased at the net asset value per share calculated at the
close of trading on the day of your call. "QuickBuy" requests received after the
close of regular trading on the Exchange will begin their processing and be
purchased at the net asset value calculated the following business day.

If you purchase shares by "QuickBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA accounts.

By exchange. The Fund may be exchanged for shares of other funds in the Scudder
Family of Funds unless otherwise determined by the Board of Trustees. 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.

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<PAGE>

Redeeming shares

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

By telephone. This is the quickest and easiest way to sell Fund shares. If you
provided your banking information on your application, you can call to request
that federal funds be sent to your authorized bank account. If you did not
include your banking information 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 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.

By "QuickSell." If you elected "QuickSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "QuickSell,"
call 1-800-225-5163 for more information.

To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "QuickSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.

"QuickSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.

Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $100,000 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 $100,000 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

16
<PAGE>

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 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 must be received in good order by the
Fund's transfer agent. Those requests received 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.

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 business days (or
longer in the case of shares recently purchased by check).

Purchase restrictions

Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of Fund shares (including exchanges) for any reason including 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 correct 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 correct 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 correct 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 $2,500, which amount
may be changed by the Board of Trustees. Scudder retirement plans and certain
other accounts have similar or lower minimum share balance requirements. A
shareholder may open an account with at least $1,000, if an automatic investment
plan of $100/month is established.

17
<PAGE>

following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account. The Fund
will mail the proceeds of the redeemed account to the shareholder. Reductions in
value that result solely from market activity will not trigger an involuntary
redemption. Retirement accounts and certain other accounts will not be assessed
the $10.00 charge or be subject to automatic liquidation. Please refer to
"Exchanges and Redemptions--Other Information" in the Fund's combined Statement
of Additional Information for more information.

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
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 Kemper Investments, Inc., one of the nation's most experienced
investment management firms, actively manages your 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 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 the Adviser's large staff of economists,
research analysts, traders and other investment specialists who work in offices
across the United States and abroad. The Adviser believes its team approach
benefits Fund investors by bringing together many disciplines and leveraging its
extensive resources.

Lead Portfolio Manager Valerie F. Malter is responsible for the Fund's
investment strategy and daily operation. Ms. Malter joined the Adviser in 1995
and has over 10 years of experience as an analyst covering a wide range of
industries, and four years of portfolio management experience focusing on the
stocks of companies with medium- to large-sized market capitalizations.
Portfolio Manager George Fraise joined the Adviser and the Fund in 1997 and has
10 years of industry experience as an international research analyst.

SAIL(TM)--Scudder Automated Information Line

18
<PAGE>

1-800-343-2890, 24 hours a day. 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. (The exchange
privilege may not be available for certain Scudder funds or classes thereof. For
more information, please call 1-800-225-5163.) 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.

Personal Counsel(SM) -- A Managed Fund Portfolio Program

If you would like to receive direct guidance and management of your overall
mutual fund portfolio to help you pursue your investment goals, you may be
interested in Personal Counsel from Scudder. Personal Counsel, a program of
Scudder Investor Services, Inc., a registered investment adviser and a
subsidiary of Scudder Kemper Investments, Inc., combines the benefits of a
customized portfolio of no-load mutual funds with ongoing portfolio monitoring
and individualized service, for an annual fee of generally 1.25% or less of
assets. In addition, it draws upon the Adviser's more than 75-year heritage of
providing investment counsel to large corporate and private clients. If you have
$100,000 or more to invest initially and would like more information about
Personal Counsel, please call 1-800-700-0183.

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 will receive a detailed statement summarizing account activity, including
dividend and capital gain reinvestment, purchases and redemptions. All of your
statements should be retained to help you keep track of account activity and the
cost of shares for tax purposes.

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 Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.

Scudder Investor Centers

As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor Centers in Boca Raton, Boston,
Chicago, New York and San Francisco.

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.

19
<PAGE>

Purchases

<TABLE>
<CAPTION>
Opening Minimum initial investment: $2,500; IRAs $1,000
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.

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

The Scudder Funds The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291

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

o In Person Visit one of our Investor Centers to complete your application
with the help of a Scudder representative. Investor Center
locations are listed under Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
shares 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
Scudder Funds." Fund name, to the appropriate address listed above.

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

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

o By Telephone Please see Transaction information--Purchasing shares--
By QuickBuy or By telephone order for more details.

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

</TABLE>

20
<PAGE>

Exchanges and redemptions

<TABLE>
<CAPTION>
Exchanging Minimum investments: $2,500 to establish a new account;
shares $100 to exchange among existing accounts

<S> <C> <C>
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 Print or type your instructions and include:
or Fax - 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;
- 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 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184
-----------------------------------------------------------------------------------------------------------------------
Redeeming o By Telephone
shares
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 $100,000 sent to your address of record.

o By Mail Send your instructions for redemption to the appropriate address or fax
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;
- your signature(s) as it appears on your account; and
- a daytime telephone number.

A signature guarantee is required for redemptions over $100,000.
See Transaction information--Redeeming shares.

o By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
</TABLE>

21
<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.

o Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of up to $2,000 per person for anyone with earned income (up to
$2,000 per individual for married couples filing jointly, even if only one
spouse has 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 you no annual
custodial fee.

o Scudder Roth No-Fee IRAs. Similar to the traditional IRA in many respects,
these retirement plans provide a unique opportunity for qualifying
individuals to accumulate investment earnings tax free. Unlike a traditional
IRA, with a Roth IRA, if you meet the distribution requirements, you can
withdraw your money without paying any taxes on the earnings. No tax
deduction is allowed for contributions to a Roth IRA. The Scudder Roth IRA
charges you no annual custodial fee.

o 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.

o 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.

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

o 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. The Scudder SEP-IRA charges you
no annual custodial fee.

o 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 and most 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.

Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.

22
<PAGE>

Investment products and services

The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series--
Premium Shares*
Managed Shares*
Scudder Government Money Market Series--
Managed Shares*

Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**

Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**

U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund

Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund

Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio

U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund

U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund

Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund

Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund

Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.

Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund

Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)

Education Accounts
- ------------------
Education IRA
UGMA/UTMA

Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.

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. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *A class of
shares of the Fund. **Not available in all states. ***Only the Scudder Shares of
the Fund are part of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New York
Stock Exchange and, in some cases, on various foreign stock exchanges.

23
<PAGE>

How to contact Scudder

Account Service and Information:
<S> <C>

For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163

For 24 hour account information, fund information, exchanges, and an
overview of all the services available to you

Scudder Electronic Account Services -- http://funds.scudder.com

For personalized information about your Scudder accounts, exchanges and redemptions

Scudder Automated Information Line (SAIL) -- 1-800-343-2890

Investment Information:

For information about the Scudder funds, including additional
applications and prospectuses, or for answers to investment questions

Scudder Investor Relations -- 1-800-225-2470
[email protected]

Scudder's World Wide Web Site -- http://funds.scudder.com

For establishing 401(k) and 403(b) plans

Scudder Defined Contribution Services -- 1-800-323-6105

Scudder Brokerage Services:

To receive information about this discount brokerage service and to obtain an application

Scudder Brokerage Services* -- 1-800-700-0820

Personal Counsel(SM) -- A Managed Fund Portfolio Program:

To receive information about this mutual fund portfolio guidance and management program

Personal Counsel from Scudder -- 1-800-700-0183

Please address all correspondence to:

The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291

Or Stop by a Scudder Investor Center:

Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:

Boca Raton Chicago San Francisco
Boston New York

Scudder Investor Relations and Scudder Investor Centers are services provided
through Scudder Investor Services, Inc., Distributor.
</TABLE>
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA
02061--Member NASD/SIPC.

<PAGE>
This prospectus sets forth concisely the information about Scudder Income Fund,
a diversified 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.

- -------------------------------
NOT FDIC- / MAY LOSE VALUE
INSURED` / NO BANK GUARANTEE
- -------------------------------

SCUDDER (logo)

Scudder
Income Fund

Prospectus
May 1, 1998

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 Family of Funds 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

Investment management fee (after waiver) 0.38%**
12b-1 fees NONE
Other expenses 0.57%
-----
Total Fund operating expenses (after waiver) 0.95%**
=====

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 $30 $53 $117

* 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."
** Until April 30, 1999, the Adviser and certain of its subsidiaries have
agreed to waive a portion of their fees payable by the Fund to the extent
necessary so that the total annualized expenses of the Fund do not exceed
0.95% of average daily net assets. Expenses shown above are restated to
reflect what the Fund would have paid for the fiscal year ended December
31, 1997 including the effect of such waiver. Actual expenses for the year
ended December 31, 1997 were: investment management fee 0.61%, other
expenses 0.57% and total operating expenses 1.18%.

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, 1997, which may be obtained
without charge by writing or calling Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
Years Ended December 31,
1996(a) 1995 1994 1993 1992 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
Net asset value, beginning
of period ...................... $13.61 $12.32 $13.71 $13.48 $13.91 $12.82 $12.89 $12.41 $12.40 $13.41
-------------------------------------------------------------------------------------------
Income from investment operations: .80 .83 .84 .90 .95 .93 1.03 1.05 1.07 1.08
Net investment income
Net realized and unrealized gain
(loss) on investments .......... (.36) 1.41 (1.45) .77 (.05) 1.22 (.01) .49 .01 (.99)
-------------------------------------------------------------------------------------------
Total from investment operations .44 2.24 (.61) 1.67 .90 2.15 1.02 1.54 1.08 .09
-------------------------------------------------------------------------------------------
Less distributions: .............. (.81) (.86) (.76) (.87) (.93) (.92) (1.03) (1.06) (1.07) (1.10)
From net investment income
From paid-in capital ............. -- -- -- -- -- -- (.06)(b) -- -- --
From net realized gains on ....... (.09) (.03) -- (.45) (.40) (.14) -- -- -- --
investment transactions
In excess of net realized gains .. -- (.06) (.02) (.12) -- -- -- -- -- --
-------------------------------------------------------------------------------------------
Total distributions .............. (.90) (.95) (.78) (1.44) (1.33) (1.06) (1.09) (1.06) (1.07) (1.10)
-------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------
Net asset value, end of
period ......................... $13.15 $13.61 $12.32 $13.71 $13.48 $13.91 $12.82 $12.89 $12.41 $12.40
- -------------------------------------------------------------------------------------------------------------------------------
Total Return (%) ................. 3.41 18.54 (4.43) 12.58 6.74 17.32 8.32 12.75 8.91 .74
Ratios and Supplemental Data
Net assets, end of period ........ 579 578 463 509 457 403 302 272 245 242
($ millions)
Ratio of operating expenses to ... .98 .99 .97 .92 .93 .97 .95 .93 .94 .94
average daily net assets (%)
Ratio of net investment income to 6.01 6.35 6.43 6.32 7.05 7.13 8.21 8.23 8.53 8.37
average daily net assets (%)
Portfolio turnover rate (%) ...... 66.9 128.3 60.3 130.6 121.3 109.6 48.0 63.2 19.6 33.7
</TABLE>

(a) Based on montly average shares outstanding during the period.

(b) 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 International Revenue Code section 4982.

3
<PAGE>

A message from the President

/s/ Edmond D. Villani

Scudder Income Fund

Investment objective

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

Investment characteristics

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

o share price fluctuates as interest rates rise and fall

o invests in longer-term securities for higher income

o quarterly dividends

o 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
Distribution and performance information 11
Fund organization 12
Transaction information 13
Shareholder benefits 17
Purchases 20
Exchanges and redemptions 21
Investment products and services 23
How to contact Scudder Back cover

4
<PAGE>

Investment objective and policies

Scudder Income Fund (the "Fund"), a diversified series of Scudder Portfolio
Trust (the "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.

Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. 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, debt securities issued by real estate investment
trusts ("REITs"), mortgage and asset-backed securities and other money market
instruments and illiquid securities such as certain securities issued in private
placements.

Under normal market conditions, the Fund will invest at least 65% of its assets
in securities rated within the three highest quality rating categories of
Moody's Investor Services, Inc. ("Moody's") (Aaa, Aa and A) or Standard & Poor's
Corporation ("S&P") (AAA, AA and A), or if unrated, in bonds judged by the
Fund's investment adviser, Scudder Kemper Investments, Inc. (the "Adviser"), to
be of comparable quality at the time of purchase. The Fund may invest up to 20%
of its assets in debt securities rated lower than Baa or BBB or, if unrated, of
equivalent quality as determined by the Adviser, but will not purchase bonds
rated below B by Moody's or S&P or their equivalent. During the fiscal year
ended December 31, 1997, the average monthly dollar-weighted market value of the
bonds in the Fund's portfolio was rated as follows: 52% Aaa, 1% Aa, 14% A, 17%
Baa, 8% Ba and 9% B.

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

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

o 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

5
<PAGE>

of the issuer itself and may be supported as well by the issuer's right
to borrow from the U.S. Treasury; and

o 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, indexed securities, repurchase agreements,
reverse repurchase agreements, illiquid securities, and may engage in
dollar-roll transactions and 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. The Fund's share price tends to rise as interest rates decline and
decline as interest rates rise. 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 intermediate- and long-term,
high-grade fixed-income securities.

Fixed-income securities purchased by the Fund will be primarily high-grade
bonds: those rated Aaa, Aa or A by Moody's, or AAA, AA or A by S&P, or those of
equivalent quality as determined by the Adviser. By focusing on intermediate-
and long-term securities, the Fund offers investors willing to accept greater
principal risk the possibility of earning a higher rate of income than is
generally available from funds investing in short-term or money market
securities.

The Fund may also invest up to 20% of its assets in lower quality domestic debt
securities, sometimes referred to as "high-yield" or "junk" bonds. These bonds
offer higher income, as well as the prospect for price appreciation, but involve
more risk, particularly a greater risk of default, than U.S. Government bonds or
other high quality, corporate fixed-income securities. The Fund's Adviser seeks
to reduce these risks through investment diversification and ongoing research
and analysis.

The Adviser has been researching and managing fixed-income investments since
1929 and as of December 31, 1997, was responsible for managing more than $200
billion in assets globally. As America's oldest no-load mutual fund, Scudder
Income Fund has not missed a quarterly dividend payment in over 60 years.

Additional information about policies and investments

Investment restrictions

As a matter of fundamental policy, the Fund may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Fund may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes and by engaging in reverse repurchase
agreements and dollar rolls.

As a matter of fundamental policy, the Fund may not make loans except through
the lending of portfolio securities, the purchase of debt securities, interests
in indebtedness or through repurchase agreements. The Fund has adopted a
non-fundamental policy restricting the lending of portfolio securities to no
more than 5% of total assets.

6
<PAGE>

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

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.

Mortgage and other asset-backed securities

Illiquid securities

Indexed securities

Zero coupon securities

When-issued securities

7
<PAGE>

the market value of the security 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 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.

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 of domestic branches of U.S. banks.

Trust preferred securities

The Fund may invest in special purpose trust securities ("trust preferred
securities"), which are hybrid instruments issued by a special purpose trust
(the "Special Trust"), the entire equity interest of which is owned by a single
issuer. The proceeds of the issuance to the Fund of trust preferred securities
are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture. These securities tend to be affected by
interest rates in a manner similar to debt securities.

Strategic Transactions and derivatives

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").

8
<PAGE>

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 to create leveraged exposure in the Fund. Please refer to "Risk
factors--Strategic Transactions and derivatives" for more information.

Risk factors

Risks of debt securities rated below investment-grade: Securities rated below
investment-grade (those rated lower than Baa or BBB) are commonly referred to as
"junk bonds". These securities can entail greater price volatility and involve a
higher degree of speculation with respect to the payment of principal and
interest than higher quality fixed-income securities. The market prices of such
lower rated debt securities may decline significantly in periods of general
economic difficulty. In addition, the trading market for these securities is
generally less liquid than for higher rated securities, and the Fund may have
difficulty disposing of these securities at the time it wishes to do so. The
lack of a liquid secondary market for certain securities may also make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing its portfolio and calculating its net asset value. Should the rating of
any security held by the Portfolio be downgraded after the time of purchase, the
Adviser will determine whether it is in the best interest of the Portfolio to
retain or dispose of the security.

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.

9
<PAGE>

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. Because principal may be prepaid at any time, mortgage-backed securities
may involve significantly greater price and yield volatility than traditional
debt securities.

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.

10
<PAGE>

Trust preferred securities. If payments on the underlying junior subordinated
debentures held by the Special Trust are deferred by the debenture issuer, the
debentures would be treated as original issue discount ("OID") obligations for
the remainder of their term. As a result, holders of trust preferred securities,
such as the Fund, would be required to accrue daily for Federal income tax
purposes, their share of the stated interest and the de minimis OID on the
debentures (regardless of whether the Fund receives any cash distributions from
the Special Trust), and the value of trust preferred securities would likely be
negatively affected. Trust preferred securities may be subject to mandatory
prepayment under certain circumstances. The market values of trust preferred
securities may be more volatile than those of conventional debt securities.

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.

Distribution and performance information

Dividends and capital gains distributions

11
<PAGE>

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 to
individual shareholders at a maximum 20% or 28% capital gains rate (depending on
the Fund's holding period for the assets giving rise to the gain), 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 "SEC yield" of the Fund is an
annualized expression of the net income generated by the Fund over a specified
30-day (one month) period, as a percentage of the Fund's share price on the last
day of that period. This yield is calculated according to methods required by
the Securities and Exchange Commission (the "SEC"), and therefore may not equate
to the level of income paid to shareholders. "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. All types of total return calculations assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. 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, 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

12
<PAGE>

Scudder, Stevens & Clark, Inc. ("Scudder"), and Zurich Insurance Company
("Zurich"), an international insurance and financial services organization, have
formed a new global investment organization by combining Scudder's business with
that of Zurich's subsidiary, Zurich Kemper Investments, Inc., and Scudder has
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owns approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.

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 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 no
more than 0.95% of the average daily net assets of the Fund until April 30,
1999. For the year ended December 31, 1997, the Adviser received an investment
management fee of 0.61% 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 Kemper Investments, Inc. is located at Two International Place, Boston,
Massachusetts.

Transfer agent

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

Underwriter

Fund accounting agent

Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.

Custodian

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

Transaction information

Purchasing shares

Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent receives the purchase request in good order.

13
<PAGE>

Purchases are made in full and fractional shares. (See "Share price.")

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.

14
<PAGE>

transactions are not available for most retirement plan accounts. However,
"QuickBuy" transactions are available for Scudder IRA accounts.

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 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.

"QuickSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.

15
<PAGE>

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

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.

Purchase restrictions

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

16
<PAGE>

shareholder may avoid involuntary redemption by providing the Fund with a tax
identification number during the 30-day notice period.

Minimum balances

Shareholders who maintain a non-fiduciary account balance of less than $2,500 in
the Fund, without establishing an automatic investment plan, will be assessed an
annual $10.00 per fund charge with the fee to be paid to the Fund. The $10.00
charge will not apply to shareholders with a combined household account balance
in any of the Scudder Funds of $25,000 or more. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account. The Fund
will mail the proceeds of the redeemed account to the shareholder. Reductions in
value that result solely from market activity will not trigger an involuntary
redemption. Retirement accounts and certain other accounts will not be assessed
the $10.00 charge or be subject to automatic liquidation. Please refer to
"Exchanges and Redemptions--Other Information" in the Fund's combined Statement
of Additional Information for more information.

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 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 the Adviser's large staff of economists,
research analysts, traders and other investment specialists who work in offices
across the United States and abroad. The Adviser believes its team approach
benefits Fund investors by bringing together many disciplines and leveraging its
extensive resources.

17
<PAGE>

Stephen A. Wohler, Lead Portfolio Manager, joined the team in 1994 and is also
responsible for implementing the Fund's strategy. Mr. Wohler has over 17 years
experience managing fixed-income investments and has been with the Adviser since
1979. Kelly D. Babson, Portfolio Manager, joined the Adviser in 1994 as a
portfolio manager and has 16 years of experience in the fixed income field,
including 13 years of high-yield management. Robert Cessine, Portfolio Manager,
joined the Adviser in January 1993, and is responsible for the Fund's investment
strategy including duration management, asset allocation, security selection and
trading.

SAIL(TM)--Scudder Automated Information Line

For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. 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

Personal Counsel(SM) -- A Managed Fund Portfolio Program

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

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

18
<PAGE>

(same surname, same address). Please call 1-800-225-5163 if you wish to receive
additional shareholder reports.

Newsletters

Scudder Investor Centers

As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor Centers in Boca Raton, Boston,
Chicago, New York and San Francisco.

T.D.D. service for the hearing impaired

19
<PAGE>

Purchases

<TABLE>
<CAPTION>
Purchases

Opening Minimum initial investment: $2,500; IRAs $1,000
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.

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

The Scudder Funds The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291

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

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

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

o By Telephone Please see Transaction information--Purchasing shares--
By QuickBuy or By telephone order for more details.

</TABLE>

20
<PAGE>

Exchanges and redemptions

Exchanging Minimum investments: $2,500 to establish a new account;
shares $100 to exchange among existing accounts

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 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184
-----------------------------------------------------------------------------------------------------------------------
Redeeming o By Telephone
shares
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 $100,000 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;
- your signature(s) as it appears on your account; and
- a daytime telephone number.

A signature guarantee is required forredemptions over $100,000.
See Transaction information--Redeeming shares.

o By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
</TABLE>

21
<PAGE>

Scudder tax-advantaged retirement plans

o Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of up to $2,000 per person for anyone with earned income (up
to $2,000 per individual for married couples filing jointly, even if only
one spouse has 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 you no annual
custodial fee.

o Scudder Roth No-Fee IRAs. Similar to the traditional IRA in many respects,
these retirement plans provide a unique opportunity for qualifying
individuals to accumulate investment earnings tax free. Unlike a
traditional IRA, with a Roth IRA, if you meet the distribution
requirements, you can withdraw your money without paying any taxes on the
earnings. No tax deduction is allowed for contributions to a Roth IRA. The
Scudder Roth IRA charges you no annual custodial fee.

o 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.

o 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.

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

o 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 Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.

<PAGE>

Investment products and services

Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market
Series--Managed Shares*
Scudder California Tax Free Money
Fund**
Scudder New York Tax Free Money
Fund**

Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited
Term Tax Free Fund**
Scudder Massachusetts Tax Free
Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**

U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund

Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund

Asset Allocation
- ----------------
Scudder Pathway Conservative
Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International
Portfolio

U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund

U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund

Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund

Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and
Income Fund
Scudder International Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth
Fund
Scudder Gold Fund

Regional
Scudder Greater Europe Growth
Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.

Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund

Education Accounts
- ------------------
Education IRA
UGMA/UTMA

23
<PAGE>

How to contact Scudder

Account Service and Information:
<S> <C>

For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163

For 24 hour account information, fund information, exchanges, and an
overview of all the services available to you

Scudder Electronic Account Services -- http://funds.scudder.com

For personalized information about your Scudder accounts, exchanges and redemptions

Scudder Automated Information Line (SAIL) -- 1-800-343-2890

Investment Information:

For information about the Scudder funds, including additional
applications and prospectuses, or for answers to investment questions

Scudder Investor Relations -- 1-800-225-2470
[email protected]

Scudder's World Wide Web Site -- http://funds.scudder.com

For establishing 401(k) and 403(b) plans

Scudder Defined Contribution Services -- 1-800-323-6105

Scudder Brokerage Services:

To receive information about this discount brokerage service and to obtain an application

Scudder Brokerage Services* -- 1-800-700-0820

Personal Counsel(SM) -- A Managed Fund Portfolio Program:

To receive information about this mutual fund portfolio guidance and management program

Personal Counsel from Scudder -- 1-800-700-0183

Please address all correspondence to:

The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291

Or Stop by a Scudder Investor Center:

Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:

Boca Raton Chicago San Francisco
Boston New York

<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

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STATEMENT OF ADDITIONAL INFORMATION

May 1, 1998

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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, 1998, 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.

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TABLE OF CONTENTS

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES .................................1
General Investment Objectives and Policies of Scudder Balanced Fund......1
Investments..............................................................1
Equity Investments.......................................................1
Fixed-Income Investments.................................................2
General Investment Objective and Policies of Scudder Income Fund.........2
Master/feeder structure..................................................3
Investments and Investment Techniques....................................3
Convertible Securities..................................................13
Depositary Receipts.....................................................13
Investment Restrictions.................................................20

PURCHASES.....................................................................22
Additional Information About Opening An Account.........................22
Additional Information About Making Subsequent Investments..............22
Additional Information About Making Subsequent Investments by QuickBuy..22
Checks..................................................................23
Wire Transfer of Federal Funds..........................................23
Share Price.............................................................23
Share Certificates......................................................23
Other Information.......................................................24

EXCHANGES AND REDEMPTIONS.....................................................24
Exchanges...............................................................24
Redemption by Telephone.................................................25
Redemption By QuickSell.................................................26
Redemption by Mail or Fax...............................................26
Redemption-In-Kind......................................................27
Other Information.......................................................27

FEATURES AND SERVICES OFFERED BY THE FUNDS....................................27
The Pure No-Load(TM) Concept............................................27
Internet access.........................................................28
Dividend and Capital Gain Distribution Options..........................29
Diversification.........................................................29
Scudder Investors Centers...............................................30
Reports to Shareholders.................................................30
Transaction Summaries...................................................30

THE SCUDDER FAMILY OF FUNDS...................................................30

SPECIAL PLAN ACCOUNTS.........................................................35
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension
Plans for Corporations and Self-Employed Individuals....................35
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for
Corporations and Self-Employed Individuals..............................35
Scudder IRA: Individual Retirement Account.............................35
Scudder Roth IRA: Individual Retirement Account........................36
Scudder 403(b) Plan.....................................................37
Automatic Withdrawal Plan...............................................37
Group or Salary Deduction Plan..........................................37
Automatic Investment Plan...............................................37
Uniform Transfers/Gifts to Minors Act...................................38

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................38

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TABLE OF CONTENTS (continued)

PERFORMANCE INFORMATION.......................................................38
Average Annual Total Return.............................................38
Cumulative Total Return.................................................39
Total Return............................................................40
Yield for Scudder Income Fund...........................................40
Comparison of Fund Performance..........................................40

ORGANIZATION OF THE FUNDS.....................................................44

INVESTMENT ADVISER............................................................45
Personal Investments by Employees of the Adviser........................48

TRUSTEES AND OFFICERS.........................................................48

REMUNERATION..................................................................50
Responsibilities of the Board--Board and Committee Meetings.............50
Compensation of Officers and Trustees...................................50

DISTRIBUTOR...................................................................51

TAXES ........................................................................52

PORTFOLIO TRANSACTIONS........................................................56
Brokerage Commissions...................................................56
Portfolio Turnover......................................................57

NET ASSET VALUE...............................................................57

ADDITIONAL INFORMATION........................................................58
Experts.................................................................58
Shareholder Indemnification.............................................58
Other Information.......................................................58

FINANCIAL STATEMENTS..........................................................59
Scudder Balanced Fund...................................................59
Scudder Income Fund.....................................................59

APPENDIX

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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES

(See"Investment objective and policies" and "Additional information about
policies and investments" in each Fund's 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), 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 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. It is impossible to predict for how long such
alternate strategies may be utilized.

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 Kemper Investments, 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.

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.
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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 Corporation 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
Corporation ("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, indexed securities, illiquid securities and
reverse repurchase agreements, and engage in dollar-roll transactions.

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 after being purchased by
the Fund, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security. (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.

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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.

Under normal market conditions, the Fund will invest at least 65% of its
assets in securities rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in bonds judged
by the Adviser to be of comparable quality at the time of purchase. The Fund may
invest up to 20% of its assets in debt securities rated lower than Baa3 or BBB-
or, if unrated, of equivalent quality as determined by the Adviser, but will not
purchase bonds rated below B3 by Moody's or B- by S&P or their equivalent.

Securities rated below investment-grade (those rated lower than Baa3 or
BBB-) are commonly referred to as "junk bonds". These securities can entail
greater price volatility and involve a higher degree of speculation with respect
to the payment of principal and interest than higher quality fixed-income
securities. The market prices of such lower rated debt securities may decline
significantly in periods of general economic difficulty. In addition, the
trading market for these securities is generally less liquid than for higher
rated securities, and the Fund may have difficulty disposing of these securities
at the time it wishes to do so. The lack of a liquid secondary market for
certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing its portfolio and calculating
its net asset value.

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.

Maste/feeder structure

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

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

Investments and Investment Techniques

High Yield, High Risk Securities. Income Fund may invest in below
investment-grade securities (rated Ba and lower by Moody's and BB and lower by
S&P) or unrated securities of equivalent quality, which may carry a high degree
of

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risk (including the possibility of default or baFkruptcy of the issuers of
such securities), generally involve greater volatility of price and risk of
principal and income, and may be less liquid, than securities in the higher
rating categories and are considered speculative. The lower the ratings of such
debt securities, the greater their risks. See the Appendix to this Statement of
Additional Information for a more complete description of the ratings assigned
by ratings organizations and their respective characteristics.

Economic downturns may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have an adverse impact on the value of such
obligations. During an economic downturn or period of rising interest rates,
highly leveraged issues may experience financial stress which could adversely
affect their ability to service their principal and interest payment
obligations. Prices and yields of high yield securities will fluctuate over time
and, during periods of economic uncertainty, volatility of high yield securities
may adversely affect a Fund's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.

The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of a
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the values and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.

Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded after being purchased by the
Fund, the Adviser will determine whether it is in the best interest of the Fund
to retain or dispose of such security.

Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."

Trust Preferred Securities. Income Fund may invest in Trust Preferred
Securities, which are hybrid instruments issued by a special purpose trust (the
"Special Trust"), the entire equity interest of which is owned by a single
issuer. The proceeds of the issuance to the Fund of Trust Preferred Securities
are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.

If payments on the underlying junior subordinated debentures held by the
Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Fund, would be required to accrue daily for Federal income tax purposes, their
share of the stated interest and the de minimis OID on the debentures
(regardless of whether the Fund receives any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Fund, to sell their holdings.

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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.

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.")

Real Estate Investment Trusts. The Funds may invest in REITs. REITs are
sometimes informally characterized as equity REITs, mortgage REITs and hybrid
REITs. Investment in REITs may subject a Fund to risks associated with the
direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of a
Fund's investment in REITs. For instance, during periods of declining interest
rates, certain mortgage REITs may hold mortgages that the mortgagors elect to
prepay, which prepayment may diminish the yield on securities issued by those
REITs.

Certain REITs have relatively small market capitalization, which may tend
to increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986 as
amended (the "Code"), and to maintain

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exemption from the registration requirements of the Investment Company Act of
1940 (the "1940 Act"). By investing in REITs indirectly through a Fund, a
shareholder will bear not only his or her proportionate share of the expenses of
the Fund, but also, indirectly, similar expenses of the REITs. In addition,
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders.

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.

When interest rates rise, mortgage prepayment rates tend to decline, thus
lengthening the life of mortgage-related securities and increasing their
volatility, affecting the price volatility of the Fund's shares.

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. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. 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 ("CMOs"). 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. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may not be as liquid as other securities.

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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<PAGE>

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 ReceivablesSM ("CARSSM").
CARSSM 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 CARSSM 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 CARSSM 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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<PAGE>

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.

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

9
<PAGE>

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 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
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.

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<PAGE>

The Funds will not use such transactions for leveraging purposes and,
accordingly, will segregate cash or liquid assets 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 Trust, on behalf 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 or liquid assets, 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 5% of the value of
each Fund's total assets at the time any loan is made.

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

Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the Securities Act of 1933. A Fund may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 when selling restricted
securities to the public, and in such event a Fund may be liable to purchasers
of such securities if such sale is made in violation of the 1933 Act or if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading.

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

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<PAGE>

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 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.)

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<PAGE>

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

Each 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.

The convertible securities in which each 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

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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. 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 to create leveraged exposure in the Fund.

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

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close out a transaction without incurring substantial losses, if at all.
Although the use of futures and options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.

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

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

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<PAGE>

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
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 15% of its net assets in
illiquid securities.

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

Each Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, 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.

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<PAGE>

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
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

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<PAGE>

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
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

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<PAGE>

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
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 its custodian to the extent that obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by 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 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 to segregate liquid 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 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 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

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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.

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 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.

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 fundamental policies 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.

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

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

(1) borrow money, except as permitted under the 1940 Act, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;

(2) issue senior securities, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;

20
<PAGE>

(3) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;

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

(5) purchase physical commodities or contracts relating to physical
commodities;

(6) make loans to other persons, except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in
indebtedness in accordance with the Fund's objective and policies
may be deemed to be loans; or

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

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

(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by engaging
in reverse repurchase agreements, dollar rolls, or other investments
or transactions described in the Fund's registration statement which
may be deemed to be borrowings;

(2) For Balanced Fund only enter into either reverse repurchase
agreements or dollar rolls in an amount greater than 5% of its total
assets;

(3) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the Fund may
obtain such short-term credits as may be necessary for the clearance
of securities transactions;

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

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

(6) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of the
value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to have
no value); and

(7) lend portfolio securities in an amount greater than 5% of its total
assets.

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.

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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 $2,500 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 ($2,500 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 $2,500 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.

Additional Information About Making Subsequent Investments by QuickBuy

Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
Exchange, normally 4 p.m. eastern time. Proceeds in the amount of your purchase
will be transferred from your bank checking account two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. QuickBuy requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day. If you purchase shares by QuickBuy and redeem them within seven
days of the purchase,

22
<PAGE>

the Fund may hold the redemption proceeds for a period of up to seven business
days. If you purchase shares and there are insufficient funds in your bank
account the purchase will be canceled and you will be subject to any losses or
fees incurred in the transaction. QuickBuy transactions are not available for
most retirement plan accounts. However, QuickBuy transactions are available for
Scudder IRA accounts.

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

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

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.

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 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
by the close of regular trading on the Exchange.

23
<PAGE>

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

The Funds have authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Funds' shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on each Fund's behalf. Orders for purchase or redemption will be deemed
to have been received by a Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between a Fund and the
broker, ordinarily orders will be priced at that Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of a Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Funds' principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of a Fund at any time for any reason.

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.

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 into a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Funds' 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.

24
<PAGE>

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

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. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.

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 $100,000 and have the proceeds mailed to
their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.

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

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

Telephone redemption is not available with respect to shares represented
by share certificates 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.

25
<PAGE>

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 QuickSell

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

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

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 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 seven days after
receipt by the Transfer Agent of a request for redemption that complies with the
above requirements. Delays in payment of

26
<PAGE>

More than seven business days for 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

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 may be suspended at
times during which (a) the Exchange is closed, other than customary weekend and
holiday closings, (b) trading on the Exchange is restricted for any reason, (c)
an emergency exists as a result of which disposal by the Fund 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) the SEC may
by order permit such a suspension for the protection of the Trust's
shareholders; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b) or (c) exist.

If transactions at any time reduce a shareholder's account balance in a
Fund to below $2,500 in value, the Trust may notify the shareholder that, unless
the account balance is brought up to at least $2,500, the Trust will redeem all
shares and close the account by making payment to the shareholder. The
shareholder has sixty days to bring the account balance up to $2,500 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 $2,500 or the new account will be redeemed as
described above. (This policy applies to accounts of new shareholders, but does
not apply to certain Special Plan Accounts.) The Trustees have the authority to
change the minimum account size.

FEATURES AND SERVICES OFFERED BY THE FUNDS

(See "Shareholder benefits" in the Funds' 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 Scudder Family of
Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.

27
<PAGE>

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 funds in the Scudder Family of Funds do not pay any asset-based
sales charges or service fees, Scudder developed and trademarked the phrase pure
no-load(TM) to distinguish funds in the Scudder Family of 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 Family of Funds 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.

================================================================================

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

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

================================================================================

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.

Internet access

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

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

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

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

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

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

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

Dividend and Capital Gain Distribution Options

Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders 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.

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<PAGE>

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 Investors Centers

Investors may visit any of the 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, 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

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.

MONEY MARKET

Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current income.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible, and declares
dividends daily.

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. SCIT seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not
be possible, and declares dividends daily.

Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.

Scudder Government Money Market Series seeks to provide investors with as
high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of shares
of this Fund is not within the Scudder Family of Funds.

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<PAGE>

TAX FREE MONEY MARKET

Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt from
regular federal income tax and stability of principal through investments
primarily in municipal securities. STFMF seeks to maintain a constant net
asset value of $1.00 per share, although in extreme circumstances this may
not be possible.

Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal income
tax by reason of federal law as is consistent with its investment policies
and with preservation of capital and liquidity. The Fund seeks to maintain
a constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.

Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.

Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There can
be no assurance that the stable net asset value will be maintained.

TAX FREE

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 Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.

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

Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.

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

Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.

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

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

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<PAGE>

Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.

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

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

U.S. INCOME

Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.

Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.

Scudder GNMA Fund seeks to provide high current income primarily from U.S.
Government guaranteed mortgage-backed (Ginnie Mae) securities.

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

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

GLOBAL INCOME

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

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

Scudder 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 by governments and
corporations in emerging markets.

ASSET ALLOCATION

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

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

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

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<PAGE>

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

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

U.S. GROWTH AND INCOME

Scudder 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
approach that is designed to reduce risk.

Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.

Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index.

Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies in
the real estate industry.

U.S. GROWTH

Value

Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.

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

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

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

Growth

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

Scudder Large Company 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 Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.

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

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<PAGE>

SCUDDER CHOICE SERIES

Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.

Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related to
the treatment or prevention of diseases and other medical problems.

Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the development,
production or distribution of technology-related products or services.

GLOBAL GROWTH

Worldwide

Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.

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

Scudder International Fund seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities.

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

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

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

Regional

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

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

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

The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts) 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.

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<PAGE>

The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.

SPECIAL PLAN ACCOUNTS

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

Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service ("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. The
discussions of the plans below describe only certain aspects of the Federal
income tax treatment of the plan. State tax treatment may be different and may
vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.

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

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

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

Shares of the 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 Internal
Revenue 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 Internal Revenue Code as to Form.

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

Shares of the 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 the Fund may be purchased as the underlying investment for an
individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue 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

35
<PAGE>

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 $2,000 per individual for married couples if only one spouse has
earned income). 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.)

Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution

- --------------------------------------------------------------------------------
Starting
Age of Annual Rate of Return
-------------------------------------------------------------
Contributions 5% 10% 15%
- --------------------------------------------------------------------------------
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

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.)

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

- -------------------------------------------------------------------------
Starting
Age of Annual Rate of Return
------------------------------------------------------
Contributions 5% 10% 15%
- -------------------------------------------------------------------------
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681

Scudder Roth IRA: Individual Retirement Account

Shares of the Funds may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.

A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.

An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.

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<PAGE>

All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, excess medical expenses, the
purchase of health insurance for an unemployed individual and education
expenses.

An individual with an income of less than $100,000 (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.

Scudder 403(b) Plan

Shares of the Fund may also be purchased as the underlying investment for
tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue 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 may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. 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 the Fund's
prospectus. Any such requests must be received by the Fund's 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 the Fund
under the Plan have been liquidated or upon receipt by the Trust of notice of
death of the shareholder.

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

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.

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<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.

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 March, June, September 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, 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.

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:

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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, 1997

One Year Life of Fund (1)*
-------- -----------------

Balanced Fund 22.78% 12.00%

One Year Five Years Ten Years
-------- ---------- ---------

Income Fund 8.66% 7.46% 9.09%

(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 three fiscal years ended December 31, 1997. The Average Annual
Total Return 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):

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.

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<PAGE>

Cumulative Total Return for periods ended December 31, 1997

One Year Life of Fund (1)*
-------- -----------------

Balanced Fund 22.78% 76.05%

One Year Five Years Ten Years
-------- ---------- ---------

Income Fund 8.66% 43.33% 138.72%

(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 three fiscal years ended December 31, 1997. The Cumulative Total
Return 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.

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, sometimes
referred to as the Fund's "SEC 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, 1997, the Fund's SEC yield was 5.74%.

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

40
<PAGE>

should consider the effects of the methods used to calculate performance when
comparing performance of a Fund with performance quoted with respect to other
investment companies or types of investments.

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

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

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

USA Today, a leading national daily newspaper.

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

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

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

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<PAGE>

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

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

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

ORGANIZATION OF THE FUNDS

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

The Funds are separate diversified 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, Inc., the predecessor to
Scudder Kemper Investments, Inc.

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
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 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

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<PAGE>

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 Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Funds. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") entered into
an agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder
and Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc.

Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.

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

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

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

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<PAGE>

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
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 transaction between Scudder and Zurich resulted in the assignment of
each Fund's investment management agreement with Scudder, that agreement
automatically terminated at the consummation of the transaction. In anticipation
of the transaction, however, a new investment management agreement (each an
"Agreement") between each Fund and the Adviser was approved by the Trust on
behalf of each Fund's Trustees on August 14, 1997. At the special meeting of
each Fund's shareholders held on October 24, 1997, the shareholders also
approved the new investment management agreements. The Agreements became
effective as of December 31, 1997 and will be in effect for an initial term
ending on September 30, 1998. Each Agreements is in all material respects on the
same terms as the previous investment management agreement which it supersedes.
The Agreements incorporate conforming changes which promote consistency among
all of the funds advised by the Adviser and which permit ease of administration.
Each Agreement will continue in effect 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 the 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 a vote of the Trust's Trustees on behalf
of each Fund or of a majority of the outstanding voting securities of a Fund.
The Agreements may be terminated at any time without payment of penalty by
either party on sixty days' written notice and automatically terminates in the
event of its assignment.

Under 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 the Trust'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.

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<PAGE>

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. 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 ____% of the average daily net assets until
______________. 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, 1995, the
Adviser did not impose a portion of its management fee amounting to $308,877 and
the fee imposed amounted to $231,419. For the fiscal year ended December 31,
1996, the Adviser did not impose a portion of its management fee amounting to
$387,170 and the fee imposed amounted to $340,364. For the fiscal year ended
December 31, 1997, the Adviser did not impose a portion of its management fee
amounting to $483,894 and the fee imposed amounted to $480,340, of which $48,092
is unpaid at December 31, 1997.

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, 1997, 1996 and 1995 the Adviser charged
the Fund aggregate fees pursuant to its then effective investment advisory
agreement of $3,750,067, $3,516,782 and $3,207,423, respectively.
Net assets as of December 31, 1997 were $695,255,717.

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.

The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.

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.

47
<PAGE>

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.

The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance.

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.

TRUSTEES AND OFFICERS

<TABLE>
<CAPTION>
Position with
Underwriter,
Position with Principal Scudder Investor
Name, Age and Address Fund Occupation** Services, Inc.
- --------------------- ------------- ------------ --------------

<S> <C> <C> <C>
Daniel Pierce+*= (64) President and Trustee Managing Director of Director, Vice President
Scudder Kemper and Assistant Treasurer
Investments, Inc.

Henry P. Becton, Jr. (54) Trustee President and General --
125 Western Avenue Manager, WGBH Educational
Allston, MA 02134 Foundation

Dawn-Marie Driscoll (51) Trustee Executive Fellow, Center --
4909 SW 9th Place for Business Ethics,
Cape Coral, FL 33914 Bentley College;
President, Driscoll
Associates

Peter B. Freeman (65) Trustee Corporate Director and --
100 Alumni Avenue Trustee
Providence, RI 02906

George M. Lovejoy, Jr.= (68) Trustee President and Director, --
50 Congress Street, Suite 543 Fifty Associates(real
Boston, MA 02109 estate corporation)
</TABLE>

48
<PAGE>

<S> <C> <C> <C>
Wesley W. Marple, Jr. (66) Trustee Professor of Business --
Northeastern University Administration,
413 Hayden Hall Northeastern University,
360 Huntington Ave. College of Business
Boston, MA 02115 Administration

Kathryn L. Quirk*# (45) Trustee, Vice President Managing Director of Director, Assistant
and Assistant Secretary Scudder Kemper Treasurer and Senior Vice
Investments, Inc. President

Jean C. Tempel (55) Trustee Managing Partner, --
Technology Equity Partners Technology Equity
Ten Post Office Square Partners
Suite 1325
Boston, MA

Kelly D. Babson+* (39) Vice President Senior Vice President of
Scudder Kemper
Investments, Inc.

Jerard K. Hartman# (65) Vice President Managing Director of --
Scudder Kemper
Investments, Inc.

Thomas W. Joseph+ (59) Vice President Senior Vice President of Vice President, Director,
Scudder Kemper Treasurer and Assistant
Investments, Inc. Clerk

Valerie F. Malter# (39) Vice President Senior Vice President of --
Scudder Kemper
Investments, Inc.

Stephen Wohler+ (49) Vice President Managing Director of --
Scudder Kemper
Investments, Inc.

Caroline Pearson+ (36) Assistant Secretary Vice President, Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm) 1989 to
1997

John R. Hebble+ (39) Assistant Treasurer Senior Vice President, --
Scudder Kemper
Investments, Inc

Thomas F. McDonough+ (51) Vice President, Secretary Senior Vice President of Assistant Clerk
and Treasurer Scudder Kemper
Investments, Inc.
</TABLE>

* Mr. Pierce and Ms. Babson 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).

49
<PAGE>

** 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. 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 March 31, 1998, 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) __________ shares, or _____% of the shares of the Balanced Fund.

As of March 31, 1998, __________ shares in the aggregate, _____% 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 March 31, 1998, 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) _______ shares, or _____% of the shares of the Income Fund.

As of March 31, 1998, ___________shares in the aggregate, _____% of the
outstanding shares of Income Fund, were held in the name of State Street Bank &
Trust Co., Custodian for the Scudder Pathway Series, One Heritage Drive, Quincy,
MA 02171-2128, who may be deemed to be the beneficial owner of certain of these
shares, but disclaims any beneficial ownership therein.

Certain accounts for which the Adviser acts as investment adviser owned
________ shares in the aggregate, or _____% of the outstanding shares of the
Income Fund on ______________. The Adviser may be deemed to be the beneficial
owner of such shares, but disclaims any beneficial interest in such shares.

To the best of the Trust's knowledge, as of March 31, 1998, no person
owned beneficially more than 5% of the Fund's outstanding shares except as
stated above.

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

REMUNERATION

Responsibilities of the Board--Board and Committee Meetings

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

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

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

50
<PAGE>

The Independent Trustees met _________ times during 1997, including Board
and Committee meetings and meetings to review each Fund's contractual
arrangements as described above. All of the Independent Trustees attended ___%
of all such meetings.

Compensation of Officers and Trustees

The Independent Trustees receive the following compensation from the Funds
of Scudder Portfolio Trust: an annual trustee's fee of $2,400 for a Fund in
which assets do not exceed $100 million, $4,800 for assets which exceed $100
million, but not exceeding $1 billion, and $7,200 if assets exceed $1 billion; a
fee of $150 for attendance at each board meeting, audit committee meeting, or
other meeting held for the purposes of considering arrangements between the
Trust for the Fund and Scudder or any affiliate of Scudder; $75 for any other
committee meeting (although in some cases the Independent Trustees have waived
committee meeting fees); and reimbursement of expenses incurred for travel to
and from Board Meetings. No additional compensation is paid to any Independent
Trustee for travel time to meetings, attendance at directors' educational
seminars or conferences, service on industry or association committees,
participation as speakers at directors' conferences, service on special trustee
task forces or subcommittees or service as lead or liaison trustee. Independent
Trustees do not receive any employee benefits such as pension, retirement or
health insurance.

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

Scudder
Name Portfolio Trust* All Scudder Funds
---- ---------------- -----------------

Henry P. Becton,
Jr.,Trustee $16,900 $113,974 (23 funds)

Dawn-Marie
Driscoll**Trustee $2,100 $107,142 (23 funds)

Peter B.Freeman**
Trustee $2,274 $137,011 (42 Funds)

George M. Lovejoy,
Jr.,Trustee $17,450 $138,533 (21 funds)

Wesley W. Marple,
Jr.,Trustee $17,450 $120,549 (22 funds)

Jean C. Tempel, $17,300 $121,924 (22 funds)
Trustee

* Scudder Portfolio Trust consists of three Funds: Scudder Balanced Fund,
Scudder Income Fund and Scudder High Yield Bond Fund.
** Elected as trustee on October 24, 1997.

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

DISTRIBUTOR

The Trust, on behalf of each Fund, has an underwriting agreement with
Scudder Investor Services, Inc., a Massachusetts corporation, which is a
subsidiary of the Adviser. The Trust's underwriting agreement dated October 13,

51
<PAGE>

1992 will remain in effect until September 30, 1998 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 12, 1997.

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 Funds do 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 "Transaction information--Tax information,
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 Fund 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 percent 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
payment to shareholders during a calendar year of distributions representing
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 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.

52
<PAGE>

Investment company taxable income generally is made up of 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.

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 the Fund, the 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 taxable to individual shareholders at a maximum 20% or 28% capital gains
rate (depending on the Fund's holding period for the assets giving rise to the
gain), will be able to claim a proportionate share of federal income taxes paid
by the Fund on such gains as a credit against the shareholder's federal income
tax liability, and will be entitled to increase the adjusted tax basis of the
shareholder's Fund shares by the difference between the shareholder's pro rata
share of such gains and the shareholder's tax credit. If a Fund makes such an
election, it may not be treated as having met the excise tax distribution
requirement.

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 Scudder Income Fund's gross income. If any such dividends
constitute a portion of a Fund's gross income, a portion of the income
distributions of the Fund may be eligible for the 70% 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 the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law and is eliminated if
either those shares or the shares of the Fund are deemed to have been held by
the Fund or the shareholder, as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.

Properly designated distributions of the excess of net long-term capital
gain over net short-term capital loss are taxable to individual shareholders
at a maximum 20% or 28% capital gains rate (depending on the Fund's holding
period for the assets giving rise to the gain), regardless of the length of time
the shares of the 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 gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be
deemed to have been received by shareholders on December 31, if paid during
January of the following year. 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 individual's 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 ($2,000 per
individual for married couples if only one spouse has earned income) 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.

53
<PAGE>

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
the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder 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.

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 in respect of investments by
foreign investors.

Equity options (including covered call options written 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 will
be 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 the exercise of a put option, on a Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in the Fund's portfolio similar to the property underlying the put option. If a
Fund writes an 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 short-term
capital gain or loss. If the option is exercised, the character of the gain or
loss depends on the holding period of the underlying stock.

Positions of the 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 the 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 stocks or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for
certain "qualified covered call options" on stock written by the Fund.

Many futures and forward contracts entered into by the Funds and listed
nonequity options written or purchased by the Funds (including options on debt
securities, options on futures contracts, options on securities indices and
options on currencies), 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 generally will be treated as 60% long-term
and 40% short-term capital gain or loss, and on the last trading day of the
Fund's fiscal year, all outstanding Section 1256 positions 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 the Fund will be treated as ordinary income or loss.

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 or
other position governed by Section 1256 which substantially diminishes the
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, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. Each Fund will
monitor its transactions in options, foreign currency futures and forward
contracts and may make certain tax elections in connection with these
investments.

Notwithstanding any of the foregoing, recent tax law changes may require
each Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,

54
<PAGE>

offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.

Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.

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 options, futures and forward
contracts, 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 Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.

If a Fund invests in stock of certain 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 Fund's 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 Fund's 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.

A Fund may 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; any
mark-to-market losses and any loss from an actual disposition of shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years. 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 when distributed to shareholders as a dividend.
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.

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 a 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 Fund's level. In addition, if the Fund invests in certain high yield
original issue discount obligations issued by corporations, a portion of the
original issue discount accruing on the obligation may be eligible for the
deduction for dividends received by corporations. In such event, dividends of
investment company taxable income received from the Fund by its corporate
shareholders, to the extent attributable to such portion of accrued original
issue discount, may be eligible for this deduction for dividends received by
corporations if so designated by the Fund in a written notice to shareholders.

Each Fund will be required to report to the Internal Revenue Service (the
"IRS") all distributions of investment company 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 investment company
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

55
<PAGE>

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 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 of a Fund may be subject to state and local taxes on
distributions received from a Fund and on redemptions of the Fund's shares.

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.

Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.

PORTFOLIO TRANSACTIONS

Brokerage Commissions

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 is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size
of order, difficulty of execution and skill required of the executing
broker/dealer. The 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.

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 research, market and statistical information 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 authorized when placing portfolio transactions for a Fund to
pay a brokerage commission in excess of that which another broker might charge
for executing the same transaction on account of execution services and the
receipt of research, market or statistical information. The Adviser will not
place orders with broker/dealers on the basis that the broker/dealer has or
has not sold shares of a Fund. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.

To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the

56
<PAGE>

Adviser; the Distributor will place orders on behalf of the Funds with issuers,
underwriters or other brokers and dealers. The Distributor will not receive any
commission, fee or other remuneration from the Funds for this service.

Although certain research, market and statistical information from
broker/dealers may be useful to a Fund and to the Adviser, it is the opinion of
the Adviser that such information only supplements the Adviser's 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 fiscal years ended December 31, 1997, 1996 and 1995, Balanced Fund
paid brokerage commissions of $______, $87,557 and $100,886, respectively.
In the fiscal year ended December 31, 1997, Balanced Fund paid $_______ (__% 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 $__________ (__% 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, 1997, 1996 and 1995, 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 years
ended December 31, 1997 and 1996 the portfolio turnover rate for Income Fund was
61.9% and 66.9%, respectively and for Scudder Balanced Fund it was 43.2%
and 69.7%, 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, Martin Luther King, Jr. 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.

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 Nasdaq
Stock Market ("Nasdaq") system is valued at its most recent sale price. Lacking
any sales, the security is valued at the most recent bid quotation. The value
of an equity security not quoted on 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,

57
<PAGE>

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 the Fund's prospectus,
and the Financial Statements incorporated by reference to the Statement of
Additional Information, are 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. Coopers & Lybrand, L.L.P. is
responsible for performing annual audits of the financial statements and
financial highlights of each Fund in accordance with generally accepted auditing
standards, and the preparation of federal tax returns.

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 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.

58
<PAGE>

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.

Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts 02110-4103, a subsidiary of the Adviser, is responsible for
determining the daily net asset value per share and maintaining the portfolio
and general accounting records of each Fund. 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 Fund Accounting Corporation
charged Balanced Fund an aggregate fee of $48,318 of which $4,128 is unpaid
and Income Fund an aggregate fee of $91,363, of which $7,208 is unpaid for the
fiscal year ended December 31, 1997.

Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
dividend-paying and shareholder service agent for each Fund. Each Fund pays
Service Corporation an annual fee of $26.00 for each account maintained for a
participant. The Service Corporation fees incurred for the year ended December
31, 1997 for Balanced Fund amounted to $269,472, of which $23,120 is unpaid and
$787,239, of which $65,400 is unpaid for Income Fund.

Scudder Trust Company, Two International Place, Boston, MA 02110-4103, a
subsidiary of the Adviser provides recordkeeping and other services in
connection with certain retirement and employee benefit plans for each Fund. The
Fund pays Scudder Trust Company an annual fee of $29.00 for each account
maintained for a participant. The fees incurred for the year ended December 31,
1997 for Balanced Fund amounted to $294,504, of which $26,529 is unpaid and
$1,641,229, of which $162,040 is unpaid 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.

FINANCIAL STATEMENTS

Scudder Balanced Fund

The financial statements, including the Investment Portfolio of Balanced
Fund, together with the Report of Independent Accountants, and Financial
Highlights, are incorporated by reference and attached hereto on pages 10
through 23, inclusive, in the Annual Report to Shareholders of the Fund dated
December 31, 1997, and are deemed to be a part of this Statement of Additional
Information.

Scudder Income Fund

59
<PAGE>

The financial statements, including the Investment Portfolio of Income
Fund, together with the Report of Independent Accountants, and Financial
Highlights, are incorporated by reference and attached hereto on pages 11
through 23, inclusive, in the Annual Report to Shareholders of the Fund dated
December 31, 1997, and are deemed to be a part of this Statement of Additional
Information.

60
<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.

Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.

Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.

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. Bonds which are rated Ba are
judged to have speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.

61
<PAGE>

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.

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>

Scudder
Balanced
Fund

Annual Report
December 31, 1997

Pure No-Load(TM) Funds

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.

SCUDDER (logo)
<PAGE>

Scudder Balanced Fund

- --------------------------------------------------------------------------------
Date of Inception: 1/04/93 Total Net Assets as of Ticker Symbol: SCBAX
12/31/97: $158.7 million
- --------------------------------------------------------------------------------

o For the 12-month period ended December 31, 1997, Scudder Balanced Fund
returned 22.78%, which ranked it in the top 15% (54th) of 350 balanced funds
tracked by Lipper Analytical Services.

o Portfolio asset allocation strategy remained virtually unchanged over the
year, closing the period with 58% invested in equities and 42% invested in fixed
income securities (including cash equivalents).

o The Fund's equity holdings of quality growth companies benefited from the
stock market's positive performance over most of the year and from careful stock
selection.

o The Fund's fixed income holdings were structured with a duration that was
close to the Lehman Aggregate Bond Index for most of the 12 months, but was
lengthened toward the end of the period to take advantage of rising bond prices.

Table of Contents

3 Letter from the Fund's President 20 Notes to Financial Statements
4 Performance Update 23 Report of Independent Accountants
5 Portfolio Summary 24 Tax Information
6 Portfolio Management Discussion 25 Shareholder Meeting Results
9 Glossary of Investment Terms 28 Officers and Trustees
10 Investment Portfolio 29 Investment Products and Services
16 Financial Statements 30 Scudder Solutions
19 Financial Highlights

2 - Scudder Balanced Fund

<PAGE>

Letter from the Fund's President

Dear Shareholders,

The 12-month period was particularly rewarding for Scudder Balanced Fund,
as the U.S. stock market posted yet another year of strong returns and bonds
provided income and price appreciation. However, the market environment changed
over the last few months of the period, as bonds began to outperform stocks.

We believe the Fund's investments in quality growth stocks and investment
grade bonds were particularly well-suited to this changing environment. While
the investment climate in the United States continues to remain healthy, we
think a return to performance that is closer to the 10% average long-run return
for stocks is more realistic going forward. A detailed discussion of the Fund's
activities begins on page 6.

As you may know, the Fund's investment adviser has changed its name to
Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc., pursuant
to the acquisition of a majority interest in Scudder, Stevens & Clark by Zurich
Insurance Company, and the combining of Scudder's business with that of Zurich
Kemper Investments, Inc. In addition, the Fund has added two members to its
management team effective January 1, 1998 -- portfolio managers George Fraise
and Stephen Wohler. We think their extensive knowledge and expertise will be an
asset to the Fund.

For those of you who are interested in new Scudder products, we recently
introduced a new industry sector fund, Scudder Financial Services Fund, one of
Scudder's Choice Series funds. The Fund seeks long-term growth by investing in
financial services companies in the U.S. and abroad. In addition, two other
Choice Series funds will be launched on March 2: Scudder Health Care Fund,
seeking long-term growth from health care companies located around the world,
and Scudder Technology Fund, pursuing long-term growth by investing in companies
that develop, produce, or distribute technology. For further information on
these new funds, please call 1-800-225-2470.

Thank you for your continued investment in Scudder Balanced Fund. If you
have any questions about your account, please call Scudder Investor Relations at
the toll-free number above, or visit our Internet Web site at
http://funds.scudder.com.

Sincerely,

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

3 - Scudder Balanced Fund

<PAGE>

PERFORMANCE UPDATE as of December 31, 1997
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------

Total Return
- --------------------------------------------
Period Growth
Ended of Average
12/31/97 $10,000 Cumulative Annual
- --------------------------------------------
SCUDDER BALANCED FUND
- --------------------------------------------
1 Year $ 12,278 22.78% 22.78%
Life of Fund* $ 17,605 76.05% 12.00%

- --------------------------------------------
S&P 500 INDEX (60%) and LBAB Index (40%)
- --------------------------------------------
1 Year $ 12,363 23.63% 23.63%
Life of Fund* $ 19,949 99.49% 15.08%
- --------------------------------------------
* The Fund commenced operations January 4, 1993. Index
comparisons begin January 31, 1993.

- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------

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* $10,000
6/93 $ 9,876
12/93 $10,395
6/94 $ 9,823
12/94 $10,147
6/95 $11,705
12/95 $12,834
6/96 $13,584
12/96 $14,315
6/97 $16,286
12/97 $17,576

S&P 500 INDEX
Year Amount
- ----------------------
1/31/93* $10,000
6/93 $10,399
12/93 $10,915
6/94 $10,546
12/94 $11,059
6/95 $13,293
12/95 $15,214
6/96 $16,749
12/96 $18,707
6/97 $22,564
12/97 $24,951

LBAB INDEX
Year Amount
- ----------------------
1/31/93* $10,000
6/93 $10,489
12/93 $10,768
6/94 $10,351
12/94 $10,454
6/95 $11,650
12/95 $12,386
6/96 $12,234
12/96 $12,833
6/97 $13,232
12/97 $14,075

The Standard & Poor's (S&P) 500 Index is an unmanaged 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 Aggregrate Bond (LBAB) Index is an unmanaged 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.

Yearly periods Ended December 31

1993* 1994 1995 1996 1997
--------------------------------------------
NET ASSET VALUE... $ 12.23 $ 11.63 $ 14.12 $ 14.60 $ 16.85
INCOME DIVIDENDS.. $ .26 $ .31 $ .32 $ .34 $ .36
CAPITAL GAINS
DISTRIBUTIONS..... $ -- $ -- $ .25 $ .79 $ .68
FUND TOTAL
RETURN (%)........ 4.12 -2.39 26.48 11.54 22.78
INDEX TOTAL
RETURN (%)........ 8.56 -.03 31.34 14.96 23.63

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

4 Scudder Balanced Fun

<PAGE>
PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Common Stocks 58%
Fixed Income Holdings 33%
Cash Equivalents 9%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

As stock market volatility increased
in the second half, the Fund's balanced
approach to investing in quality stocks
and investment grade bonds provided
relative stability.

- --------------------------------------------------------------------------
FIXED INCOME HOLDINGS
(Excludes 9% of Cash Equivalents)
- --------------------------------------------------------------------------
Type
- --------------------------------------------
Corporate Bonds 37%
U.S. Government & Agencies 25%
U.S. Government Mortgages 23%
Foreign Bonds - U.S.
$ Denominated 8%
Asset-Backed Securities 7%
- --------------------------------------------
100%
- --------------------------------------------

Quality
- --------------------------------------------
AAA 55%
AA 7%
A 10%
BBB 28%
- --------------------------------------------
100%
- --------------------------------------------

Rather than emphasize asset allocation,
management focused on duration by
maintaining a barbelled maturity
structure until the fourth quarter when
duration was lengthened to take advantage
of declining interest rates.
- --------------------------------------------------------------------------
EQUITY HOLDINGS
- --------------------------------------------------------------------------
Health 22%
Consumer Staples 22%
Technology 15%
Consumer Discretionary 11%
Manufacturing 8%
Media 7%
Financial 6%
Durables 4%
Service Industries 4%
Energy 1%
- ---------------------------------------------
100%
- ---------------------------------------------

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

Five Largest Equity Holdings
- --------------------------------------------
1. GENERAL ELECTRIC CO.
Leading producer of electrical equipment
2. PROCTER & GAMBLE CO.
Diversified manufacturer of
consumer products
3. PFIZER, INC.
Leading international pharmaceutical company
4. COCA-COLA CO., INC.
International soft drink company
5. MICROSOFT CORP.
Computer operating systems software

The strong performance of high quality, large-cap
stocks--the emphasis of the equity portion of the
portfolio--was an important contributor to the
Fund's solid returns.

For more complete details about the Fund's investment portfolio,
see page 10. A monthly Investment Portfolio Summary and quarterly Portfolio
Holdings are available upon request.

5 Scudder Balanced Fun

<PAGE>
Portfolio Management Discussion

An Interview with Valerie Malter
Lead Portfolio Manager,
Scudder Balanced Fund

Q: How would you summarize the 12-month period ended December 31, 1997?

A: Stocks provided another good year of returns, with the unmanaged Russell 1000
Growth Index returning 30.49% and the unmanaged S&P 500 returning 33.35%. Stocks
continued their upward momentum for most of the period, driven by a continuation
of the healthy economic and low inflation environment that has been a staple of
our economy for a number of years. This momentum was supported by the Federal
Reserve's status quo approach to interest rates and solid corporate earnings
reports. Large-cap issues outperformed small-caps during the year, which
coincided well with our increase in the average market-capitalization of the
Fund's equity holdings for the period.

Q: How did the fixed income markets perform over the year?

A: Overall, this was also a good period for bond investors. Interest rates
generally declined from May through the end of the year, and (due to the inverse
relationship of interest rates to bond prices) bond prices rose. This trend
occurred in the context of a benign inflation environment, despite robust
economic growth. The yield on the benchmark U.S. Treasury bond began the year at
6.64%, peaked at 7.20% in April, and declined to 5.92% by the close of the
period. Bond holders received not only income, but also price appreciation
during this period. Any year that bond investors receive more than just the
coupon is a pretty good year, in my opinion. Our fixed income benchmark (the
Lehman Aggregate Bond Index) returned 9.65% for the 12 months, reflecting the
generally positive environment for bonds.

Q: ... And the Fund?

A: The Fund's balanced approach benefited from the favorable conditions in both
markets, in addition to value-added by our individual security selections. For
the 12-months ended December 31, 1997, the Fund returned 22.78%. This total
return reflects an increase in net asset value from $14.60 on December 31, 1996
to $16.85 on December 31, 1997, an income distribution of $0.36 per share, and a
capital gain distribution of $0.68 per share. We were pleased with this
performance, which ranked the Fund in the top 15% (54th) of 350 balanced funds
tracked by Lipper Analytical Services.

Q: In the second half, concern over the impact of a strong dollar on earnings of
large multinational companies put pressure on a number of stocks, particularly
those in the consumer staples and pharmaceutical areas. How did this affect the
Fund's equity holdings?

A: Our equity holdings are heavily weighted in these major global companies, and
they were negatively affected by the strong dollar. In addition, profit warnings
from Coca Cola and Gillette, and fears of slowing exports in the wake of
currency devaluations in Southeast Asia, exacerbated the decline. However, many
of these stocks, which had been negatively impacted in the third quarter,
recovered in the fourth quarter.

6 - Scudder Balanced Fund

<PAGE>

Q: Did you change your strategy?

A: Because we know that these issues (i.e. the dollars strength or the Asian
crisis) will come up from time to time, we strongly believe that they are not
reasons to alter our approach. The Fund's equity holdings are selected
stock-by-stock, with a focus on high quality companies which have solid
long-term franchises, outstanding management teams, and sustainable
above-average earnings growth potential. As long as we remain confident in a
company's ability to meet its growth projections, we will continue to hold the
stock.

Q: What were the noteworthy performers in the stock portion of the Fund?

A: In such a good year, we had many. Media stocks Outdoor Systems and Clear
Channel Communications appreciated more than 100% in 1997. These two continued
to benefit from the rapid consolidation taking place in the radio and outdoor
advertising industries. Within the consumer staples group standouts included
Gillette, Procter and Gamble, and Suiza (a dominant consolidator in the highly
fragmented dairy industry). Many of our health care holdings also performed well
for the year, including HBO (up 62%), Pfizer (up 80%), Eli Lilly (up 91%), and
Tenet Healthcare (up 51%).

Q: What about stocks that held back performance?

A: There were several, including a number of stocks in the technology sector
such as National Semiconductor, Teradyne (crushed by concerns about 1998
semiconductor capital spending from Korea, Taiwan and Japan), and 3Com.
Elsewhere, Corporate Express, which we trimmed early in the fourth quarter, was
negatively impacted by a slower than expected recovery from a recent
acquisition, despite continued robust growth in its core businesses. Compaq was
the lone exception in the technology area, appreciating 90% for the year.

Q: What equity sectors did you emphasize?

A: Our weightings remained close to the same proportions as the Russell 1000
Growth Index. While we may over- or underweight specific sectors from time to
time, we focus primarily on individual stock selection, where we believe we can
add the most value. We believe this diversified approach helps to control risk.
As a result, the Fund's largest equity weightings remained in the health care,
consumer staples, and technology sectors. At the beginning of the fourth
quarter, we made a decision to trim exposure to semiconductor capital equipment
to reflect our declining confidence in expected growth rates, considering the
expanding crisis in Asia. We also swapped other technology holdings into
computer services stocks to reduce portfolio risk/volatility brought on by the
same concerns. In the financial services area, we also continued to maintain our
neutral position and remained focused on the insurance sector (AIG and Conseco)
as well as on "super regional" banks (NationsBank and First Union).

Q: How did you position the Fund's fixed income holdings?

A: We managed this sector actively throughout the 12 months, seeking to
capitalize on shifts in relative valuation among the Treasury, mortgage, and
corporate bond sectors. Given the uncertainties surrounding the level of
economic growth and inflation over the first half of the year, we maintained a

7 - Scudder Balanced Fund

<PAGE>

neutral portfolio duration compared to our benchmark, the Lehman Aggregate Bond
Index. Instead, we focused on sector allocations. We de-emphasized mortgage
securities which typically have intermediate term (3-5 year) maturities, and
increased our "barbelled" maturity strategy by adding to holdings at the short
and long ends of the maturity spectrum. The barbelled strategy made a neutral
contribution to performance during the first half. As the Asian crisis deepened
and reports of accelerating inflation remained nonexistent, we lengthened the
portfolio's duration slightly to take advantage of declining interest rates and
rising bond prices. At the end of the period, the Fund's duration was 4.9 years.

Q: What is your outlook, given prospects for slowing profit growth rates and the
uncertainty in Asia?

A: Change usually creates opportunities for investors. We intend to take
advantage of those opportunities as they come along, while continuing to manage
the Fund with the same investment discipline we have outlined here. We will
continue to monitor developments closely, but we believe the Fund is especially
well suited to weather periods of uncertainty, given its balanced approach to
investing in quality growth companies and investment grade fixed income
securities.

Scudder Balanced Fund:
A Team Approach to Investing

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

Lead Portfolio Manager Valerie F. Malter assumed responsibility for the Fund's
day-to-day management and investment strategies in September 1995. Valerie has
10 years of experience as an analyst covering a wide range of industries, and
three years of portfolio management experience, focusing on the stocks of
companies with medium- to large-sized market capitalizations. 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 SKI since 1986, has over 20 years of investment experience.

8 - Scudder Balanced Fund

<PAGE>
Glossary of Investment Terms

COUPON The interest rate the bond issuer promises to
pay to the bondholder until maturity,
expressed as an annual percentage of face
value. As an example, a bond with a 10%
coupon and a $1,000 face value pays $100 a
year.

DURATION A measure of the portfolio's sensitivity to
changes in interest rates. If an investment
portfolio has a duration of 4.9 years and
interest rates decline by 1% from present
levels, the value of the portfolio would rise
by about 4.9% and vice versa.

FUNDAMENTAL RESEARCH Analysis of a company's financial statements
to project future stock price changes.
Considers past records of sales and earnings,
as well as the future impact of products,
consumer markets, and management in weighting
a company's prospects. Distinct from
technical analysis, which evaluates the
attractiveness of a stock based on historical
price and trading volume movements.

MARKET CAPITALIZATION The value of a company's outstanding shares
of common stock, determined by multiplying
the number of shares outstanding by the share
price (shares x price = market
capitalization). The universe of
publicly-traded companies is frequently
divided into large-, mid-, and
small-capitalizations. "Large-cap" stocks
tend to be more liquid and less volatile,
while "small-cap" stocks in the aggregate
have more potential for earnings growth and
are typically more volatile.

OVER/UNDER WEIGHTING Refers to the allocation of assets -- usually
by sector, industry, or country -- within an
investment portfolio relative to a benchmark
index or investment universe.

PRICE/EARNINGS RATIO A widely used gauge of a stock's valuation
(P/E or earnings multiple) that indicates what investors are paying for
a company's earning power at the current
stock price. Often based on a company's
projected earnings for the coming 12 months.
A higher "earnings multiple" indicates higher
expected earnings growth and greater risk; a
lower multiple is usually associated with
mature or out-of-favor companies, and lower
stock price volatility.

(Sources: SKI; Barron's Dictionary of Finance and Investment Terms)

9 - Scudder Balanced Fund

<PAGE>

Investment Portfolio as of December 31, 1997

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements 8.7%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with Salomon Brothers dated 12/31/97 at 6.7% to be
repurchased at $13,677,089 on 1/2/98, collateralized by a $14,555,000 U.S. Treasury -----------
Bill, 10/15/98 (Cost $13,672,000) ..................................................... 13,672,000 13,672,000
-----------
U. S. Government & Agencies 7.8%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note, 5.625%, 12/31/99 .................................................... 2,500,000 2,498,825
U.S. Treasury Bond, 7.25%, 5/15/16 ...................................................... 500,000 569,530
U.S. Treasury Bond, 7.875%, 2/15/21 ..................................................... 500,000 613,905
U.S. Treasury Note, 6.875%, 7/31/99 ..................................................... 1,000,000 1,017,810
U.S. Treasury Note, 5.875%, 11/15/99 .................................................... 1,500,000 1,505,385
U.S. Treasury Note, 6.125%, 7/31/00 ..................................................... 1,000,000 1,010,310
U.S. Treasury Note, 5.75%, 10/31/00 ..................................................... 750,000 750,938
U.S. Treasury Note, 6.25%, 1/31/02 ...................................................... 1,500,000 1,526,715
U.S. Treasury Note, 5.625%, 2/15/06 ..................................................... 2,000,000 1,977,500
U.S. Treasury Separate Trading Registered Interest and Principal, Principal only,
11/15/18 .............................................................................. 3,000,000 855,300
- ------------------------------------------------------------------------------------------------------------------------------
Total U. S. Government & Agencies (Cost $12,137,126) 12,326,218
- ------------------------------------------------------------------------------------------------------------------------------

Government National Mortgage Association 1.7%
- ------------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association Pass-thru, 9.5%, 8/15/19 ....................... 21,007 22,777
Government National Mortgage Association Pass-thru, 10%, 2/15/25 ........................ 830,726 923,817
Government National Mortgage Association Pass-thru, 8.5%, with various maturities
to 9/15/26 ............................................................................ 1,703,788 1,790,386
- ------------------------------------------------------------------------------------------------------------------------------
Total Government National Mortgage Assoc. (Cost $2,674,884) 2,736,980
- ------------------------------------------------------------------------------------------------------------------------------

U. S. Government Agency Pass-Thrus 5.8%
- ------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association, 6.5%, with various maturities to 1/1/26 .......... 3,233,233 3,204,942
Federal National Mortgage Association, 7%, with various maturities to 9/1/26 ............ 5,809,697 5,865,815
- ------------------------------------------------------------------------------------------------------------------------------
Total U. S. Government Agency Pass-Thrus (Cost $8,752,135) 9,070,757
- ------------------------------------------------------------------------------------------------------------------------------

Collateralized Mortgage Obligations 0.9%
- ------------------------------------------------------------------------------------------------------------------------------
-----------
Federal Home Loan Mortgage Corp., 8%, 4/1/08 (Cost $1,441,916) .......................... 1,405,676 1,440,565
-----------

Foreign Bonds - U.S.$ Denominated 2.8%
- ------------------------------------------------------------------------------------------------------------------------------
Abbey National PLC Global Medium Term Note, 6.69%, 10/17/05 ............................. 750,000 756,519
Deutsche Bank, 7.5%, 4/25/09 ............................................................ 1,500,000 1,615,620
Province of Ontario Global, 6%, 2/21/06 ................................................. 1,000,000 984,570
Saga Petroleum A/S, 7.25%, 9/23/27 ...................................................... 1,000,000 1,020,060
- ------------------------------------------------------------------------------------------------------------------------------
Total Foreign Bonds - U.S.$ Denominated (Cost $4,241,533) 4,376,769
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

10 - Scudder Balanced Fund
<PAGE>

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Asset Backed Securities 2.2%
- ------------------------------------------------------------------------------------------------------------------------------
Automobile Receivables 1.3%
Ford Credit Automobile Trust Series 1996-A A4, 6.75%, 9/15/00 ........................... 1,000,000 1,008,750
Premier Auto Trust Asset Backed Certificate Series 1996-3 A4, 6.75%, 11/6/00 ............ 1,000,000 1,010,620
-----------
2,019,370
-----------
Credit Card Receivables 0.9%
Sears Credit Account Master Trust, Series 1995-A4, 6.25%, 1/15/03 ....................... 1,400,000 1,401,302
- ------------------------------------------------------------------------------------------------------------------------------
Total Asset Backed (Cost $3,396,960) 3,420,672
- ------------------------------------------------------------------------------------------------------------------------------

Corporate Bonds 12.5%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.6%
ITT Corp., 7.375%, 11/15/15 ............................................................. 1,000,000 943,140
-----------
Consumer Staples 0.4%
Seagram Co., Ltd., 8.35%, 1/15/22 ....................................................... 500,000 580,795
-----------
Financial 5.1%
Associates Corp. of North America, 6.625%, 5/15/01 ...................................... 500,000 506,110
Capital One Bank Medium Term Note, 5.95%, 2/15/01 ....................................... 1,000,000 988,870
First Industrial L.P., 7.6%, 5/15/07 .................................................... 700,000 731,150
General Electric Capital Services Inc., 7.5%, 8/21/35 ................................... 250,000 278,970
Highwoods/Forsyth, Ltd., 7%, 12/1/06 .................................................... 1,500,000 1,510,350
Southern National Corp., 7.05%, 5/23/03 ................................................. 1,000,000 1,029,630
Spieker Properties, Inc., 7.875%, 12/1/16 ............................................... 750,000 806,033
Susa Partnership L.P., 8.2%, 6/1/17 ..................................................... 1,000,000 1,089,210
US West Capital Funding Inc., 7.9%, 2/1/27 .............................................. 1,000,000 1,094,340
-----------
8,034,663
-----------
Media 1.3%
TCI Communications, Inc., 8%, 8/1/05 .................................................... 750,000 803,723
Time Warner Inc., 9.125%, 1/15/13 ....................................................... 1,000,000 1,190,770
-----------
1,994,493
-----------
Service Industries 0.7%
ServiceMasters Co., Ltd, 7.45%, 8/15/27 ................................................. 1,000,000 1,039,130
-----------
Durables 2.1%
Ford Motor Co., 8.875%, 1/15/22 ......................................................... 500,000 616,690
Ford Motor Credit Co., 6.25%, 2/26/98 ................................................... 250,000 250,065
Lockheed Martin Corp., 7.75%, 5/1/26 .................................................... 500,000 554,105
Northrop Grumman Corp., 7%, 3/1/06 ...................................................... 750,000 773,663
</TABLE>

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

11 - Scudder Balanced Fund
<PAGE>

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Northrop Grumman Corp., 7.875%, 3/1/26 .................................................. 1,000,000 1,112,690
-----------
3,307,213
-----------
Manufacturing 0.3%
Nova Gas Transmissions, Ltd., 7.875%, 4/1/23 ............................................ 500,000 556,135
-----------
Technology 0.3%
Loral Corp., 8.375%, 6/15/24 ............................................................ 500,000 587,280
-----------
Energy 0.7%
PanEnergy Corp., 7.375%, 9/15/03 ........................................................ 1,000,000 1,051,020
-----------
Metals & Minerals 0.7%
Potash Corp., 7.125%, 6/15/07 ........................................................... 1,000,000 1,022,760
-----------
Transportation 0.3%
Norfolk Southern Corp., 7.8%, 5/15/27 ................................................... 500,000 562,020
- ------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $18,535,311) 19,678,649
- ------------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------------
Common Stocks 57.6%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 6.2%
Department & Chain Stores 4.4%
Costco Companies Inc.* .................................................................. 28,400 1,267,340
Home Depot, Inc. ........................................................................ 44,100 2,596,388
Nordstrom, Inc. ......................................................................... 16,800 1,014,300
Wal-Mart Stores Inc. .................................................................... 51,100 2,015,256
-----------
6,893,284
-----------
Hotels & Casinos 0.7%
Host Marriott Corp.* .................................................................... 55,300 1,085,263
-----------
Specialty Retail 1.1%
Corporate Express, Inc.* ................................................................ 50,800 654,050
Pier 1 Imports, Inc. .................................................................... 48,300 1,092,788
-----------
1,746,838
-----------
Consumer Staples 12.6%
Alcohol & Tobacco 1.6%
Philip Morris Companies Inc. ............................................................ 56,300 2,551,094
-----------
Consumer Specialties 0.5%
Samsonite Corp.* ........................................................................ 23,800 752,675
-----------
Food & Beverage 4.9%
Coca-Cola Co., Inc. ..................................................................... 48,300 3,217,988
H.J. Heinz Co. .......................................................................... 39,900 2,027,419
</TABLE>

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

12 - Scudder Balanced Fund
<PAGE>

<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interstate Bakeries Corp. ............................................................... 37,400 1,397,825
Suiza Foods Corp.* ...................................................................... 17,300 1,030,431
-----------
7,673,663
-----------
Package Goods/Cosmetics 5.6%
Colgate-Palmolive Co. ................................................................... 32,300 2,374,050
Gillette Co. ............................................................................ 24,276 2,438,221
Procter & Gamble Co. .................................................................... 50,000 3,990,625
-----------
8,802,896
-----------
Health 12.7%
Biotechnology 1.0%
Guidant Corp. ........................................................................... 26,500 1,649,625
-----------
Health Industry Services 1.3%
HBO & Company, Inc. ..................................................................... 22,400 1,075,200
Total Renal Care Holdings, Inc.* ........................................................ 33,500 921,250
-----------
1,996,450
-----------
Hospital Management 0.6%
Tenet Healthcare Corp.* ................................................................. 27,800 920,875
-----------
Pharmaceuticals 9.8%
Bristol-Myers Squibb Co. ................................................................ 19,300 1,826,263
Eli Lilly & Co. ......................................................................... 39,238 2,731,946
Johnson & Johnson ....................................................................... 32,600 2,147,525
Merck & Co. Inc. ........................................................................ 19,300 2,050,625
Pfizer, Inc. ............................................................................ 52,000 3,877,250
SmithKline Beecham PLC (ADR) ............................................................ 34,800 1,790,025
Warner-Lambert Co. ...................................................................... 8,500 1,054,000
-----------
15,477,634
-----------
Financial 3.6%
Banks 1.2%
First Union Corp. ....................................................................... 17,400 891,750
NationsBank Corp. ....................................................................... 15,700 954,756
-----------
1,846,506
-----------
Insurance 2.4%
American International Group, Inc. ...................................................... 23,925 2,601,844
Conseco Inc. ............................................................................ 24,100 1,095,044
-----------
3,696,888
-----------
</TABLE>

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

13 - Scudder Balanced Fund
<PAGE>

<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Media 3.7%
Advertising 1.8%
Interpublic Group of Companies Inc. ..................................................... 28,200 1,404,713
Outdoor Systems, Inc.* .................................................................. 38,250 1,467,844
-----------
2,872,557
-----------
Broadcasting & Entertainment 1.9%
Clear Channel Communications, Inc.* ..................................................... 25,000 1,985,938
Walt Disney Co. ......................................................................... 10,400 1,030,250
-----------
3,016,188
-----------
Service Industries 2.2%
Miscellaneous Consumer Services 1.5%
Cendant Corporation* .................................................................... 31,450 1,081,094
Service Corp. International ............................................................. 36,100 1,333,444
-----------
2,414,538
-----------
Printing/Publishing 0.7%
Reuters Holdings PLC "B" (ADR) .......................................................... 15,600 1,033,500
-----------
Durables 2.4%
Aerospace 0.9%
AlliedSignal Inc. ....................................................................... 34,200 1,331,663
-----------
Telecommunications Equipment 1.5%
Ciena Corp.* ............................................................................ 18,200 1,112,475
Nokia AB Oy "A" (ADR) ................................................................... 18,000 1,260,000
-----------
2,372,475
-----------
Manufacturing 4.8%
Chemicals 0.6%
Monsanto Co. ............................................................................ 23,300 978,600
-----------
Diversified Manufacturing 4.2%
General Electric Co. .................................................................... 66,200 4,857,425
Textron, Inc. ........................................................................... 28,400 1,775,000
-----------
6,632,425
-----------
Technology 8.9%
Computer Software 3.7%
Computer Associates International, Inc. ................................................. 25,725 1,360,209
Microsoft Corp.* ........................................................................ 23,400 3,024,450
PeopleSoft Inc.* ........................................................................ 35,600 1,388,400
-----------
5,773,059
-----------
</TABLE>

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

14 - Scudder Balanced Fund
<PAGE>

<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Diverse Electronic Products 0.5%
Teradyne Inc.* .......................................................................... 25,700 822,400
-----------
Electronic Data Processing 0.9%
Compaq Computer Corp. ................................................................... 25,350 1,430,691
-----------
Office/Plant Automation 1.0%
3Com Corp.* ............................................................................. 16,600 579,963
Cisco Systems, Inc.* .................................................................... 16,950 944,963
-----------
1,524,926
-----------
Semiconductors 2.8%
Intel Corp. ............................................................................. 28,400 1,995,100
Linear Technology Corp. ................................................................. 13,300 766,413
National Semiconductor Corp.* ........................................................... 37,800 980,438
Taiwan Semiconductor Manufacturing Co.* ................................................. 33,200 603,825
-----------
4,345,776
-----------
Energy 0.5%
Oilfield Services/Equipment
Schlumberger Ltd. ....................................................................... 10,700 861,350
- ------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $58,548,025) 90,503,839
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $123,399,890) (a) 157,226,449
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Non-income producing security.

(a) The cost for federal income tax purposes was $123,476,478. At December 31,
1997, net unrealized appreciation for all securities based on tax cost was
$33,749,971. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $34,758,407 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,008,436.

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

15 - Scudder Balanced Fund
<PAGE>
Financial Statements

Statement of Assets and Liabilities
as of December 31, 1997

<TABLE>
<CAPTION>
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $123,399,890) .................. $ 157,226,449
Receivable for Fund shares sold ........................................ 1,149,642
Dividends and interest receivable ...................................... 778,392
Other assets ........................................................... 2,514
----------------
Total assets ........................................................... 159,156,997
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed ....................................... 236,348
Accrued management fee ................................................. 48,092
Other accrued expenses ................................................. 160,649
----------------
Total liabilities ...................................................... 445,089
--------------------------------------------------------------------------------------------
Net assets, at market value $ 158,711,908
--------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income .................................... 105,659
Net unrealized appreciation on investments ............................. 33,826,559
Accumulated net realized gain .......................................... 688,296
Paid-in capital ........................................................ 124,091,394
--------------------------------------------------------------------------------------------
Net assets, at market value $ 158,711,908
--------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($158,711,908 / 9,416,710 outstanding shares of beneficial -----------------
interest, $.01 par value, unlimited number of shares authorized) ..... $16.85
-----------------
</TABLE>

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

16 - Scudder Balanced Fund
<PAGE>

Statement of Operations
year ended December 31, 1997

<TABLE>
<CAPTION>
<S> <C>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------------
Income:
Interest ............................................................... $ 3,799,396
Dividends (net of foreign taxes withheld of $7,552) .................... 784,766
-----------------
4,584,162
Expenses:
Management fee ......................................................... 964,234
Services to shareholders ............................................... 660,947
Custodian and accounting fees .......................................... 77,375
Trustees' fees and expenses ............................................ 36,837
Reports to shareholders ................................................ 50,692
Auditing ............................................................... 36,627
Registration fees ...................................................... 23,148
Legal .................................................................. 13,489
Amortization of organization expense ................................... 9,599
Other .................................................................. 8,746
-----------------
Total expenses before reductions ....................................... 1,881,694
Expense reductions ..................................................... (483,894)
-----------------
Expenses, net .......................................................... 1,397,800
--------------------------------------------------------------------------------------------
Net investment income 3,186,362
--------------------------------------------------------------------------------------------

Realized and unrealized gain (loss) on investment transactions
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain from:
Investments ............................................................ 6,767,432
Net unrealized appreciation during the period on:
Investments ............................................................ 18,257,895
--------------------------------------------------------------------------------------------
Net gain on investment transactions 25,025,327
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 28,211,689
--------------------------------------------------------------------------------------------
</TABLE>

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

17 - Scudder Balanced Fund
<PAGE>
Statements of Changes in Net Assets

<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ........................................ $ 3,186,362 $ 2,514,758
Net realized gain from investment transactions ............... 6,767,432 4,906,972
Net unrealized appreciation on investment transactions
during the period ......................................... 18,257,895 3,888,751
---------------- ----------------
Net increase in net assets resulting from operations ......... 28,211,689 11,310,481
---------------- ----------------
Distributions to shareholders:
From net investment income ................................... (3,153,021) (2,447,716)
---------------- ----------------
From net realized gains ...................................... (6,023,486) (5,755,741)
---------------- ----------------
Fund share transactions:
Proceeds from shares sold .................................... 58,695,668 39,011,632
Net asset value of shares issued to shareholders in
reinvestment of distributions .............................. 8,964,419 8,015,313
Cost of shares redeemed ...................................... (37,524,903) (30,743,649)
---------------- ----------------
Net increase in net assets from Fund share transactions ...... 30,135,184 16,283,296
---------------- ----------------
Increase in net assets ....................................... 49,170,366 19,390,320
Net assets at beginning of period ............................ 109,541,542 90,151,222
Net assets at end of period (including undistributed net ---------------- ----------------
investment income of $105,659 and $94,771, respectively).... $158,711,908 $109,541,542
---------------- ----------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................... 7,502,830 6,386,156
---------------- ----------------
Shares sold .................................................. 3,666,310 2,665,524
Shares issued to shareholders in reinvestment of
distributions ............................................. 542,526 547,246
Shares redeemed .............................................. (2,294,956) (2,096,096)
---------------- ----------------
Net increase in Fund shares .................................. 1,913,880 1,116,674
---------------- ----------------
Shares outstanding at end of period .......................... 9,416,710 7,502,830
---------------- ----------------
</TABLE>

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

18 - Scudder Balanced Fund
<PAGE>
Financial Highlights

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

19 - Scudder Balanced Fund
<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 Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.

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 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 most recent 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 purchased with an original maturity 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. Money market instruments purchased with an original maturity of
sixty days or less are valued at amortized cost.

All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees.

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, is equal to at least 100.5% of the repurchase price.

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 certain securities sold at a
loss. As a result, net investment income (loss) and net realized gain (loss) on

20 - Scudder Balanced Fund
<PAGE>

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 Costs. Costs incurred by the Fund in connection with its
organization were deferred and 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, 1997, purchases and sales of investment
securities (excluding short-term investments and direct U.S. Government
obligations) aggregated $57,901,191 and $52,365,683, respectively. Purchases and
sales of direct U.S. Government obligations aggregated $5,988,086 and
$1,408,516, respectively.

C. Related Parties

Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.

Under the Management Agreement with Scudder Kemper, 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 Management Agreement. The
management fee payable under the Management Agreement is equal to an annual rate
of .70% of the Fund's average daily net assets, computed and accrued daily and
payable monthly. In addition, the Adviser had agreed not to impose all or a
portion of its management fee until October 31, 1997 to maintain the annualized
expenses of the Fund at not more than 1.00% of average daily net assets. The
Adviser has also agreed not to impose all or a portion of its management fee
until April 30, 1998 and to maintain the annualized expenses of the Fund at not
more than 1.10% of average daily net assets. Accordingly, for the year ended
December 31, 1997, the Adviser did not impose a portion of its fees amounting to
$483,894, and the portion imposed amounted to $480,340, of which $48,092 is
unpaid at December 31, 1997.

21 - Scudder Balanced Fund
<PAGE>

Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended December 31, 1997, the amount charged to the Fund by SSC aggregated
$269,472, of which $23,120 is unpaid at December 31, 1997.

Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans for the Fund. For the year ended December 31, 1997, the
amount charged to the Fund by STC aggregated $294,504, of which $26,529 is
unpaid at December 31, 1997.

Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
December 31, 1997, the amount charged to the Fund by SFAC aggregated $48,318, of
which $4,128 is unpaid at December 31, 1997.

The Trust pays each Trustee not affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended December 31, 1997,
Trustees' fees and expenses aggregated $36,837.

22 - Scudder Balanced Fund
<PAGE>
Report of Independent Accountants

To the Trustees of Scudder Portfolio Trust and the 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, 1997, and
the related statements of operations for the year then ended, and changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the four years in the period 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, 1997, by correspondence with the custodian. 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, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the four years
in the period 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 9, 1998

23 - Scudder Balanced Fund
<PAGE>

Tax Information

The Fund paid distributions of $0.49 per share from net long-term capital gains
during the year ended December 31, 1997, of which 74.2% represents 20% gains.
Pursuant to section 852 of the Internal Revenue Code, the Fund designates
$3,964,340 as capital gain dividends for the year ended December 31, 1997, of
which 30.69% represent 20% gains.

For corporate shareholders, 23.26% of the income dividends paid during the
Fund's fiscal year ended December 31, 1997 qualified for the dividends received
deduction.

24 - Scudder Balanced Fund
<PAGE>
Shareholder Meeting Results

A Special Meeting of Shareholders (the "Meeting") of Scudder Balanced Fund (the
"Fund") was held on October 24, 1997, at the office of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, Massachusetts 02110. At the Meeting, as adjourned and reconvened,
the following matters were voted upon by the shareholders (the resulting votes
for each matter are presented below). With regard to certain proposals, it was
recommended that the Meeting be reconvened in order to provide shareholders with
an additional opportunity to return their proxies. The date of the reconvened
meeting at which the matters were decided is noted after the proposed matter.

1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

5,043,832 146,714 136,477 109,810

2. To elect Trustees.

Number of Votes:
----------------

Trustee For Withheld
------- --- --------

Henry P. Becton, Jr. 5,217,588 109,435

Dawn-Marie Driscoll 5,216,902 110,121

Peter B. Freeman 5,216,538 110,485

George M. Lovejoy, Jr. 5,215,525 111,498

Dr. Wesley W. Marple, Jr. 5,216,616 110,407

Daniel Pierce 5,215,750 111,273

Kathryn L. Quirk 5,212,323 114,700

Jean C. Tempel 5,216,334 110,689

3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

4,774,135 239,364 203,714 109,810

25 - Scudder Balanced Fund

<PAGE>

4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

4,944,224 176,679 254,434 106,049

5. To approve the revision of certain fundamental investment policies.

<TABLE>
<CAPTION>
Number of Votes:
----------------

Fundamental Policies For Against Abstain Broker
-------------------- --- ------- ------- ------
Non-Votes*
<S> <C> <C> <C> <C>
5.1 Diversification 4,808,138 178,317 230,758 109,810
5.2 Borrowing 4,803,941 182,514 230,758 109,810
5.3 Senior securities 4,805,720 180,505 230,988 109,810
5.4 Concentration 4,804,404 181,907 230,902 109,810
5.5 Underwriting of securities 4,807,112 142,693 267,408 109,810
5.6 Investment in real estate 4,805,916 143,511 267,786 109,810
5.7 Purchase of physical 4,797,348 152,079 267,786 109,810
commodities
5.8 Lending 4,803,109 146,318 267,786 109,810
</TABLE>

6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.

Number of Votes:
----------------

For Against Abstain
--- ------- -------

5,103,454 44,226 179,343

* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.

26 - Scudder Balanced Fund

<PAGE>
This Page
intentionally
left blank.

27 - Scudder Balanced Fund

<PAGE>
Officers and Trustees

Daniel Pierce*
President and Trustee

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

Dawn-Marie Driscoll
Trustee; President, Driscoll
Associates

Peter B. Freeman
Trustee ; Corporate Director and
Trustee

George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates

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

Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary

Jean C. Tempel
Trustee; Director, General
Partner, TL Ventures

Kelly D. Babson*
Vice President

Jerard K. Hartman*
Vice President

William M. Hutchinson*
Vice President

Thomas W. Joseph*
Vice President

Valerie F. Malter*
Vice President

Thomas F. McDonough*
Vice President, Secretary and
Treasurer

John R. Hebble*
Assistant Treasurer

Caroline Pearson*
Assistant Secretary

*Scudder Kemper Investments, Inc.

28 - Scudder Balanced Fund

<PAGE>
Investment Products and Services

The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*

U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund

Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund

Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio

U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund

U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund

Growth
Scudder Classic Growth Fund
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund

Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund

Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.

Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)

Education Accounts
- ------------------
Education IRA
UGMA/UTMA

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. +++Funds within categories are listed
in order from expected least risk to most risk. Certain Scudder funds may not be
available for purchase or exchange. +A portion of the income from the tax-free
funds may be subject to federal, state, and local taxes. *A class of shares of
the Fund. **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 Kemper Investments, Inc., are traded on the New York Stock Exchange
and, in some cases, on various other stock exchanges.

29 - Scudder Balanced Fund

<PAGE>

Scudder Solutions
<TABLE>
<CAPTION>

Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy

A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.

Automatic Dividend Transfer Payroll Deduction and Direct Deposit

The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).

Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.

Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.

Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell

You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.

DistributionsDirect

Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.

30 - Scudder Balanced Fund
<PAGE>

Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder

Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 6,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.

Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.

Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.

For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center

For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York

</TABLE>

31 - Scudder Balanced Fund
<PAGE>
About the Fund's Adviser

Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.

Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.

Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.

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

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

SCUDDER

[LOGO]
<PAGE>

Scudder
Income
Fund

Annual Report
December 31, 1997

Pure No-Load(TM) Funds

Seeks 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.

SCUDDER (logo)

<PAGE>

Scudder Income Fund
- --------------------------------------------------------------------------------
Date of Inception: 4/24/28 Total Net Assets as of Ticker Symbol: SCSBX
12/31/97: $695.3 million
- --------------------------------------------------------------------------------

o The environment for fixed income investors was generally favorable in 1997.
Scudder Income Fund earned an 8.66% total return for the 12-month period ended
December 31, 1997.

o A healthy U.S. economy, benign inflation, and worries over the Asian crisis
caused bonds to rally from May through the end of the year.

o The Fund pursued a barbelled maturity strategy for most of the year,
emphasizing securities with long and short maturities.

o In the second half of the year, Fund strategy shifted to longer maturities to
take advantage of rising bond prices.

o The Fund maintained its 4 star rating from Morningstar for its risk-adjusted
performance among 1,371 taxable bond funds as of December 31, 1997.^1

Table of Contents

3 Letter from the Fund's President 19 Notes to Financial Statements
4 Performance Update 23 Report of Independent Accountants
5 Portfolio Summary 24 Tax Information
6 Portfolio Management Discussion 25 Shareholder Meeting Results
10 Glossary of Investment Terms 28 Officers and Trustees
11 Investment Portfolio 29 Investment Products and Services
15 Financial Statements 30 Scudder Solutions
18 Financial Highlights

^1 Source: Morningstar. Ratings are subject to change monthly and are
calculated from the Fund's 3-, 5-, and 10-year average annual returns in
excess of 90-day Treasury bill returns with appropriate fee adjustments,
and a risk factor that reflects Fund performance below 90-day T-bill
returns. In an investment category, the top 10% of funds receive 5 stars
and the next 22.5% receive 4 stars. In the taxable bond category, the Fund
received a 4 star rating for the three-year period, a 3 star rating for the
five-year period, and a 4 star rating for the ten-year period among 1371,
771, and 323 funds, respectively. Past performance is no guarantee of
future results.

2 - Scudder Income Fund

<PAGE>

Letter from the Fund's President

Dear Shareholders,

The environment for domestic equity investors, which had been so favorable
for most of the last seven years, became unsettled in the second half, as
concern mounted over slowing corporate profit growth rates and the currency
crisis in Asia. Increasingly, investors began to see the value of the relatively
steady income and price stability of fixed income investments. The Fund
especially benefited as interest rates declined and bond prices rose from May
through the end of the year.

In our last few reports to shareholders we have discussed the importance of
a fixed income component as part of a well balanced investment program. As a
current shareholder of Scudder Income Fund, I suspect you are already familiar
with these benefits, which have become particularly valuable in this period of
increased volatility for equity securities. Your Fund's manager discusses the
market environment and recent investment strategy in more detail beginning on
page 6.

As you may know, the Fund's investment adviser has changed its name to
Scudder Kemper Investments, Inc. from Scudder, Stevens & Clark, Inc., reflecting
the acquisition of a majority interest in Scudder by Zurich Insurance Company,
and the combining of Scudder's business with that of Zurich Kemper Investments,
Inc. In addition, the Fund has added two members to its management team
effective January 1, 1998 -- portfolio managers Kelly Babson and Robert Cessine.
We think their extensive knowledge and expertise will be an asset to the Fund.

For those of you who are interested in new Scudder products, we introduced
a new industry sector fund in November, Scudder Financial Services Fund, one of
Scudder's Choice Series sector funds. This Fund seeks long-term growth by
investing in financial services companies in the U.S. and abroad. In addition,
two other Choice Series funds will be launched on March 2: Scudder Health Care
Fund, seeking long-term growth from health care companies located around the
world, and Scudder Technology Fund, pursuing long-term growth by investing in
companies that develop, produce, or distribute technology. For further
information on these new funds, please call 1-800-225-2470.

Thank you for your continued investment in Scudder Income Fund. If you have
any questions about your account, please call Scudder Investor Relations at the
toll-free number above, or visit our web site at http://funds.scudder.com.

Sincerely,

/s/Daniel Pierce

Daniel Pierce
President,
Scudder Income Fund

3 - Scudder Income Fund

<PAGE>

PERFORMANCE UPDATE as of December 31, 1997
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/97 $10,000 Cumulative Annual
- ---------------------------------------
SCUDDER INCOME FUND
- ---------------------------------------
1 Year $ 10,866 8.66% 8.66%
5 Year $ 14,333 43.33% 7.46%
10 Year $ 23,872 138.72% 9.09%

- ---------------------------------------
LB AGGREGATE BOND INDEX
- ---------------------------------------
1 Year $ 10,967 9.67% 9.67%
5 Year $ 14,345 43.45% 7.48%
10 Year $ 24.057 140.57% 9.17%

- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------

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
- ----------------------
'87 $10,000
'88 $10,891
'89 $12,279
'90 $13,301
'91 $15,604
'92 $16,655
'93 $18,751
'94 $17,921
'95 $21,244
'96 $21,969
'97 $23,872

LB AGGREGATE BOND INDEX
Year Amount
- ----------------------
'87 $10,000
'88 $10,789
'89 $12,357
'90 $13,461
'91 $15,614
'92 $16,771
'93 $18,406
'94 $17,869
'95 $21,170
'96 $21,935
'97 $24,057

The unmanaged 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.

- -----------------------------------------------------------------
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>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 12.41 $ 12.89 $ 12.82 $ 13.91 $ 13.48 $ 13.71 $ 12.32 $ 13.61 $ 13.15 $ 13.46
INCOME DIVIDENDS.. $ 1.07 $ 1.06 $ 1.03 $ .92 $ .93 $ .87 $ .76 $ .86 $ .81 $ .79
CAPITAL GAINS AND
PAID-IN CAPITAL
DISTRIBUTIONS..... $ -- $ -- $ 0.06 $ .14 $ .40 $ .57 $ .02 $ .09 $ .09 $ .01
FUND TOTAL
RETURN (%)........ 8.91 12.75 8.32 17.32 6.74 12.58 -4.43 18.54 3.41 8.66
INDEX TOTAL
RETURN (%)........ 7.88 14.53 8.96 16.00 7.40 9.75 -2.92 18.47 3.63 9.67
</TABLE>

4 - Scudder Income Fund

<PAGE>
PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Corporate Bonds 38%
Cash Equivalents 18%
U.S. Gov't Agency Pass-thrus 17%
U.S. Treasury Obligations 13%
Asset Backed Securities 8%
Foreign Bonds -
U.S. $ Denominated 5%
Other 1%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

The Fund's emphasis on corporates
and de-emphasis on mortgages was
a significant contributor to
performance for much of the year.
- ---------------------------------------------------------------------------
QUALITY
- ---------------------------------------------------------------------------
AAA* 55%
A 11%
BBB 15%
BB 7%
B 10%
NR 2%
- --------------------------------------
100%
- --------------------------------------
*Category includes cash equivalents

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

The portfolio maintained its high
average quality rating of AA.

- ---------------------------------------------------------------------------
EFFECTIVE MATURITY
- ---------------------------------------------------------------------------
Less than 1 year 23%
1 - 5 years 18%
5 - 8 years 22%
8 - 15 years 12%
Greater than 15 years 25%
- --------------------------------------
100%
- --------------------------------------
Weighted average effective maturity: 10 years

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

Duration was kept close to the
Fund's benchmark index until the
fourth quarter when it was
lengthened to take advantage of
declining interest rates.

For more complete details about the Fund's investment portfolio,
see page 11. A monthly Investment Portfolio Summary and quarterly Portfolio
Holdings are available upon request.

5 - Scudder Income Fund

<PAGE>
Portfolio Management Discussion

An Interview with Stephen A. Wohler
Lead Portfolio Manager,
Scudder Income Fund

Q: How would you characterize the environment for fixed income investors for the
12-month period ended December 31, 1997?

A: Overall, this has been a good period for bond investors, as a combination of
solid economic growth and low inflation generally caused bond yields to decline,
and (due to the inverse relationship of yields to prices) bond prices to rise.
The yield on the benchmark U.S. Treasury bond reflected this environment,
beginning the year at 6.64%, peaking at about 7.20% in April, and declining to
5.92% by the close of the period. Bond holders received not only interest, but
also some price appreciation over the year. And, we think any year that
investors receive more than just the interest is a pretty good year.

Q: The first half of 1997 was significantly different than the second half. Tell
us what factors influenced the bond market early in the year.

A: In the first half of the year, the U.S. economy was operating at nearly
breakneck speed. Gross domestic product (GDP) (a widely recognized measure of
economic growth) chimed in at 4.9% for the first quarter and 3.3% in the second
quarter, well above its normal level. The reports of strong growth had bond
investors and the Federal Reserve (Fed) worried. If growth is too strong, the
thinking goes, inflation will accelerate. Inflation, as you know, is bad news
for bonds because it reduces an existing bond's net yield. As a result of the
growth worries, the Fed attempted to slow the economy by raising the Fed funds
rate (a key short-term interest rate) by one quarter of one percent in March,
sending bond prices lower. Because such actions by the Fed typically are
followed by additional rate changes in the same direction, bond investors
remained concerned about the possibility of further rate hikes during the second
quarter.

Q: The 30-year Treasury bond yield peaked above 7% in April and proceeded to
decline for the rest of the year. What changed?

A: A number of factors cooled interest rates. The subsequent rate hikes by the
Fed that many expected never materialized, primarily because the economy
appeared to be slowing from the rapid pace set during the first half of the
year. In addition, economic reports continued to show no signs of a pickup in
inflation. Many analysts questioned these reports because it's been a long time
since we have had a period of strong growth without accelerating inflation. As
the year progressed, further evidence suggested that technology and productivity
improvements were responsible for much of the "growth without inflation"
scenario. Finally, corporations were beginning to see the payoff from years of
investment in technology and computer systems. In addition, the currency crisis
which began with the devaluation of the Thai baht in July, spread to other
Southeast Asian countries, resulting in serious damage to the currencies and
financial markets there during the second half of the year.

Q: How did this affect the U.S. bond market?

A: Well, the crisis sent many foreign investors looking for a safe haven and a
stable currency. U.S. bonds were a popular choice, especially given the recent

6 - Scudder Income Fund

<PAGE>

strong performance of the dollar. The crisis also had implications for U.S.
multinational corporations with earnings dependent on trade with Asia or
operations in the region. While the actual effects on profits are still being
sorted out, Asia's difficulties cast further doubt on the ability of many U.S.
companies to sustain profit growth rates. U.S. stock market investors didn't
like the implications, which resulted in sharp declines in August and October.
With any lingering concerns about accelerating inflation diminished, the U.S.
bond market continued to rally.

Q: What about the shrinking federal budget deficit? Has it had a positive effect
on the bond market?

A: The shrinking deficit is having a significant long-term effect on the bond
market. With a strong economy, the Treasury has been awash in tax receipts.
Higher tax receipts mean less borrowing by the federal government and,
subsequently, a shortage of bonds. The size of Treasury auctions has declined,
and with fewer new securities offered, the demand for income-earning
dollar-based assets has been more than sufficient.

Q: How did the Fund perform over the 12-month period ended December 31, 1997?

A: The Fund returned 8.66%, which is essentially in line with the 9.67% return
of the unmanaged Lehman Aggregate Bond Index. The Fund's total return reflects
an increase in its net asset value from $13.15 on December 31, 1996 to $13.46 on
December 31, 1997, an income distribution of $0.79 per share and a capital gain
distribution of $0.01 per share.

THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE

LINE CHART TITLE:

The Interest Rate Picture
December 1990 through December 1997

LINE CHART DATA:

30-year 10-year 5-year 1-year
Treasury Treasury Treasury Treasury
-------- -------- -------- --------

12/90 8.25% 8.07% 7.68% 6.76%
8.23 8.04 7.73 6.25
8.42 8.24 7.91 6.31
7.81 7.46 6.91 5.40
12/91 7.40 6.70 5.93 4.09
7.96 7.53 6.93 4.52
7.79 7.13 6.28 4.05
7.38 6.36 5.33 3.06
12/92 7.39 6.69 6.04 3.59
6.92 6.03 5.23 3.28
6.68 5.78 5.05 3.43
6.04 5.39 4.78 3.38
12/93 6.34 5.79 5.20 3.60
7.13 6.78 6.24 4.42
7.63 7.34 6.96 5.50
7.82 7.60 7.28 5.95
12/94 7.89 7.83 7.83 7.17
7.43 7.20 7.07 6.50
6.63 6.21 5.97 5.62
6.49 6.16 6.02 5.64
12/95 5.96 5.58 5.40 5.15
6.68 6.34 6.09 5.39
6.90 6.72 6.49 5.69
6.93 6.71 6.46 5.70
12/96 6.64 6.42 6.21 5.48
7.10 6.92 6.77 5.93
6.79 6.51 6.38 5.66
6.41 6.11 6.00 5.46
12/97 5.93 5.75 5.71 5.48

The Treasury bond yields trended lower from May through the end of the year
resulting in a rally in bond prices.

Q: What was your investment strategy?

A: We managed the portfolio actively throughout the 12 months, seeking to
capitalize on shifts in relative valuation among the Treasury, mortgage, and
corporate bond sectors. Given the uncertainties surrounding the level of
economic growth and inflation over the first half of the year, we maintained a
neutral portfolio duration compared to the Fund's benchmark, the Lehman
Aggregate Bond Index. Instead, we focused on sector allocations. We
de-emphasized mortgage securities (which typically have intermediate term (3-5
year) maturities), and

7 - Scudder Income Fund
<PAGE>

increased our "barbelled" maturity strategy by adding to holdings at the short
and long ends of the maturity spectrum. The barbelled strategy made a neutral
contribution to performance during the first half of the year.

As the Asian crisis deepened and reports of accelerating inflation remained
nonexistent, we lengthened the portfolio's duration slightly to take advantage
of declining interest rates and rising bond prices. At the end of the period,
the Fund's duration was 4.9 years, up from 4.6 years six months ago and slightly
above the 4.8 year duration of a year ago.

Q: How were portfolio assets allocated?

A: The Fund's portfolio was well diversified, with representation from many
different segments of the fixed income market. The only area that we slightly
overweighted was REITs (real estate investment trusts). REITs performed in line
with other financial issues for most of the year, but held back performance
somewhat in the fourth quarter. Their weakness was offset by strong performance
from several corporate issues, especially Time Warner and TCI.

Q: Corporate bonds comprised the largest sector of the portfolio. How did they
perform?

A: Corporates were good issues to hold during the first nine months of the year.
However, they underperformed during the last quarter as rates declined and
Treasuries (the most interest rate sensitive issues) shot up. In the first half
of the year we trimmed our holdings of investment grade corporate bonds in favor
of selected high yield bonds, which performed quite well. High yield bonds
benefited from the strong economy and solid

8 - Scudder Income Fund

<PAGE>

demand from investors seeking a yield advantage in today's relatively low rate
environment. These bonds typically offer some of the highest yields, reduced
exposure to changes in interest rates, and diversification. We were selective in
our additions here, preferring to "cherry pick" bonds issued by established
companies with viable operations that we believed had the potential for credit
quality upgrades. Even with limited holdings of high yield bonds, the Fund still
maintained its high average quality rating of AA .

Q: In your June 30 report, you were underweighting mortgages. Did you continue
this theme over the last six months?

A: We continued to de-emphasize mortgages over the last six months of the year,
as rates declined and individuals continued to refinance mortgages. As you
probably know, refinancing has become increasingly easy such that every time
rates drop, mortgage securities are immediately repaid and replaced with lower
yielding issues. This activity has limited the upside potential of many mortgage
securities.

Q: What is your outlook?

A: We expect interest rates to trend downward in the months ahead. Inflation
remains low, and slowing corporate profit growth and uncertainty in Asia provide
few reasons to expect rising interest rates. In this environment, we plan to
continue with our diversified approach, while emphasizing securities that can
add incremental value to the Fund's consistent long term record.

Scudder Income Fund:
A Team Approach to Investing

Scudder Income Fund is managed by a team of Scudder Kemper Investments, Inc.
(SKI) 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. They are supported by a large staff of
economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging SKI's extensive resources.

Lead Portfolio Manager Stephen A. Wohler joined the team in 1994 and is also
responsible for implementing the Fund's strategy. Steve has over 17 years'
experience managing fixed-income investments and has been with SKI since 1979.
William M. Hutchinson, Portfolio Manager, has been responsible for the Fund's
day-to-day operations and overall investment strategy since he joined SKI in
1986. Bill has over 20 years of investment experience.

9 - Scudder Income Fund

<PAGE>

Glossary of Investment Terms

BOND RATING Many corporate bonds are rated according to
their likelihood of default by nationally
recognized statistical rating organizations
(NSROs) such as Moody's Investor Service,
Fitch Investor Service, or Standard and
Poor's Corporation. Bonds with high quality
ratings are considered among the most
financially sound and enable the issuer to
issue the bond at a lower interest rate than
lower-rated issuers.

FED FUNDS RATE An important short term interest rate charged
by banks with excess reserves at the Federal
Reserve district bank to other banks needing
overnight loans to meet reserve requirements.
Distinct from the "Discount Rate" which is
the rate the Federal Reserve charges member
banks for loans. Banks set their rates at a
level above the Discount Rate.

GDP, PPI Gross Domestic Product and the Producer Price
Index are commonly referenced measures of the
health of the U.S. economy. Too strong
economic growth can lead to accelerating
inflation (the Consumer Price Index [CPI] is
a measure of inflation); weak growth can lead
to a recession.

30-DAY SEC YIELD The standard yield reference for bond funds
since the SEC required all bond funds to
quote yields based on a prescribed formula.
This yield calculation reflects the 30-day
average of the net annualized income earnings
capability of every holding in a given fund's
portfolio, assuming each is held to maturity.

(Sources: SKI; Barron's Dictionary of Finance and Investment Terms)

10 - Scudder Income Fund

<PAGE>
Investment Portfolio as of December 31, 1997

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements 6.3%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreement with Salomon Brothers dated 12/31/97 at 6.7%,
to be repurchased at $43,313,116 on 1/2/98, collateralized by a ------------
$46,085,000 U.S. Treasury Bill, 10/15/98 (Cost $43,297,000) ........................... 43,297,000 43,297,000
------------
Commercial Paper 11.8%
- ------------------------------------------------------------------------------------------------------------------------------
Ciesco L.P., 6.02%, 1/9/98 .............................................................. 20,000,000 19,973,333
Ford Motor Credit Co., 6.13%, 1/2/98 .................................................... 30,000,000 29,994,900
JP Morgan, 5.8%, 1/8/98 ................................................................. 31,000,000 30,965,039
- ------------------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost $80,933,272) 80,933,272
- ------------------------------------------------------------------------------------------------------------------------------

U.S. Treasury Obligations 13.3%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond, 6.25%, 8/15/23 ...................................................... 10,000,000 10,300,000
U.S. Treasury Note, 6.875%, 7/31/99 ..................................................... 13,000,000 13,231,530
U.S. Treasury Note, 5.875%, 11/15/99 .................................................... 22,000,000 22,078,980
U.S. Treasury Note, 5.625%, 12/31/99 .................................................... 10,000,000 9,995,300
U.S. Treasury Note, 6.25%, 1/31/02 ...................................................... 20,000,000 20,356,200
U.S. Treasury Note, 6.25%, 2/15/07 ...................................................... 5,000,000 5,159,350
U.S. Treasury Separate Trading Registered Interest and Principal,
Principal only, 11/15/18 .............................................................. 35,000,000 9,978,500
- ------------------------------------------------------------------------------------------------------------------------------
Total U. S. Treasury Obligations (Cost $89,065,755) 91,099,860
- ------------------------------------------------------------------------------------------------------------------------------

U. S. Government Agency Pass-thrus 14.1%
- ------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association, 8% with various maturities to 12/1/09 ............ 13,665,549 14,062,534
Federal National Mortgage Association, 7% with various maturities to 8/1/26 ............. 58,647,792 59,271,419
Government National Mortgage Association Pass-thru, 10% with various
maturities to 2/15/25 ................................................................. 11,508,326 12,797,949
Government National Mortgage Association Pass-thru, 7.5% with
various maturities to 11/15/27 ........................................................ 9,892,911 10,134,001
- ------------------------------------------------------------------------------------------------------------------------------
Total U. S. Government Agency Pass-thrus (Cost $93,660,029) 96,265,903
- ------------------------------------------------------------------------------------------------------------------------------

Collateralized Mortgage Obligations 2.7%
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 7.78% with various maturities to 9/1/24 ------------
(Cost $18,588,110) .................................................................... 17,782,347 18,588,065
------------

Foreign Bonds - U. S.$ Denominated 5.0%
- ------------------------------------------------------------------------------------------------------------------------------
Fage Dairy Industry SA, 9%, 2/1/07 ...................................................... 14,000,000 13,615,000
Hutchison Whampoa, Ltd., 7.5%, 8/1/27 ................................................... 10,000,000 8,950,000
ITT Publimedia BV, 9.375%, 9/15/07 ...................................................... 2,000,000 2,100,000
Petroleos Mexicanos S.A., 8.85%, 9/15/07 ................................................ 5,000,000 4,937,500
State Development Institute of Hungary, 10.5%, 8/31/00 .................................. 4,425,000 4,856,438
- ------------------------------------------------------------------------------------------------------------------------------
Total Foreign Bonds - U. S.$ Denominated (Cost $35,360,213) 34,458,938
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

11 - Scudder Income Fund
<PAGE>

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Asset Backed 8.2%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automobile Receivables 1.5%
Premier Auto Trust Asset Backed Certificate Series 1996-3 A4, 6.75%, 11/6/00 ............ 10,000,000 10,106,200
------------
Credit Card Receivables 3.5%
Advanta Corp. Series 1997-1 A4, 7.65%, 5/25/27 .......................................... 8,000,000 8,300,000
Sears Credit Account Master Trust, Series 1995-A4, 6.25%, 1/15/03 ....................... 15,500,000 15,514,415
------------
23,814,415
------------
Home Equity Loans 0.0%
Fleet Financial Home Equity Trust Series 1991-2A, 6.7%, 10/15/06 ........................ 244,176 244,710
------------
Manufactured Housing Receivables 3.2%
Green Tree Financial Corp. Series 1995-1 B2, 9.2%, 6/15/25 .............................. 8,071,000 8,801,804
Green Tree Financial Corp. Series 1997-1 B2, 7.76%, 3/15/28 ............................. 4,250,000 4,295,820
Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D, 9.85%, 7/15/11 ............... 8,500,000 8,855,895
------------
21,953,519
- ------------------------------------------------------------------------------------------------------------------------------
Total Asset Backed (Cost $54,560,229) 56,118,844
- ------------------------------------------------------------------------------------------------------------------------------

Corporate Bonds 38.0%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Staples 1.3%
Borden Inc., 7.875%, 2/15/23 ............................................................ 5,000,000 5,030,900
Polymer Group, Inc., 9%, 7/1/07 ......................................................... 4,000,000 4,000,000
------------
9,030,900
------------
Health 0.5%
Tenet Healthcare Corp., 8.625%, 1/15/07 ................................................. 3,000,000 3,097,500
------------
Financial 15.7%
American Health Properties, Inc. (REIT), 7.5%, 1/15/07 .................................. 3,000,000 3,126,780
Bank United Financial Corp., 10.25%, 12/31/26 ........................................... 4,500,000 4,635,000
Bay View Capital Corp., 9.125%, 8/15/07 ................................................. 2,500,000 2,575,000
Commerce Bancorporation, 11.75%, 6/6/27 ................................................. 6,200,000 6,572,000
ERP Operating L.P. Note (REIT), 7.57%, 8/15/26 .......................................... 2,200,000 2,339,172
First Union Capital II, 7.85%, 1/1/27 ................................................... 15,000,000 15,515,250
Ford Motor Credit Co., 6.25%, 2/26/98 ................................................... 5,000,000 5,001,300
Ford Motor Credit Co. Global Note, 5.625%, 12/15/98 ..................................... 10,000,000 9,964,000
Highwoods/Forsyth L.P. (REIT), 7%, 12/1/06 .............................................. 8,000,000 8,055,200
People's Heritage Bank, 9.06%, 2/1/27 ................................................... 6,750,000 7,450,313
Security Capital Industrial Trust (REIT), 7.81%, 2/1/15 ................................. 4,500,000 4,704,300
Spieker Properties, Inc. (REIT), 7.875%, 12/1/16 ........................................ 5,000,000 5,373,550
Spieker Properties, Inc. (REIT), 7.5%, 10/1/27 .......................................... 5,000,000 5,061,250
</TABLE>

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

12 - Scudder Income Fund
<PAGE>

<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Susa Partnership L.P. (REIT), 8.2%, 6/1/17 .............................................. 10,000,000 10,892,100
US West Capital Funding Inc., 7.9%, 2/1/27 .............................................. 15,000,000 16,415,100
------------
107,680,315
------------
Media 5.0%
Lamar Advertising Co., 8.625%, 9/15/07 .................................................. 3,000,000 3,071,250
Outdoor Systems, Inc., 8.875%, 6/15/07 .................................................. 5,000,000 5,225,000
Tele-Communications, Inc., 8%, 8/1/05 ................................................... 11,000,000 11,787,930
Time Warner Inc., 9.125%, 1/15/13 ....................................................... 12,000,000 14,289,240
------------
34,373,420
------------
Service Industries 1.3%
SC International Services, Inc., 9.25%, 9/1/07 .......................................... 4,000,000 4,120,000
ServiceMaster L.P., 7.45%, 8/15/27 ...................................................... 5,000,000 5,195,650
------------
9,315,650
------------
Durables 1.8%
Tracor, Inc., 8.5%, 3/1/07 .............................................................. 12,000,000 12,120,000
------------
Manufacturing 1.7%
Mead Corp., 7.55%, 3/1/47 ............................................................... 11,000,000 11,791,230
------------
Technology 3.6%
Amphenol Corp., 9.875%, 5/15/07 ......................................................... 3,000,000 3,150,000
International Business Machines Corp., 7%, 10/30/45 ..................................... 15,000,000 15,364,650
Loral Corp., 8.375%, 6/15/24 ............................................................ 5,000,000 5,872,800
------------
24,387,450
------------
Energy 3.6%
Barrett Resources Corp., 7.55%, 2/1/07 .................................................. 5,500,000 5,690,465
Chesapeake Energy Corp., "B", 8.5%, 3/15/12 ............................................. 5,900,000 5,885,250
Ensco International Inc., 7.2%, 11/15/27 ................................................ 2,750,000 2,774,778
Lomak Petroleum, Inc., 8.75%, 1/15/07 ................................................... 10,000,000 10,100,000
------------
24,450,493
------------
Construction 1.1%
Nortek, Inc., 9.125%, 9/1/07 ............................................................ 3,500,000 3,552,500
Synthetic Industries, Inc., Series B, 9.25%, 2/15/07 .................................... 4,000,000 4,200,000
------------
7,752,500
------------
Transportation 0.8%
Atlantic Express, Inc., 10.75%, 2/1/04 .................................................. 5,000,000 5,312,500
------------
</TABLE>

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

13 - Scudder Income Fund
<PAGE>

Other 0.6%
- ------------------------------------------------------------------------------------------------------------------------------
------------
New Jersey Economic Development Authority, 7.425%, 2/15/29 (Cost $3,500,000) ............ 3,500,000 3,834,530
------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $667,133,974) (a) 685,067,479
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) The cost for federal income tax purposes was $667,133,974. At December 31,
1997, net unrealized appreciation for all securities based on tax cost was
$17,933,505. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $19,152,439 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,218,934.

Included in the portfolio are investments in mortgage or asset-backed securities
which are interests in separate pools of mortgages or assets. Effective
maturities of these investments will be shorter than stated maturities due to
prepayments.

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

14 - Scudder Income Fund
<PAGE>

Financial Statements

Statement of Assets and Liabilities
as of December 31, 1997
<TABLE>
<CAPTION>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investments, at market (identified cost $667,133,974) .............. $685,067,479
Cash ............................................................... 18,856
Interest receivable ................................................ 10,342,316
Receivable for Fund shares sold .................................... 1,596,772
Other receivables and assets ....................................... 473,223
----------------
Total assets ....................................................... 697,498,646
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed ................................... 1,329,635
Payable for daily variation margin on closed futures contracts ..... 46,260
Accrued management fee ............................................. 351,753
Other payables and accrued expenses ................................ 515,281
----------------
Total liabilities .................................................. 2,242,929
---------------------------------------------------------------------------------------------
Net assets, at market value $695,255,717
---------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation on investments ......................... 17,933,505
Accumulated net realized loss ...................................... (1,907,168)
Paid-in capital .................................................... 679,229,380
---------------------------------------------------------------------------------------------
Net assets, at market value $695,255,717
---------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($695,255,717 / 51,662,855 outstanding shares of beneficial ----------------
interest, $.01 par value, unlimited number of shares authorized) ... $13.46
----------------
</TABLE>

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

15 - Scudder Income Fund
<PAGE>

Statement of Operations
year ended December 31, 1997

<TABLE>
<CAPTION>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Income:
Interest ............................................................ $ 44,304,949
-----------------
Expenses:
Management fee ...................................................... 3,750,067
Services to shareholders ............................................ 3,048,479
Custodian and accounting fees ....................................... 148,997
Trustees' fees and expenses ......................................... 36,929
Reports to shareholders ............................................. 130,514
Auditing ............................................................ 44,928
Legal ............................................................... 19,999
Registration fees ................................................... 62,781
Other ............................................................... 25,605
-----------------
7,268,299
----------------------------------------------------------------------------------------------
Net investment income 37,036,650
----------------------------------------------------------------------------------------------

Realized and unrealized gain (loss) on investments
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ......................................................... 840,210
Futures ............................................................. (133,605)
-----------------
706,605
Net unrealized appreciation (depreciation) during the period on
investments ......................................................... 14,225,433
----------------------------------------------------------------------------------------------
Net gain on investments 14,932,038
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 51,968,688
----------------------------------------------------------------------------------------------
</TABLE>

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

16 - Scudder Income Fund
<PAGE>

Statements of Changes in Net Assets

<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Operations:
<S> <C> <C>
Net investment income ...................................... $ 37,036,650 $ 34,599,797
Net realized gain from investment transactions ............. 706,605 5,099,598
Net unrealized appreciation (depreciation) on investment
transactions during the period ........................... 14,225,433 (20,219,372)
--------------- ---------------
Net increase in net assets resulting from operations ....... 51,968,688 19,480,023
--------------- ---------------
Distributions to shareholders:
From net investment income ................................. (37,423,384) (35,051,118)
--------------- ---------------
From net realized gains .................................... (443,613) (3,898,759)
--------------- ---------------
Fund share transactions:
Proceeds from shares sold .................................. 288,306,064 167,697,618
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................ 33,681,717 34,318,821
Cost of shares redeemed .................................... (219,353,257) (182,294,031)
--------------- ---------------
Net increase in net assets from Fund share transactions .... 102,634,524 19,722,408
--------------- ---------------
Increase (decrease) in net assets .......................... 116,736,215 252,554
Net assets at beginning of period .......................... 578,519,502 578,266,948
Net assets at end of period (including undistributed net --------------- ---------------
investment income of $618,802 at December 31, 1996) ...... $695,255,717 $578,519,502
--------------- ---------------
Other Information
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................. 43,994,954 42,499,531
--------------- ---------------
Shares sold ................................................ 21,674,473 12,592,757
Shares issued to shareholders in reinvestment of
distributions ............................................ 2,533,020 2,612,478

Shares redeemed ............................................ (16,539,592) (13,709,812)
--------------- ---------------
Net increase in Fund shares ................................ 7,667,901 1,495,423
--------------- ---------------
Shares outstanding at end of period ........................ 51,662,855 43,994,954
--------------- ---------------
</TABLE>

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

17 - Scudder Income Fund
<PAGE>
Financial Highlights

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

<TABLE>
<CAPTION>
Years Ended December 31,
1997(a) 1996(a) 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning ----------------------------------------------------------------------------------------------
of period ......................... $13.15 $13.61 $12.32 $13.71 $13.48 $13.91 $12.82 $12.89 $12.41 $12.40
----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............... .80 .80 .83 .84 .90 .95 .93 1.03 1.05 1.07
Net realized and unrealized gain
(loss) on investments ............. .31 (.36) 1.41 (1.45) .77 (.05) 1.22 (.01) .49 .01
Total from investment ----------------------------------------------------------------------------------------------
operations ........................ 1.11 .44 2.24 (.61) 1.67 .90 2.15 1.02 1.54 1.08
----------------------------------------------------------------------------------------------
Less distributions:
From net investment income .......... (.79) (.81) (.86) (.76) (.87) (.93) (.92) (1.03) (1.06) (1.07)
From paid-in capital ................ -- -- -- -- -- -- -- (.06)(b) -- --
From net realized gains on
investment transactions ........... (.01) (.09) (.03) -- (.45) (.40) (.14) -- -- --
In excess of net realized gains ..... -- -- (.06) (.02) (.12) -- -- -- -- --
----------------------------------------------------------------------------------------------
Total distributions ................. (.80) (.90) (.95) (.78) (1.44) (1.33) (1.06) (1.09) (1.06) (1.07)
----------------------------------------------------------------------------------------------
Net asset value, end of ----------------------------------------------------------------------------------------------
period ............................ $13.46 $13.15 $13.61 $12.32 $13.71 $13.48 $13.91 $12.82 $12.89 $12.41
----------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (%) .................... 8.66 3.41 18.54 (4.43) 12.58 6.74 17.32 8.32 12.75 8.91
Ratios and Supplemental Data
Net assets, end of period
($ millions) ...................... 695 579 578 463 509 457 403 302 272 245
Ratio of operating expenses to
average daily net assets (%) ...... 1.18 .98 .99 .97 .92 .93 .97 .95 .93 .94
Ratio of net investment income to
average daily net assets (%) ...... 6.00 6.01 6.35 6.43 6.32 7.05 7.13 8.21 8.23 8.53
Portfolio turnover rate (%) ......... 61.9 66.9 128.3 60.3 130.6 121.3 109.6 48.0 63.2 19.6
</TABLE>

(a) Based on monthly average shares outstanding during the period.
(b) 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 International Revenue Code section 4982.

18 - Scudder Income Fund
<PAGE>

Notes to Financial Statements

A. Significant Accounting Policies

Scudder Income 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.

Security Valuation. Portfolio debt securities purchased with original 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. Money market investments purchased with an original
maturity of sixty days or less are valued at amortized cost. All other
securities are valued at their fair value as determined in good faith by the
Valuation Committee of the Board of Trustees.

Foreign Currency Translations. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:

(i) market value of investment securities, other assets and liabilities at the
daily rates of exchange, and

(ii) purchases and sales of investment securities, interest income and certain
expenses at the rates of exchange prevailing on the respective dates of
such transactions.

The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes in
market prices of the investments. Such fluctuations are included with the net
realized and unrealized gains and losses from investments.

Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on interest and
foreign withholding taxes.

Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the year ended
December 31, 1997, the Fund purchased interest rate futures to manage the
duration of the portfolio and sold interest rate futures to hedge against
declines in the value of portfolio securities.

Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are

19 - Scudder Income Fund
<PAGE>

recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.

Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.

Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. The Fund accordingly paid no federal income taxes and no federal
income tax provision was required. In addition, from November 1, 1997 through
December 31, 1997, the Fund incurred approximately $242,000 of net realized
capital losses. As permitted by tax regulations, the Fund intends to elect to
defer these losses and treat them as arising in the fiscal year ending December
31, 1998.

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 primarily
relate to investments in foreign denominated investments and futures. 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 identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting purposes.

Other. Investment security transactions are accounted for on a trade date basis.
Distributions to shareholders are recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. All original issue discounts are
accreted for both tax and financial reporting purposes.

B. Purchases and Sales of Securities

For the year ended December 31, 1997, purchases and sales of investment
securities (excluding short-term investments and direct U.S. Government
obligations) aggregated $300,292,671 and $200,552,686, respectively. Purchases
and sales of direct U.S. Government obligations aggregated $79,803,042 and
$118,890,856, respectively.

The aggregate face value of futures contracts opened and closed during the year
ended December 31, 1997 was $2,480,419,652.

20 - Scudder Income Fund
<PAGE>

C. Related Parties

Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.

Under the Management Agreement with Scudder Kemper, 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 Management Agreement. The
management fee payable under the Management Agreement is equal to an annual rate
of 0.65% on the first $200,000,000 of average daily net assets, 0.60% on the
next $300,000,000 of such net assets, and 0.55% of such net assets in excess of
$500,000,000, computed and accrued daily and payable monthly. For the year ended
December 31, 1997, the fee pursuant to these agreements amounted to $3,750,067,
which was equivalent to an annual effective rate of .61% of the Fund's average
daily net assets.

Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended December 31, 1997, the amount charged to the Fund by SSC aggregated
$787,239, of which $65,400 is unpaid at December 31, 1997.

Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the year ended December 31,
1997, the amount charged to the Fund by STC aggregated $1,641,229, of which
$162,040 is unpaid at December 31, 1997.

Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
December 31, 1997, the amount charged to the Fund by SFAC aggregated $91,363, of
which $7,208 is unpaid at December 31, 1997.

The Fund is one of several Scudder Funds (the "Underlying Funds") in which the
Scudder Pathway Series Portfolios (the "Portfolios") invest. In accordance with
the Special Servicing Agreement entered into by the Adviser, the Portfolios, the
Underlying Funds, SSC, SFAC, STC, and Scudder Investor Services, Inc., expenses
from the operation of the Portfolios are borne by the Underlying Funds based on
each Underlying Fund's proportionate share of assets owned by the Portfolios. No
Underlying Funds will be charged expenses that exceed the estimated savings to
each respective Underlying Fund. These estimated savings result from the
elimination of separate shareholder accounts which either currently are or have
potential to be invested in the Underlying Funds. For the year ended December
31, 1997, the Special Servicing Agreement expense charged to the Fund amounted
to $437,527.

21 - Scudder Income Fund
<PAGE>

22 - Scudder Income Fund
<PAGE>
Report of Independent Accountants

To the Trustees of Scudder Portfolio Trust and Shareholders of Scudder Income
Fund:

We have audited the accompanying statement of assets and liabilities of Scudder
Income Fund, including the investment portfolio, as of December 31, 1997, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the ten years in the period then ended.
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, 1997 by correspondence with the custodian. 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 Income Fund as of December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the ten years in
the period then ended, in conformity with generally accepted accounting
principles.

Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 23, 1998

23 - Scudder Income Fund
<PAGE>

Tax Information

Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$443,613 as a capital gain dividend for its year ended December 31, 1997.

24 - Scudder Income Fund

<PAGE>
Shareholder Meeting Results

A Special Meeting of Shareholders (the "Meeting") of Scudder Income Fund (the
"Fund") was held on October 24, 1997, at the office of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, Massachusetts 02110. At the Meeting, as adjourned and reconvened,
the following matters were voted upon by the shareholders (the resulting votes
for each matter are presented below). With regard to certain proposals, it was
recommended that the Meeting be reconvened in order to provide shareholders with
an additional opportunity to return their proxies. The date of the reconvened
meeting at which the matters were decided is noted after the proposed matter.

1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

24,473,428 807,496 563,326 1,103,741

2. To elect Trustees.

Number of Votes:
----------------

Trustee For Withheld
------- --- --------

Henry P. Becton, Jr. 25,169,514 674,736

Dawn-Marie Driscoll 25,166,017 678,233

Peter B. Freeman 25,166,380 677,870

George M. Lovejoy, Jr. 25,164,248 680,002

Dr. Wesley W. Marple, Jr. 25,144,761 699,489

Daniel Pierce 25,154,160 690,090

Kathryn L. Quirk 25,163,336 680,914

Jean C. Tempel 25,169,920 674,330

3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise. (Approved on December 2, 1997).

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

23,374,892 1,498,776 1,396,199 848,332

25 - Scudder Income Fund

<PAGE>

Number of Votes:
----------------

For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------

24,623,607 1,181,230 1,465,030 848,332

5. To approve the revision of certain fundamental investment policies.

<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------

<S> <C> <C> <C> <C>
5.1 Diversification 22,344,958 1,036,284 1,359,267 1,103,741

5.2 Borrowing 22,245,315 1,137,881 1,357,313 1,103,741

5.3 Senior securities 22,326,589 1,053,747 1,360,173 1,103,741

5.4 Concentration 22,300,948 1,078,891 1,360,670 1,103,741

5.5 Underwriting of securities 22,314,569 916,519 1,509,421 1,103,741

5.6 Investment in real estate 22,329,966 907,107 1,503,436 1,103,741

5.7 Purchase of physical commodities 22,299,452 941,489 1,499,568 1,103,741

5.8 Lending 22,319,531 917,617 1,503,361 1,103,741
</TABLE>

6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.

Number of Votes:
----------------

For Against Abstain
--- ------- -------

24,876,264 326,225 641,761

26 - Scudder Income Fund

<PAGE>

This Page
intentionally
left blank.

27 - Scudder Income Fund

<PAGE>

Officers and Trustees

Daniel Pierce*
President and Trustee

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

Dawn-Marie Driscoll
Trustee; President, Driscoll
Associates

Peter B. Freeman
Trustee; Corporate Director and
Trustee

George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates

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

Kathryn L. Quirk*
Trustee, Vice President and
Assistant Secretary

Jean C. Tempel
Trustee; Director, General
Partner, TL Ventures

Kelly D. Babson*
Vice President

Jerard K. Hartman*
Vice President

William M. Hutchinson*
Vice President

Thomas W. Joseph*
Vice President

Valerie F. Malter*
Vice President

Thomas F. McDonough*
Vice President, Secretary and
Treasurer

John R. Hebble*
Assistant Treasurer

Caroline Pearson*
Assistant Secretary

*Scudder Kemper Investments, Inc.

28 - Scudder Income Fund