SCUDDER PATHWAY SERIES /NEW/
485BPOS, 2000-12-29
Previous: HARTFORD LIFE INSURANCE CO SEPARATE ACCOUNT THREE, 485BPOS, EX-16, 2000-12-29
Next: SCUDDER PATHWAY SERIES /NEW/, 485BPOS, EX-99.A.5, 2000-12-29



        Filed electronically with the Securities and Exchange Commission
                             on December 29, 2000.

                                                              File No.  33-86070
                                                              File No.  811-8606

                       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. 11                   / X /
                                                      --
                                     and/or
                        REGISTRATION STATEMENT UNDER THE
                         INVESTMENT COMPANY ACT OF 1940                    /___/

                                Amendment No. 13                           / X /
                                              ---


                             Scudder Pathway Series
                             ----------------------
               (Exact Name of Registrant as Specified in Charter)

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

       Registrant's Telephone Number, including Area Code: (617) 295-2572
                                                           --------------

                                  John Millette
                        Scudder Kemper Investments, Inc.
                  Two International Place, Boston MA 02110-4103
                     (Name and Address of Agent for Service)

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

/___/  Immediately upon filing pursuant to paragraph  ( b )
/ X /  On December 29, 2000 pursuant to paragraph ( b )
/___/  60 days after filing pursuant to paragraph ( a ) ( 1 )
/___/  On ___________pursuant to paragraph ( a ) ( 1 )
/___/  75 days after filing pursuant to paragraph ( a ) ( 2 )
/___/  On ___________ pursuant to paragraph ( a ) ( 2 ) of Rule 485.

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




<PAGE>

                                                                    SCUDDER
                                                                INVESTMENTS (SM)
                                                                     [LOGO]


-----------------------
ASSET ALLOCATION
-----------------------

Class AARP and Class S Shares

Scudder
Pathway Series

Conservative Portfolio

Moderate Portfolio
(formerly known as Balanced Portfolio)

Growth Portfolio



Prospectus
December 29, 2000


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


<PAGE>


Contents
--------------------------------------------------------------------------------

   How the Portfolios Work              How to Invest in the Portfolios

     4  Conservative Portfolio           22  How to Buy, Sell and Exchange
                                             Class AARP Shares
     8  Moderate Portfolio
                                         24  How to Buy, Sell and Exchange
    12  Growth Portfolio                     Class S Shares

    16  Other Policies and Risks         26  Policies You Should Know
                                             About
    17  Who Manages and Oversees
        the Portfolios                   30  Understanding Distributions
                                             and Taxes
    18  Financial Highlights


<PAGE>


  How the Portfolios Work

  These portfolios use an asset allocation strategy, dividing their assets among
  different types of investments. All three portfolios invest in other Scudder
  funds. Each portfolio is designed for investors with a particular time horizon
  or risk profile, and invests in a distinct mix of funds. Because the
  underlying funds hold a range of securities, an investment in a portfolio may
  offer exposure to thousands of individual securities.

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

  This prospectus offers two classes of shares for each of the portfolios
  described. Class AARP shares have been created especially for AARP members.
  Class S shares are generally not available to new investors. Unless otherwise
  noted, all information in this prospectus applies to both classes.

  You can find prospectuses on the Internet for Class AARP shares at
  aarp.scudder.com and for Class S shares at www.scudder.com.



<PAGE>


--------------------------------------------------------------------------------
                                                      |  Class AARP     Class S
                                       ticker symbol  |  APWCX          SCPCX
                                         fund number  |  180            080

Conservative Portfolio
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The portfolio seeks current income and, as a secondary objective, long-term
growth of capital. It does this by investing mainly in other Scudder mutual
funds.

The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.

The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.

The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.

The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

ASSET ALLOCATION

The portfolio's target allocation is as follows:

A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.

60% Bond funds
40% Equity funds

Bond funds        50%-70%

Equity funds      30%-50%



                                       4
<PAGE>

Main Risks of Investing in the Fund

There are several risk factors that could hurt the portfolio's performance,
cause you to lose money or make the portfolio perform less well than other
investments.

Bonds could be hurt by rises in market interest rates. (As a general rule, a 1%
rise in interest rates means a 1% fall in value for every year of duration.)
Some bonds could be paid off earlier than expected, which would hurt the
portfolio's performance; with mortgage- or asset-backed securities, any
unexpected behavior in interest rates could increase the volatility of the
portfolio's share price and yield. Corporate bonds could perform less well than
other bonds in a weak economy.

The portfolio is also affected by how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Stock prices can be hurt by poor management, shrinking product demand,
and other business risks. These risks tend to be greater with smaller companies.

Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains.

Other factors that could affect performance include:

o        the managers of the portfolio or the underlying funds could be wrong in
         their analysis of economic trends, countries, industries, companies,
         the relative attractiveness of asset classes or other matters

o        a bond could fall in credit quality or go into default; this risk is
         greater with junk and foreign bonds

o        derivatives could produce disproportionate losses

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

This portfolio is designed for investors who have a time horizon of three to
five years and are interested in a relatively conservative asset allocation
investment.



                                       5
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the returns for the portfolio's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns of the portfolio's Class S shares and three
broad-based market indexes (which, unlike the portfolio, do not have any fees or
expenses). The performance of both the portfolio and each index varies over
time. All figures on this page assume reinvestment of dividends and
distributions.


Scudder Pathway Series: Conservative Portfolio
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                        Class S
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1997                                14.36
1998                                5.63
1999                                2.84


2000 Total Return as of September 30: 3.66%
Best Quarter: 7.47%, Q2 1997               Worst Quarter: -4.93%, Q3 1998


--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
                                            1 Year            Since Inception*
--------------------------------------------------------------------------------
Class S**                                    2.84                   7.61
--------------------------------------------------------------------------------
Index 1                                     -0.82                   5.25
--------------------------------------------------------------------------------
Index 2                                      4.91                   5.88
--------------------------------------------------------------------------------
Index 3                                     21.04                  25.90
--------------------------------------------------------------------------------
Index 4                                      4.74                   4.94
--------------------------------------------------------------------------------
Index 5                                     26.96                  14.81
--------------------------------------------------------------------------------

Index 1: Lehman Brothers Aggregate Bond Index, an unmanaged, market
value-weighted measure of U.S. Treasury and agency securities, corporate bond
issues and mortgage-backed securities.

Index 2: Treasury Bill 1-year.

Index 3: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.

Index 4: Treasury Bill 3-month.

Index 5: MSCI EAFE, an unmanaged capitalization-weighted measure of
international stock markets.

As of 12/29/2000, the portfolio adopted the Treasury Bill 3-month in place of
the Treasury Bill 1-year, as the Treasury Bill 3-month better represents the
portfolio's investments.

*        Fund inception: 11/15/96. Index comparisons begin 11/30/96.

**       Performance for Class AARP is not provided because this class does not
         have a full calendar year of performance.



                                       6
<PAGE>

How Much Investors Pay

The portfolio has no sales charge or other shareholder fees. The portfolio
expects to operate at a zero expense level. However, shareholders of either
Class AARP or Class S of the portfolio will indirectly bear that portfolio's pro
rata share of fees and expenses incurred by the underlying Scudder funds in
which the portfolio is invested.


--------------------------------------------------------------------------------
Fee Table (%)
--------------------------------------------------------------------------------

Range of Average Weighted Expense Ratio
--------------------------------------------------------------------------------
Conservative Portfolio                                0.59% to 1.01%
--------------------------------------------------------------------------------

The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Your
actual costs could be higher or lower than this example.


--------------------------------------------------------------------------------
Example                     1 Year        3 Years       5 Years       10 Years
--------------------------------------------------------------------------------
Conservative Portfolio        $82          $255           $444          $990
--------------------------------------------------------------------------------

The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions
and that you sold your shares at the end of each period.



                                       7
<PAGE>

--------------------------------------------------------------------------------
                                                      |  Class AARP     Class S
                                       ticker symbol  |  SPWBX          SPBAX
                                         fund number  |  181            081

Moderate Portfolio
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The portfolio seeks a balance of current income and growth of capital. It does
this by investing mainly in other Scudder mutual funds.

The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.

The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.

The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.

The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

ASSET ALLOCATION

The portfolio's target allocation is as follows: 60% Equity funds 40% Bond funds
The managers have the flexibility to adjust this allocation within the following
ranges:

Equity funds      50%-70%

Bond funds        30%-50%



                                       8
<PAGE>

Main Risks of Investing in the Fund

There are several risk factors that could hurt the portfolio's performance,
cause you to lose money, or make the portfolio perform less well than other
investments.

One of the most important factors is how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Stock prices can be hurt by poor management, shrinking product demand,
and other business risks. These risks tend to be greater with smaller companies.

Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains.

The portfolio is also affected by the performance of bonds, which could be hurt
by rises in market interest rates. (As a general rule, a 1% rise in interest
rates means a 1% fall in value for every year of duration.) Some bonds could be
paid off earlier than expected, which would hurt the portfolio's performance;
with mortgage- or asset-backed securities, any unexpected behavior in interest
rates could increase the volatility of the portfolio's share price and yield.
Corporate bonds could perform less well than other bonds in a weak economy.

Other factors that could affect performance include:

o        the managers of the portfolio or the underlying funds could be wrong in
         their analysis of economic trends, countries, industries, companies,
         the relative attractiveness of asset classes, or other matters

o        a bond could fall in credit quality or go into default; this risk is
         greater with junk and foreign bonds

o        derivatives could produce disproportionate losses

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

This fund is designed for investors who have a time horizon of five to ten years
and are interested in a balanced asset allocation investment.



                                       9
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the returns for the portfolio's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns of the portfolio's Class S shares and four
broad-based market indexes (which, unlike the portfolio, do not have any fees or
expenses). The performance of both the portfolio and each index varies over
time. All figures on this page assume reinvestment of dividends and
distributions.


Scudder Pathway Series: Moderate Portfolio
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                        Class S
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

1997                                13.33
1998                                7.64
1999                                16.66


2000 Total Return as of September 30: 0.56%
Best Quarter: 12.53%, Q4 1999                 Worst Quarter: -10.26%, Q3 1998


--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------

                                            1 Year            Since Inception*
--------------------------------------------------------------------------------
Class S**                                   16.66                  12.40
--------------------------------------------------------------------------------
Index 1                                     21.04                  25.90
--------------------------------------------------------------------------------
Index 2                                     26.96                  14.81
--------------------------------------------------------------------------------
Index 3                                     -0.82                   5.25
--------------------------------------------------------------------------------
Index 4                                     21.26                  13.65
--------------------------------------------------------------------------------
Index 5                                      4.74                   4.94
--------------------------------------------------------------------------------

Index 1: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.

Index 2: MSCI EAFE, an unmanaged capitalization-weighted measure of
international stock markets.

Index 3: Lehman Brothers Aggregate Bond Index, an unmanaged market
value-weighted measure of U.S. Treasury and agency securities, corporate bond
issues and mortgage-backed securities.

Index 4: Russell 2000 Index, an unmanaged measure of the 2000 companies that
typically have a market capitalization less than $2 billion.

Index 5: Treasury Bill 3-month.

*        Fund inception: 11/15/96. Index comparisons begin 11/30/96.

**       Performance for Class AARP is not provided because this class does not
         have a full calendar year of performance.



                                       10
<PAGE>

How Much Investors Pay

The portfolio has no sales charge or other shareholder fees. The portfolio
expects to operate at a zero expense level. However, shareholders of either
Class AARP or Class S of the portfolio will indirectly bear the portfolio's pro
rata share of fees and expenses incurred by the underlying Scudder funds in
which the portfolio is invested.


--------------------------------------------------------------------------------
Fee Table (%)
--------------------------------------------------------------------------------

Range of Average Weighted Expense Ratio
--------------------------------------------------------------------------------
Moderate Portfolio                                    0.73% to 1.11%
--------------------------------------------------------------------------------

The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Your
actual costs could be higher or lower than this example.

--------------------------------------------------------------------------------
Example                     1 Year        3 Years       5 Years       10 Years
--------------------------------------------------------------------------------
Moderate Portfolio            $94          $293           $509         $1,131
--------------------------------------------------------------------------------

The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions
and that you sold your shares at the end of each period.



                                       11
<PAGE>

--------------------------------------------------------------------------------
                                                      |  Class AARP     Class S
                                       ticker symbol  |  APWGX          SPGRX
                                         fund number  |  182            082

Growth Portfolio
--------------------------------------------------------------------------------

The Fund's Investment Strategy

The portfolio seeks long-term growth of capital. It does this by investing
mainly in other Scudder mutual funds.

The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.

The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.

The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.

The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

ASSET ALLOCATION

The portfolio's target allocation is as follows: 85% Equity funds 15% Bond funds
The managers have the flexibility to adjust this allocation within the following
ranges:

A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.

Equity funds       75%-95%

Bond funds          5%-25%



                                       12
<PAGE>

Main Risks of Investing in the Fund

There are several risk factors that could hurt the portfolio's performance,
cause you to lose money, or make the portfolio perform less well than other
investments.

One of the most important factors is how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Because a stock represents ownership in its issuer, stock prices can be
hurt by poor management, shrinking product demand, and other business risks.
These risks tend to be greater with smaller companies.

Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains. These
risks tend to be greater in emerging markets.

Because the portfolio invests some of its assets in bond funds, it may perform
less well in the long run than a fund investing entirely in stocks. At the same
time, the portfolio's bond component means that its performance could be hurt
somewhat by poor performance in the bond market.

Other factors that could affect performance include:

o        the managers of the portfolio or the underlying funds could be wrong in
         their analysis of economic trends, countries, industries, companies,
         the relative attractiveness of asset classes, or other matters

o        derivatives could produce disproportionate losses

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

This portfolio is designed for investors with a long-term time horizon -- ten
years or more -- who are interested in taking an asset allocation approach to
growth investing.



                                       13
<PAGE>

The Fund's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know.

The bar chart shows how the returns for the portfolio's Class S shares have
varied from year to year, which may give some idea of risk. The table shows
average annual total returns of the portfolio's Class S shares and five
broad-based market indexes (which, unlike the portfolio, do not have any fees or
expenses). The performance of both the portfolio and each index varies over
time. All figures on this page assume reinvestment of dividends and
distributions.


Scudder Pathway Series: Growth Portfolio
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year                        Class S
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:


         1997          14.93
         1998           9.60
         1999          35.24

2000 Total Return as of September 30: -2.27%
Best Quarter: 21.81%, Q4 1999                 Worst Quarter: -15.06%, Q3 1998

--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
                                            1 Year            Since Inception*
--------------------------------------------------------------------------------
Class S**                                   35.24                  19.24
--------------------------------------------------------------------------------
Index 1                                     33.16                  32.17
--------------------------------------------------------------------------------
Index 2                                     26.96                  14.81
--------------------------------------------------------------------------------
Index 3                                     21.26                  13.65
--------------------------------------------------------------------------------
Index 4                                     21.04                  25.90
--------------------------------------------------------------------------------
Index 5                                     -0.82                   5.25
--------------------------------------------------------------------------------

Index 1: Russell 1000 Growth Index, an unmanaged measure of 1000 companies with
higher price-to-book and higher forecasted growth values.

Index 2: MSCI EAFE, an unmanaged capitalization-weighted measure of
international stock markets.

Index 3: Russell 2000 Index, an unmanaged measure of the 2000 companies that
typically have a market capitalization less than $2 billion.

Index 4: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.

Index 5: Lehman Brothers Aggregate Bond Index, an unmanaged market
value-weighted measure of U.S. Treasury and agency securities, corporate bond
issues and mortgage backed securities.

As of 12/29/2000, the portfolio adopted the S&P 500 Index and the Lehman
Brothers Aggregate Bond Index in place of the Russell 1000 Growth Index, as the
S&P 500 Index and the Lehman Brothers Aggregate Bond Index better represent the
portfolio's investments.

*        Fund inception: 11/15/96. Index comparisons begin 11/30/96.

**       Performance for Class AARP is not provided because this class does not
         have a full calendar year of performance.




                                       14
<PAGE>

How Much Investors Pay

The portfolio has no sales charge or other shareholder fees. The portfolio
expects to operate at a zero expense level. However, shareholders of either
Class AARP or Class S of the portfolio will indirectly bear the portfolio's pro
rata share of fees and expenses incurred by the underlying Scudder funds in
which the portfolio is invested.


--------------------------------------------------------------------------------
Fee Table (%)
--------------------------------------------------------------------------------
Range of Average Weighted Expense Ratio
--------------------------------------------------------------------------------
Growth Portfolio                                      0.47% to 1.22%
--------------------------------------------------------------------------------

The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Your
actual costs could be higher or lower than this example.


--------------------------------------------------------------------------------
Example                     1 Year        3 Years       5 Years       10 Years
--------------------------------------------------------------------------------
Growth Portfolio              $86          $270           $470         $1,045
--------------------------------------------------------------------------------

The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions
and that you sold your shares at the end of each period.


                                       15
<PAGE>

Other Policies and Risks
While the portfolio-by-portfolio sections on the previous pages describe the
main points of each portfolio's strategy and risks, there are a few other issues
to know about:

o        Although major changes tend to be infrequent, a portfolio's Board could
         change that portfolio's investment goal without seeking shareholder
         approval.

o        As a temporary measure, any of these portfolios could shift up to 100%
         of their assets into investments such as money market securities. This
         could prevent losses, but would mean that the portfolio was not
         pursuing its goal.

o        While certain underlying funds are permitted to use various types of
         derivatives (contracts whose value is based on, for example, indices,
         currencies or securities), the managers of those funds don't intend to
         use them as principal investments, and may not use them at all.

For more information

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

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

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



                                       16
<PAGE>

Who Manages and Oversees the Portfolios

The investment advisor

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

The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.

The advisor does not receive any fees for managing the portfolios, but does
receive fees as investment advisor to each underlying fund.

The portfolio managers

The following people handle the day-to-day management of each portfolio.


Donald E. Hall                        Shahram Tajbakhsh
Lead Portfolio Manager                o Began investment career
 o Began investment career in 1982      in 1991
 o Joined the advisor in 1982         o Joined the advisor in 1996
 o Joined the fund team in 2000       o Joined the fund team in 1999

Maureen F. Allyn
 o Began investment career in 1989
 o Joined the advisor in 1989
 o Joined the fund team in 1996




                                       17
<PAGE>

Financial Highlights

These tables are designed to help you understand each portfolio's financial
performance. The figures in the first part of each table are for a single share.
The total return figures represent the percentage that an investor in a
particular portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested.

This information has been audited by PricewaterhouseCoopers LLP, whose report,
along with each portfolio's financial statements, is included in the portfolios'
annual report (see "Shareholder reports" on the back cover).

Effective September 25, 2000, existing shares of the Conservative Portfolio and
Growth Portfolio and effective October 2, 2000, existing shares of the Moderate
Portfolio were redesignated as Class S. Because Class AARP shares became
available September 25, 2000 for the Conservative Portfolio and Growth Portfolio
and October 2, 2000 for the Moderate Portfolio, there is no financial data for
these shares as of the date of this prospectus.

Scudder Pathway Series: Conservative Portfolio -- Class S

--------------------------------------------------------------------------------
Years Ended August 31,                      2000      1999     1998(b)   1997(c)
--------------------------------------------------------------------------------
Net asset value, beginning of period      $12.45    $12.28    $13.27    $12.00
--------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------
  Net investment income                   .65(a)    .57(a)    .51(a)       .39
--------------------------------------------------------------------------------
  Net realized and unrealized gain
  (loss) on investment transactions          .23       .36     (.63)      1.36
                                          --------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations           .88       .93     (.12)      1.75
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                    (.65)     (.55)     (.57)     (.33)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                             (.21)     (.21)     (.30)     (.15)
                                          --------------------------------------
--------------------------------------------------------------------------------
  Total distributions                      (.86)     (.76)     (.87)     (.48)
--------------------------------------------------------------------------------
Net asset value, end of period            $12.47    $12.45    $12.28    $13.27
                                          --------------------------------------
--------------------------------------------------------------------------------
Total Return (%) (d)                        7.39      7.62     (1.10)**  14.99**
--------------------------------------------------------------------------------

Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions)        29        28        29        17
--------------------------------------------------------------------------------
Ratio of expenses (%) (e)                     --        --        --        --
--------------------------------------------------------------------------------
Ratio of net investment income (%)          5.30      4.45      4.21*     3.67*
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                   26        28        32*       42*
--------------------------------------------------------------------------------


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

(b)      For the eleven months ended August 31, 1998. On August 12, 1998 the
         Trustees of the Portfolio changed the fiscal year end from September 30
         to August 31.

(c)      For the period November 15, 1996 (commencement of operations) to
         September 30, 1997.

(d)      Total return would have been lower if the advisor had not maintained
         some Underlying Funds' expenses.

(e)      This Portfolio invests in other Scudder Funds, and although the
         Portfolio did not incur any direct expenses for the period, the
         Portfolio did bear its share of the operating, administrative and
         advisory expenses of the Underlying Scudder Funds.

*        Annualized

**       Not annualized


                                       18
<PAGE>

Scudder Pathway Series: Moderate Portfolio-- Class S

--------------------------------------------------------------------------------
Years Ended August 31,                       2000     1999     1998(b)   1997(c)
--------------------------------------------------------------------------------
Net asset value, beginning of period       $13.42   $12.06    $13.56    $12.00
--------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------
  Net investment income                    .45(a)   .38(a)    .39(a)       .37
--------------------------------------------------------------------------------
  Net realized and unrealized gain (loss)
  on investment transactions                 1.60     1.79    (1.26)      1.59
                                           -------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations           2.05     2.17     (.87)      1.96
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                     (.48)    (.38)     (.42)     (.33)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                              (.69)    (.43)     (.21)     (.07)
                                           -------------------------------------
--------------------------------------------------------------------------------
  Total distributions                      (1.17)    (.81)     (.63)     (.40)
--------------------------------------------------------------------------------
Net asset value, end of period             $14.30   $13.42    $12.06    $13.56
                                           -------------------------------------
--------------------------------------------------------------------------------
Total Return (%) (d)                        15.65    18.27    (6.78)**  16.67**
--------------------------------------------------------------------------------

Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions)        258      247       222       192
--------------------------------------------------------------------------------
Ratio of expenses (%) (e)                      --       --        --        --
--------------------------------------------------------------------------------
Ratio of net investment income (%)           3.23     2.88     3.15*     2.96*
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                    28       24       28*       24*
--------------------------------------------------------------------------------

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

(b)      For the eleven months ended August 31, 1998. On August 12, 1998 the
         Trustees of the Portfolio changed the fiscal year end from September 30
         to August 31.

(c)      For the period November 15, 1996 (commencement of operations) to
         September 30, 1997.

(d)      Total return would have been lower if the advisor had not maintained
         some Underlying Funds' expenses.

(e)      This Portfolio invests in other Scudder Funds, and although the
         Portfolio did not incur any direct expenses for the period, the
         Portfolio did bear its share of the operating, administrative and
         advisory expenses of the Underlying Scudder Funds.

*        Annualized

**       Not annualized



                                       19
<PAGE>

Scudder Pathway Series: Growth Portfolio -- Class S

--------------------------------------------------------------------------------
Years Ended August 31,                       2000     1999     1998(b)   1997(c)
--------------------------------------------------------------------------------
Net asset value, beginning of period       $15.33   $12.17    $14.15    $12.00
--------------------------------------------------------------------------------
Income from investment operations:
--------------------------------------------------------------------------------
  Net investment income                    .29(a)   .18(a)    .23(a)       .29
--------------------------------------------------------------------------------
  Net realized and unrealized gain (loss)
  on investment transactions                 3.41     3.61    (1.74)      2.15
                                           -------------------------------------
--------------------------------------------------------------------------------
  Total from investment operations           3.70     3.79    (1.51)      2.44
--------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------
  Net investment income                     (.29)    (.20)     (.21)     (.16)
--------------------------------------------------------------------------------
  Net realized gains on investment
  transactions                              (.89)    (.43)     (.26)     (.13)
                                           -------------------------------------
--------------------------------------------------------------------------------
  Total distributions                      (1.18)    (.63)     (.47)     (.29)
--------------------------------------------------------------------------------
Net asset value, end of period             $17.85   $15.33    $12.17    $14.15
                                           -------------------------------------
--------------------------------------------------------------------------------
Total Return (%) (d)                        24.24    31.69    (10.94)** 20.79**
--------------------------------------------------------------------------------

Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net assets, end of period ($ millions)        128       94        64        50
--------------------------------------------------------------------------------
Ratio of expenses (%) (e)                      --       --        --        --
--------------------------------------------------------------------------------
Ratio of net investment income (%)           1.67     1.26     1.78*     2.09*
--------------------------------------------------------------------------------
Portfolio turnover rate (%)                    27       28       24*       15*
--------------------------------------------------------------------------------


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

(b)      For the eleven months ended August 31, 1998. On August 12, 1998, the
         Trustees of the Portfolio changed the fiscal year end from September 30
         to August 31.

(c)      For the period November 15, 1996 (commencement of operations) to
         September 30, 1997.

(d)      Total return would have been lower if the advisor had not maintained
         some Underlying Funds' expenses.

(e)      This Portfolio invests in other Scudder Funds, and although the
         Portfolio did not incur any direct expenses for the period, the
         Portfolio did bear its share of the operating, administrative and
         advisory expenses of the Underlying Scudder Funds.

*        Annualized

**       Not annualized


                                       20
<PAGE>

  How to Invest in the Portfolios

  The following pages tell you how to invest in these portfolios and what to
  expect as a shareholder. If you're investing directly with Scudder, all of
  this information applies to you.

  If you're investing through a "third party provider" -- for example, a
  workplace retirement plan, financial supermarket or financial advisor -- your
  provider may have its own policies or instructions, and you should follow
  those.

  As noted earlier, there are two classes of shares of each portfolio available
  through this prospectus. The instructions for buying and selling each class
  are slightly different.

  Instructions for buying and selling Class AARP shares, which have been created
  especially for AARP members, are found on the next two pages. These are
  followed by instructions for buying and selling Class S shares, which are
  generally not available to new investors. Be sure to use the appropriate table
  when placing any orders to buy, exchange or sell shares in your account.


                                       21
<PAGE>

How to Buy, Sell and Exchange Class AARP Shares

Buying Shares  Use these instructions to invest directly. Make out your check to
"The AARP Investment Program."

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
First investment                                             Additional investments
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>
$1,000 or more for regular accounts                          $50 or more with an Automatic Investment Plan, Payroll
                                                             Deduction or Direct Deposit
$500 or more for IRAs
-------------------------------------------------------------------------------------------------------------------------------
By mail

o For enrollment forms, call 1-800-253-2277                  Send a personalized investment slip or short note that
                                                             includes:
o Fill out and sign an enrollment form
                                                             o  fund and class name
o Send it to us at the appropriate address, along
  with an investment check                                   o  account number

                                                             o  check payable to "The AARP Investment Program"
-------------------------------------------------------------------------------------------------------------------------------
By wire

o Call 1-800-253-2277 for instructions                       o  Call 1-800-253-2277 for instructions
-------------------------------------------------------------------------------------------------------------------------------
By phone

--                                                           o  Call 1-800-253-2277 for instructions
-------------------------------------------------------------------------------------------------------------------------------
With an automatic investment plan

o  Fill in the information required on your                  o  To set up regular investments from a bank checking
  enrollment form and include a voided check                    account, call 1-800-253-2277 (minimum $50)
-------------------------------------------------------------------------------------------------------------------------------
Payroll Deduction or Direct Deposit

o Select either of these options on your                     o  Once you specify a dollar amount (minimum $50),
  enrollment form and submit it. You will receive               investments are automatic.
  further instructions by mail.
-------------------------------------------------------------------------------------------------------------------------------
Using QuickBuy

--                                                           o  Call 1-800-253-2277
-------------------------------------------------------------------------------------------------------------------------------
On the Internet

o Go to "services and forms-- How to Open an                 o  Call 1-800-253-2277 to ensure you have electronic
  Account" at aarp.scudder.com                                  services

o Print out a prospectus and an enrollment form              o  Register at aarp.scudder.com

o Complete and return the enrollment form with               o  Follow the instructions for buying shares with money
  your check                                                    from your bank account
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

--------------------------------------------------------------------------------
  Regular mail: The AARP Investment Program,
  First investment: PO Box 219735, Kansas City, MO 64121-9735
  Additional investments: PO Box 219743, Kansas City, MO 64121-9743

  Express, registered or certified mail:
  The AARP Investment Program, 811 Main Street, Kansas City, MO 64105-2005

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



                                       22
<PAGE>

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Exchanging into another fund                            Selling shares
--------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>
$1,000 or more to open a new account ($500 or           Some transactions, including most for over $100,000,
more for IRAs)                                          can only be ordered in writing; if you're in
                                                        doubt, see page 28
--------------------------------------------------------------------------------------------------------------------------
By phone

o Call 1-800-253-2277 for instructions                  o  Call 1-800-253-2277 for instructions
--------------------------------------------------------------------------------------------------------------------------
Using Easy-Access Line

o Call 1-800- 631-4636 and follow the                   o  Call 1-800-631-4636 and follow the instructions
  instructions
--------------------------------------------------------------------------------------------------------------------------
By mail or fax (see previous page)

Your instructions should include:                       Your instructions should include:

o your account number                                   o  your account number

o  names of the funds, class and number of              o  names of the funds, class and number of shares or
  shares or dollar amount you want to exchange             dollar amount you want to redeem
--------------------------------------------------------------------------------------------------------------------------
With an automatic withdrawal plan

--                                                      o  To set up regular cash payments from an account,
                                                           call 1-800-253-2277
--------------------------------------------------------------------------------------------------------------------------
Using QuickSell

--                                                      o  Call 1-800-253-2277
--------------------------------------------------------------------------------------------------------------------------
On the Internet                                         --

o  Register at aarp.scudder.com

o Go to "services and forms"

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

--------------------------------------------------------------------------------
 To reach us:   o  Web site aarp.scudder.com
                o  Program representatives 1-800-253-2277, M-F, 8 a.m. - 8 p.m.
                   EST
                o  Confidential fax line 1-800-821-6234, always open
                o  TDD line 1-800-634-9454, M-F, 9 a.m. - 5 p.m. EST

 Class AARP     o  AARP Lump Sum Service For planning and setting up a lump
 Services          sum distribution.
                o  AARP Legacy Service For organizing financial documents and
                   planning the orderly transfer of assets to heirs
                o  AARP Goal Setting and Asset Allocation Service For allocating
                   assets and measuring investment progress
                o  For more information, please call 1-800-253-2277.

                                       23
<PAGE>

How to Buy, Sell and Exchange Class S Shares

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

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

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

                                                           $50 or more with an Automatic Investment Plan
----------------------------------------------------------------------------------------------------------------------------
By mail or express (see below)

o Fill out and sign an application                         Send a Scudder investment slip or short note that
                                                           includes:
o Send it to us at the appropriate address,
  along with an investment check                           o  fund and class name

                                                           o  account number

                                                           o  check payable to "The Scudder Funds"
----------------------------------------------------------------------------------------------------------------------------
By wire

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

--                                                         o  Call 1-800-SCUDDER for instructions
----------------------------------------------------------------------------------------------------------------------------
With an automatic investment plan

o Fill in the information on your application              o  To set up regular investments from a bank
  and include a voided check                                  checking account, call 1-800-SCUDDER (minimum $50)
----------------------------------------------------------------------------------------------------------------------------
Using QuickBuy

--                                                         o  Call 1-800-SCUDDER
----------------------------------------------------------------------------------------------------------------------------
On the Internet

o Go to "funds and prices" at www.scudder.com              o  Call 1-800-SCUDDER to ensure you have electronic
                                                              services
o Print out a prospectus and a new account
  application                                              o  Register at www.scudder.com

o Complete and return the application with your            o  Follow the instructions for buying shares with
  check                                                       money from your bank account
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
  Regular mail:
  First investment: The Scudder Funds, PO Box 219669, Kansas City, MO 64121-9669
  Additional investments: The Scudder Funds, PO Box 219664, Kansas
  City, MO 64121-9664

  Express, registered or certified mail:
  The Scudder Funds, 811 Main Street, Kansas City, MO 64105-2005

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





                                       24
<PAGE>

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

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Exchanging into another fund                                Selling shares
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>
$2,500 or more to open a new account ($1,000 or             Some transactions, including most for over $100,000,
more for IRAs)                                              can only be ordered in writing; if you're in doubt,
                                                            see page 28
$100 or more for exchanges between existing
accounts
-----------------------------------------------------------------------------------------------------------------------------
By phone or wire

o Call 1-800-SCUDDER for instructions                       o  Call 1-800-SCUDDER for instructions
-----------------------------------------------------------------------------------------------------------------------------
Using SAIL(TM)

o Call 1-800-343-2890 and follow the instructions           o  Call 1-800-343-2890 and follow the instructions
-----------------------------------------------------------------------------------------------------------------------------
By mail, express or fax (see previous page)

Your instructions should include:
                                                            Your instructions should include:
o the fund, class, and account number you're
  exchanging out of                                         o  the fund, class and account number from which you
                                                               want to sell shares
o the dollar amount or number of shares you want
  to exchange                                               o  the dollar amount or number of shares you want to
                                                               sell
o the name and class of the fund you want to
  exchange into                                             o  your name(s), signature(s) and address, as they
                                                               appear on your account
o your name(s), signature(s), and address, as they
  appear on your account                                    o  a daytime telephone number

o a daytime telephone number
-----------------------------------------------------------------------------------------------------------------------------
With an automatic withdrawal plan

--                                                          o  To set up regular cash payments from a Scudder
                                                               account, call 1-800-SCUDDER
-----------------------------------------------------------------------------------------------------------------------------
Using QuickSell

--                                                          o  Call 1-800-SCUDDER
-----------------------------------------------------------------------------------------------------------------------------
On the Internet

o Register at www.scudder.com                               --

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



                                       25
<PAGE>


Policies You Should Know About

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

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

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

In order to reduce the amount of mail you receive and to help reduce portfolio
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).

Policies about transactions

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

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

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

Questions? You can speak to a Scudder representative between 8 a.m. and 8 p.m.
Eastern time on any fund business day by calling 1-800-253-2277 (Class AARP) or
1-800-SCUDDER (Class S).



                                       26
<PAGE>

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

For Class AARP shares
----------------------------------------------------------------------
Call Easy-Access Line, the AARP Program Automated Information Line,
at 1-800-631-4636
----------------------------------------------------------------------

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

QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-253-2277
(Class AARP) or 1-800-SCUDDER (Class S).

Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.

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

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

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



                                       27
<PAGE>

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

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

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

How the portfolios calculate share prices

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


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

The assets of each share class of each portfolio consist primarily of the
underlying Scudder funds, which are valued at their respective net asset values
at the time of computation.

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

Because certain underlying funds invest in securities that are traded primarily
in foreign markets, the value of their holdings could change at a time when you
aren't able to buy or sell portfolio shares. This is because some foreign
markets are open on days when the portfolios don't price their shares.


                                       28
<PAGE>

Other rights we reserve

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

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

o        for Class AARP and Class S shareholders, close your account and send
         you the proceeds if your balance falls below $1,000; for Class S
         shareholders, charge you $10 a year if your account balance falls below
         $2,500; in either case, we will give you 60 days notice so you can
         either increase your balance or close your account (these policies
         don't apply to retirement accounts, to investors with $100,000 or more
         in Scudder fund shares or in any case where a fall in share price
         created the low balance)

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

o        pay you for shares you sell by "redeeming in kind," that is, by giving
         you marketable securities (which typically will involve brokerage costs
         for you to liquidate) rather than cash; a portfolio generally won't
         make a redemption in kind unless your requests over a 90-day period
         total more than $250,000 or 1% of the value of the portfolio's net
         assets, whichever is less

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

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




                                       29
<PAGE>

Understanding Distributions and Taxes

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

The Conservative and Moderate Portfolios intend to pay dividends and
distributions to their shareholders quarterly, in March, June, September and
December. The Growth Portfolio intends to pay dividends and distributions
annually in December. If necessary, the portfolios may do so at other times as
well.

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

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING
PARAGRAPHS.

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


                                       30
<PAGE>

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


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

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

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

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


                                       31
<PAGE>

To Get More Information

Shareholder reports -- These include commentary from each portfolio's management
team about recent market conditions and the effects of a portfolio's strategies
on its performance. For each portfolio, they also have detailed performance
figures, a list of everything the portfolio owns, and the portfolio's financial
statements. Shareholders get these reports automatically. For more copies, call
1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S).

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

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


AARP Investment
Program from Scudder    Scudder Funds           SEC
---------------------------------------------------------------------
PO Box 219735           PO Box 219669           450 Fifth Street, N.W.
Kansas City, MO         Kansas City, MO         Washington, D.C.
64121-9735              64121-9669              20549-6009
---------------------------------------------------------------------
1-800-253-2277          1-800-SCUDDER           1-202-942-8090
---------------------------------------------------------------------
aarp.scudder.com        www.scudder.com         www.sec.gov
---------------------------------------------------------------------


SEC File Number        811-8606



<PAGE>



                                                                SCUDDER
                                                                INVESTMENTS (SM)
                                                                [LOGO]

     December 29, 2000

Prospectus

                                                          Scudder Pathway Series

                                                          Conservative Portfolio

                                                              Moderate Portfolio
                                          (formerly known as Balanced Portfolio)

                                                                Growth Portfolio

                                                      Advisor Classes A, B and C

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

<PAGE>

Contents
--------------------------------------------------------------------------------

    How the Portfolios Work                     How to Invest in the Portfolios

     4  Conservative Portfolio                  22  Choosing a Share Class

     9  Moderate Portfolio                      27  How to Buy Shares

    14  Growth Portfolio                        28  How to Exchange or Sell
                                                    Shares
    19  Other Policies and Risks
                                                29  Policies You Should Know
    20  Who Manages and Oversees                    About
        the Portfolios
                                                34  Understanding Distributions
                                                    and Taxes

<PAGE>

How the Portfolios Work

These portfolios use an asset allocation strategy, dividing their assets among
different types of investments. All three portfolios invest in other Scudder
funds. Each portfolio is designed for investors with a particular time horizon
or risk profile, and invests in a distinct mix of funds. Because the underlying
funds hold a range of securities, an investment in a portfolio may offer
exposure to thousands of individual securities.

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

<PAGE>

--------------------------------------------------------------------------------
                                                Class A     Class B     Class C
                                fund number     480         680         780

Conservative Portfolio
--------------------------------------------------------------------------------

The Portfolio's Investment Strategy

The portfolio seeks current income and, as a secondary objective, long-term
growth of capital. It does this by investing mainly in other Scudder mutual
funds.

The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.

The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.

The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.

The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.

A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT POINTS
IN THE TABLE BELOW.

ASSET ALLOCATION

The portfolio's target allocation is as follows:

60% Bond funds
40% Equity funds

The managers have the flexibility to adjust this allocation within the following
ranges:

Bond funds     50%-70%
Equity funds   30%-50%


4
<PAGE>

Main Risks of Investing in the Portfolio

There are several risk factors that could hurt the portfolio's performance,
cause you to lose money or make the portfolio perform less well than other
investments.

Bonds could be hurt by rises in market interest rates. (As a general rule, a 1%
rise in interest rates means a 1% fall in value for every year of duration.)
Some bonds could be paid off earlier than expected, which would hurt the
portfolio's performance; with mortgage- or asset-backed securities, any
unexpected behavior in interest rates could increase the volatility of the
portfolio's share price and yield. Corporate bonds could perform less well than
other bonds in a weak economy.

The portfolio is also affected by how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Stock prices can be hurt by poor management, shrinking product demand,
and other business risks. These risks tend to be greater with smaller companies.

Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains.

Other factors that could affect performance include:

o     the managers of the portfolio or the underlying funds could be wrong in
      their analysis of economic trends, countries, industries, companies, the
      relative attractiveness of asset classes or other matters

o     a bond could fall in credit quality or go into default; this risk is
      greater with junk and foreign bonds

o     derivatives could produce disproportionate losses

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This portfolio is designed for investors who have a time horizon of three to
five years and are interested in a relatively conservative asset allocation
investment.


                                                                               5
<PAGE>

The Portfolio's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows how
portfolio performance has varied from year to year, which may give some idea of
risk. The table shows how portfolio performance compares with three broad-based
market indexes (which, unlike the portfolio, do not have any fees or expenses).
The performance of both the portfolio and each index varies over time. All
figures on this page assume reinvestment of dividends and distributions.

The share classes offered in this prospectus -- Classes A, B and C -- are newly
offered. In the bar chart, the performance figures for Class A are based on the
historical performance of the portfolio's original share class (Class S),
adjusted to reflect the higher gross total annual operating expenses of Class A.
The bar chart does not reflect sales loads; if it did, returns would be lower.
In the table, the performance figures for each share class are based on the
historical performance of Class S, adjusted to reflect both the higher gross
total annual operating expenses of Class A, B or C and the current applicable
sales charge of that class. Class S shares are offered in a different
prospectus.

Scudder Pathway Series: Conservative Portfolio

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

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

         1997          14.05
         1998           5.34
         1999           2.55

2000 Total Return as of September 30: 3.45%
Best Quarter: 7.40%, Q2 1997               Worst Quarter: -5.00%, Q3 1998


6
<PAGE>

--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
                                     1 Year                Since Inception*
--------------------------------------------------------------------------------
Class A                               -3.34                      5.23
--------------------------------------------------------------------------------
Class B                               -1.32                      5.69
--------------------------------------------------------------------------------
Class C                                1.76                      6.39
--------------------------------------------------------------------------------
Index 1                               -0.82                      5.25
--------------------------------------------------------------------------------
Index 2                                4.91                      5.88
--------------------------------------------------------------------------------
Index 3                               21.04                     25.90
--------------------------------------------------------------------------------
Index 4                                4.74                      4.94
--------------------------------------------------------------------------------
Index 5                               26.96                     14.81
--------------------------------------------------------------------------------

Index 1: Lehman Brothers Aggregate Bond Index, an unmanaged, market
value-weighted measure of U.S. Treasury and agency securities, corporate bond
issues and mortgage-backed securities.

Index 2: Treasury Bill 1-year.

Index 3: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.

Index 4: Treasury Bill 3-month.

Index 5: MSCI EAFE, an unmanaged capitalization-weighted measure of
international stock markets.

*     Fund inception: 11/15/96. Index comparisons begin 11/30/96.

As of 12/29/2000, the portfolio adopted the Treasury Bill 3-month in place of
the Treasury Bill 1-year, as the Treasury Bill 3-month better represents the
portfolio's investments.


                                                                               7
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the portfolio. The portfolio does not directly bear any fees or
expenses other than distribution/service fees. However, the portfolio's
shareholders will indirectly bear the portfolio's pro rata share of fees and
expenses incurred by the underlying Scudder funds in which the portfolio is
invested. The range of the average weighted expense ratio is set forth below.

--------------------------------------------------------------------------------
Fee Table                                    Class A        Class B      Class C
--------------------------------------------------------------------------------

Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Purchases (% of offering price)               5.75%         None         None
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge
(Load) (% of redemption proceeds)             None*         4.00%        1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses (deducted from portfolio assets)
--------------------------------------------------------------------------------
Management Fee                                 --            --           --
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee              0.25%         1.00%        1.00%
--------------------------------------------------------------------------------
Other Expenses                                 --            --           --
--------------------------------------------------------------------------------
Total Annual Operating Expenses               0.25%         1.00%        1.00%
--------------------------------------------------------------------------------
Range of Average Weighted Expense Ratio                       0.59% to 1.01%
--------------------------------------------------------------------------------

*  The redemption of shares purchased at net asset value under the Large Order
   NAV Purchase Privilege (see "Policies You Should Know About -- Policies about
   transactions") may be subject to a contingent deferred sales charge of 1.00%
   if redeemed within one year of purchase and 0.50% if redeemed during the
   second year following purchase.

The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Actual
costs could be higher or lower than this example.

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

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares               $676         $890        $1,121       $1,784
--------------------------------------------------------------------------------
Class B shares                583          866         1,175        1,738
--------------------------------------------------------------------------------
Class C shares                283          566           975        2,116
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares               $676         $890        $1,121       $1,784
--------------------------------------------------------------------------------
Class B shares                183          566           975        1,738
--------------------------------------------------------------------------------
Class C shares                183          566           975        2,116
--------------------------------------------------------------------------------

The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions.


8
<PAGE>

--------------------------------------------------------------------------------
                                                 Class A     Class B     Class C
                                 fund number     481         681         781

Moderate Portfolio
--------------------------------------------------------------------------------

The Portfolio's Investment Strategy

The portfolio seeks a balance of current income and growth of capital. It does
this by investing mainly in other Scudder mutual funds.

The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.

The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.

The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.

The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.

A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT POINTS
IN THE TABLE BELOW.

ASSET ALLOCATION

The portfolio's target allocation is as follows:

60% Equity funds
40% Bond funds

The managers have the flexibility to adjust this allocation within the following
ranges:

Equity funds 50%-70%
Bond funds   30%-50%


                                                                               9
<PAGE>

Main Risks of Investing in the Portfolio

There are several risk factors that could hurt the portfolio's performance,
cause you to lose money, or make the portfolio perform less well than other
investments.

One of the most important factors is how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Stock prices can be hurt by poor management, shrinking product demand,
and other business risks. These risks tend to be greater with smaller companies.

Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains.

The portfolio is also affected by the performance of bonds, which could be hurt
by rises in market interest rates. (As a general rule, a 1% rise in interest
rates means a 1% fall in value for every year of duration.) Some bonds could be
paid off earlier than expected, which would hurt the portfolio's performance;
with mortgage- or asset-backed securities, any unexpected behavior in interest
rates could increase the volatility of the portfolio's share price and yield.
Corporate bonds could perform less well than other bonds in a weak economy.

Other factors that could affect performance include:

o     the managers of the portfolio or the underlying funds could be wrong in
      their analysis of economic trends, countries, industries, companies, the
      relative attractiveness of asset classes, or other matters

o     a bond could fall in credit quality or go into default; this risk is
      greater with junk and foreign bonds

o     derivatives could produce disproportionate losses

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This fund is designed for investors who have a time horizon of five to ten years
and are interested in a balanced asset allocation investment.


10
<PAGE>

The Portfolio's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows how
portfolio performance has varied from year to year, which may give some idea of
risk. The table shows how portfolio performance compares with four broad-based
market indexes (which, unlike the portfolio, do not have any fees or expenses).
The performance of both the portfolio and each index varies over time. All
figures on this page assume reinvestment of dividends and distributions.

The share classes offered in this prospectus -- Classes A, B and C -- are newly
offered. In the bar chart, the performance figures for Class A are based on the
historical performance of the portfolio's original share class (Class S),
adjusted to reflect the higher gross total annual operating expenses of Class A.
The bar chart does not reflect sales loads; if it did, returns would be lower.
In the table, the performance figures for each share class are based on the
historical performance of Class S, adjusted to reflect both the higher gross
total annual operating expenses of Class A, B or C and the current applicable
sales charge of that class. Class S shares are offered in a different
prospectus.

Scudder Pathway Series: Moderate Portfolio

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

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

         1997          13.02
         1998           7.34
         1999          16.34

2000 Total Return as of September 30: 0.35%
Best Quarter: 12.45%, Q4 1999              Worst Quarter: -10.32%, Q3 1998


                                                                              11
<PAGE>

--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
                                     1 Year                Since Inception*
--------------------------------------------------------------------------------
Class A                                9.65                      9.85
--------------------------------------------------------------------------------
Class B                               11.95                     10.32
--------------------------------------------------------------------------------
Class C                               15.44                     11.05
--------------------------------------------------------------------------------
Index 1                               21.04                     25.90
--------------------------------------------------------------------------------
Index 2                               26.96                     14.81
--------------------------------------------------------------------------------
Index 3                               -0.82                      5.25
--------------------------------------------------------------------------------
Index 4                               21.26                     13.65
--------------------------------------------------------------------------------
Index 5                                4.74                      4.94
--------------------------------------------------------------------------------

Index 1: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.

Index 2: MSCI EAFE, an unmanaged capitalization-weighted measure of
international stock markets.

Index 3: Lehman Brothers Aggregate Bond Index, an unmanaged market
value-weighted measure of U.S. Treasury and agency securities, corporate bond
issues and mortgage-backed securities.

Index 4: Russell 2000 Index, an unmanaged measure of the 2000 companies that
typically have a market capitalization less than $2 billion.

Index 5: Treasury Bill 3-month

*     Fund inception: 11/15/96. Index comparisons begin 11/30/96.


12
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the portfolio. The portfolio does not directly bear any fees or
expenses other than distribution/service fees. However, the portfolio's
shareholders will indirectly bear the portfolio's pro rata share of fees and
expenses incurred by the underlying Scudder funds in which the portfolio is
invested. The range of the average weighted expense ratio is set forth below.

--------------------------------------------------------------------------------
Fee Table                                    Class A        Class B      Class C
--------------------------------------------------------------------------------

Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on
Purchases (% of offering price)               5.75%         None         None
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge
(Load) (% of redemption proceeds)             None*         4.00%        1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses (deducted from portfolio assets)
--------------------------------------------------------------------------------
Management Fee                                 --            --           --
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee              0.25%         1.00%        1.00%
--------------------------------------------------------------------------------
Other Expenses                                 --            --           --
--------------------------------------------------------------------------------
Total Annual Operating Expenses               0.25%         1.00%        1.00%
--------------------------------------------------------------------------------
Range of Average Weighted Expense Ratio                       0.73% to 1.11%
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Actual
costs could be higher or lower than this example.

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

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares               $687         $925        $1,182       $1,914
--------------------------------------------------------------------------------
Class B shares                595          903         1,237        1,869
--------------------------------------------------------------------------------
Class C shares                295          603         1,037        2,243
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares               $687         $925        $1,182       $1,914
--------------------------------------------------------------------------------
Class B shares                195          603         1,037        1,869
--------------------------------------------------------------------------------
Class C shares                195          603         1,037        2,243
--------------------------------------------------------------------------------

The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions.


                                                                              13
<PAGE>

--------------------------------------------------------------------------------
                                                 Class A     Class B     Class C
                                 fund number     482         682         782

Growth Portfolio
--------------------------------------------------------------------------------

The Portfolio's Investment Strategy

The portfolio seeks long-term growth of capital. It does this by investing
mainly in other Scudder mutual funds.

The portfolio has a target allocation (see sidebar), which the portfolio
managers use as a reference point in setting the portfolio's actual allocation.
While the actual allocation may vary, the managers expect that over the long
term it will average out to be similar to the target allocation.

The managers regularly review the actual allocation, and may adjust it in
seeking to take advantage of current or expected market conditions or to manage
risk. In making their allocation decisions, the managers take a top-down
approach, looking at the outlooks for various securities markets and segments of
those markets. Based on the desired exposure to particular investments, the
managers then decide which funds to use as underlying funds and how much to
invest in each fund.

The portfolio's underlying funds use a broad array of investment styles. These
funds can buy many types of securities, among them common stocks of companies of
any size, corporate bonds of varying credit quality, U.S. government and agency
bonds, mortgage- and asset-backed securities, money market instruments, and
others. These securities are mainly from U.S. issuers but may, to a more limited
extent, be from foreign issuers.

The managers of the underlying funds may adjust the duration (a measure of
sensitivity to interest rates) of a fund's bond allocation depending on their
outlook for interest rates, and the portfolio's allocation among the underlying
funds may similarly be adjusted.

A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT POINTS
IN THE TABLE BELOW.

ASSET ALLOCATION

The portfolio's target allocation is as follows:

85% Equity funds
15% Bond funds

The managers have the flexibility to adjust this allocation within the following
ranges:

Equity funds  75%-95%
Bond funds     5%-25%


14
<PAGE>

Main Risks of Investing in the Portfolio

There are several risk factors that could hurt the portfolio's performance,
cause you to lose money, or make the portfolio perform less well than other
investments.

One of the most important factors is how stock markets perform -- something that
depends on many influences, including economic, political, and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Because a stock represents ownership in its issuer, stock prices can be
hurt by poor management, shrinking product demand, and other business risks.
These risks tend to be greater with smaller companies.

Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. There is also the risk that
changing currency rates could add to market losses or reduce market gains. These
risks tend to be greater in emerging markets.

Because the portfolio invests some of its assets in bond funds, it may perform
less well in the long run than a fund investing entirely in stocks. At the same
time, the portfolio's bond component means that its performance could be hurt
somewhat by poor performance in the bond market.

Other factors that could affect performance include:

o     the managers of the portfolio or the underlying funds could be wrong in
      their analysis of economic trends, countries, industries, companies, the
      relative attractiveness of asset classes, or other matters

o     derivatives could produce disproportionate losses

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

This portfolio is designed for investors with a long-term time horizon -- ten
years or more -- who are interested in taking an asset allocation approach to
growth investing.


                                                                              15
<PAGE>

The Portfolio's Performance History

While a fund's past performance isn't necessarily a sign of how it will do in
the future, it can be valuable for an investor to know. The bar chart shows how
portfolio performance has varied from year to year, which may give some idea of
risk. The table shows how portfolio performance compares with five broad-based
market indexes (which, unlike the portfolio, do not have any fees or expenses).
The performance of both the portfolio and each index varies over time. All
figures on this page assume reinvestment of dividends and distributions.

The share classes offered in this prospectus -- Classes A, B and C -- are newly
offered. In the bar chart, the performance figures for Class A are based on the
historical performance of the portfolio's original share class (Class S),
adjusted to reflect the higher gross total annual operating expenses of Class A.
The bar chart does not reflect sales loads; if it did, returns would be lower.
In the table, the performance figures for each share class are based on the
historical performance of Class S, adjusted to reflect both the higher gross
total annual operating expenses of Class A, B or C and the current applicable
sales charge of that class. Class S shares are offered in a different
prospectus.

Scudder Pathway Series: Growth Portfolio

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

THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE

BAR CHART DATA:

         1997          14.62
         1998           9.30
         1999          34.87

2000 Total Return as of September 30: -2.47%
Best Quarter: 21.72%, Q4 1999              Worst Quarter: -15.12%, Q3 1998


16
<PAGE>

--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
                                     1 Year                Since Inception*
--------------------------------------------------------------------------------
Class A                               27.12                     16.45
--------------------------------------------------------------------------------
Class B                               29.78                     16.95
--------------------------------------------------------------------------------
Class C                               33.83                     17.73
--------------------------------------------------------------------------------
Index 1                               33.16                     32.17
--------------------------------------------------------------------------------
Index 2                               26.96                     14.81
--------------------------------------------------------------------------------
Index 3                               21.26                     13.65
--------------------------------------------------------------------------------
Index 4                               21.04                     25.90
--------------------------------------------------------------------------------
Index 5                               -0.82                      5.25
--------------------------------------------------------------------------------

Index 1: Russell 1000 Growth Index, an unmanaged measure of 1000 companies with
higher price-to-book and higher forecasted growth values.

Index 2: MSCI EAFE, an unmanaged capitalization-weighted measure of
international stock markets.

Index 3: Russell 2000 Index, an unmanaged measure of the 2000 companies that
typically have a market capitalization less than $2 billion.

Index 4: Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.

Index 5: Lehman Brothers Aggregate Bond Index, an unmanaged market
value-weighted measure of U.S. Treasury and agency securities, corporate bond
issues and mortgage-backed securities.

*     Fund inception: 11/15/96. Index comparisons begin 11/30/96.

As of 12/29/2000, the portfolio adopted the S&P 500 Index and the Lehman
Brothers Aggregate Bond Index in place of the Russell 1000 Growth Index, as the
S&P 500 Index and the Lehman Brothers Aggregate Bond Index better represent the
portfolio's investments.


                                                                              17
<PAGE>

How Much Investors Pay

This table describes the fees and expenses that you may pay if you buy and hold
shares of the portfolio. The portfolio does not directly bear any fees or
expenses other than distribution/service fees. However, the portfolio's
shareholders will indirectly bear the portfolio's pro rata share of fees and
expenses incurred by the underlying Scudder funds in which the portfolio is
invested. The range of the average weighted expense ratio is set forth below.

--------------------------------------------------------------------------------
Fee Table                                    Class A        Class B      Class C
--------------------------------------------------------------------------------

Shareholder Fees (paid directly from your investment)
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on        5.75%         None         None
Purchases (% of offering price)
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge
(Load) (% of redemption proceeds)             None*         4.00%        1.00%
--------------------------------------------------------------------------------

Annual Operating Expenses (deducted from portfolio assets)
--------------------------------------------------------------------------------
Management Fee                                 --            --           --
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee              0.25%         1.00%        1.00%
--------------------------------------------------------------------------------
Other Expenses**                               --            --           --
--------------------------------------------------------------------------------
Total Annual Operating Expenses               0.25%         1.00%        1.00%
--------------------------------------------------------------------------------
Range of Average Weighted Expense Ratio                       0.47% to 1.22%
--------------------------------------------------------------------------------

*     The redemption of shares purchased at net asset value under the Large
      Order NAV Purchase Privilege (see "Policies You Should Know About --
      Policies about transactions") may be subject to a contingent deferred
      sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
      redeemed during the second year following purchase.

The example below shows an approximate estimate of the expenses that might apply
to your investment of $10,000 in the portfolio over 1, 3, 5 and 10 years. Actual
costs could be higher or lower than this example.

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

Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares               $680         $903        $1,144       $1,833
--------------------------------------------------------------------------------
Class B shares                587          880         1,198        1,793
--------------------------------------------------------------------------------
Class C shares                287          580           998        2,164
--------------------------------------------------------------------------------

Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares               $680         $903        $1,144       $1,833
--------------------------------------------------------------------------------
Class B shares                187          580           998        1,793
--------------------------------------------------------------------------------
Class C shares                187          580           998        2,164
--------------------------------------------------------------------------------

The example assumes 5% annual returns, expenses calculated at the midpoint of
the current expense range and reinvestment of all dividends and distributions.


18
<PAGE>

Other Policies and Risks

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

o     Although major changes tend to be infrequent, a portfolio's Board could
      change that portfolio's investment goal without seeking shareholder
      approval.

o     As a temporary measure, any of these portfolios could shift up to 100% of
      their assets into investments such as money market securities. This could
      prevent losses, but would mean that the portfolio was not pursuing its
      goal.

o     While certain underlying funds are permitted to use various types of
      derivatives (contracts whose value is based on, for example, indices,
      currencies or securities), the managers of those funds don't intend to use
      them as principal investments, and may not use them at all.

For more information

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

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

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


                                                                              19
<PAGE>

Who Manages and Oversees the Portfolios

The investment advisor

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

The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.

The advisor does not receive any fees for managing the portfolios, but does
receive fees as investment advisor to each underlying fund.

The portfolio managers

The following people handle the day-to-day management of each portfolio.

Donald E. Hall
Lead Portfolio Manager
o     Began investment career in 1982
o     Joined the advisor in 1982
o     Joined the fund team in 2000

Maureen F. Allyn
o     Began investment career in 1989
o     Joined the advisor in 1989
o     Joined the fund team in 1996

Shahram Tajbakhsh
o     Began investment career in 1991
o     Joined the advisor in 1996
o     Joined the fund team in 1999


20
<PAGE>

How to Invest in the Portfolios

The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.

You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.


                                                                              21
<PAGE>

Choosing a Share Class

Offered in this prospectus are three share classes for each portfolio. The
portfolios offer other classes of shares separately. Each class has its own fees
and expenses, offering you a choice of cost structures. Class A, Class B and
Class C shares are intended for investors seeking the advice and assistance of a
financial representative, who may receive compensation for those services
through sales commissions, service fees and/or distribution fees.

Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.

We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.

--------------------------------------------------------------------------------
Classes and features                      Points to help you compare
--------------------------------------------------------------------------------
Class A

o Sales charges with a range of up to     o Some investors may be able to reduce
  5.75%, charged when you buy shares        or eliminate their sales charges;
                                            see next page
o In most cases, no charges when you
  sell shares                             o Total annual operating expenses are
                                            lower than those for Class B or
o 0.25% service fee                         Class C
--------------------------------------------------------------------------------
Class B

o No charges when you buy shares          o The deferred sales charge rate falls
                                             to zero after six years
o Deferred sales charge declining from
  4.00%, charged when you sell shares     o Shares automatically convert to
  you bought within the last six years      Class A after six years, which means
                                            lower annual expenses going forward
o 1.00% distribution/service fee
--------------------------------------------------------------------------------
Class C

o No charges when you buy shares          o The deferred sales charge rate is
                                            lower, but your shares never convert
o Deferred sales charge of 1.00%,           to Class A, so annual expenses
  charged when you sell shares you          remain higher
  bought within the last year

o 1.00% distribution/service fee
--------------------------------------------------------------------------------


22
<PAGE>

Class A shares

Class A shares do have a 12b-1 plan, under which a service fee of 0.25% is
deducted from portfolio assets each year. Class A shares have a sales charge
that varies with the amount you invest:

                            Sales charge as a            Sales charge as % of
Your investment             % of offering price          your net investment
--------------------------------------------------------------------------------
Up to $50,000               5.75%                        6.10%
--------------------------------------------------------------------------------
$50,000-$99,999             4.50                         4.71
--------------------------------------------------------------------------------
$100,000-$249,999           3.50                         3.63
--------------------------------------------------------------------------------
$250,000-$499,999           2.60                         2.67
--------------------------------------------------------------------------------
$500,000-$999,999           2.00                         2.04
--------------------------------------------------------------------------------
$1 million or more          See below and next page
--------------------------------------------------------------------------------

The offering price includes the sales charge.

You may be able to lower your Class A sales charges if:

o     you plan to invest at least $50,000 over the next 24 months ("letter of
      intent")

o     the amount of shares you already own (including shares in certain other
      funds) plus the amount you're investing now is at least $50,000
      ("cumulative discount")

o     you are investing a total of $50,000 or more in several funds at once
      ("combined purchases")

The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.


                                                                              23
<PAGE>

You may be able to buy Class A shares without sales charges when you are:

o     reinvesting dividends or distributions

o     investing through certain workplace retirement plans

o     participating in an investment advisory program under which you pay a fee
      to an investment advisor or other firm for portfolio management services

There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The portfolios may waive the sales charges for
investors in other situations as well. Your financial representative or Kemper
Service Company can answer your questions and help you determine if you are
eligible.

If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Kemper Service Company can answer your questions and help you
determine if you're eligible.


24
<PAGE>

Class B shares

With Class B shares, you pay no up-front sales charges to the portfolio. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% and a
service fee of 0.25% are deducted from portfolio assets each year. This means
the annual expenses for Class B shares are somewhat higher (and their
performance correspondingly lower) compared to Class A shares. After six years,
Class B shares automatically convert to Class A, which has the net effect of
lowering the annual expenses from the seventh year on. However, unlike Class A
shares, your entire investment goes to work immediately.

Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:

Year after you bought shares                  CDSC on shares you sell
--------------------------------------------------------------------------------
First year                                    4.00%
--------------------------------------------------------------------------------
Second or third year                          3.00
--------------------------------------------------------------------------------
Fourth or fifth year                          2.00
--------------------------------------------------------------------------------
Sixth year                                    1.00
--------------------------------------------------------------------------------
Seventh year and later                        None (automatic conversion
                                              to Class A)
--------------------------------------------------------------------------------

This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.

While Class B shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses.


                                                                              25
<PAGE>

Class C shares

Like Class B shares, Class C shares have no up-front sales charges. However,
Class C shares do have a 12b-1 plan under which a distribution fee of 0.75% and
a service fee of 0.25% are deducted from portfolio assets each year. Because of
these fees, the annual expenses for Class C shares are similar to those of Class
B shares, but higher than those for Class A shares (and the performance of Class
C shares is correspondingly lower than that of Class A). However, unlike Class A
shares, your entire investment goes to work immediately.

Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.

Class C shares have a CDSC, but only on shares you sell within one year of
buying them:

Year after you bought shares                   CDSC on shares you sell
--------------------------------------------------------------------------------
First year                                     1.00%
--------------------------------------------------------------------------------
Second year and later                          None
--------------------------------------------------------------------------------

This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.

While Class C shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.


26
<PAGE>

How to Buy Shares

Once you've chosen a share class, use these instructions to make investments.

--------------------------------------------------------------------------------
First investment                          Additional investments
--------------------------------------------------------------------------------
$1,000 or more for regular accounts       $100 or more for regular accounts

$250 or more for IRAs                     $50 or more for IRAs

                                          $50 or more with an Automatic
                                          Investment Plan
--------------------------------------------------------------------------------
Through a financial representative

o Contact your representative using the   o Contact your representative using
  method that's most convenient for you     the method that's most convenient
                                            for you
--------------------------------------------------------------------------------
By mail or express mail (see below)

o Fill out and sign an application        o Send a check made out to "Kemper
                                            Funds" and an investment slip to us
o Send it to us at the appropriate          at the appropriate address below
  address, along with an investment
  check                                   o If you don't have an investment
                                            slip, simply include a letter with
                                            your name, account number, the full
                                            name of the fund and the share class
                                            and your investment instructions
--------------------------------------------------------------------------------
By wire

o Call (800) 621-1048 for instructions    o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By phone

--                                        o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
With an automatic investment plan

--                                        o To set up regular investments from a
                                            bank checking account, call (800)
                                            621-1048 (minimum $50)
--------------------------------------------------------------------------------
On the Internet

--                                        o Go to www.kemper.com and register

                                          o Follow the instructions for buying
                                            shares with money from your bank
                                            account
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153

Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005

Fax number: (800) 818-7526 (for exchanging and selling only)


27
<PAGE>

How to Exchange or Sell Shares

Use these instructions to exchange or sell shares in your account.

--------------------------------------------------------------------------------
Exchanging into another fund              Selling shares
--------------------------------------------------------------------------------
$1,000 or more to open a new account      Some transactions, including most for
($250 for IRAs)                           over $50,000, can only be ordered in
                                          writing with a signature guarantee; if
$100 or more for exchanges between        you're in doubt, see page 41
existing accounts
--------------------------------------------------------------------------------
Through a financial representative

o Contact your representative by the      o Contact your representative by the
  method that's most convenient for         method that's most convenient for
  you                                       you
--------------------------------------------------------------------------------
By phone or wire

o Call (800) 621-1048 for instructions    o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)

Write a letter that includes:             Write a letter that includes:

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

o a daytime telephone number
--------------------------------------------------------------------------------
With a systematic exchange plan

o To set up regular exchanges from a      --
  fund account, call (800) 621-1048
--------------------------------------------------------------------------------
With a systematic withdrawal plan

--                                        o To set up regular cash payments from
                                            a fund account, call (800) 621-1048
--------------------------------------------------------------------------------
On the Internet

o Go to www.kemper.com and register       --

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


28
<PAGE>

Policies You Should Know About

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

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

In either case, keep in mind that the information in this prospectus applies
only to each portfolio's Class A, Class B and Class C shares. Each portfolio
does have other share classes, which are described in a separate prospectus and
which have different fees, requirements and services.

In order to reduce the amount of mail you receive and to help reduce portfolio
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.

Policies about transactions

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

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

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


                                                                              29
<PAGE>

KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Scudder or Kemper funds generally and on accounts held directly at Kemper. You
can also use it to make exchanges and sell shares.

EXPRESS-Transfer lets you set up a link between a Scudder or Kemper account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.

Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.

When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The portfolios can only send or
accept wires of $100 or more.

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

When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.


30
<PAGE>

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

When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.

There are certain cases in which you may be exempt from a CDSC. These include:

o     the death or disability of an account owner (including a joint owner)

o     withdrawals made through a systematic withdrawal plan

o     withdrawals related to certain retirement or benefit plans

o     redemptions for certain loan advances, hardship provisions or returns of
      excess contributions from retirement plans

o     for Class A shares purchased through the Large Order NAV Purchase
      Privilege, redemption of shares whose dealer of record at the time of the
      investment notifies Kemper Distributors that the dealer waives the
      applicable commission

In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper Service Company can answer your questions and help you determine if you
are eligible.


31
<PAGE>

If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper Service Company or your
financial representative.

Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.

How the portfolios calculate share prices

The price at which you buy shares is as follows:

Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing a Share Class")

Class B and Class C shares-- net asset value per share, or NAV

To calculate NAV, each share class of each portfolio uses the following
equation:

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

For each share class, the price at which you sell shares is also the NAV,
although for Class B and Class C investors a contingent deferred sales charge
may be taken out of the proceeds (see "Choosing a Share Class").


32
<PAGE>

Because certain underlying funds invest in securities that are traded primarily
in foreign markets, the value of their holdings could change at a time when you
aren't able to buy or sell portfolio shares. This is because some foreign
markets are open on days when the portfolios don't price their shares.

The assets of each share class of each portfolio consist primarily of the
underlying Scudder funds, which are valued at their respective net asset values
at the time of computation.

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

Other rights we reserve

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

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

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

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

o     pay you for shares you sell by "redeeming in kind," that is, by giving you
      marketable securities (which typically will involve brokerage costs for
      you to liquidate) rather than cash; a portfolio generally won't make a
      redemption in kind unless your requests over a 90-day period total more
      than $250,000 or 1% of the value of a portfolio's net assets, whichever is
      less

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

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


                                                                              33
<PAGE>

Understanding Distributions and Taxes

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

The Conservative and Moderate Portfolios intend to pay dividends and
distributions to their shareholders quarterly, in March, June, September and
December. The Growth Portfolio intends to pay dividends and distributions
annually in December. If necessary, the portfolios may do so at other times as
well.

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

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

THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.

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


34
<PAGE>

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

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

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

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

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

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


                                                                              35
<PAGE>

Notes
--------------------------------------------------------------------------------




<PAGE>

Notes
--------------------------------------------------------------------------------




<PAGE>

Notes
--------------------------------------------------------------------------------




<PAGE>

Notes
--------------------------------------------------------------------------------




<PAGE>

To Get More Information

Shareholder reports -- These include commentary from the portfolios' management
team about recent market conditions and the effects of a portfolio's strategies
on its performance. They also have detailed performance figures, a list of
everything the portfolio owns, and the portfolios' financial statements.
Shareholders get the reports automatically. For more copies, call (800)
621-1048.

Statement of Additional Information (SAI) -- This tells you more about the
portfolio's features and policies, including additional risk information. The
SAI is incorporated by reference into this document (meaning that it's legally
part of this prospectus). If you'd like to ask for copies of these documents,
please contact Kemper or the SEC (see below). If you're a shareholder and have
questions, please contact Kemper. Materials you get from Kemper are free; those
from the SEC involve a copying fee. If you like, you can look over these
materials at the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].

SEC                                               Scudder Funds c/o
450 Fifth Street, N.W.                            Kemper Distributors, Inc.
Washington, DC 20549-0102                         222 South Riverside Plaza
www.sec.gov                                       Chicago, IL 60606-5808
Tel (202) 942-8090                                www.kemper.com
                                                  Tel (800) 621-1048

SEC File Number
Scudder Pathway Series                            811-8606

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

<PAGE>


                             SCUDDER PATHWAY SERIES
                             Two International Place
                           Boston, Massachusetts 02110

               Scudder Pathway Series is a professionally managed,
                 open-end investment company which offers three
                             investment portfolios.

                             CONSERVATIVE PORTFOLIO
                               MODERATE PORTFOLIO
                                GROWTH PORTFOLIO


                             CLASS AARP AND CLASS S







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



                       STATEMENT OF ADDITIONAL INFORMATION

                                December 29, 2000



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



This combined  Statement of  Additional  Information  is not a  prospectus.  The
combined  prospectus of Scudder  Pathway  Series  Portfolios  dated December 29,
2000, as amended from time to time, may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston,  Massachusetts
02110-4103.

The Annual Report to  Shareholders  of each  Portfolio  dated August 31, 2000 is
incorporated  by reference and is hereby deemed to be part of this  Statement of
Additional Information.




<PAGE>



<TABLE>
<CAPTION>
                                TABLE OF CONTENTS
                                                                                                                  Page


<S>                                                                                                                  <C>
SCUDDER PATHWAY SERIES' INVESTMENT OBJECTIVES AND POLICIES............................................................1
         General Investment Objectives and Policies...................................................................1
         Master/feeder structure......................................................................................2
         Investment of Uninvested Cash Balances.......................................................................2
         The Underlying Scudder Funds.................................................................................2
         Risk Factors of Underlying Scudder Funds....................................................................23
         Investment Restrictions of the Portfolios...................................................................23

PURCHASES............................................................................................................24
         Additional Information About Opening An Account.............................................................24
         Minimum Balances............................................................................................25
         Additional Information About Making Subsequent Investments..................................................26
         Additional Information About Making Subsequent Investments by QuickBuy......................................26
         Checks......................................................................................................26
         Wire Transfer of Federal Funds..............................................................................27
         Share Price.................................................................................................27
         Share Certificates..........................................................................................27
         Other Information...........................................................................................27

EXCHANGES AND REDEMPTIONS............................................................................................28
         Exchanges...................................................................................................28
         Redemption By Telephone.....................................................................................28
         Redemption by QuickSell.....................................................................................29
         Redemption by Mail or Fax...................................................................................30
         Redemption-in-Kind..........................................................................................30
         Other Information...........................................................................................30

FEATURES AND SERVICES OFFERED BY THE FUND............................................................................31
         The No-Load Concept.........................................................................................31
         Internet access.............................................................................................31
         Dividends and Capital Gains Distribution Options............................................................32
         Reports to Shareholders.....................................................................................32
         Transaction Summaries.......................................................................................32

THE SCUDDER FAMILY OF FUNDS..........................................................................................32

SPECIAL PLAN ACCOUNTS................................................................................................34
         Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and
              Self-Employed Individuals..............................................................................34
         Scudder 401(k): Cash or Deferred Profit-Sharing Planfor Corporations and Self-Employed Individuals..........35
         Scudder IRA: Individual Retirement Account..................................................................35
         Scudder Roth IRA: Individual Retirement Account.............................................................35
         Scudder 403(b) Plan.........................................................................................36
         Automatic Withdrawal Plan...................................................................................36
         Group or Salary Deduction Plan..............................................................................36
         Automatic Investment Plan...................................................................................37
         Uniform Transfers/Gifts to Minors Act.......................................................................37

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................37

PERFORMANCE INFORMATION..............................................................................................38
         Average Annual Total Return.................................................................................38
         Cumulative Total Return.....................................................................................38
         Total Return................................................................................................39

TRUST ORGANIZATION...................................................................................................40
         Investment Advisor..........................................................................................41
         AMA InvestmentLinkSM Program................................................................................43

CODE OF ETHICS.......................................................................................................43
         Management Fees of Underlying Scudder Funds.................................................................44



<PAGE>

                          TABLE OF CONTENTS (continued)
                                                                                                                  Page

SPECIAL SERVICING AGREEMENT..........................................................................................45

TRUSTEES AND OFFICERS................................................................................................47

REMUNERATION.........................................................................................................50

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

TAXES................................................................................................................51
         Taxation of the Portfolios and Their Shareholders...........................................................51
         Taxation of the Underlying Scudder Funds....................................................................53

PORTFOLIO TRANSACTIONS...............................................................................................54
         Portfolio Turnover..........................................................................................54

NET ASSET VALUE......................................................................................................55

ADDITIONAL INFORMATION...............................................................................................55
         Experts.....................................................................................................55
         Shareholder Indemnification.................................................................................55
         Other Information...........................................................................................55

FINANCIAL STATEMENTS.................................................................................................56

GLOSSARY.............................................................................................................57

</TABLE>



                                       ii
<PAGE>

           SCUDDER PATHWAY SERIES' INVESTMENT OBJECTIVES AND POLICIES


General Investment Objectives and Policies

Scudder  Pathway  Series  (the  "Trust") is an  open-end  management  investment
company composed of three separate  diversified  portfolios (the  "Portfolios"),
which  invest  primarily  in existing  Scudder  Funds (the  "Underlying  Scudder
Funds"),  according to well-defined  investment  objectives.  The Portfolios may
also  invest in money  market  instruments  to provide for  redemptions  and for
temporary or defensive purposes. It is impossible to accurately predict how long
such   alternate   strategies  may  be  utilized.   Each   Portfolio   offers  a
professionally  managed,  long-term  investment  program  that  can  serve  as a
complete investment program or as a core part of a larger portfolio. Achievement
of each Portfolio's objective cannot be assured.


As of September 25, 2000 for Conservative  Portfolio and Growth Portfolio and as
of  October  2,  2000 for  Moderate  Portfolio,  this  Statement  of  Additional
Information  offers two classes of shares to provide  investors  with  different
purchase options. Only Class AARP and Class S are offered herein. Each Portfolio
has five classes:  Class AARP, Class S, Class A, Class B and Class C. Each class
has its own important features and policies.  In addition,  as of the respective
dates noted above for each portfolio, all existing shares of Moderate Portfolio,
Conservative  Portfolio and Growth Portfolio were redesignated Class S shares of
their respective  portfolios.  Shares of Class AARP will be especially  designed
for members of AARP.

The  Portfolios  are  professionally  managed  portfolios  which  allocate their
investments among select funds in the Scudder Family of Funds. Each Portfolio is
designed for  investors  seeking a distinct  investment  style:  a  conservative
investment  approach ("Pathway Series:  Conservative  Portfolio"),  a balance of
growth and income ("Pathway  Series:  Moderate  Portfolio") or growth of capital
("Pathway  Series:  Growth  Portfolio").  The  Portfolios  have been  created in
response  to  increasing  demand  by  mutual  fund  investors  for a simple  and
effective  means of  structuring a diversified  mutual fund  investment  program
suited to their  general  needs.  As has been well  documented  in the financial
press,  the  proliferation  of mutual funds over the last several years has left
many  investors  confused  and in  search of a  simpler  means to  manage  their
investments.  Many mutual fund investors realize the value of diversifying their
investments in a number of mutual funds (e.g., a money market fund for liquidity
and price stability,  a growth fund for long-term  appreciation,  an income fund
for current  income and relative  safety of  principal),  but need  professional
management to decide such questions as which mutual funds to select, how much of
their assets to commit to each fund and when to allocate their  selections.  The
Portfolios will allow investors to rely on Zurich Scudder Investments, Inc. (the
"Advisor") to determine  (within  clearly  explained  parameters)  the amount to
invest  in each of  several  Underlying  Scudder  Funds  and the  timing of such
investments.  The Portfolios  may each borrow money for temporary,  emergency or
other purposes,  including  investment  leverage purposes,  as determined by the
Trustees.  The  Investment  Company Act of 1940,  as  amended,  (the "1940 Act")
requires  borrowings to have 300% asset  coverage.  The Portfolios may each also
enter into reverse repurchase agreements.


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

The investment objectives of the Portfolios are as follows:

Conservative Portfolio

The Conservative  Portfolio seeks current income and, as a secondary  objective,
long-term  growth of capital.  This portfolio may be suitable for investors with
an investment time horizon of 3-5 years or more.

Moderate Portfolio

The Moderate  Portfolio seeks a balance of current income and growth of capital.
This portfolio may be suitable for investors with an investment  time horizon of
5-10 years.



<PAGE>

Growth Portfolio

The Growth  Portfolio seeks long-term  growth of capital.  This portfolio may be
suitable for investors with an investment time horizon of 10 years or more.

Master/feeder structure

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


Investment of Uninvested Cash Balances

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

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

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


The Underlying Scudder Funds


Each Portfolio will purchase or sell  securities to: (a)  accommodate  purchases
and  sales of each  Portfolio's  shares,  (b)  change  the  percentages  of each
Portfolio's  assets invested in each of the Underlying Scudder Funds in response
to changing market conditions, and (c) maintain or modify the allocation of each
Portfolio's  assets in accordance with the investment mixes described below. The
Portfolios  invest in Class S shares of each fund  except  for  Scudder  Capital
Growth Fund,  Scudder GNMA Fund and Scudder Small Company Stock Fund,  which all
invest in Class AARP shares.

Portfolio  managers will allocate  Portfolio assets among the Underlying Scudder
Funds in accordance with predetermined percentage ranges, based on the Advisor's
outlook for the  financial  markets,  the  world's  economies  and the  relative
performance  potential of the Underlying  Scudder Funds. The Underlying  Scudder
Funds have been selected to represent a broad spectrum of investment options for
the  Portfolios,  subject to the  following  investment  ranges:


                                       2
<PAGE>

(Conservative)  50-70% fixed income  mutual  funds,  30-50% equity mutual funds;
(Moderate)  50-70% equity mutual  funds,  30-50% fixed income mutual funds;  and
(Growth)  75-95%  equity mutual  funds,  5-25% fixed income  mutual  funds.  The
allowed range of international  equity investment is (Conservative)  0-10%, with
none in emerging  markets;  (Moderate) 0-20%, with up to 5% in emerging markets;
(Growth)  0-30%,  with up to 10% in  emerging  markets.  The  allowed  range  of
investment in small capitalization is (Conservative) 0-5%,  (Moderate) 0-10% and
(Growth) 0-20%. None of the Portfolios may invest over 20% of their fixed income
component in high yield bonds,  and none may invest over 75% in domestic small-,
mid- and large-cap stocks.



<TABLE>
<CAPTION>

 ------------------------------------------------------------------------------------------------------------------------
        Conservative Portfolio                   Moderate Portfolio                        Growth Portfolio
       Underlying Scudder Funds               Underlying Scudder Funds                 Underlying Scudder Funds
 ------------------------------------------------------------------------------------------------------------------------
 ------------------------------------------------------------------------------------------------------------------------
  Bond Mutual Funds                     Equity Mutual Funds                     Equity Mutual Funds
  -----------------                     -------------------                     -------------------
<S>                                    <C>                                     <C>
 Scudder Emerging Markets Income Fund  Classic Growth Fund-Scudder Shares      Classic Growth Fund-Scudder Shares
 Scudder Global Bond Fund              Global Discovery Fund-Scudder Shares    Global Discovery Fund-Scudder Shares
 Scudder GNMA Fund                     Scudder Balanced Fund                   Scudder Balanced Fund
 Scudder High Yield Bond Fund          Scudder Capital Growth Fund             Scudder Capital Growth Fund
 Scudder Income Fund                   Scudder Development Fund                Scudder Development Fund
 Scudder Short Term Bond Fund          Scudder Dividend & Growth Fund          Scudder Dividend & Growth Fund
                                       Scudder Emerging Markets Growth Fund    Scudder Emerging Markets Growth Fund
 Equity Mutual Funds                   Scudder Global Fund                     Scudder Global Fund
 -------------------
 Classic Growth Fund-Scudder Shares    Scudder Gold Fund                       Scudder Gold Fund
 Global Discovery Fund-Scudder Shares  Scudder Greater Europe Growth Fund      Scudder Greater Europe Growth Fund
 Scudder Balanced Fund                 Scudder Growth and Income Fund          Scudder Growth and Income Fund
 Scudder Capital Growth Fund           Scudder Health Care Fund                Scudder Health Care Fund
 Scudder Development Fund              Scudder International Fund              Scudder International Fund
 Scudder Dividend & Growth Fund        Scudder Large Company Growth Fund       Scudder Large Company Growth Fund
 Scudder Emerging Markets Growth Fund  Scudder Large Company Value Fund        Scudder Large Company Value Fund
 Scudder Global Fund                   Scudder Latin America Fund              Scudder Latin America Fund
 Scudder Gold Fund                     Scudder Pacific Opportunities Fund      Scudder Pacific Opportunities Fund
 Scudder Greater Europe Growth Fund    Scudder Select 500 Fund                 Scudder Select 500 Fund
 Scudder Growth and Income Fund        Scudder Select 1000 Growth Fund         Scudder Select 1000 Growth Fund
 Scudder Health Care Fund              Scudder S&P 500 Index Fund              Scudder S&P 500 Index Fund
 Scudder International Fund            Scudder Small Company Stock Fund        Scudder Small Company Stock Fund
 Scudder Large Company Growth Fund        Scudder Small Company Value Fund     Scudder Small Company Value Fund
 Scudder Large Company Value Fund      Scudder Technology Innovation Fund      Scudder Technology Innovation Fund
 Scudder Latin America Fund            Scudder 21st Century Growth Fund        Scudder 21st Century Growth Fund
 Scudder Pacific Opportunities Fund    The Japan Fund                          The Japan Fund
 Scudder Select 500 Fund               Value Fund-Scudder Shares               Value Fund-Scudder Shares
 Scudder Select 1000 Growth Fund
 Scudder S&P 500 Index Fund            Bond Mutual Funds                       Bond Mutual Funds
                                       -----------------                       -----------------
 Scudder Small Company Stock Fund      Scudder Emerging Markets Income Fund    Scudder Emerging Markets Income Fund
 Scudder Small Company Value Fund      Scudder Global Bond Fund                Scudder Global Bond Fund
 Scudder Technology Innovation Fund    Scudder GNMA Fund                       Scudder GNMA Fund
 Scudder 21st Century Growth Fund      Scudder High Yield Bond Fund            Scudder High Yield Bond Fund
 The Japan Fund                        Scudder Income Fund                     Scudder Income Fund
 Value Fund-Scudder Shares             Scudder Short Term Bond Fund            Scudder Short Term Bond Fund

 Money Market Funds                    Money Market Funds                      Money Market Funds
 ------------------                    ------------------                      ------------------
 Scudder Cash Investment Trust         Scudder Cash Investment Trust           Scudder Cash Investment Trust
 Scudder Money Market Series--         Scudder Money Market Series-- Scudder   Scudder Money Market Series-- Scudder
    Scudder Premium Money Market          Premium Money Market Shares             Premium Money Market Shares
    Shares
   Shares

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

</TABLE>

The following  Underlying  Scudder Funds are the money market funds in which the
Portfolios may invest and will likely serve as the primary cash reserve  portion
of each Portfolio.

Scudder Cash Investment Trust (SCIT) seeks to maintain stability of capital and,
consistent  therewith,  to maintain  liquidity of capital and to provide current
income.  The Fund seeks to achieve its  objectives  by investing in money market
securities.  The Fund seeks to maintain a constant  net asset value of $1.00 per
share and declares  dividends  daily.  There can be no assurance that the stable
net asset  value will be  maintained  and shares of the Fund are not  insured or
guaranteed by the U.S. Government.  The Fund purchases domestic and foreign U.S.
dollar-denominated  money  market  securities.


                                       3
<PAGE>

All of the Fund's portfolio securities must meet certain quality criteria at the
time of purchase.  Generally,  the Fund may purchase only  securities  which are
rated, or issued by a company with comparable  securities rated,  within the two
highest  quality  rating  categories  of one or  more  of the  following  rating
agencies: Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Services, a division of McGraw Hill Companies,  Inc. ("S&P") and Fitch Investors
Service, Inc. ("Fitch"). The maturity of each investment in the Fund's portfolio
is 397 calendar days or less, except in the case of U.S.  Government  securities
which  may  have   maturities  of  up  to  762  calendar   days  or  less.   The
dollar-weighted average maturity of the Fund's portfolio investments varies with
money market  conditions,  but is always 90 days or less. As a money market fund
with a  short-term  maturity,  the  Fund's  income  fluctuates  with  changes in
interest rates but its price is expected to remain fixed at $1.00 per share.

SCIT may invest in short-term  securities  consisting of:  obligations issued or
guaranteed  by  the  U.S.   Government,   its  agencies  or   instrumentalities;
obligations of supranational  organizations  such as the International  Bank for
Reconstruction  and Development (the World Bank);  obligations of domestic banks
and  foreign  branches  of  domestic  banks,   including  bankers'  acceptances,
certificates  of  deposit  ("CD's"),   deposit  notes  and  time  deposits;  and
obligations of savings and loan institutions.

SCIT may also invest in:  instruments  whose  credit has been  enhanced by banks
(letters of  credit),  insurance  companies  (surety  bonds) or other  corporate
entities (corporate  guarantees);  corporate  obligations,  including commercial
paper, notes, bonds, loans and loan participations;  securities with variable or
floating  interest  rates;  when-issued  securities,   asset-backed  securities,
including   certificates,   participations  and  notes;   municipal  securities,
including notes, bonds and participation interests,  either taxable or tax free;
and illiquid  securities.  SCIT has adopted 144a procedures for the valuation of
illiquid securities.

In addition,  SCIT may invest in repurchase  agreement and  securities  with put
features. SCIT may also hold cash.

Scudder  Money Market  Series - Scudder  Premium  Money  Market  Shares seeks to
provide  investors with as high a level of current income as is consistent  with
its investment policies and with preservation of capital and liquidity. The Fund
invests exclusively in a broad range of short-term money market instruments that
have  remaining  maturities  of not more  than  397  calendar  days and  certain
repurchase  agreements.  These money market  securities  consist of  obligations
issued   or   guaranteed   by  the   U.S.   Government   or  its   agencies   or
instrumentalities,  taxable and tax-exempt municipal obligations,  corporate and
bank obligations,  CD's, bankers'  acceptances and variable amount master demand
notes. The fund will maintain a  dollar-weighted  average maturity of 90 days or
less in an effort 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 bank  obligations  in which the Fund may  invest  include  negotiable  CD's,
bankers' acceptances,  fixed time deposits or other short-term bank obligations.
Generally,  the Fund may not invest  less than 25% of the  current  value of its
total  assets  in  bank  obligations  (including  bank  obligations  subject  to
repurchase agreements). The Fund limits its investments in U.S. bank obligations
to banks (including foreign branches, the obligations of which are guaranteed by
the U.S.  parent)  that have at least $1 billion in total  assets at the time of
investment.  "U.S.  banks"  include  commercial  banks  that are  members of the
Federal  Reserve  System or are examined by the  Comptroller  of the Currency or
whose  deposits are insured by the Federal  Deposit  Insurance  Corporation.  In
addition,  the Fund may invest in  obligations  of savings banks and savings and
loan associations insured by the Federal Deposit Insurance Corporation that have
total assets in excess of $1 billion at the time of the investment. The Fund may
invest in U.S.  dollar-denominated  obligations  of foreign banks subject to the
following  conditions:  the foreign  banks (based upon their most recent  annual
financial  statements)  at the time of  investment  (i) have more than U.S.  $10
billion, or the equivalent in other currencies,  in total assets; (ii) are among
the 100 largest  banks in the world as  determined  on the basis of assets;  and
(iii) have branches or agencies in the U.S.; and (iv) are obligations  which, in
the  opinion  of  the  Advisor,  are  of an  investment  quality  comparable  to
obligations of U.S.  banks in which the Fund may invest.  Such  investments  may
involve greater risks than those  affecting U.S. bank or Canadian  affiliates of
U.S.  banks.  In addition,  foreign banks are not subject to  examination by any
U.S. government agency or instrumentality.

The Fund may invest in U.S.  dollar-denominated CD's and promissory notes issued
by Canadian  affiliates of U.S. banks under  circumstances where the instruments
are  guaranteed  as to principal  and interest by the U.S.  bank.  While foreign
obligations  generally involve greater risks than those of domestic obligations,
such  as  risks  relating  to  liquidity,   marketability,   foreign   taxation,
nationalization and exchange controls, generally the Advisor believes that these
risks are  substantially  less in the case of  instruments  issued  by  Canadian
affiliates  that are  guaranteed by U.S. banks than in the case of other foreign
money market instruments.


                                       4
<PAGE>

There is no  limitation  on the amount of the Fund's assets that may be invested
in obligations  of foreign banks that meet the conditions set forth above.  Such
investments  may  involve  greater  risks than  those  affecting  U.S.  banks or
Canadian affiliates of U.S. banks. In addition, foreign banks are not subject to
examination by any U.S. Governmental agency or instrumentality.

Except for obligations of foreign banks and foreign  branches of U.S. banks, the
Fund will not invest in the securities of foreign issuers.  Generally,  the Fund
may not invest  less than 25% of the current  value of its total  assets in bank
obligations (including bank obligations subject to repurchase agreements).


Generally,  the  commercial  paper  purchased  by the Fund is  limited to direct
obligations of domestic  corporate  issuers,  including bank holding  companies,
which  obligations,  at the time of investment,  are (i) rated "P-1" by Moody's,
"A-1" or better  by S&P or "F-1" by  Fitch,  (ii)  issued  or  guaranteed  as to
principal and interest by issuers  having an existing  debt  security  rating of
"Aa" or better by Moody's or "AA" or better by S&P or Fitch, or (iii) securities
that, if not rated,  are of comparable  investment  quality as determined by the
Advisor in accordance  with  procedures  adopted by the  Corporation's  Board of
Directors.

All of the  securities in which the Fund will invest must meet credit  standards
applied  by the  Advisor  pursuant  to  procedures  established  by the Board of
Directors.  Should an issue of securities  cease to be rated or if its rating is
reduced  below the minimum  required for purchase by the Fund,  the Advisor will
dispose of any such security,  as soon as  practicable,  unless the Directors of
the Corporation  determine that such disposal would not be in the best interests
of the Fund.


In  addition,  the Fund may invest in  variable or  floating  rate  obligations,
obligations  backed  by bank  letters  of  credit,  when-issued  securities  and
securities  with put  features.  The Fund has adopted  144a  procedures  for the
valuation of illiquid securities.

The following  Underlying  Scudder  Funds are bond mutual  funds,  which seek to
provide current income.

Scudder Emerging  Markets Income Fund is a  non-diversified  investment  company
which seeks to provide high current income. As a secondary  objective,  the Fund
seeks long-term capital appreciation.  In pursuing these goals, the Fund invests
at least 50% of its total assets in  high-yielding,  high-risk  debt  securities
issued by governments and corporations in emerging  markets.  The Fund considers
"emerging  markets"  to include  any  country  that is defined as an emerging or
developing  economy  by  any  one  of  the  following:  International  Bank  for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation or the United Nations or its  authorities.  To reduce currency risk,
the Fund will invest at least 65% of its assets in U.S.  dollar-denominated debt
securities.  Therefore, no more than 35% of the Fund's assets may be invested in
debt securities  denominated in foreign currencies.  By focusing on fixed-income
instruments issued in emerging markets,  the Fund invests  predominantly in debt
securities that are rated below  investment-grade.  The Fund may invest up to 5%
of its net assets in  non-performing  securities  whose quality is comparable to
securities  rated  as  low  as D by  S&P  or C by  Moody's.  The  Fund  involves
above-average  bond fund risk and can invest  entirely in high  yield/high  risk
bonds.  Investments in emerging markets can be volatile.  The Fund's share price
and yield can fluctuate  daily in response to political  events,  changes in the
perceived  creditworthiness of emerging nations,  fluctuations in interest rates
and, to a certain extent, movements in foreign currencies.

In addition,  Scudder  Emerging  Markets Income Fund may invest up to 35% of its
total  assets in  securities  other  than debt  obligations  issued in  emerging
markets.  These holdings  include debt  securities and money market  instruments
issued by corporations and governments based in developed markets,  including up
to 20% of total assets in U.S.  fixed  income-instruments.  The Fund has adopted
144a procedures for the valuation of illiquid securities.

The Fund may for temporary, defensive or emergency purposes invest without limit
in U.S. debt securities  including  short-term  money market  securities.  It is
impossible to accurately  predict how long such  alternative  strategies  may be
utilized.  In addition,  the Fund may invest in shares of closed end  investment
companies,  warrants, reverse repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.


Scudder Global Bond Fund is a non-diversified  investment company which 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 seeks  capital  appreciation.  The Fund  invests
principally  in a managed  portfolio of high-grade  intermediate-  and long-term
bonds  denominated in the U.S.  dollar and foreign  currencies,


                                       5
<PAGE>

including   bonds   denominated   in   the   European   Currency   Unit   (ECU).
(Intermediate-term bonds generally have maturities between three and eight years
and  long-term  bonds  generally  have  maturities of greater than eight years.)
Portfolio investments are selected on the basis of, among other things,  yields,
credit  quality,  and the  fundamental  outlooks for currency and interest  rate
trends in different parts of the globe, taking into account the ability to hedge
a degree of  currency  or local  bond  price  risk.  At least 65% of the  Fund's
investments will consist of high-grade debt securities, which are those rated in
one of the three  highest  rating  categories  of one of the major  U.S.  rating
services  or,  if  unrated,  considered  to be of  equivalent  quality  in local
currency terms as determined by the Advisor.  The Fund may also invest up to 15%
of its net  assets  in debt  securities  rated  BBB or BB by S&P or Baa or Ba by
Moody's,  or unrated  securities  considered to be of equivalent  quality by the
Advisor.  The Fund does not  invest in any  securities  rated B or lower.  Under
normal market conditions,  the Fund will invest at least 15% of its total assets
in U.S. dollar-denominated  securities,  issued domestically or abroad. The Fund
may invest in debt securities issued or guaranteed by the U.S.  government,  its
agencies  or  instrumentalities;  obligations  issued or  guaranteed  by foreign
national   governments,   their   agencies,   instrumentalities   or   political
subdivisions;   and  debt  securities  issued  or  guaranteed  by  supranational
organizations such as the European Investment Bank,  Inter-American  Development
Bank and The World Bank. The Fund may also invest in  non-government  securities
including  corporate debt securities,  bank or bank holding company  obligations
(e.g.,  CD's and  bankers  acceptances),  and  mortgage  and other  asset-backed
issues.


Scudder  Global Bond Fund may for temporary  defensive  purposes  invest without
limit in U.S.  Government  debt  securities  including  short-term  money market
securities.  It is impossible to  accurately  predict how long such  alternative
strategies may be utilized. In addition,  the Fund may invest in warrants,  zero
coupon securities  mortgage and asset-backed  securities,  illiquid  securities,
reverse  repurchase   agreements,   repurchase  agreements  and  may  engage  in
securities lending, strategic transactions including derivatives.

Scudder GNMA Fund is designed to produce a high level of current income but with
less risk of loss to the Fund's  portfolio than other GNMA mutual funds measured
by the frequency and amount by which total return fluctuates downward.  The Fund
is designed for investors who are seeking high current  income from high quality
securities and who wish to receive a degree of protection from bond market price
risk.  The  Fund's  investment  objective  is to produce a high level of current
income while actively  seeking to reduce  downside risk compared with other GNMA
mutual  funds.  It does this by  investing at least 65% of net assets in "Ginnie
Maes":   mortgage-backed  securities  that  are  issued  or  guaranteed  by  the
Government National Mortgage Association ("GNMA"). The Fund also invests in U.S.
Treasury  securities.  With both  types of  securities,  the  timely  payment of
interest and  principal is  guaranteed  by the full faith and credit of the U.S.
government.  In  addition,  the Fund  does not  invest in  securities  issued by
tobacco-producing  companies.  The Fund has been designed with the conservative,
safety-conscious  investor in mind. Although past performance is no guarantee of
future  performance,  historically,  this Fund  offers  higher  yields than such
short-term investments as insured savings accounts,  insured six-month CD's, and
fixed-price money market funds.

The Fund  invests in U.S.  Treasury  bills,  notes and bonds;  other  securities
issued or  backed by the full  faith  and  credit of the U.S.  Government  as to
principal  and  interest,  including,  but not limited to, GNMA  mortgage-backed
securities,  Merchant Marine Bonds guaranteed by the Maritime Administration and
obligations of the Export-Import Bank;  financial futures contracts with respect
to such securities;  options on either such securities or such financial futures
contracts; and bank repurchase agreements. At least 65% of the Fund's net assets
will be directly invested in GNMAs. The Fund may also utilize hedging techniques
involving  limited use of  financial  futures  contracts  and the  purchase  and
writing  (selling)  of put and call  options on such  contracts.  Under  certain
market conditions,  these strategies may reduce current income. At any time, the
Fund may have a substantial  portion of its assets in securities of a particular
type or  maturity.  The Fund may also write  covered  call  options on portfolio
securities and purchase "when-issued" securities.

GNMAs.  GNMAs are  mortgage-backed  securities  representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial  banks and savings and loan  associations,  are either insured by the
Federal   Housing   Administration   (FHA)  or   guaranteed   by  the   Veterans
Administration (VA). A "pool" or group of such mortgages is assembled and, after
being approved by GNMA, is offered to investors through securities dealers. Once
approved by GNMA, a Government corporation within the U.S. Department of Housing
and  Urban  Development,  the  timely  payment  of  interest  and  principal  is
guaranteed by the full faith and credit of the United States Government. This is
not,  however,  a  guarantee  related to the  Fund's  yield or the value of your
investment principal.

As mortgage-backed securities, GNMAs differ from bonds in that principal is paid
back by the borrower  over the length of the loan rather than returned in a lump
sum at  maturity.  GNMAs  are  called  "pass-through"  securities  because  both


                                       6
<PAGE>

interest and principal payments including  prepayments are passed through to the
holder of the security (in this case, the Fund).

Mortgage-backed  securities 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.

A decline  in  interest  rates  may lead to a faster  rate of  repayment  of the
underlying  mortgages,  and may 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 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. Mortgage-backed securities are subject to the risk or 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.

When  interest  rates rise,  mortgage  prepayment  rates tend to  decline,  thus
lengthening  the life of a  mortgage-related  security and  increasing the price
volatility  of that  security,  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 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 Fund 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  Fannie Mae and the  Federal  Home Loan  Mortgage
Corporation ("FHLMC").  Fannie Mae is a  government-sponsored  corporation owned
entirely by private  stockholders.  It is subject to general  regulation  by the
Secretary of Housing and Urban  Development.  Fannie Mae purchases  conventional
(i.e.,  not insured or guaranteed by any governmental  agency)  mortgages from a
list of approved  seller/servicers  which include state and  federally-chartered
savings and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage  bankers.  Pass-through  securities issued by Fannie Mae are
guaranteed as to timely  payment of principal and interest by Fannie Mae 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.


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,


                                       7
<PAGE>

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 the 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 Fund 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  Advisor  determines  that  the
securities  meet the  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.

The payment of  principal  on the  underlying  mortgages  may exceed the minimum
required by the schedule of payments for the  mortgages.  Such  prepayments  are
made at the option of the  mortgagors  for a wide variety of reasons  reflecting
their individual  circumstances  and may involve capital losses if the mortgages
were  purchased at a premium.  For example,  mortgagors may speed up the rate at
which they prepay their  mortgages when interest rates decline  sufficiently  to
encourage refinancing. The Fund, when such prepayments are passed through to it,
may be able to reinvest them only at a lower rate of interest.  The Advisor,  in
determining  the  attractiveness  of GNMAs relative to alternative  fixed-income
securities,  and in choosing specific GNMA issues, will have made assumptions as
to the  likely  speed  of  prepayment.  Actual  experience  may vary  from  this
assumption  resulting in a higher or lower investment  return than  anticipated.
When  interest  rates rise,  mortgage  prepayment  rates tend to  decline,  thus
lengthening  the life of a  mortgage-related  security and  increasing the price
volatility  of that  security,  affecting  the price  volatility  of the  Fund's
shares.


Some  investors may view the Fund as an  alternative  to a bank  certificate  of
deposit.  While an investment in the Fund is not federally insured, and there is
no guarantee of price stability, an investment in the Fund--unlike a certificate
of deposit -- is not locked  away for any  period,  may be  redeemed at any time
without incurring early withdrawal penalties, and may provide a higher yield.

The Fund may also  invest  in  dollar  roll  transactions,  mortgage-backed  and
mortgage pass-though securities, securities purchased on a "forward delivery" or
"when-issued" basis, and covered call options.

For temporary defensive purposes,  the fund may temporarily invest up to 100% of
assets in cash or cash equivalents.

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.  In  pursuit  of  its  investment
objectives,  the Fund, under normal market  conditions,  invests at least 65% of
its total assets in high yield, below investment-grade domestic debt securities.
The Fund defines "domestic debt securities" as securities of companies domiciled
in the U.S.  or  organized  under  the laws of the U.S.  or for  which  the U.S.
trading  market is a primary  market.  The Fund may invest in a variety of other
securities  including  convertible and preferred  securities,  U.S. Treasury and
Agency bonds, Brady bonds,  mortgage-backed and asset-backed securities,  common
stocks and warrants,  securities  issued by REITs,  trust preferred  securities,
bank loans, loan participations, dollar rolls, indexed securities and restricted
securities,  such as those acquired  through  private  placements.  The Fund may
invest up to 25% of its total assets in foreign  securities.  The Fund considers
"emerging  markets"  to include  any  country  that is defined as an emerging or
developing  economy by any one of the International  Bank for Reconstruction and
Development (i.e., the World Bank), the International Finance Corporation or the
United Nations or its authorities.

Scudder High Yield Bond Fund may for temporary defensive purposes invest without
limit  in  cash or  money  market  instruments  or high  quality  domestic  debt
securities.  It is impossible to  accurately  predict how long such  alternative
strategies  may be  utilized.  In  addition,  the Fund may  invest in  warrants,
securities  lending,   illiquid  securities,   reverse  repurchase   agreements,
repurchase  agreements,  may purchase  securities  on a  when-issued  or forward
delivery basis and may engage in strategic transactions including derivatives.

The Fund has adopted 144a procedures for the valuation of illiquid securities.

                                       8
<PAGE>


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.  The Fund invests  primarily in a broad range of  high-grade,
income-producing  securities such as corporate bonds and government  securities.
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 Advisor,  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 3 or
BBB or, if unrated, of equivalent quality as determined by the Advisor, but will
not purchase bonds rated below B by Moody's or S&P or their equivalent.


Scudder  Income  Fund may  invest  in  bonds,  notes,  zero  coupon  securities,
adjustable rate bonds,  convertible bonds,  preferred and convertible  preferred
securities, U.S. Government securities, commercial paper, debt securities issued
by  REITs,   mortgage  and  asset-backed   securities  and  other  money  market
instruments and illiquid securities such as certain securities issued in private
placements,  foreign securities and CD's issued by foreign and domestic branches
of U.S. banks. It may also invest in warrants,  when-issued or forward  delivery
securities,  indexed  securities,   repurchase  agreements,  reverse  repurchase
agreements,  and may engage in dollar-roll transactions,  securities lending and
strategic transactions including derivatives.


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. The dollar-weighted average effective maturity of the
Fund's portfolio may not exceed three years.  Within this  limitation,  the Fund
may purchase  individual  securities with remaining stated maturities of greater
than three years.  The net asset value of the Fund is expected to fluctuate with
changes in interest rates and bond market conditions,  although this fluctuation
should be more moderate than that of a fund with a longer average maturity.  The
Advisor,  however, will attempt to minimize principal fluctuation through, among
other  things,  diversification,  credit  analysis and security  selection,  and
adjustment of the Fund's average portfolio maturity. When, in the opinion of the
Advisor,  economic or other conditions warrant, for temporary defensive purposes
the Fund may invest more than 35% of its assets in money market instruments. The
Fund emphasizes high quality investments.  At least 65% of the Fund's net assets
will be invested in (1)  obligations  of the U.S.  Government,  its  agencies or
instrumentalities,  and (2) debt securities  rated, at the time of purchase,  in
one of the two highest categories of S&P or Moody's or, if unrated, judged to be
of comparable quality by the Advisor.  In addition,  the Fund will not invest in
any debt security rated at the time of purchase below investment-grade.


Scudder Short Term Bond Fund may for temporary defensive purposes invest without
limit in money market  assets.  It is impossible to accurately  predict how long
such alternative strategies may be utilized. In addition, the Fund may invest in
warrants,   indexed   securities,   zero  coupon  securities,   trust  preferred
securities,  illiquid  securities,  reverse  repurchase  agreements,  repurchase
agreements,  dollar roll transactions,  may purchase securities on a when-issued
or forward  delivery  basis and may engage in  securities  lending and strategic
transactions including derivatives.

The following  Underlying  Scudder  Funds are equity mutual funds,  which seek a
combination of income and growth.

Scudder  Balanced  Fund seeks a balance of growth and income from a  diversified
portfolio of equity and fixed-income securities.

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.


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 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.




                                       9
<PAGE>

While the Fund  emphasizes  U.S.  equity  and debt  securities,  it may invest a
portion of its assets in foreign securities,  including depositary receipts. The
Fund's  foreign  holdings  will meet the  criteria  applicable  to its  domestic
investments.  The international  component of the Fund's  investment  program is
intended to increase  diversification,  thus reducing risk,  while providing the
opportunity for higher returns.  In addition,  the Fund may invest in securities
on a  when-issued  or  forward  delivery  basis and may  utilize  various  other
strategic transactions.


Scudder Dividend & Growth Fund seeks high current income and long-term growth of
capital  through  investment  in income  paying  equity  securities.  The Fund's
Advisor  expects that the average  gross income yield of the Fund will be higher
than the yield of the  Standard & Poor's  Composite  Stock Price Index (the "S&P
500 Index"),  a commonly accepted  benchmark for U.S. stock market  performance.
The Fund invests  primarily in dividend paying common stocks,  preferred stocks,
securities convertible into common stock, and REITs.

Under normal market conditions,  the Fund will invest at least 80% of net assets
in income-paying  equity  securities,  which the Advisor,  believes offer a high
level of current income and potential for long-term  capital  appreciation.  The
Advisor believes that an actively  managed  portfolio of dividend paying stocks,
convertible  securities,  and REITs offers the  potential  for a higher level of
income and lower average share price  volatility  than the S&P 500 Index.  Under
normal circumstances, the Fund will invest between 40% and 80% of its net assets
in dividend  paying common  stocks.  The Fund may also purchase such  securities
which do not pay  current  dividends  but which  offer  prospects  for growth of
capital and future income.

Under normal circumstances,  the Fund will invest between 40% and 80% of its net
assets in dividend  paying  common  stocks.  The Advisor  applies a  disciplined
investment approach to selecting these stocks of primarily medium-to-large sized
U.S.  companies.  The Fund's portfolio may include stocks which are out of favor
in the  market,  but which,  in the  opinion of the  Advisor,  offer  compelling
valuations and potential for long-term  appreciation in price and dividends.  In
investing the Fund's  portfolio among different  industry  sectors,  the Advisor
evaluates  how each sector  reacts to economic  factors such as interest  rates,
inflation,  Gross Domestic Product, and consumer spending.  The Fund's portfolio
is constructed by attaining a proper balance of stocks in these sectors based on
the Advisor's economic  forecasts.  In summary,  the Advisor applies disciplined
buy and sell criteria,  fundamental company and industry analysis,  and economic
forecasts in managing the Fund to pursue long-term price appreciation and income
with lower overall volatility than the market.


Scudder Growth and Income Fund seeks long-term growth of capital, current income
and growth of income.  The Fund attempts to achieve its investment  objective by
investing  primarily in  dividend-paying  common  stocks,  preferred  stocks and
securities  convertible  into  common  stocks of  companies  with  long-standing
records of earnings growth.  The Fund may also purchase  securities which do not
pay current dividends but which offer prospects for growth of capital and future
income.  Convertible  securities  (which  may be current  coupon or zero  coupon
securities) are bonds, notes, debentures,  preferred stocks and other securities
which may be converted or exchanged at a stated or  determinable  exchange ratio
into  underlying   shares  of  common  stock.   The  Fund  may  also  invest  in
nonconvertible preferred stocks consistent with its objective.

Scudder  Growth and Income  Fund may for  temporary  defensive  purposes  invest
without  limit in cash and cash  equivalents.  It is  impossible  to  accurately
predict how long such alternative  strategies may be utilized. In addition,  the
Fund may invest in warrants,  foreign securities,  REITs,  illiquid  securities,
reverse  repurchase   agreements,   repurchase  agreements  and  may  engage  in
securities lending and strategic transactions including derivatives.

Scudder  International  Fund seeks long-term  growth of capital mainly through a
diversified portfolio of marketable foreign equity securities.  The Fund invests
in companies, wherever organized, which do business primarily outside the United
States. The Fund intends to diversify investments among several countries and to
have  represented  in  the  portfolio,  in  substantial  proportions,   business
activities in not less than three  different  countries  other than the U.S. The
Fund does not intend to concentrate  investments in any particular industry. The
Fund's investments are generally denominated in foreign currencies. The strength
or weakness of the U.S. dollar against these  currencies is responsible for part
of the Fund's investment performance. The Fund may invest up to 20% of its total
assets in investment-grade debt securities except that the Fund may invest up to
5%  of  its  total   assets   in  debt   securities   which   are  rated   below
investment-grade.

Scudder  International Fund may for temporary  defensive purposes invest without
limits in Canadian or U.S. Government  obligations or currencies,  or securities
of companies  incorporated in and having their principal activities in Canada or
the


                                       10
<PAGE>

U.S. It is impossible to accurately predict how long such alternative strategies
may be utilized. In addition,  the Fund may invest in warrants,  trust preferred
securities,  fixed-income  securities,  illiquid securities,  reverse repurchase
agreements,  repurchase  agreements  and may engage in  securities  lending  and
strategic transactions including derivatives.

Scudder  S&P 500 Index Fund seeks to match as closely as  possible  (before  the
deduction of expenses) the total return of the S&P 500 Index,  which  emphasizes
the stocks of large U.S.  companies.  The Fund seeks to achieve  its  investment
objective by investing substantially all of its investable assets in an open-end
management  investment company having the same investment objective as the Fund.
The  investment  company  in which  the Fund  invests  is the  Equity  500 Index
Portfolio (the "Portfolio"), advised by Bankers Trust Company ("Bankers Trust").

The Portfolio may invest in equity  securities listed on any domestic or foreign
securities exchange or traded in the over-the-counter  market as well as certain
restricted  or unlisted  securities.  As used herein,  "equity  securities"  are
defined  as  common  stock,   preferred  stock,  trust  or  limited  partnership
interests,  rights and  warrants to subscribe  to or purchase  such  securities,
sponsored  or  unsponsored   ADRs,  EDRs,  GDRs,  and  convertible   securities,
consisting  of debt  securities  or preferred  stock that may be converted  into
common stock or that carry the right to purchase  common stock.  Common  stocks,
the  most  familiar  type,   represent  an  equity  (ownership)  interest  in  a
corporation.  They may or may not pay dividends or carry voting  rights.  Common
stock  occupies  the most  junior  position in a  company's  capital  structure.
Although equity  securities have a history of long-term  growth in value,  their
prices  fluctuate  based on changes in a company's  financial  condition  and on
overall  market  and  economic  conditions.  Smaller  companies  are  especially
sensitive to these factors.

When the Portfolio experiences large cash inflows through the sale of securities
and  desirable  equity  securities,  that are  consistent  with the  Portfolio's
investment  objective,  which are  unavailable  in  sufficient  quantities or at
attractive prices,  the Portfolio may hold short-term  investments (or shares of
money  market  mutual  funds) for a limited time  pending  availability  of such
equity securities.  Short-term  instruments consist of foreign and domestic: (i)
short-term    obligations   of   sovereign    governments,    their    agencies,
instrumentalities,  authorities or political subdivisions; (ii) other short-term
debt  securities  rated AA or higher by S&P or Aa or  higher by  Moody's  or, if
unrated, of comparable quality in the opinion of Bankers Trust; (iii) commercial
paper;  (iv) bank  obligations,  including  negotiable  CD's,  time deposits and
banker's acceptances;  and (v) repurchase agreements.  At the time the Portfolio
invests in commercial  paper,  bank  obligations or repurchase  agreements,  the
issuer of the issuer's parent must have  outstanding  debt rated AA or higher by
S&P  or Aa or  higher  by  Moody's  or  outstanding  commercial  paper  or  bank
obligations  rated A-1 by S&P or Prime-1 by Moody's;  or, if no such ratings are
available,  the  instrument  must be of  comparable  quality  in the  opinion of
Bankers Trust.

Scudder Select 500 Fund is a diversified  fund which seeks long-term  growth and
income  through  investment  in selected  stocks of  companies in the S&P 500(R)
Index, a commonly  recognized  unmanaged  measure of 500 widely held U.S. common
stocks listed on the New York Stock  Exchange,  the American  Stock Exchange and
the Nasdaq National  Market System.  The Fund pursues its objective by investing
at least 80% of its total assets in the stocks of companies in the index.  Under
normal circumstances, the Fund invests primarily in common stocks.

The Fund's portfolio management team will apply a multi-step  investment process
to select certain of the composite  stocks in the Fund's benchmark index for its
portfolio.  This  process  includes  the  following  steps:

o        Ranking - using a proprietary computer model, the stocks of companies
         in the particular benchmark index are evaluated and ranked based on
         their growth prospects, relative valuation, and history of rising
         prices.

o        Selection - the 20% lowest ranking stocks in the index are generally
         excluded from the portfolio. o Portfolio Construction - From the
         remaining 80% of stocks, a subset is selected and weighted to ensure
         portfolio diversification and attempts to create a portfolio that is
         similar to the benchmark index. Factors to be considered in the
         allocation of the remaining stocks include level of exposure to
         specific industries, company specific financial data, price volatility,
         and market capitalization.

o        Ongoing Active Management - the fund's portfolio is rebalanced on an
         ongoing basis as the rankings of the stocks in the benchmark indices
         change over time.

The Fund may, but is not  required  to,  invest up to 20% of its total assets in
investment  grade debt  securities.  The Fund can purchase other types of equity
securities   including  preferred  stocks  (convertible   securities),   rights,
warrants,  and  illiquid  securities.  Securities  may  be  listed  on  national
exchanges  or traded  over-the-counter.  The Fund may,  but is not


                                       11
<PAGE>

required to, utilize other investments and investment techniques that may impact
fund  performance,  including,  but not limited to,  options,  futures and other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).

The Fund manages risk by diversifying widely among industries and companies, and
using disciplined security selection.  The Fund may, but is not required to, use
derivatives in an attempt to manage risk.  The use of derivatives  could magnify
losses. For temporary defensive purposes, the Fund may invest, without limit, in
cash and cash equivalents,  U.S. government securities, money market instruments
and high quality debt securities without equity features.

The following  Underlying  Scudder  Funds are equity  mutual  funds,  which seek
long-term growth or capital appreciation.


Classic  Growth  Fund -- Scudder  Shares  seeks to provide  long-term  growth of
capital  and to keep the value of its shares  more  stable  than  other  capital
growth mutual funds. Under normal market conditions,  the Fund invests primarily
in a diversified  portfolio of common stocks which the Advisor  believes  offers
above-average  appreciation potential yet, as a portfolio,  offers the potential
for less share price  volatility than other growth mutual funds. In seeking such
investments, the Advisor focuses its investment in high quality, medium-to-large
sized U. S. companies with leading competitive positions. The Fund allocates its
investments among different industries and companies,  and adjusts its portfolio
securities based on long-term investment considerations as opposed to short-term
trading. While the Fund emphasizes U.S. investments,  it can commit a portion of
assets to the  equity  securities  of  foreign  growth  companies  that meet the
criteria  applicable to the Fund's domestic  investments.  The Fund can purchase
other types of equity securities  including  securities  convertible into common
stocks,  preferred stocks, rights and warrants. The Fund may invest up to 20% of
its net assets in debt securities when the Advisor  anticipates that the capital
appreciation  on debt  securities  is  likely  to equal or  exceed  the  capital
appreciation  on common stocks over a selected  time,  such as during periods of
unusually high interest rates.


Classic  Growth  Fund -- Scudder  Shares may for  temporary  defensive  purposes
invest  without limit in high quality money market  securities,  including  U.S.
Treasury bill, repurchase agreements,  commercial paper, CD's issued by domestic
and  foreign  branches  of U.S.  banks,  bankers'  acceptances,  and other  debt
securities,  such as U.S. Government obligations and corporate debt instruments.
It is impossible to accurately predict how long such alternative  strategies may
be utilized.  In addition,  the Fund may invest in illiquid securities,  reverse
repurchase  agreements,  repurchase  agreements  and may  engage  in  securities
lending and strategic transactions including derivatives.


Global Discovery Fund -- Scudder Shares seeks above-average capital appreciation
over the long term by  investing  primarily  in the equity  securities  of small
companies  located  throughout the world. In pursuit of its objective,  the Fund
generally invests in small,  rapidly growing companies which offer the potential
for  above-average  returns  relative to larger  companies,  yet are  frequently
overlooked and thus  undervalued by the market.  The Fund has the flexibility to
invest in any region of the world. Under normal circumstances,  the Fund invests
at least 65% of its total assets in the equity  securities  of small  companies.
While the  Advisor  believes  that  smaller,  lesser-known  companies  can offer
greater growth potential than larger,  more  established  firms, the former also
involves  greater  risk and price  volatility.  To help  reduce  risk,  the Fund
expects,  under normal market  conditions,  to diversify its portfolio widely by
company, industry and country. The Fund intends to allocate investments among at
least three countries at all times,  one of which may be the United States.  The
Fund  invests   primarily   in  companies   whose   individual   equity   market
capitalization  would  place  them  in the  same  size  range  as  companies  in
approximately  the lowest 20% of world market  capitalization  as represented by
the Salomon Brothers Broad Market Index, an index comprised of equity securities
of more than 6,500 small-, medium- and large-sized companies based in 22 markets
around the globe. Based on this policy, the companies held by the Fund typically
will have individual equity market  capitalizations of between approximately $50
million  and $2  billion  (although  the Fund will be free to invest in  smaller
capitalization issues that satisfy the Fund's size standard).  Furthermore,  the
median market capitalization of the companies in which the Fund invests will not
exceed $750 million. The Fund may invest up to 35% of its total assets in equity
securities   of  larger   companies   located   throughout   the  world  and  in
investment-grade  debt  securities  if the Advisor  determines  that the capital
appreciation of debt securities is likely to exceed the capital  appreciation of
equity  securities.  The  Fund may  invest  up to 5% of its net  assets  in debt
securities rated below investment-grade.


Global  Discovery  Fund -- Scudder Shares may for temporary  defensive  purposes
invest  without  limit  in  cash  and  cash  equivalents.  It is  impossible  to
accurately  predict how long such  alternative  strategies  may be utilized.  In
addition,  the Fund may  invest  in  common  stocks,  preferred  stocks  (either
convertible  or  non-convertible),  rights and warrants,  closed end  investment
companies,  bonds, notes, debentures,  government securities,  zero coupon bonds
(any  of  which  may be


                                       12
<PAGE>

convertible  or  nonconvertible),   foreign   securities,   American  Depositary
Receipts,  purchase  securities on a when-issued or forward  delivery basis, and
enter into reverse repurchase  agreements,  repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.

Scudder  Capital  Growth Fund is designed to provide  long-term  capital  growth
while actively seeking to reduce downside risk compared with other growth mutual
funds.  The Fund pursues this investment  objective by investing at least 65% of
total  assets in  equities,  mainly  common  stocks of  established  medium- and
large-sized  companies.  Through  a  broadly  diversified  portfolio  consisting
primarily of the securities of high quality,  medium- to  large-sized  companies
with strong  competitive  positions in their  industries  and  reasonable  stock
market  valuation the Fund seeks to offer less share price  volatility than many
growth  funds.  Unlike many other  diversified  growth funds that  typically may
invest  up to 5% in any one  company,  the fund  adheres  to a more  restrictive
policy that limits the amount it invests in any one company to no more than 3.5%
of its total assets. It may also invest in rights to purchase common stocks, the
growth  prospects  of which are greater than most stocks but which may also have
above-average  market  risk.  The Fund  may  also  invest  in  preferred  stocks
consistent with the Fund's objective.  While most of the fund's  investments are
common  stocks,  some  may be  other  types  of  equities,  such as  convertible
securities and preferred  stocks.  The fund does not invest in securities issued
by tobacco-producing companies.

Investments  in  common  stocks  have  a  wide  range  of  characteristics,  and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and  companies  of all sizes.  In addition,  since 1945,  the overall
performance  of  common  stocks  has  exceeded  the rate of  inflation.  It is a
fundamental  policy of the Fund,  which may not be changed without approval of a
majority  of the  Fund's  outstanding  shares  (see  "Investment  Restrictions",
herein,  for majority voting  requirements),  that the Fund will not concentrate
its investments in any particular industry.

The Fund may  invest  up to 100% of its  assets  in  high-quality  money  market
instruments (including U.S. Treasury bills, commercial paper, CD's, and bankers'
acceptances),  repurchase  agreements  and other debt  securities  for temporary
defensive  purposes  when the Fund  Manager  deems such a position  advisable in
light of economic or market conditions.

The Fund may also invest in REITs,  futures  contracts,  covered  call  options,
options on stock indices,  foreign  securities,  and foreign  currency  exchange
contracts.


Scudder  Development  Fund  seeks  long-term  growth  of  capital  by  investing
primarily in U.S.  companies with the potential for  above-average  growth.  The
Fund  generally  invests  in equity  securities,  including  common  stocks  and
convertible  securities,  of  companies  that  the  Advisor  believes  have  the
potential for above-average revenue, earnings,  business value and/ or cash flow
growth.  To help reduce risk,  the Fund  allocates  its  investments  among many
companies. In selecting industries and companies for investment, the Advisor may
consider many factors, including overall growth prospects,  financial condition,
competitive position, technology, research and development,  productivity, labor
costs,  raw material costs and sources,  profit  margins,  return on investment,
structural  changes  in  local  economies,  capital  resources,  the  degree  of
governmental regulation or deregulation, management and other factors. 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  when the  anticipated  performance  of  foreign
securities  is  believed by the Advisor to offer more  potential  than  domestic
alternatives in keeping with the investment  objective of the Fund. However, the
Fund has no current  intention of  investing  more than 20% of its net assets in
foreign securities.

Scudder  Development  Fund may for temporary  defensive  purposes invest without
limit in cash and may invest in high  quality  debt  securities  without  equity
features,  U.S.  Government  securities and money market  instruments  which are
rated in the two  highest  categories  by Moody's or S&P,  or, if  unrated,  are
deemed  by  the  Advisor  to be of  equivalent  quality.  It  is  impossible  to
accurately  predict how long such  alternative  strategies  may be utilized.  In
addition, the Fund may invest in warrants,  convertible bonds, preferred stocks,
illiquid securities,  reverse repurchase  agreements,  repurchase agreements and
may  engage  in  securities   lending  and  strategic   transactions   including
derivatives.


Scudder Emerging  Markets Growth Fund is a  non-diversified  investment  company
which seeks long-term growth of capital  primarily  through equity investment in
emerging  markets  around the globe.  The Fund will  invest in the  Asia-Pacific
region,  Latin America,  less developed  nations in Europe,  the Middle East and
Africa,  focusing  investments in countries and regions where there appear to be
the  best  value  and  appreciation  potential,  subject  to  considerations  of


                                       13
<PAGE>

portfolio diversification and liquidity. At least 65% of the Fund's total assets
will be invested in the equity  securities of emerging market issuers.  The Fund
considers  "emerging  markets"  to  include  any  country  that is defined as an
emerging  or  developing  economy  by  any  one of the  International  Bank  for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation  or the  United  Nations  or its  authorities.  The Fund  intends to
allocate its investments  among at least three countries at all times,  and does
not expect to concentrate in any particular  industry.  The Fund deems an issuer
to be located in an emerging market if:

o        the issuer is organized under the laws of an emerging market country;

o        the  issuer's  principal  securities  trading  market is in an emerging
         market; or

o        at least 50% of the issuer's non-current assets, capitalization,  gross
         revenue  or profit in any one of the two most  recent  fiscal  years is
         derived (directly or indirectly  through  subsidiaries)  from assets or
         activities located in emerging markets.


The Fund may  invest  up to 35% of its  total  assets  in  emerging  market  and
domestic debt securities if the Advisor determines that the capital appreciation
of debt  securities  is likely to equal or exceed the  capital  appreciation  of
equity securities. Under normal market conditions, the Fund may invest up to 35%
of its assets in equity  securities  of issuers in the U.S. and other  developed
markets.


Scudder Emerging Markets Growth Fund may for temporary defensive purposes invest
without limit in debt instruments, cash and cash equivalents,  including foreign
and domestic  money market  instruments,  short-term  government  and  corporate
obligations,  and repurchase agreements.  It is impossible to accurately predict
how long such alternative  strategies may be utilized. In addition, the Fund may
invest in debt instruments such as warrants,  bonds, notes,  bills,  debentures,
convertible securities, bank obligations, short-term paper, loan participations,
loan  assignments  and trust  interests.  The Fund may also invest in closed end
investment   companies  investing   primarily  in  emerging  markets,   illiquid
securities,  purchase  securities on a when-issued  or forward  delivery  basis,
enter into reverse repurchase  agreements,  repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.

The Fund has adopted 144a procedures for the valuation of illiquid securities.


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.  The Fund invests on a worldwide basis in equity securities of companies
which are incorporated in the U.S. or in foreign  countries.  It also may invest
in the debt  securities of U.S. and foreign  issuers.  The Fund will be invested
usually in securities  of issuers  located in at least three  countries,  one of
which may be the U.S. It is expected that investments will include  companies of
varying size as measured by assets, sales or capitalization.  The Fund generally
invests in equity securities of established  companies listed on U.S. or foreign
securities exchanges, but also may invest in securities traded over-the-counter.
It also may invest in debt securities convertible into common stock, convertible
and non-convertible preferred stock, and fixed-income securities of governments,
government  agencies,  supranational  agencies  and  companies  when the Advisor
believes the potential for appreciation will equal or exceed that available from
investments in equity securities. These debt and fixed-income securities will be
investment-grade,  except that the Fund may invest up to 5% of its total  assets
in debt securities rated below investment-grade.


Scudder Global Fund may for temporary defensive purposes invest without limit in
cash and cash equivalents.  It is impossible to accurately predict how long such
alternative  strategies  may be utilized.  In  addition,  the Fund may invest in
warrants,  zero-coupon  securities,   illiquid  securities,  reverse  repurchase
agreements,  repurchase  agreements  and may engage in  securities  lending  and
strategic transactions including derivatives.

Scudder Gold Fund is a  non-diversified  investment  company which seeks maximum
return (principal change and income) consistent with investing in a portfolio of
gold-related  equity  securities  and  gold.  The  Fund  pursues  its  objective
primarily through a portfolio of gold-related  investments.  Under normal market
conditions,  at least 65% of the Fund's  total  assets  will be  invested in (1)
equity securities  (defined as common stock,  investment-grade  preferred stock,
warrants and debt  securities  that are  convertible  into or  exchangeable  for
common  stock)  of  U.S.  and  foreign   companies   primarily  engaged  in  the
exploration,  mining, fabrication,  processing or distribution of gold, (2) gold
bullion, and (3) gold coins. A company will be considered "primarily engaged" in
a business  or an  activity if it devotes or derives at least 50% of its assets,
revenues and/or operating earnings from that business or activity. The remaining
35% of the Fund's assets may be


                                       14
<PAGE>

invested  in any  precious  metals  other than  gold;  in equity  securities  of
companies  engaged in  activities  primarily  relating  to  precious  metals and
minerals  other  than  gold;  in  investment-grade  debt  securities,  including
warrants, zero coupon bonds, of companies engaged in activities relating to gold
or other precious metals and minerals; in certain debt securities,  a portion of
the return on which is indexed to the price of precious metals; and, for hedging
purposes, in precious metals; and utilize various other strategic  transactions.
Consistent with applicable  state securities laws, up to 10% of the Fund's total
assets may be invested directly in gold, silver,  platinum and palladium bullion
and in gold and silver coins. In addition,  the Fund's assets may be invested in
wholly owned  subsidiaries of Scudder Mutual Funds, Inc., of which the Fund is a
series, that invest in gold, silver,  platinum and palladium bullion and in gold
and silver coins.

Scudder  Gold Fund may hold  cash,  high  quality  cash  equivalents  (including
foreign money market instruments) such as bankers' acceptances, CD's, commercial
paper,   short-term  government  and  corporate   obligations,   and  repurchase
agreements,  obligations  issued  or  guaranteed  by the  U.S.  government,  its
agencies or instrumentalities without limit for temporary defensive purposes and
up to 30% to maintain liquidity.  In addition,  the Fund may invest in warrants,
foreign  currencies in the form of bank  deposits,  short sales against the box,
illiquid securities,  reverse repurchase  agreements,  repurchase agreements and
may  engage  in  securities   lending  and  strategic   transactions   including
derivatives.

Scudder Greater Europe Growth Fund is a non-diversified investment company which
seeks long-term  growth of capital through  investments  primarily in the equity
securities of European companies. Although its focus is on long-term growth, the
Fund may provide current income principally  through holdings in dividend-paying
securities.  The Fund will invest, under normal market conditions,  at least 80%
of its total assets in the equity securities of European companies.

The Fund defines a European company as follows:

         o        A company  organized  under the laws of a European  country or
                  for  which  the  principal  securities  trading  market  is in
                  Europe; or

         o        A  company,  wherever  organized,  where at  least  50% of the
                  company's non-current assets, capitalization, gross revenue or
                  profit in its most recent fiscal year represents  (directly or
                  indirectly through  subsidiaries) assets or activities located
                  in Europe.

The Fund may invest,  under  normal  market  conditions,  up to 20% of its total
assets in European debt  securities.  Within this 20% limit, the Fund may invest
in debt  securities  which are unrated,  rated, or the equivalent of those rated
below investment-grade.

Scudder Greater Europe Growth Fund may hold foreign or U.S. debt  instruments as
well as cash or cash  equivalents,  including  foreign and domestic money market
instruments,  short-term  government and corporate  obligations,  and repurchase
agreements  without  limit for  temporary  defensive  purposes  and up to 20% to
maintain  liquidity.  It is  impossible  to  accurately  predict  how long  such
alternative  strategies  may be utilized.  In  addition,  the Fund may invest in
closed end investment  companies,  warrants,  when-issued  securities,  illiquid
securities, reverse repurchase agreements,  repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.

Scudder Health Care Fund is a non-diversified  fund which seeks long-term growth
of capital primarily  through  investment in common stocks of companies that are
engaged primarily in the development,  production or distribution of products or
services  related to the  treatment or  prevention of diseases and other medical
problems.  These include  companies that operate hospitals and other health care
facilities;  companies  that  design,  manufacture  or  sell  medical  supplies,
equipment and support  services;  and  pharmaceutical  firms.  The Fund may also
invest  in   companies   engaged  in  medical,   diagnostic,   biochemical   and
biotechnological research and development. The Fund "concentrates," for purposes
of the 1940 Act,  its assets in  securities  related to a  particular  industry,
which means that at least 25% of its net assets will be invested in these assets
at all times. As a result, the Fund may be subject to greater market fluctuation
than a fund which has  securities  representing  a broader  range of  investment
alternatives.


The Fund  invests in the equity  securities  of health  care  companies  located
throughout the world.  In the opinion of the Advisor,  investments in the health
care  industry  offer  potential  for   significant   growth  due  to  favorable
demographic trends,  technological  advances in the industry, and innovations by
companies in the diagnosis and treatment of illnesses.


                                       15
<PAGE>

Under  normal  circumstances,  the Fund  will  invest  at least 80% of its total
assets in  common  stocks  of  companies  in a group of  related  industries  as
described below. The Fund will invest in securities of U.S.  companies,  but may
invest in foreign  companies as well. A security will be considered  appropriate
for the Fund if at least 50% of its total  assets,  revenues,  or net  income is
related to or derived from the industry or industries  designated  for the Fund.
The  industries  in the health care sector are  pharmaceuticals,  biotechnology,
medical products and supplies, and health care services.  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 stock also offers  greater  potential for long-term  gain on  investment,
compared to other classes of financial assets such as bonds or cash equivalents.


While the Fund invests  predominantly  in common  stocks,  the Fund may purchase
convertible securities,  rights, warrants and illiquid securities.  The Fund may
enter into  repurchase  agreements and reverse  repurchase  agreements,  and may
engage in  strategic  transactions,  using such  derivatives  contracts as index
options and futures, to increase stock market  participation,  enhance liquidity
and manage transaction costs.  Securities may be listed on national exchanges or
traded  over-the-counter.  The Fund may invest up to 20% of its total  assets in
U.S.  Treasury  securities,  and agency  and  instrumentality  obligations.  For
temporary defensive purposes, the Fund may invest without limit in cash and cash
equivalents  when  the  Advisor  deems  such a  position  advisable  in light of
economic or market  conditions.  It is impossible to predict accurately how long
such alternative strategies may be utilized.

Scudder Large Company Growth Fund seeks to provide  long-term  growth of capital
through investment  primarily in the equity securities of seasoned,  large-sized
financially-strong U.S. growth companies.  The Fund's equity investments consist
of common  stocks,  preferred  stocks and  securities  convertible  into  common
stocks,  rights and warrants of companies which 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 S&P 500 Index.  The
Fund  invests  at least 65% of its  total  assets in the  equity  securities  of
seasoned, financially-strong U.S. growth companies which are considered to be of
above-average  financial  quality.  The common stocks issued by these  companies
qualify,  at the time of purchase,  for one of the three highest  equity ranking
categories  (A+, A or A-) of S&P or, if not  ranked by S&P,  are judged to be of
comparable  quality by the  Advisor.  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
Advisor  conducts its own  analysis of a company's  history,  current  financial
position,  and earnings  prospects.  The Fund  allocates its  investments  among
different  industries and companies,  and adjusts its portfolio securities based
on long-term investment  considerations as opposed to short-term trading.  While
the Fund emphasizes U.S.  investments,  it can commit a portion of assets to the
equity securities of foreign growth companies which meet the criteria applicable
to domestic  investments.  The Fund may invest in convertible  securities  which
must be investment-grade.


Scudder Large Company Growth Fund may for temporary  defensive  purposes  invest
without  limit in cash and cash  equivalents.  It is  impossible  to  accurately
predict how long such alternative  strategies may be utilized. In addition,  the
Fund may invest in warrants,  foreign securities,  illiquid securities,  reverse
repurchase  agreements,  repurchase  agreements  and may  engage  in  securities
lending and strategic transactions including derivatives.


Scudder  Large  Company Value Fund seeks to maximize  long-term  capital  growth
through a value-orientated  investment approach.  The Fund invests in marketable
securities,  principally  common  stocks and,  consistent  with its objective of
long-term capital growth, preferred stocks. The Fund is free to invest in a wide
range of marketable  securities  which the Advisor  believes offer the potential
for long-term,  above-average growth. The Fund will normally invest at least 65%
of its assets in the equity securities of large U.S.  companies.  The Fund looks
for  companies  whose  securities  appear to  present a  favorable  relationship
between market price and opportunity.  These may include securities of companies
whose  fundamentals  or products  may be of only average  promise.  The Fund may
invest  up to  20%  of  its  net  assets  in  debt  securities  when  management
anticipates that the capital  appreciation on debt securities is likely to equal
or exceed the capital  appreciation  on common stocks over a selected time, such
as during periods of unusually high interest rates.  Such debt securities may be
rated below  investment-grade,  or of  equivalent  quality as  determined by the
Advisor.  However,  the Fund will  invest no more than 20% of its net  assets in
securities rated B or lower.


                                       16
<PAGE>

Scudder Large Company Value Fund may for  temporary  defensive  purposes  invest
without  limit  in debt  securities,  short-term  indebtedness,  cash  and  cash
equivalents.  It is impossible to accurately  predict how long such  alternative
strategies  may be  utilized.  In  addition,  the Fund  may  invest  in  rights,
warrants,  convertible  securities,   illiquid  securities,  reverse  repurchase
agreements,  repurchase  agreements  and may engage in  securities  lending  and
strategic transactions including derivatives.


Scudder Latin America Fund is a non-diversified  investment  company which seeks
to provide long-term capital  appreciation  through investment  primarily in the
securities of Latin American issuers. The Fund involves above-average investment
risk.  The Fund seeks to benefit from  economic and  political  trends  emerging
throughout Latin America. These trends are supported by governmental initiatives
designed  to promote  freer  trade and  market-oriented  economies.  The Advisor
believes that efforts by Latin American countries to, among other things, reduce
government  spending and  deficits,  control  inflation,  lower trade  barriers,
stabilize currency exchange rates,  increase foreign and domestic investment and
privatize  state-owned  companies,  will set the stage for attractive investment
returns  over time.  At least 65% of the Fund's total assets will be invested in
the  securities of Latin  American  issuers,  and 50% of the Fund's total assets
will be invested in Latin American equity  securities.  To meet its objective to
provide long-term capital  appreciation,  the Fund normally invests at least 65%
of its total assets in equity  securities.  The Fund  considers  Latin  American
countries  to  include   Mexico,   Central   America,   South  America  and  the
Spanish-speaking  islands of the Caribbean. The Fund defines securities of Latin
American issuers as follows:


         o        Securities  of companies  organized  under the laws of a Latin
                  American country or for which the principal securities trading
                  market is in Latin America;

         o        Securities issued or guaranteed by the government of a country
                  in Latin America, its agencies or instrumentalities, political
                  subdivisions or the central bank of such country;

         o        Securities of companies, wherever organized, when at least 50%
                  of  an  issuer's  non-current  assets,  capitalization,  gross
                  revenue  or  profit in any one of the two most  recent  fiscal
                  years represents (directly or indirectly through subsidiaries)
                  assets or activities located in Latin America; or

         o        Securities of Latin American issuers, as defined above, in the
                  form of depositary shares.

The  Fund  may  invest  in debt  securities  which  are  unrated,  rated  or the
equivalent  of those rated  below  investment-grade  although  the Fund will not
invest more than 10% of its net assets in securities rated B or lower by Moody's
or S&P and may invest in securities rated C by Moody's or D by S&P.

Scudder Latin America Fund may for temporary  defensive  purposes invest without
limit  in  cash  and  cash  equivalents  and  money  market  instruments,  or in
securities  of U.S. or other  non-Latin  American  issuers.  It is impossible to
accurately  predict how long such  alternative  strategies  may be utilized.  In
addition,  the Fund may invest in closed end investment  companies  primarily in
Latin  America,  warrants,  loan  participations  and  assignments,  when-issued
securities,  convertible  securities,  illiquid  securities,  reverse repurchase
agreements,  repurchase  agreements  and may engage in  securities  lending  and
strategic transactions including derivatives.

Scudder Pacific Opportunities Fund is a non-diversified investment company which
seeks  long-term  growth of capital through  investment  primarily in the equity
securities of Pacific Basin companies,  excluding Japan. The Fund invests, under
normal market conditions, at least 65% of its assets in the equity securities of
Pacific Basin companies.  Pacific Basin countries include Australia, the Peoples
Republic of China, India, Indonesia, Malaysia, New Zealand, the Philippines, Sri
Lanka, Pakistan and Thailand,  as well as Hong Kong, Singapore,  South Korea and
Taiwan -- the so-called "four tigers." The Fund may invest in other countries in
the Pacific Basin when their markets  become  sufficiently  developed.  The Fund
will not, however,  invest in Japanese securities.  The Fund intends to allocate
investments  among at least three  countries at all times and does not expect to
concentrate  investments in any particular industry. The Fund defines securities
of Pacific Basin companies as follows:

         o        Securities of companies  organized under the laws of a Pacific
                  Basin  country or for which the principal  securities  trading
                  market is in the Pacific Basin; or

                                       17
<PAGE>

         o        Securities of companies, wherever organized, when at least 50%
                  of  a  company's  non-current  assets,  capitalization,  gross
                  revenue  or  profit in any one of the two most  recent  fiscal
                  years represents (directly or indirectly through subsidiaries)
                  assets or activities located in the Pacific Basin.


Under normal market  conditions,  the Fund may invest up to 35% of its assets in
equity securities of U.S. and other non-Pacific Basin issuers (excluding Japan).
The Fund may  invest  up to 35% of its  total  assets in  foreign  and  domestic
high-grade  debt   securities  if  the  Advisor   determines  that  the  capital
appreciation  of debt  securities  is  likely  to equal or  exceed  the  capital
appreciation of equity securities.


Scudder Pacific  Opportunities Fund may for temporary  defensive purposes invest
without  limit  in  debt  instruments  as well as  cash  and  cash  equivalents,
including foreign and domestic money market instruments,  short-term  government
and  corporate  obligations,  and  repurchase  agreements.  It is  impossible to
accurately  predict how long such  alternative  strategies  may be utilized.  In
addition,  the  Fund  may  invest  in  common  stock,  preferred  stock  (either
convertible or non-convertible), depository receipts, rights, warrants, illiquid
securities,  when-issued securities,  reverse repurchase agreements,  repurchase
agreements  and may engage in  securities  lending  and  strategic  transactions
including derivatives.

Scudder Select 1000 Growth Fund is a non-diversified  fund which seeks long-term
growth of capital  through  investment  in selected  stocks of  companies in the
Russell 1000(R) Growth Index, an unmanaged  index of  growth-oriented  mid-sized
and large company  stocks.  The Fund pursues its objective by investing at least
80% of its total assets in the stocks of  companies  in the index.  Under normal
circumstances, the Fund invests primarily in common stocks.

The Fund's portfolio management team will apply a multi-step  investment process
to select certain of the composite  stocks in the Fund's benchmark index for its
portfolio.  This  process  includes  the  following  steps:

         o        Ranking - using a proprietary  computer  model,  the stocks of
                  companies in the particular  benchmark index are evaluated and
                  ranked based on their growth  prospects,  relative  valuation,
                  and history of rising prices.

         o        Selection  - the 20%  lowest  ranking  stocks in the index are
                  generally excluded from the portfolio.

         o        Portfolio  Construction - From the remaining 80% of stocks,  a
                  subset  is  selected   and   weighted   to  ensure   portfolio
                  diversification  and  attempts to create a  portfolio  that is
                  similar to the  benchmark  index.  Factors to be considered in
                  the  allocation  of the  remaining  stocks  include  level  of
                  exposure to specific  industries,  company specific  financial
                  data, price volatility, and market capitalization.

         o        Ongoing Active Management - the fund's portfolio is rebalanced
                  on an  ongoing  basis as the  rankings  of the  stocks  in the
                  benchmark indices change over time.

The Fund may, but is not  required  to,  invest up to 20% of its total assets in
investment  grade debt  securities.  The Fund can purchase other types of equity
securities   including  preferred  stocks  (convertible   securities),   rights,
warrants,  and  illiquid  securities.  Securities  may  be  listed  on  national
exchanges  or traded  over-the-counter.  The Fund may,  but is not  required to,
utilize  other  investments  and  investment  techniques  that may  impact  fund
performance,   including,  but  not  limited  to,  options,  futures  and  other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).

The Fund manages risk by diversifying widely among industries and companies, and
using disciplined security selection.  The Fund may, but is not required to, use
derivatives in an attempt to manage risk.  The use of derivatives  could magnify
losses. For temporary defensive purposes, the Fund may invest, without limit, in
cash and cash equivalents,  U.S. government securities, money market instruments
and high quality debt securities without equity features.

Scudder Small Company Stock Fund is designed to provide long-term capital growth
while actively seeking to reduce downside risk compared with other small company
stock funds.  The Fund pursues this  investment  objective by investing at least
65% of total assets in common stocks of small U.S.  companies with above-average
long-term  capital  growth.  The fund does not  invest in  securities  issued by
tobacco-producing companies.

Under  normal  circumstances,  the Fund may  invest  up to 5% of its  assets  in
certain short-term fixed income securities  including  high-quality money market
securities such as U.S. Treasury bills, repurchase agreements, commercial paper,
CD's  issued by  domestic  and  foreign  branches  of U.S.  banks  and  bankers'
acceptances,  although  cash  or  cash  equivalents  are  normally  expected  to
represent  less than 1% of the Fund's  assets.  The Fund may invest up to 20% of
its assets in


                                       18
<PAGE>

stock  futures  contracts  and  options  in order  to  invest  uncommitted  cash
balances, to maintain liquidity to meet shareholder redemptions,  or to minimize
trading costs.

The Fund may also invest in  Standard & Poor's  Depositary  Receipts  ("SPDRs").
SPDRs  typically  trade  like a share of  common  stock and  provide  investment
results that  generally  correspond  to the price and yield  performance  of the
component  common stocks of S&P 500 Index.  There can be no assurance  that this
can be  accomplished  as it may not be possible for the trust to  replicate  and
maintain  exactly the  composition  and  relative  weightings  of the  component
securities of the S&P 500 Index. SPDRs are subject to the risks of an investment
in a broadly  based  portfolio  of common  stocks,  including  the risk that the
general level of stock prices may decline, thereby adversely affecting the value
of such investment.  SPDRs are also subject to risks other than those associated
with an  investment  in a broadly  based  portfolio of common stocks in that the
selection of the stocks  included in the trust may affect  trading in SPDRs,  as
compared with trading in a broadly based portfolio of common stocks.

The Fund is neither sponsored by nor affiliated with Standard & Poor's.

In pursuing its objective of long-term capital growth, the Fund normally remains
substantially  invested in the common  stocks of small U.S.  companies.  Using a
quantitative investment approach developed by the Fund Manager, the Fund focuses
on equity  securities of companies with market  capitalization  below $2 billion
and that the Fund  Manager  believes are  undervalued  relative to the stocks in
Russell 2000  Index(R).  The Russell  2000  Index(R) is a widely used measure of
small stock  performance.  The Fund will sell  securities of companies that have
grown in market  capitalization  above this level as  necessary to keep the Fund
focused on small companies.

The Fund takes a diversified approach to investing. It generally invests no more
than 2% of its assets in the securities of any one company and typically invests
in over 150 securities, representing a variety of U.S. industries.

While the Fund invests  predominantly  in common  stocks,  it can purchase other
types of equity  securities  including  preferred stocks (either  convertible or
non-convertible),  rights and  warrants.  Securities  may be listed on  national
exchanges  or  traded  over-the-counter.  The Fund may  invest  up to 20% of its
assets in U.S. Treasury, agency and instrumentality  obligations, may enter into
repurchase  agreements  and may  make use of  financial  futures  contracts  and
related  options.  The Fund may  purchase  and sell  options or futures on stock
indices for  hedging  purposes as a temporary  investment  to  accommodate  cash
flows.  The Fund  may also  invest  in  REITs,  covered  call  options,  foreign
securities, and foreign currency exchange contracts.

For  temporary  defensive  purposes,  the Fund may invest  without limit in high
quality money market  securities,  including  U.S.  Treasury  bills,  repurchase
agreements,  commercial  paper,  CD's issued by domestic and foreign branches of
U.S.  banks,  bankers'  acceptances,  and other  debt  securities,  such as U.S.
government  obligations  and corporate  debt  instruments  when the Fund Manager
deems such a position advisable in light of economic or market conditions.

Scudder  Small  Company  Value  Fund  pursues  long-term  growth of  capital  by
investing  in  undervalued  stocks of small U.S.  companies.  The fund  normally
invests  at least  90% of its  assets in common  stocks  of  companies  that are
similar in size to those  included  in the  Russell  2000  index--a  widely used
benchmark of small stock  performance.  Typically,  these companies have a stock
market value of less than $1.5 billion.  Companies  represented in the portfolio
of the Fund typically have the following characteristics:

         o        Attractive  valuations relative to the Russell 2000 Index -- a
                  widely used  benchmark of small stock  performance -- based on
                  measures  such as price to  earnings,  price to book value and
                  price to cash flow ratios.

         o        Favorable  trends in  earnings  growth  rates and stock  price
                  momentum.

While the Fund invests  predominately  in common  stocks,  it can purchase other
types of equity securities including preferred stocks (convertible  securities),
rights,  warrants and illiquid securities.  The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality  obligations, may enter into
repurchase  agreements  and  reverse  repurchase  agreements  and may  engage in
strategic  transactions,  using such derivatives  contracts as index options and
futures,  to increase stock market  participation,  enhance liquidity and manage
transaction costs.

                                       19
<PAGE>

Scudder Small Company Value Fund may for  temporary  defensive  purposes  invest
without  limit in cash and cash  equivalents.  It is  impossible  to  accurately
predict how long such alternative strategies may be utilized.

Scudder  Technology  Innovation  Fund is a  non-diversified  fund,  which  seeks
long-term  growth of capital  primarily  through  investment in common stocks of
companies   engaged  in  the   development,   production  or   distribution   of
technology-related  products or  services.  These types of products and services
currently  include  computer  hardware  and  software,  semi-conductors,  office
equipment and automation,  and Internet-related  products and services. The Fund
"concentrates,"  for purposes of the 1940 Act, its assets in securities  related
to a particular  industry,  which means that at least 25% of its net assets will
be invested in these assets at all times. As a result,  each Fund may be subject
to greater market  fluctuation  than a fund which has securities  representing a
broader range of investment alternatives.

Under  normal  circumstances,  the Fund  will  invest  at least 80% of its total
assets in  common  stocks  of  companies  in a group of  related  industries  as
described below. The Fund will invest in securities of U.S.  companies,  but may
invest in foreign  companies as well. A security will be considered  appropriate
for the Fund if at least 50% of its total  assets,  revenues,  or net  income is
related to or derived from the industry or industries  designated  for the Fund.
The  industries  in the  technology  sector are computers  (including  software,
hardware and internet-related businesses), computer services, telecommunications
and  semi-conductors.  Common  stock is issued by  companies  to raise  cash for
business  purposes  and  represents  a  proportionate  interest  in the  issuing
companies.  Therefore,  a 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  stock also
offers greater  potential for long-term  gain on  investment,  compared to other
classes of financial assets such as bonds or cash equivalents.


While the Fund invests  predominantly  in common  stocks,  the Fund may purchase
convertible securities,  rights, warrants and illiquid securities.  The Fund may
enter into  repurchase  agreements and reverse  repurchase  agreements,  and may
engage in  strategic  transactions,  using such  derivatives  contracts as index
options and futures, to increase stock market  participation,  enhance liquidity
and manage transaction costs.  Securities may be listed on national exchanges or
traded  over-the-counter.  The Fund may invest up to 20% of its total  assets in
U.S.  Treasury  securities,  and agency  and  instrumentality  obligations.  For
temporary defensive purposes, the Fund may invest without limit in cash and cash
equivalents  when  the  Advisor  deems  such a  position  advisable  in light of
economic or market  conditions.  It is impossible to predict accurately how long
such alternative strategies may be utilized.


Securities  issued through an initial public offering  ("IPO") can experience an
immediate  drop in value if the demand for the  securities  does not continue to
support the offering price.  Information  about the issuers of IPO securities is
also  difficult  to  acquire  since  they are new to the market and may not have
lengthy  operating  histories.  The Fund may  engage in  short-term  trading  in
connection  with its IPO  investments,  which could produce higher trading costs
and  adverse  tax  consequences.  The number of  securities  issued in an IPO is
limited,  so it is likely that IPO securities will represent a smaller component
of the Fund's  portfolio  as the Fund's  assets  increase  (and thus have a more
limited effect on the Fund's performance).


The Japan Fund is a  diversified  mutual fund which  seeks to achieve  long-term
capital  appreciation  by investing  primarily in equity  securities  (including
American  Depositary  Receipts) of Japanese  companies.  Equity  securities  are
defined as common and preferred stock,  debt securities  convertible into common
stock  (sometimes  referred to as  "convertible  debentures")  and common  stock
purchase warrants. Under normal conditions, the Fund will invest at least 80% of
its assets in Japanese  securities,  that is, securities issued by entities that
are  organized  under the laws of Japan  ("Japanese  companies"),  securities of
affiliates of Japanese  companies,  wherever organized or traded, and securities
of issuers not  organized  under the laws of Japan but  deriving  50% or more of
their  revenues  from  Japan.  These  securities  may  include  debt  securities
(Japanese  government debt securities and debt securities of Japanese companies)
when the Advisor  believes  that the  potential  for capital  appreciation  from
investment in debt  securities  equals or exceeds that available from investment
in equity  securities.  The Fund may also  invest up to 30% of its net assets in
equity securities of Japanese companies which are traded in an  over-the-counter
market.  These are  generally  securities of  relatively  small or  little-known
companies  that  the  Advisor  believes  have   above-average   earnings  growth
potential.  The Fund may  invest up to 20% of its  assets in cash or  short-term
government or other short-term prime  obligations in order to have funds readily
available  for general  corporate  purposes,  including the payment of operating
expenses,  dividends and  redemptions,  or the investment in securities  through
exercise of rights or otherwise, or in repurchase agreements.  Where the Advisor
determines  that market or economic  conditions  so warrant,  the Fund


                                       20
<PAGE>

may, for  temporary  defensive  purposes,  invest more than 20% of its assets in
cash or such securities. It is impossible to predict for how long such alternate
strategies  may be  utilized.  In  addition,  the Fund may  invest  in  illiquid
securities,  options, futures contracts, warrants, reverse repurchase agreements
and may engage in securities lending and strategic transactions.

Scudder  21st  Century  Growth  Fund  pursues  long-term  growth of  capital  by
investing in emerging growth  companies that have the potential to be leaders in
the next century.  Emerging  growth  companies tend to be small or  little-known
companies  that have strong  prospects  for growth  because  they may offer such
things as  cutting  edge  products,  unique  services,  innovative  distribution
channels or  technological  advances.  The fund normally invests at least 80% of
its  assets in common  stocks of  companies  that are  similar  in size to those
included in the Russell  2000 index -- a widely  used  benchmark  of small stock
performance.  Typically,  these companies have a stock market value of less than
$1.5 billion.  The Advisor  believes  these  companies are  well-positioned  for
above-average earnings growth and/or greater market recognition.  Such favorable
prospects  may be a result of new or  innovative  products  or  services a given
company is developing or provides,  products or services that have the potential
to impact  significantly the industry in which the company competes or to change
dramatically  customer behavior in the 21st century.  To help reduce risk in its
search for high quality,  emerging growth  companies,  the Advisor allocates the
Fund's  investments  among many  companies and different  industries in the U.S.
and, where opportunity  warrants,  abroad as well. Emerging growth companies are
those with the ability,  in the Advisor's opinion,  to expand earnings per share
by at least 15% per annum over the next three to five years at a minimum.

The Fund may for temporary, defensive or emergency purposes invest without limit
in cash and high quality debt  securities  without  equity  features,  which are
rated Aaa, Aa or A by Moody's or AAA, AA or A by S&P, or, if unrated, are deemed
by the Advisor to be of  equivalent  quality,  U.S.  Government  securities  and
invest in money market instruments which are rated in the two highest categories
by Moody's or S&P or, if unrated,  are deemed by the Advisor to be of equivalent
quality.  It is  impossible  to  accurately  predict  how long such  alternative
strategies  may be  utilized.  In  addition,  the Fund may  invest  in shares of
preferred stocks,  convertible securities,  rights, warrants, reverse repurchase
agreements  and may engage in  securities  lending  and  strategic  transactions
including derivatives.


The Fund has adopted 144a procedures for the valuation of illiquid securities.

Value  Fund  --  Scudder  Shares  seeks  long-term  growth  of  capital  through
investment  in  undervalued  equity  securities.  The Fund invests  primarily in
common   stock  of  larger,   established   domestic   companies   with   market
capitalization of at least $1 billion that the Fund's portfolio  management team
believes are  undervalued in the  marketplace.  The Fund invests at least 80% of
its  assets in equity  securities,  which  consist of common  stocks,  preferred
stocks, securities convertible into common stocks, rights and warrants. The Fund
may invest up to 20% of its total  assets in debt  obligations,  including  zero
coupon  securities,  may enter into repurchase  agreements,  reverse  repurchase
agreements and may also engage in strategic  transactions  including derivatives
for hedging  purposes and to seek to increase gain. The debt securities in which
the Fund may be invested may be rated below investment-grade,  although the Fund
will invest no more than 10% of its net assets in securities rated B or lower by
S&P or Moody's,  and may not invest more than 5% of its net assets in securities
rated C by Moody's or D by S&P.

Value Fund -- Scudder Shares may for temporary defensive purposes invest without
limit in cash and cash equivalents.  It is impossible to accurately  predict how
long such  alternative  strategies  may be utilized.  In addition,  the Fund may
invest in illiquid securities and may engage in securities lending.

If you require more detailed  information about an Underlying  Scudder Fund call
Scudder Investor  Relations at  1-800-SCUDDER to obtain the complete  prospectus
and statement of additional information for that fund.

The  following  chart shows the  Average  Annual  Total  Returns for each of the
Underlying  Scudder Funds for their most recent one-,  five-,  ten-year  periods
ended October 31, 2000 or the life of fund if shorter.



<TABLE>
<CAPTION>

                                                                             Average Annual Total Returns
---------------------------------------------------------------------------------------------------------------------------------
                                              Inception      Assets         One            Five           Ten         Life of
                                                Date          as of         Year           Years         Years          Fund
                                             ----------     10/31/00        ----           -----         -----          ----

                                       21
<PAGE>

                                                                             Average Annual Total Returns
---------------------------------------------------------------------------------------------------------------------------------
                                                          (in millions)
---------------------------------------------------------------------------------------------------------------------------------
Money Market Fund
---------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>           <C>            <C>            <C>          <C>
Scudder Cash Investment Trust                 7/23/76         1,300         5.45           4.87           4.57          --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Money Market Series - Scudder         7/7/97          1,085         6.28            --             --          5.61
Premium Money Market Shares
---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------
Bond Mutual Funds
---------------------------------------------------------------------------------------------------------------------------------
Scudder Emerging Markets Income Fund          12/31/93         140          15.32          8.88            --           6.39
---------------------------------------------------------------------------------------------------------------------------------
Scudder Global Bond Fund                      3/1/91           143           -.84             2.27         --           3.92
---------------------------------------------------------------------------------------------------------------------------------
Scudder GNMA Fund***                          7/5/85          3,977         6.52           5.79           6.74          --
---------------------------------------------------------------------------------------------------------------------------------
Scudder High Yield Bond Fund                  6/28/96          123          -3.32            --            --           5.73
---------------------------------------------------------------------------------------------------------------------------------
Scudder Income Fund                           5/10/28          795           5.96           5.20           7.58         --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Short Term Bond Fund                  4/2/84           988          5.72           4.61            5.84         --
---------------------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------------------
Equity Mutual Funds
---------------------------------------------------------------------------------------------------------------------------------
Classic Growth Fund-Scudder Shares            9/9/96           195          25.60           --             --          25.20
---------------------------------------------------------------------------------------------------------------------------------
Scudder Balanced Fund                         1/4/93          1,084         6.57           14.51           --          12.07
---------------------------------------------------------------------------------------------------------------------------------
Scudder Capital Growth Fund**                 11/30/84        2,442         16.11          23.28         20.26          --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Development Fund                      1/18/71          790          24.48          13.42         18.59          --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Dividend & Growth Fund                7/17/98          32           20.95           --             --          10.36
---------------------------------------------------------------------------------------------------------------------------------
Scudder Emerging Markets Growth Fund          5/8/96           72           -5.61           --             --          -1.52
---------------------------------------------------------------------------------------------------------------------------------
Global Discovery Fund-Scudder Shares          9/10/91          576          48.67          21.70           --          17.12
---------------------------------------------------------------------------------------------------------------------------------
Scudder Global Fund                           7/23/86         1,572         8.80           12.67         12.41          --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Gold Fund                             8/22/88          82          -20.08          -9.06          -1.75         --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Greater Europe Growth Fund            10/10/94        1,403         11.31          20.25           --          19.46
---------------------------------------------------------------------------------------------------------------------------------
Scudder Growth and Income Fund                3/15/29        11,252          6.68          15.10          15.92         --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Health Care Fund                      3/2/98           246          87.76           --             --          31.41
---------------------------------------------------------------------------------------------------------------------------------
Scudder International Fund                    6/15/54         4,507          .63           13.84         11.26          --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Large Company Growth Fund             5/15/91         1,410         10.86          22.69           --          17.89
---------------------------------------------------------------------------------------------------------------------------------
Scudder Large Company Value Fund              6/6/56          2,354         12.18          16.79         17.74          --
---------------------------------------------------------------------------------------------------------------------------------
Scudder Latin America Fund                    12/08/92         423          14.15           9.83           --          10.87
---------------------------------------------------------------------------------------------------------------------------------
Scudder Pacific Opportunities Fund            12/08/92         105         -14.14          -7.64           --          -1.56
---------------------------------------------------------------------------------------------------------------------------------
Scudder S&P 500 Index Fund                    8/29/97         1,120          5.63           --             --          16.79
---------------------------------------------------------------------------------------------------------------------------------
Scudder Select 500 Fund                       5/17/99          38           12.16           --             --          10.17
---------------------------------------------------------------------------------------------------------------------------------
Scudder Select 1000 Growth Fund               5/17/99          32           11.47           --             --          13.26
---------------------------------------------------------------------------------------------------------------------------------
Scudder Small Company Stock Fund**            2/1/97           88           3.48            --             --          4.94
---------------------------------------------------------------------------------------------------------------------------------
Scudder Small Company Value Fund              10/6/95          166          4.05           9.30            --          8.69
---------------------------------------------------------------------------------------------------------------------------------
Scudder Technology Innovation Fund            3/2/98           816          66.44           --             --          64.78
---------------------------------------------------------------------------------------------------------------------------------
Scudder 21st Century Growth Fund              9/9/96           373          33.93           --             --          23.12
---------------------------------------------------------------------------------------------------------------------------------
Value Fund-Scudder Shares                     12/31/92         350          17.63          17.34           --          15.84
---------------------------------------------------------------------------------------------------------------------------------
The Japan Fund                                4/19/62*         708          -5.07          12.50          4.69          --
---------------------------------------------------------------------------------------------------------------------------------

</TABLE>

*   From April 19, 1962 until August 14, 1987, the Fund operated as a closed-end
    diversified management investment company.

**  On July 17, 2000, the funds were reorganized from AARP Growth Trust into two
    newly created series of Investment Trust. The performance above reflects the
    performance  of Class AARP  shares for the period  ended March 31, 2000 from
    when the funds were AARP Capital  Growth Fund and AARP Small  Company  Stock
    Fund. If the Advisor had not  maintained  expenses,  the total returns would
    have been lower.

*** On July 17, 2000, the fund was reorganized from AARP GNMA and U.S.  Treasury
    Fund into Scudder GNMA Fund.  The  performance  reflects the  performance of
    Class AARP  shares for the period  ended  March 31,  2000 from AARP GNMA and
    U.S. Treasury Fund.

All  total  return   calculations   assume  that  dividends  and  capital  gains
distributions,  if any, were reinvested.

                                       22
<PAGE>

Performance  figures are  historical  and are not  intended  to indicate  future
investment performance.

Risk Factors of Underlying Scudder Funds


In pursuing their investment objectives, each of the Underlying Scudder Funds is
permitted  to engage in a wide  range of  investment  policies.  The  Underlying
Scudder Funds' risks are determined by the nature of the securities held and the
portfolio management  strategies used by the Advisor.  Certain of these policies
are described in the  "Glossary"  and further  information  about the Underlying
Scudder  Funds is  contained  in the  prospectuses  of such funds.  Because each
Portfolio  invests in certain of the Underlying  Scudder Funds,  shareholders of
each  Portfolio  will  be  affected  by  these  investment  policies  in  direct
proportion to the amount of assets each  Portfolio  allocates to the  Underlying
Scudder Funds pursuing such policies.


Investment Restrictions of the Portfolios

The policies set forth below are fundamental  policies of each Portfolio and may
not be changed with respect to each of the Portfolios  without the approval of a
majority  of such  Portfolio's  outstanding  shares.  As  used in this  combined
Statement  of  Additional  Information,  a "majority of the  outstanding  voting
securities  of a  Portfolio"  means the  lesser of (1) 67% or more of the voting
securities  present  at such  meeting,  if the  holders  of more than 50% of the
outstanding  voting  securities of such  Portfolio are present or represented by
proxy;  or (2)  more  than  50% of the  outstanding  voting  securities  of such
Portfolio.

Each  Portfolio  has  elected to be  classified  as a  diversified  series of an
open-end  investment  company.  In addition,  as a matter of fundamental policy,
each  Portfolio will not:

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

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

         (4)      concentrate  its investments in investment  companies,  as the
                  term  "concentrate"  is used in the 1940 Act,  interpreted  by
                  regulatory  authority having  jurisdiction  from time to time;
                  except that each  Portfolio may  concentrate  in an underlying
                  Fund.  However,  each  Underlying  Scudder  Fund in which each
                  Portfolio  will invest may  concentrate  its  investments in a
                  particular industry;

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

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

         (7)      make  loans  except  as  permitted  under  the  1940  Act,  as
                  interpreted  or  modified  by  regulatory   authority   having
                  jurisdiction, from time to time.

Nonfundamental  policies  may be changed by the  Trustees  of the Trust  without
shareholder approval. As a matter of nonfundamental  policy, each Portfolio does
not currently intend to:

         (a)      invest in companies for the purpose of  exercising  management
                  or control.

         (b)      (i)  borrow  money in an amount  greater  than 5% of its total
                  assets, except for temporary or emergency purposes and (ii) by
                  engaging  in  reverse  repurchase  agreements,  entering  into
                  dollar rolls, or making other investments or engaging in other
                  transactions  which  may be deemed  to be  borrowings  but are
                  consistent with each Portfolio's investment objective.

                                       23
<PAGE>

Any  investment  restrictions  herein  which  involve  a maximum  percentage  of
securities  or assets shall not be  considered  to be violated  unless an excess
over the percentage occurs  immediately  after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Portfolios.


The Trust's  Board of Trustees  has approved  the filing of an  application  for
exemptive  relief with the SEC which would permit the  Portfolios to participate
in an interfund  lending program among certain  investment  companies advised by
the Advisor.  If the  Portfolios  receive the  requested  relief,  the interfund
lending  program  would allow the  participating  funds to borrow money from and
loan money to each other for temporary or emergency purposes.  The program would
be subject  to a number of  conditions  designed  to ensure  fair and  equitable
treatment of all participating funds,  including the following:  (1) no fund may
borrow money through the program  unless it receives a more  favorable  interest
rate than a rate  approximating  the  lowest  interest  rate at which bank loans
would be available to any of the participating funds under a loan agreement; and
(2) no fund may lend  money  through  the  program  unless  it  receives  a more
favorable return than that available from an investment in repurchase agreements
and,  to the  extent  applicable,  money  market  cash  sweep  arrangements.  In
addition, a fund would participate in the program only if and to the extent that
such  participation  is consistent  with the fund's  investment  objectives  and
policies (for instance,  money market funds would normally  participate  only as
lenders and tax exempt funds only as borrowers).  Interfund loans and borrowings
would extend  overnight,  but could have a maximum duration of seven days. Loans
could be called on one day's notice.  A fund may have to borrow from a bank at a
higher interest rate if an interfund loan is called or not renewed. Any delay in
repayment  to a lending fund could result in a lost  investment  opportunity  or
additional costs. The program is subject to the oversight and periodic review of
the Boards of the participating funds. To the extent the Portfolios are actually
engaged in borrowing through the interfund lending program, the Portfolios, as a
matter of  non-fundamental  policy,  may not borrow for other than  temporary or
emergency purposes (and not for leveraging).


                                    PURCHASES

Additional Information About Opening An Account

         All new investors in Class AARP of the Funds are required to provide an
AARP membership number on their account application.

         In  addition,  Class  S  shares  of the  Funds  will  generally  not be
available to new investors.

         The  following  investors  may  continue to purchase  Class S shares of
Scudder Funds:

         1.       Existing shareholders of Class S shares of any Scudder Fund as
                  of December 29, 2000,  and household  members  residing at the
                  same address.
         2.       Investors  may  purchase  Class S shares of any  Scudder  Fund
                  through any  broker-dealer or service agent account until June
                  30, 2001.  After June 30, 2001, only investors who owned Class
                  S shares as of June 30, 2001 and household members residing at
                  the  same  address  may open  new  accounts  in Class S of any
                  Scudder Fund.
         3.       Any   retirement,    employee   stock,    bonus   pension   or
                  profit-sharing plans.
         4.       Any  participant  who owns Class S shares of any Scudder  Fund
                  through an  employee  sponsored  retirement,  employee  stock,
                  bonus,  pension or profit sharing plan as of December 29, 2000
                  may, at a later date, open a new individual account in Class S
                  of any Scudder Fund.
         5.       Any  participant  who owns Class S shares of any Scudder  Fund
                  through a retirement, employee stock, bonus, pension or profit
                  sharing plan may complete a direct  rollover to an IRA account
                  that will hold Class S shares.  This  applies for  individuals
                  who begin their  retirement  plan  investments  with a Scudder
                  Fund at any time, including after December 29, 2000.
         6.       Officers, Fund Trustees and Directors, and full-time employees
                  and their family members, of Zurich Financial Services and its
                  affiliates.
         7.       Class S shares are available to any accounts managed by Zurich
                  Scudder  Investments,  Inc., any advisory  products offered by
                  Zurich Scudder Investments, Inc. or Scudder Investor Services,
                  Inc., and to the Portfolios of Scudder Pathway Series.
         8.       Registered   investment  advisors  ("RIAs")  may  continue  to
                  purchase Class S shares of Scudder Funds for all clients until
                  June 30, 2001.  After June 30, 2001, RIAs may purchase Class S
                  shares for any client that has an existing position in Class S
                  shares of any Scudder Funds as of June 30, 2001.
         9.       Broker-dealers  and  RIAs who have  clients  participating  in
                  comprehensive  fee programs  may continue to purchase  Class S
                  shares of Scudder  Funds until June 30,  2001.  After June 30,
                  2001,  broker  dealers and RIAs may purchase


                                       24
<PAGE>

                  Class S shares in  comprehensive  fee  programs for any client
                  that has an  existing  position in Class S shares of a Scudder
                  Fund as of June 30, 2001.

                  Scudder  Investors  Services,  Inc.  may,  at its  discretion,
                  require  appropriate  documentation  that shows an investor is
                  eligible to purchase Class S shares.

Clients  having a regular  investment  counsel  account  with the Advisor or its
affiliates and members of their  immediate  families,  officers and employees of
the Advisor or of any  affiliated  organization  and members of 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
for Class S and $1,000 for Class AARP through Scudder  Investor  Services,  Inc.
(the "Distributor") by letter, fax, or telephone.

Shareholders  of other Scudder funds who have  submitted an account  application
and have a  certified  Tax  Identification  Number,  clients  having  a  regular
investment  counsel  account with the Advisor or its  affiliates  and members of
their  immediate  families,  officers  and  employees  of the  Advisor or of any
affiliated  organization and their immediate families,  members of the NASD, and
banks may open an account by wire.  Investors interested in investing in Class S
must call 1-800-225-5163 to get an account number. During the call, the investor
will be asked to indicate the  Portfolio  name,  class name,  amount to be wired
($2,500  minimum for Class S and $1,000 for Class  AARP),  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, class
name, account name and the new account number.  Finally,  the investor must send
the  completed  and signed  application  to the  Portfolio  promptly.  Investors
interested  in  investing in Class AARP should call  1-800-253-2277  for further
instructions.


The  minimum  initial  purchase  amount  is less than  $2,500  for Class S under
certain special plan accounts and is $1,000 for Class AARP.

Minimum Balances

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

The  Portfolio  reserves  the  right,  following  60  days'  written  notice  to
applicable shareholders, to:

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

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

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

Fiduciary  (e.g., IRA or Roth IRA) and custodial  accounts (e.g.,  UGMA or UTMA)
with balances below $100 are subject to automatic  redemption following 60 days'
written notice to applicable shareholders.



                                       25
<PAGE>

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 established  shareholders (except by Scudder Individual
Retirement  Account  ("IRA"),  Scudder Horizon Plan,  Scudder Profit Sharing and
Money Purchase  Pension Plans,  Scudder 401(k) and Scudder 403(b) Plan holders),
members of the NASD, and banks.  Contact the  Distributor at  1-800-SCUDDER  for
additional  information.  A  confirmation  of the  purchase  will be mailed  out
promptly following receipt of a request to buy. Federal regulations require that
payment be received  within  three  business  days.  If payment is not  received
within  that time,  the order is subject to  cancellation.  In the event of such
cancellation or cancellation at the purchaser's  request,  the purchaser will be
responsible for any loss incurred by the Portfolio or the principal  underwriter
by reason of such  cancellation.  If the purchaser is a  shareholder,  the Trust
shall have the authority,  as agent of the shareholder,  to redeem shares in the
account in order to reimburse the Portfolio 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 Portfolio.

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 Portfolio 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
New York Stock Exchange (the "Exchange"), normally 4 p.m. eastern time. Proceeds
in the  amount of your  purchase  will be  transferred  from your bank  checking
account two or three business days following your call. For requests received by
the close of regular  trading on the  Exchange,  shares will be purchased at the
net asset value per share  calculated at the close of trading on the day of your
call.  QuickBuy  requests  received  after the close of  regular  trading on the
Exchange  will begin their  processing  and be  purchased at the net asset value
calculated  the following  business day. If you purchase  shares by QuickBuy and
redeem  them  within  seven days of the  purchase,  the  Portfolio  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 a
QuickBuy  Enrollment  Form.  After sending in an enrollment  form,  shareholders
should allow 15 days for this service to be available.

Each Portfolio 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 Portfolio
does not follow such procedures, it may be liable for losses due to unauthorized
or fraudulent  telephone  instructions.  The  Portfolios  will not be liable for
acting upon instructions  communicated by telephone that they reasonably believe
to be genuine.

Investors  interested  in making  subsequent  investments  in Class  AARP of the
Portfolio should call 1-800-253-2277 for further instruction.

Checks

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

If  shares  of a  Portfolio  are  purchased  by  a  check  which  proves  to  be
uncollectible,  the Trust reserves the right to cancel the purchase  immediately
and the purchaser may 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  the  Portfolio  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.



                                       26
<PAGE>

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
the Portfolio 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 Portfolio.

Share Price


Purchases  will be filled  without sales charge at the net asset value per share
next computed after receipt of the  application  in good order.  Net asset value
normally  will be computed for each class as of the close of regular  trading on
each day during which the Exchange is open for trading.  Orders  received  after
the close of regular  trading on the  Exchange  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 the  Portfolio,  to forward the  purchase  order to Scudder  Service
Corporation  (the  "Transfer  Agent")  in Kansas  City by the  close of  regular
trading on the Exchange.



Share Certificates

Due to the desire of the  Portfolios'  management to afford ease of  redemption,
certificates  will not be issued to indicate  ownership  in a  Portfolio.  Share
certificates  now in a  shareholder's  possession may be sent to the Portfolios'
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.

All issued and  outstanding  shares of what were  formerly  AARP Funds that were
subsequently   reorganized  into  existing  Scudder  Funds  were  simultaneously
cancelled  on the  books  of the AARP  Funds.  Share  certificates  representing
interests in shares of the relevant AARP Fund will  represent a number of shares
of Class  AARP of the  relevant  Scudder  Fund  into  which  the  AARP  Fund was
reorganized.  Class AARP shares of each  portfolio  will not issue  certificates
representing shares in connection with the reorganization.

Other Information

Each  Portfolio  has  authorized  certain  members  of the NASD  other  than the
Distributor  to accept  purchase  and  redemption  orders for its shares.  Those
brokers may also  designate  other  parties to accept  purchase  and  redemption
orders on the  Portfolios'  behalf.  Orders for purchase or  redemption  will be
deemed  to have  been  received  by a  Portfolio  when  such  brokers  or  their
authorized  designees  accept the orders.  Subject to the terms of the  contract
between a  Portfolio  and the  broker,  ordinarily  orders will be priced at the
class' net asset value next computed  after  acceptance by such brokers or their
authorized  designees.  Further,  if purchases or  redemptions  of a Portfolio'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
Portfolios'  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 Portfolio  shares at any
time for any reason.

The "Tax  Identification  Number" section of the  application  must be completed
when opening an account.  Applications  and purchase  orders without a certified
tax  identification  number and certain other certified  information (e.g., from
exempt  organizations,  certification  of exempt status) will be returned to the
investor. The Portfolios reserve the right, following 30 days' notice, to redeem
all  shares in  accounts  without a correct  certified  Social  Security  or tax
identification


                                       27
<PAGE>

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

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

                            EXCHANGES AND REDEMPTIONS

Exchanges

Exchanges are comprised of a redemption  from one Scudder Fund and purchase into
another  Scudder  Fund.  The  purchase  side of the  exchange  may be  either an
additional  investment  into an existing  account or may  involve  opening a new
account in the other Fund.  When an  exchange  involves a new  account,  the new
account  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 for Class S
and $1,000 for Class AARP. When an exchange represents an additional  investment
into an existing account,  the account receiving the exchange proceeds must have
identical registration,  address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more for Class S.
If the  account  receiving  the  exchange  proceeds  is to be  different  in any
respect,  the  exchange  request must be in writing and must contain an original
signature guarantee.

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 values
determined  on that day.  Exchange  orders  received  after the close of regular
trading on the Exchange will be executed on the following business day.

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

There is no charge to the shareholder  for any exchange  described above (except
for exchanges  from funds which impose a redemption fee on shares held less than
a year).  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  Portfolio  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  Portfolios do not follow such
procedures,  they may be liable  for losses due to  unauthorized  or  fraudulent
telephone  instructions.  Each  Portfolio  will not be liable  for  acting  upon
instructions  communicated  by  telephone  that  it  reasonably  believes  to be
genuine.  The  Portfolios  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 Scudder Investor  Services,  Inc. 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 of Scudder Funds. For more
information, please call 1-800-SCUDDER (Class S) or 1-800-253-2277 (Class AARP).

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


                                       28
<PAGE>

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  the telephone  redemption
                  privilege  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  proceeds
                  should  either  return  a  Telephone  Redemption  Option  Form
                  (available  upon  request)  or send a letter  identifying  the
                  account and  specifying  the exact  information to be changed.
                  The letter must be signed exactly as the shareholder's name(s)
                  appears on the account.  An original signature and an original
                  signature guarantee are required for each person in whose name
                  the account is registered.

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

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

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

Redemption requests by telephone  (technically a repurchase by agreement between
a  Portfolio  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 have elected to  participate in the
QuickSell  program may sell shares of the  Portfolio by  telephone.  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,  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.  New investors wishing to establish QuickSell may so indicate on
the  application.  Existing  shareholders  who  wish to add  QuickSell  to their
account may do so by completing a QuickSell Enrollment Form. After sending in an
enrollment  form,  shareholders  should  allow 15 days for  this  service  to be
available.

The Portfolios employ procedures, including recording telephone calls, testing a
caller's identity,  and sending written confirmation of telephone  transactions,
designed  to  give  reasonable  assurance  that  instructions   communicated  by


                                       29
<PAGE>


telephone  are  genuine,  and to  discourage  fraud.  To  the  extent  that  the
Portfolios do not follow such  procedures,  they may be liable for losses due to
unauthorized or fraudulent  telephone  instructions.  The Portfolios will not be
liable  for  acting  upon  instructions  communicated  by  telephone  that  they
reasonably believe to be genuine.

Redemption by Mail or Fax

Any  existing  share  certificates   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.

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

It is  suggested  that  shareholders  holding  shares  registered  in other than
individual  names contact the Transfer Agent prior to any  redemptions to ensure
that all necessary documents accompany the request.  When shares are held in the
name of a corporation,  trust,  fiduciary  agent,  attorney or partnership,  the
Transfer Agent requires,  in addition to the stock power,  certified evidence of
authority to sign.  These  procedures are for the protection of shareholders and
should be followed to ensure  prompt  payment.  Redemption  requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) business days after receipt by the Transfer  Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven (7) days of payment 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 call 1-800-SCUDDER.

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 the Trust
and valued as they are for purposes of computing a  Portfolio'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 each  Portfolio is generally  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 relevant Portfolio at
the beginning of the period.

Other Information


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


If a  shareholder  redeems all shares in the account  after the record date of a
dividend,  the shareholder  receives in addition to the net asset value thereof,
all  declared  but unpaid  dividends  thereon.  The value of shares  redeemed or
repurchased may be more or less than the shareholder's cost depending on the net
asset value at the time of redemption or repurchase. The Trust does 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  redemptions  undertaken  to effect an


                                       30
<PAGE>

exchange  for shares of another  Portfolio  or 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 and a shareholder's  right to redeem shares
and to receive  payment may be  suspended at times (a) during which the Exchange
is closed,  other than customary weekend and holiday closings,  (b) during which
trading on the  Exchange  is  restricted  for any  reason,  (c) during  which an
emergency  exists as a result of which  disposal by the  Portfolio of securities
owned by it is not reasonably  practicable  or it is not reasonably  practicable
for the Portfolio fairly to determine the value of its net assets, or (d) during
which the SEC by order  permits a  suspension  of the right of  redemption  or a
postponement  of the date of payment or of redemption;  provided that applicable
rules and  regulations  of the SEC (or any  succeeding  governmental  authority)
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.

                    FEATURES AND SERVICES OFFERED BY THE FUND



Internet access

World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The  address  for Class  AARP  shares is  aarp.scudder.com.  These  sites  offer
guidance on global  investing and  developing  strategies to help meet financial
goals and  provide  access to the  Scudder  investor  relations  department  via
e-mail.  The sites also  enable  users to access or view Fund  prospectuses  and
profiles with links between summary information in Fund Summaries and details in
the  Prospectus.  Users  can fill out new  account  forms  on-line,  order  free
software, and request literature on Funds.

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.

                                       31
<PAGE>


The  Advisor'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.

Dividends and Capital Gains 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 Portfolio.  A change of  instructions  for the
method of payment  must be  received  by the  Transfer  Agent at least five days
prior to a dividend  record date.  Shareholders  also may change their  dividend
option either by calling  1-800-SCUDDER for Class S and 1-800-253-2277 for Class
AARP or by sending written  instructions  to the Transfer Agent.  Please include
your account number with your written request.

Reinvestment  is  usually  made at the  closing  net  asset  value of the  class
determined on the business 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 class shares of a Portfolio.

Investors may also have dividends and distributions  automatically  deposited in
their predesignated bank account through Scudder's Direct Distributions Program.
Shareholders who elect to participate in the Direct  Distributions  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 Portfolio  pays its  distribution.  A Direct
Distributions  request form can be obtained by calling 1-800-SCUDDER for Class S
and  1-800-253-2277  for Class AARP.  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.

Reports to Shareholders

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

Transaction Summaries

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

                           THE SCUDDER FAMILY OF FUNDS

MONEY MARKET

         Scudder U.S. Treasury Money Fund
         Scudder Cash Investment Trust
         Scudder Money Market Series+

--------------------------
+ The institutional  class of shares is not part of the Scudder Family of Funds.


                                       32
<PAGE>

TAX FREE MONEY MARKET

         Scudder Tax Free Money Fund

TAX FREE

         Scudder Medium Term Tax Free Fund
         Scudder Managed Municipal Bonds
         Scudder High Yield Tax Free Fund**
         Scudder California Tax Free Fund*
         Scudder Massachusetts Tax Free Fund*
         Scudder New York Tax Free Fund*

U.S. INCOME

         Scudder Short Term Bond Fund
         Scudder GNMA Fund
         Scudder Income Fund
         Scudder High Yield Bond Fund

GLOBAL INCOME

         Scudder Global Bond Fund
         Scudder Emerging Markets Income Fund

ASSET ALLOCATION

         Scudder Pathway Series: Conservative Portfolio
         Scudder Pathway Series: Moderate Portfolio
         Scudder Pathway Series: Growth Portfolio

U.S. GROWTH AND INCOME

         Scudder Balanced Fund
         Scudder Dividend & Growth Fund
         Scudder Growth and Income Fund**
         Scudder Select 500 Fund
         Scudder S&P 500 Index Fund

U.S. GROWTH

Value
         Scudder Large Company Value Fund
         Value Fund-Scudder Shares**
         Scudder Small Company Stock Fund
         Scudder Small Company Value Fund
Growth
         Classic Growth Fund-Scudder Shares**
         Scudder Capital Growth Fund
         Scudder Large Company Growth Fund
         Scudder Select 1000 Growth Fund
         Scudder Development Fund
         Scudder 21st Century Growth Fund

------------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.



                                       33
<PAGE>

GLOBAL EQUITY

Worldwide
         Scudder Global Fund
         Scudder International Fund***
         Global Discovery Fund-Scudder Shares**
         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 Health Care Fund
         Scudder Technology Innovation Fund

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.

Certain  Scudder  funds or classes  thereof may not be available for purchase or
exchange. For more information, please call 1-800-SCUDDER.

                              SPECIAL PLAN ACCOUNTS


Detailed  information on any Scudder  investment plan,  including the applicable
charges,  minimum  investment  requirements  and  disclosures  made  pursuant to
Internal Revenue Service (the "IRS") requirements, may be obtained by contacting
Scudder Investor Services, Inc., Two International Place, Boston,  Massachusetts
02110-4103 or by calling toll free, 1-800-SCUDDER.  The discussions of the plans
below  describe only certain  aspects of the federal income tax treatment of the
plan. The 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 advisor
with respect to the suitability requirements and tax aspects thereof.


Shares of the Portfolios may also be a permitted investment under profit sharing
and  pension  plans  and  IRAs  other  than  those  offered  by the  Portfolios'
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

--------------
***  Only  the International Shares are part of the Scudder Family of Funds.



                                       34
<PAGE>

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 IRA
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, such as a pension or profit sharing plan, a governmental  plan,
a  simplified   employee  pension  plan,  a  simple  retirement  account,  or  a
tax-deferred  annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active  participant  in a qualified  plan,  are eligible to make tax  deductible
contributions  of up to  $2,000  to an IRA  prior  to the year  such  individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified  plans (or who have spouses who are active  participants)  are also
eligible to make  tax-deductible  contributions to an IRA; the annual amount, if
any, of the  contribution  which such an  individual  will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. If an individual is an active participant, the deductibility of his or
her IRA  contributions  in 2000 is phased out if the individual has gross income
between  $32,000 and $42,000 and is single,  if the  individual has gross income
between $52,000 and $62,000 and is married filing jointly,  or if the individual
has gross income  between $0 and $10,000 and is married filing  separately;  the
phase-out  ranges for  individuals  who are single or married filing jointly are
subject  to  annual  adjustment  through  2005  and  2007,  respectively.  If an
individual is married  filing jointly and the  individual's  spouse is an active
participant  but the  individual  is not,  the  deductibility  of his or her IRA
contributions  is phased out if their combined gross income is between  $150,000
and  $160,000.  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.  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.

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, even 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.

Scudder Roth IRA: Individual Retirement Account

Shares of the Fund may be purchased as the underlying  investment for a Roth IRA
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.

                                       35
<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,  certain medical expenses,  the purchase of health
insurance for an unemployed individual and qualified higher education expenses.

An  individual  with an income of $100,000  or less (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.


The following paragraph applies to Class S shareholders only:


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.  Shareholders may designate which day they
want the automatic withdrawal to be processed. The check amounts may be based on
the redemption of a fixed dollar amount, fixed share amount,  percent of account
value or declining  balance.  The Plan provides for income dividends and capital
gains distributions,  if any, to be reinvested in additional shares.  Shares are
then  liquidated  as necessary  to provide for  withdrawal  payments.  Since the
withdrawals are in amounts  selected by the investor and have no relationship to
yield or income,  payments  received  cannot be considered as yield or income on
the investment and the resulting liquidations may deplete or possibly extinguish
the  initial   investment  and  any  reinvested   dividends  and  capital  gains
distributions.  Requests for  increases in  withdrawal  amounts or to change the
payee must be submitted in writing, signed exactly as the account is registered,
and contain  signature  guarantee(s).  Any such requests must be received by the
Portfolios'  transfer  agent ten days  prior to the date of the first  automatic
withdrawal.  An Automatic  Withdrawal  Plan may be terminated at any time by the
shareholder,  the Trust or its agent on written  notice,  and will be terminated
when all shares of the  Portfolio  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-SCUDDER for Class S and 1-800-253-2277 for Class AARP.

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.

                                       36
<PAGE>

Automatic Investment Plan

Shareholders may arrange to make periodic  investments in Class S shares 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 for Class S shares.

Shareholders  may  arrange  to make  periodic  investments  in Class AARP of the
Portfolio  through  automatic  deductions  from checking  accounts.  The minimum
pre-authorized  investment  amount is $50. New  shareholders  who open a Gift to
Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the Uniform
Transfer to Minors Act (UTMA) and who sign up for the Automatic  Investment Plan
will be able to open the  Portfolio  account for less than $500 if they agree to
increase their  investment to $500 within a 10 month period.  Investors may also
invest  in any  Class  AARP for $500 if they  establish  a plan  with a  minimum
automatic  investment of at least $100 per month. This feature is only available
to Gifts to Minors  Account  investors.  The  Automatic  Investment  Plan may be
discontinued at any time without prior notice to a shareholder if any debit from
their bank is not paid, or by written notice to the  shareholder at least thirty
days prior to the next scheduled payment to the Automatic Investment Plan.

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 (AIP). In this case, the minimum initial investment is $500.

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

                    DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS


Each  Portfolio  intends  to follow  the  practice  of  distributing  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.  Each
Portfolio  may follow the  practice  of  distributing  the entire  excess of net
realized  long-term capital gains over net realized  short-term  capital losses.
However,  a Portfolio may retain all or part of such gain for reinvestment after
paying the related federal income taxes for which the  shareholders  may then be
asked to  claim a credit  against  their  federal  income  tax  liability.  (See
"TAXES.")

If a Portfolio does not  distribute  the amount of capital gain and/or  ordinary
income  required to be  distributed  by an excise tax  provision  of the Code, a
Portfolio  may be  subject  to  that  excise  tax.  (See  "TAXES.")  In  certain
circumstances,  a  Portfolio  may  determine  that  it is  in  the  interest  of
shareholders to distribute less than the required amount.

Earnings and profits  distributed  to  shareholders  on redemptions of Portfolio
shares may be utilized by a Portfolio, to the extent permissible, as part of the
Portfolios' dividends paid deduction on its federal tax return.


The Conservative  Portfolio and the Moderate Portfolio each intend to distribute
investment company taxable income,  exclusive of net short-term capital gains in
excess of net long-term  capital losses, on a quarterly basis, and distributions
of net capital gains realized during the fiscal year will be made in November or
December to avoid federal excise tax, although an additional distribution may be
made  within  three  months of its fiscal  year end,  if  necessary.  The Growth
Portfolio  intends to distribute its investment  company  taxable income and any
net realized  capital gains in November or December to avoid federal excise tax,
although  an  additional  distribution  may be made within  three  months of the
Portfolios' fiscal year end, if necessary.




                                       37
<PAGE>

Both types of distributions  will be made in Portfolio shares and  confirmations
will be mailed to each  shareholder  unless a shareholder has elected to receive
cash, in which case a check will be sent.  Distributions  of investment  company
taxable income and net realized capital gains are taxable (See "TAXES"), whether
made in shares or cash.

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

                             PERFORMANCE INFORMATION


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

Average Annual Total Return

Average  Annual Total Return is the average  annual  compound rate of return for
the periods of one year, five years, ten years or for the life of the Portfolio,
all ended on the last day of a recent  calendar  quarter.  Average  annual total
return  quotations  reflect  changes  in the price of a  Portfolio's  shares and
assume that all dividends and capital gains distributions  during the respective
periods were  reinvested  in Portfolio  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 payment 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 the periods ended August 31, 2000 ^(1)

                                            One Year      Life of Portfolio^(2)
                                            --------      -----------------

      Conservative Portfolio - Class S        7.39                7.47
      Moderate Portfolio - Class S            15.65               11.03
      Growth Portfolio - Class S              24.24               16.07

(1)      Performance  information  provided is for the Fund's  Class S. As Class
         AARP shares are a new class for the Fund, they have no past performance
         data available.
(2)      For the period November 15, 1996 (commencement of operations) to August
         31, 2000.

Cumulative Total Return

Cumulative Total Return is the compound 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  Portfolio's  shares  and  assume  that all
dividends and capital gains  distributions  during the period were reinvested in
Portfolio  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):

                                       38
<PAGE>

                                 C = (ERV/P) - 1
Where:

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



        Cumulative Total Return for the periods ended August 31, 2000 ^(1)

                                        One Year         Life of Portfolio^(2)
                                        --------         -----------------

   Conservative Portfolio - Class S       7.39                31.43
   Moderate Portfolio - Class S           15.65               48.75
   Growth Portfolio - Class S             24.24               76.00

(1)      Performance  information  provided is for the Fund's  Class S. As Class
         AARP shares are a new class for the Fund, they have no past performance
         data available.
(2)      For the period November 15, 1996 (commencement of operations) to August
         31, 2000.

Quotations of each Portfolio's  performance are based on historical earnings and
are not  intended to indicate  future  performance.  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 the
Portfolio's  expenses.  There may be  quarterly  periods  following  the periods
reflected in the performance bar chart in the Portfolio's  prospectus  which may
be higher or lower than those included in the bar chart.

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.

Comparison of Fund Performance

A  comparison  of  the  quoted  non-standard  performance  offered  for  various
investments is valid only if performance is calculated in the same manner. Since
there  are  different  methods  of  calculating  performance,  investors  should
consider the effects of the methods used to calculate performance when comparing
performance  of a  Portfolio  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 Portfolio 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,  S & P 500 Index,  the Nasdaq OTC  Composite  Index,  the
Nasdaq  Industrials  Index,  the Russell 2000 Index,  the  Wilshire  Real Estate
Securities Index and statistics published by the Small Business Administration.

From time to time,  in  advertising  and  marketing  literature,  a  Portfolio'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 Portfolio  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.

                                       39
<PAGE>


From time to time, in marketing  and other  Portfolio  literature,  Trustees and
officers of the Trust,  the  Portfolios'  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  Portfolios.  In addition,  the amount of assets that the Advisor has
under management in various  geographical areas may be quoted in advertising and
marketing materials.


The  Portfolios 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  Portfolio  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 Portfolios
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 CD's. Unlike mutual funds, CD's are
insured up to $100,000 by the U.S. government and offer a fixed rate of return.

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

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

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

Evaluation of Portfolio  performance or other relevant  statistical  information
made by independent  sources may also be used in  advertisements  concerning the
Portfolios,  including  reprints of, or selections from,  editorials or articles
about these Funds.

                               TRUST ORGANIZATION




The  Portfolios  are  portfolios  of Scudder  Pathway  Series (the  "Trust"),  a
Massachusetts business trust established under a Declaration of Trust dated July
1, 1994.  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 Trust is
comprised  of  three  separate  portfolios:   Conservative  Portfolio,  Moderate
Portfolio (formerly Balanced Portfolio), and Growth Portfolio, all of which were
organized on July 1, 1994.  Each  portfolio  consists of an


                                       40
<PAGE>

unlimited number of shares.  Each Portfolio is further divided into five classes
of shares,  Class AARP, Class S, Class A, Class B and Class C. The Trustees have
the authority to issue  additional  portfolios to the Trust.  To the extent that
the Funds offer  additional  share  classes,  these classes will be offered in a
separate prospectus and have different fees, requirements and services.

The Fund's activities are supervised by the Trust's Board of Trustees. The Trust
adopted a plan  pursuant to Rule 18f-3 under the 1940 Act (the "Plan") to permit
the Trust to establish a multiple class distribution system for the Funds.

Each  class  of  shares  will  represent  interests  in the  same  portfolio  of
investments of the Series, and be identical in all respects to each other class,
except as set forth below.  The only  differences  among the various  classes of
shares of the Series  will  relate  solely to: (a)  different  distribution  fee
payments  or  service  fee  payments  associated  with any Rule 12b-1 Plan for a
particular  class of shares and any other  costs  relating  to  implementing  or
amending such Rule 12b-1 Plan (including obtaining  shareholder approval of such
Rule  12b-1  Plan or any  amendment  thereto)  which  will be  borne  solely  by
shareholders of such class;  (b) different  service fees; (c) different  account
minimums;  (d) the  bearing by each class of its Class  Expenses,  as defined in
Section  2(b)  below;  (e) the  voting  rights  related  to any Rule  12b-1 Plan
affecting a specific  class of shares;  (f) separate  exchange  privileges;  (g)
different  conversion  features and (h) different class names and  designations.
Expenses  currently  designated  as "Class  Expenses"  by the  Trust's  Board of
Trustees under the Plan include, for example,  transfer agency fees attributable
to a specific class, and certain securities registration fees.


The  Trustees,  in their  discretion,  may authorize the division of shares of a
Portfolio into different  classes  permitting  shares of different classes to be
distributed by different methods.  Although shareholders of different classes of
a Portfolio would have interest in the same portfolio of assets, shareholders of
different  classes may bear  different  expenses in  connection  with  different
methods  of  distribution.  The Trust  will vote its  shares in each  Underlying
Scudder  Fund in  proportion  to the  vote  of all  other  shareholders  of each
respective Underlying Scudder Fund.

The Declaration of Trust (the  "Declaration")  provides that  obligations of the
Trust are not binding upon the Trustees  individually but only upon the property
of the Trust,  that the Trustees  and officers  will not be liable for errors of
judgment or  mistakes of fact or law,  and that the Trust,  will  indemnify  its
Trustees and officers  against  liabilities and expenses  incurred in connection
with litigation in which they may be involved  because of their offices with the
Trust, except if it is determined in the manner provided in the Declaration 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
protects or  indemnifies a Trustee or officer  against any liability to which he
or she would otherwise be subject by reason of willful  misfeasance,  bad faith,
gross negligence, of reckless disregard of duties involved in the conduct of his
or her office.


Investment Advisor

Zurich Scudder Investments, Inc., an investment counsel firm, acts as investment
advisor  to the  Portfolios.  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 Advisor  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 December 31, 1997,  Zurich
Insurance Company  ("Zurich")  acquired a majority interest in the Advisor,  and
Zurich  Kemper  Investments,  Inc.,  a  Zurich  subsidiary,  became  part of the
Advisor.  The  Advisor's  name changed to Scudder  Kemper  Investments,  Inc. On
September 7, 1998, the businesses of Zurich (including  Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T")  were combined to form a new global  insurance and financial  services
company  known as Zurich  Financial  Services  Group.  By way of a dual  holding
company structure,  former Zurich shareholders initially owned approximately 57%
of Zurich Financial  Services Group,  with the balance initially owned by former
B.A.T  shareholders.  On October 17, 2000, the dual holding company structure of
Zurich Financial Services Group, comprised of Allied Zurich p.l.c. in the United
Kingdom and Zurich Allied A.G. in  Switzerland,  was unified into a single Swiss
holding company,  Zurich Financial  Services.  The Advisor changed its name from
Scudder Kemper Investments, Inc. to Zurich Scudder 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").


                                       41
<PAGE>

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 Advisor's income is professional  fees received from
providing  continuous  investment advice.  Today, it provides investment counsel
for many individuals and institutions,  including insurance companies, colleges,
industrial  corporations,  and  financial and banking  organizations  as well as
providing investment advice to over 280 open and closed-end mutual funds.

The Advisor  maintains a large research  department,  which conducts  continuous
studies of the factors that affect the position of various industries, companies
and  individual   securities.   The  Advisor  receives   published  reports  and
statistical  compilations  from issuers and other  sources,  as well as analyses
from  brokers  and  dealers  who  may  execute  portfolio  transactions  for the
Advisor's clients. However, the Advisor regards this information and material as
an  adjunct  to  its  own  research  activities.   The  Advisor's  international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which the Portfolios may invest,  the conclusions
and  investment  decisions  of the Advisor  with  respect to the Funds are based
primarily on the analyses of its own research department.

Certain  investments  may be  appropriate  for a  portfolio  and also for  other
clients  advised  by the  Advisor.  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 day.  In
such event,  such  transactions  will be allocated among the clients in a manner
believed by the Advisor 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  Advisor in the  interest of  achieving  the most
favorable net results to that fund.

In certain  cases,  the  investments  for a  portfolio  are  managed by the same
individuals  who manage one or more other mutual  funds  advised by the Advisor,
that have similar names,  objectives and investment  styles. You should be aware
that the  Portfolios are likely to differ from these other mutual funds in size,
cash flow pattern and tax matters.  Accordingly, the holdings and performance of
the Portfolios can be expected to vary from those of these other mutual funds.

The present  investment  management  agreement (the "Agreement") was approved by
the Trustees on August 10, 1998,  became  effective  September 7, 1998,  and was
approved at a shareholder  meeting held on December 15, 1998. The Agreement will
continue in effect  until  September  30, 2001 and from year to year  thereafter
only if its continuance is approved  annually by the vote of a majority of those
Trustees  who are not parties to such  Agreement  or  interested  persons of the
Advisor 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 or of a
majority of the outstanding voting securities of the respective  Portfolio.  The
Agreement  may be  terminated  at any time without  payment of penalty by either
party on sixty days' written notice and automatically terminates in the event of
its  assignment.  The  continuance  of the  Agreement  was last  approved by the
Trustees on July 10, 2000.

Each Portfolio  expects to operate at a zero expense level.  Shareholders of the
Trust will still indirectly bear their fair and proportionate  share of the cost
of operating the  Underlying  Scudder Funds in which the Trust invests  because,
the Trust,  as a shareholder  of the  Underlying  Scudder  Funds,  will bear its
proportionate  share of any  fees and  expense  paid by the  Underlying  Scudder
Funds.

AARP and its  affiliates  do not  receive any fees from the  portfolios,  but do
receive fees from the investment advisor for each underlying fund.



                                       42
<PAGE>

Administrative Services Agreement


Scudder  Pathway Series has entered into an  administrative  services  agreement
with the Advisor (the "Administration Agreement"), pursuant to which the Advisor
will provide or pay others to provide  substantially  all of the  administrative
services  required by each  Portfolio  (other than those provided by the Advisor
under its  investment  management  agreement with each  Portfolio,  as described
above).   There  is  no  fee  currently   payable  by  a  Portfolio   under  the
Administration  Agreement.  The  Administration  Agreement  became  effective on
September 25, 2000 for  Conservative  Portfolio and Growth Portfolio and October
2, 2000 for Moderate Portfolio.

Various third-party service providers (the "Service  Providers"),  some of which
are  affiliated  with the Advisor , provide  certain  services to each Portfolio
pursuant to separate  agreements  with each  Portfolio.  Scudder Fund Accounting
Corporation,  a  subsidiary  of the Advisor , computes  net asset value for each
Portfolio and maintains their accounting records.  Scudder Service  Corporation,
also a subsidiary of Zurich Scudder, is the transfer,  shareholder servicing and
dividend-paying  agent for the shares of each Portfolio.  Scudder Trust Company,
an  affiliate  of  Zurich  Scudder,  provides  subaccounting  and  recordkeeping
services for  shareholders in certain  retirement and employee benefit plans. As
custodian, State Street Bank and Trust Company holds the portfolio securities of
each Portfolio,  pursuant to a custodian agreement.  PricewaterhouseCoopers  LLP
audits the financial statements of each Portfolio and provides other audit, tax,
and related services. Dechert acts as general counsel for each Portfolio.

The Advisor will pay the Service  Providers for the provision of their  services
to each Portfolio and will pay other Portfolio  expenses,  including  insurance,
registration,  printing and postage fees.  The  Administration  Agreement has an
initial term of three years,  subject to earlier termination by each Portfolio's
Board.

Certain  expenses of each  Portfolio  will not be borne by the Advisor under the
Administration Agreements, such as taxes, brokerage,  interest and extraordinary
expenses;  and the fees and expenses of the Independent  Trustees (including the
fees and expenses of their  independent  counsel).  In addition,  each Portfolio
will continue to pay any fees required by its  investment  management  agreement
with the Advisor.

The term Scudder  Investments is the designation  given to the services provided
by Zurich Scudder Investments,  Inc. and its affiliates to the Scudder Family of
Funds.


AMA InvestmentLink(SM) Program


Pursuant  to an  Agreement  between  the  Advisor  and AMA  Solutions,  Inc.,  a
subsidiary of the American Medical  Association (the "AMA"),  dated May 9, 1997,
the Advisor 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  Advisor  with  respect to assets  invested  by AMA  members in
Scudder funds in connection with the AMA  InvestmentLinkSM  Program. The Advisor
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  advisor
or broker/dealer  under federal  securities laws. Any person who participates in
the AMA  InvestmentLinkSM  Program  will be a customer  of the  Advisor (or of a
subsidiary thereof) and not the AMA or AMA Solutions,  Inc. AMA InvestmentLinkSM
is a service mark of AMA Solutions, Inc.


Code of Ethics


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


                                       43
<PAGE>

traders,  research  analysts  and others  involved  in the  investment  advisory
process.  Exceptions  to these and other  provisions  of the  Advisor's  Code of
Ethics may be granted in particular  circumstances  after review by  appropriate
personnel.


Management Fees of Underlying Scudder Funds


The  Advisor  has  agreed not to be paid a  management  fee for  performing  its
services.  However,  the Advisor will receive  management fees from managing the
Underlying Scudder Funds in which each Portfolio invests.

Each Underlying  Scudder Fund pays the Advisor a management fee as determined by
the Investment Management Agreement between each Underlying Scudder Fund and the
Advisor.  As manager of the assets of each Underlying  Scudder Fund, the Advisor
directs the  investments of an Underlying  Scudder Fund in accordance  with each
Underlying Scudder Fund's investment objective,  policies and restrictions.  The
Advisor  determines the securities,  instruments and other contracts relating to
investments to be purchased, sold or entered into by an Underlying Scudder Fund.
If an  Underlying  Scudder  Fund's  expenses,  exclusive of taxes,  interest and
extraordinary expenses, exceed specified limits, such excess up to the amount of
the management fee, will be paid by the Advisor.


The management fees and total operating expenses of the Underlying Scudder Funds
are as follows:

<TABLE>
<CAPTION>
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
                                              Fiscal Year      Total       Management          Total          Management
Name of Fund                                       End       Expenses        Fee (%)       Expenses (%)      Fee (%) after
------------                                 --------------- --------    ---------------   -------------    ---------------
                                                                                               after            waiver
                                                                                               -----            ------
                                                                                          reimbursementand/or
                                                                                          -------------------
                                                                                               waiver
                                                                                               ------
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------

-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
<S>                                               <C>          <C>              <C>              <C>               <C>
Scudder Cash Investment Trust                     5/31         0.81             0.41
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Money Market Series - Scudder             5/31         0.50             0.25             0.35
Premium Money Market Shares
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Emerging Markets Income Fund              10/31        1.65             1.00
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Global Bond Fund                          10/31        1.13             0.75
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder GNMA Fund                                 9/30         0.70             0.40
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder High Yield Bond Fund                      1/31         0.90             0.60
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Income Fund                               1/31         0.89             0.59
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Short Term Bond Fund                      12/31        0.75             0.45
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Balanced Fund                              12/31       0.77             0.47
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Capital Growth Fund                       9/30         0.88             0.58
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Classic Growth Fund                       10/31        1.84             0.70             1.59              0.45
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Development Fund                          7/31         1.30             0.85
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Dividend & Growth Fund                    12/31        1.07              0.75           1.05
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Emerging Markets Growth Fund              10/31        1.91             1.25
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Global Fund                               8/31         1.32             0.94
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Global Discovery Fund                             10/31        1.68             1.10
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Gold Fund                                 10/31        1.66             1.00
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Greater Europe Growth Fund                10/31        1.35             0.97
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Growth and Income Fund                    12/31        0.75             0.45
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Health Care Fund                          5/31         1.21             0.85
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder International Fund                        8/31         1.05             0.67
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Large Company Growth Fund                 7/31         1.00             0.70
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Large Company Value Fund                  7/31         0.89             0.59
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Latin America Fund                        10/31        1.90             1.25
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Pacific Opportunities Fund                10/31        1.75             1.10
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------

                                       44
<PAGE>

-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
                                              Fiscal Year      Total       Management          Total          Management
Name of Fund                                       End       Expenses        Fee (%)       Expenses (%)      Fee (%) after
------------                                 --------------- --------    ---------------   -------------    ---------------
                                                                                               after            waiver
                                                                                               -----            ------
                                                                                          reimbursementand/or
                                                                                          -------------------
                                                                                               waiver
                                                                                               ------
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder S&P 500 Index Fund                        12/31        0.40             0.05

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

Scudder Select 500 Fund                           2/29         0.76             0.50             0.75

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

Scudder Select 1000 Growth Fund                   2/29         0.76             0.50             0.75

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

Scudder Small Company Stock Fund                  9/30         1.20             0.75

-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Small Company Value Fund                  7/31         1.20             0.75
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Technology Innovation Fund                5/31         1.20             0.85
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder 21st Century Growth Fund                  7/31         1.44             0.75             1.20
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
Scudder Value Fund                                9/30         1.39             0.70
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
The Japan Fund, Inc.                              12/31        1.00             0.73
-------------------------------------------- -------------- ------------ ---------------- ----------------- ----------------
</TABLE>


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

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


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

                           SPECIAL SERVICING AGREEMENT




Prior to the  implementation of each underlying funds'  Administration  Services
Agreement, the Special Servicing Agreement (the "Service Agreement") was entered
into  among  the  Advisor,   the  Underlying  Scudder  Funds,   Scudder  Service
Corporation,  Scudder Fund Accounting  Corporation,  Scudder Investor  Services,
Inc.,  Scudder Trust  Company and the Trust.  Under the Service  Agreement,  the
Advisor  arranged  for all  services  pertaining  to the  operation of the Trust
including  the  services  of  Scudder  Service   Corporation  and  Scudder  Fund
Accounting Corporation to act as Shareholder Servicing Agent and Fund Accounting
Agent,  respectively,  for each Portfolio.  In addition,  the Service  Agreement
provided that, if the officers of any Underlying  Scudder Fund, at the direction
of the Board of Directors/Trustees,  determined that the aggregate expenses of a
Portfolio were less than the estimated  savings to the


                                       45
<PAGE>

Underlying  Scudder Fund from the operation of that  Portfolio,  the  Underlying
Scudder Fund would bear those  expenses in proportion to the average daily value
of its shares owned by that  Portfolio.  No  Underlying  Scudder Fund would bear
such  expenses  in excess of the  estimated  savings to it.  Such  savings  were
expected  to  result  primarily  from  the  elimination  of  numerous   separate
shareholder  accounts  which were or would have been  invested  directly  in the
Underlying  Scudder Funds and the resulting  reduction in shareholder  servicing
costs. In this regard, the shareholder servicing costs to any Underlying Scudder
Fund  for  servicing  one  account  registered  to the  Trust  would  have  been
significantly  less  than  the  cost to that  same  Underlying  Scudder  Fund of
servicing the same pool of assets  contributed in the typical fashion by a large
group of  individual  shareholders  owning  small  accounts  in each  Underlying
Scudder Fund.

The  Special   Servicing   Agreement   terminated  upon   implementation  of  an
Administration   Services  Agreement  by  each  Portfolio  and  each  applicable
Underlying Scudder Fund.

Based on actual expense data from the Underlying  Scudder Funds and certain very
conservative  assumptions with respect to the Trust, the Advisor, the Underlying
Scudder Funds,  Scudder Service  Corporation,  Scudder Investor Services,  Inc.,
Scudder  Fund  Accounting  Corporation,  Scudder  Trust  Company  and the Series
anticipated  that the aggregate  financial  benefits to the  Underlying  Scudder
Funds from these  arrangements  would have  exceeded the costs of operating  the
Portfolios.  If such turned out to be the case,  there would have been no charge
to the Trust for the services under the Service Agreement. Rather, in accordance
with the Service Agreement,  such expenses would have been passed through to the
Underlying  Scudder Funds in proportion to the value of each Underlying  Scudder
Fund's shares held by each Portfolio.

In the event that the aggregate  financial  benefits to the  Underlying  Scudder
Funds did not exceed the costs of a Portfolio,  the Advisor  would have paid, on
behalf of that Portfolio, that portion of costs, as set forth herein, determined
to be greater than the benefits.  The determination of whether and the extent to
which the benefits to the Underlying  Scudder Funds from the organization of the
Trust  would have  exceeded  the costs to such funds  would have been made based
upon the analysis criteria set forth in the Order.  This  cost-benefit  analysis
was initially reviewed by the Directors/Trustees of the Underlying Scudder Funds
before participating in the Service Agreement.

Certain  non-recurring  and  extraordinary  expenses were not paid in accordance
with the Service Agreement  including:  the fees and costs of actions,  suits or
proceedings and any penalties or damages in connection  therewith,  to which the
Trust  and/or a Portfolio  may incur  directly,  or may incur as a result of its
legal  obligation  to provide  indemnification  to its  officers,  director  and
agents;  the fees and costs of any governmental  investigation  and any fines or
penalties  in  connection  therewith;  and any  federal,  state or local tax, or
related  interest  penalties or additions to tax,  incurred,  for example,  as a
result of the Trusts'  failure to  distribute  all of its  earnings,  failure to
qualify  under  subchapter M of the Internal  Revenue Code, or failure to timely
file any required tax returns or other filings;  the fees and expenses  incurred
in connection  with  membership in investment  company  organizations;  fees and
expenses of the  Portfolios'  accounting  agent;  brokers'  commissions;  legal,
auditing and  accounting  expenses;  taxes and  governmental  fees; the fees and
expenses of the  transfer  agent;  the expenses of the fees for  registering  or
qualifying securities for sale; the fees and expenses of Trustees,  officers and
employees of a Portfolio who are not  affiliated  with the Advisor;  the cost of
printing  and  distributing  reports  and notices to  shareholders;  and fees of
disbursements  of custodians.  Under unusual  circumstances,  the parties to the
Service Agreement may agree to exclude certain other expenses.

                                       46
<PAGE>

Certain Underlying Scudder Funds impose a fee upon the redemption or exchange of
shares held for less than one year.  The fees,  which range between 1% and 2% of
the net asset value of the shares being redeemed or exchanged,  are assessed and
retained  by the  Underlying  Scudder  Funds for the  benefit  of the  remaining
shareholders. The fee is intended to encourage long-term investment in the Fund.
The fee is not a deferred sales charge,  is not a commission paid to the Advisor
of its  subsidiary  and does not benefit the Advisor in any way.  Each such Fund
reserves the right to modify the terms of or terminate  this fee at any time. As
a shareholder of such Underlying  Scudder Funds,  the Portfolios will be subject
to such fees. Under normal market conditions,  the Portfolios will seek to avoid
taking action that would result in the imposition of such a fee. However, in the
event that a fee is incurred,  the net assets of the Portfolio  would be reduced
by the amount of such fees that are  assessed  and  retained  by the  Underlying
Scudder Funds for the benefit of their shareholders.


<TABLE>
<CAPTION>
                              TRUSTEES AND OFFICERS
---------------------------------- ----------------------- --------------------------------------- -------------------------
                                                                                                   Position with
                                                                                                   Underwriter,
                                                                                                   Scudder Investor
Name, Age, and Address             Position with Fund      Principal Occupation**                  Services, Inc.
----------------------             ------------------      ----------------------                  --------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
<S>                                <C>                     <C>                                     <C>
Henry P. Becton, Jr. (56)          Trustee                 President and General Manager, WGBH     --
WGBH                                                       Educational Foundation
125 Western Avenue
Allston, MA 02134
---------------------------------- ----------------------- --------------------------------------- -------------------------

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

Linda C. Coughlin (48)+*           Trustee and President   Managing Director of Zurich Scudder     Director and Senior
                                                           Investments, Inc.                       Vice President

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

---------------------------------- ----------------------- --------------------------------------- -------------------------
Dawn-Marie Driscoll (53)           Trustee                 Executive Fellow, Center for Business   --
4909 SW 9th Place                                          Ethics, Bentley College; President,
Cape Coral, FL  33914                                      Driscoll Associates (consulting firm)
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Edgar R. Fiedler (70)              Trustee                 Senior Fellow and Economic              --
50023 Brogden                                              Counsellor, The Conference Board,
Chapel Hill, NC                                            Inc. (Not-for-profit business
                                                           research organization)
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Keith R. Fox (46)                  Trustee                 General Partner, Exeter Group of Funds  --
10 East 53rd Street
New York, NY  10022
---------------------------------- ----------------------- --------------------------------------- -------------------------

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

                                       47
<PAGE>

---------------------------------- ----------------------- --------------------------------------- -------------------------
                                                                                                   Position with
                                                                                                   Underwriter,
                                                                                                   Scudder Investor
Name, Age, and Address             Position with Fund      Principal Occupation**                  Services, Inc.
----------------------             ------------------      ----------------------                  --------------
---------------------------------- ----------------------- --------------------------------------- -------------------------
Joan E. Spero (55)                 Trustee                 President, Doris Duke Charitable        --
Doris Duke Charitable Foundation                           Foundation; Department of State -
650 Fifth Avenue                                           Undersecretary of State for Economic,
New York, NY  10128                                        Business and Agricultural Affairs
                                                           (March 1993 to January 1997)
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Jean Gleason Stromberg (56)        Trustee                 Consultant; Director, Financial         --
3816 Military Road, NW                                     Institutions Issues, U.S. General
Washington, D.C.                                           Accounting Office (1996-1997);
                                                           Partner, Fulbright & Jaworski (law
                                                           firm) (1978-1996)
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Jean C. Tempel (56)                Trustee                 Managing Director, First Light          --
One Boston Place                                           Capital, LLC (venture capital firm)
23rd Floor
Boston, MA 02108
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Steven Zaleznick (45)*             Trustee                 President and CEO, AARP Services, Inc.  --
601 E Street, NW
7th Floor
Washington, DC 20004
---------------------------------- ----------------------- --------------------------------------- -------------------------

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

Thomas V. Bruns (43)***            Vice President          Managing Director of Zurich Scudder     --
                                                           Investments, Inc.

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

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

William F. Glavin (41) +           Vice President          Managing Director of Zurich Scudder     Vice President
                                                           Investments, Inc.

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

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

James E. Masur (40) +              Vice President          Senior Vice President of Zurich         --
                                                           Scudder Investments, Inc.

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

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

Howard Schneider (43) +            Vice President          Managing Director of Zurich Scudder     --
                                                           Investments, Inc.

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

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

Brenda Lyons (37) +                Assistant Treasurer     Senior Vice President of Zurich         --
                                                           Scudder Investments, Inc.

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

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

Kathryn L. Quirk (47) #            Vice President and      Managing Director of Zurich Scudder     Senior Vice President,
                                   Assistant Secretary     Investments, Inc.                       Director, Chief Legal

                                                                                                   Officer and Assistant
                                                                                                   Clerk
---------------------------------- ----------------------- --------------------------------------- -------------------------

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

Ann M. McCreary (43) #             Vice President          Managing Director of Zurich Scudder     --
                                                           Investments, Inc.

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

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

John R. Hebble (42)+               Treasurer               Senior Vice President of Zurich         Assistant Treasurer
                                                           Scudder Investments, Inc.

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

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

Caroline Pearson (38)+             Assistant Secretary     Senior Vice President of Zurich         Clerk
                                                           Scudder Investments, Inc.; Associate,
                                                           Dechert Price & Rhoads (law firm)

                                                           1989 - 1997
---------------------------------- ----------------------- --------------------------------------- -------------------------

                                       48
<PAGE>

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

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

John Millette (37)+                Vice President and      Vice President of Zurich Scudder        --
                                   Secretary               Investments, Inc.

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

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

Donald E. Hall (48) ##             Vice President          Managing Director of Zurich Scudder     --
                                                           Investments, Inc.

---------------------------------- ----------------------- --------------------------------------- -------------------------
</TABLE>


*    Ms.  Coughlin and Mr.  Zaleznick are considered by the Fund and its counsel
     to  be "interested  persons"  of the  Advisor or of the Trust as defined in
     the 1940 Act.

**   Unless  otherwise  stated,  all officers and Trustees have been  associated
     with  their  respective  companies  for  more  than  five  years,  but  not
     necessarily in the same capacity.
+    Address:  Two International Place, Boston, Massachusetts 02110
#    Address:  345 Park Avenue, New York, New York 10154
##   Address: 333 South Hope Street, Los Angeles, California 90071
***  Address: 222 South Riverside Plaza, Chicago, Illinois 60606

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


As of  November  30,  2000,  31,434  shares in the  aggregate,  or 14.02% of the
outstanding  shares of Scudder Pathway Series;  Moderate  Portfolio,  Class AARP
were held in the name of Scudder  Trust  Company,  Trustee for the IRA of Arthur
Valla, who may deemed to be the beneficial owner of such shares.

As of November  30,  2000,  104,603  shares in the  aggregate,  or 46.66% of the
outstanding  shares of Scudder Pathway Series;  Moderate  Portfolio,  Class AARP
were held in the name of Scudder  Trust  Company,  Trustee  for the IRA of Wayne
Rambo, who may deemed to be the beneficial owner of such shares.

As of  November  30,  2000,  14,196  shares  in the  aggregate,  or 6.33% of the
outstanding  shares of Scudder Pathway Series;  Moderate  Portfolio,  Class AARP
were  held in the name of Merle and  Betty  Wingo.  They may be deemed to be the
beneficial owner of such shares.

As of November  30,  2000,  484,559  shares in the  aggregate,  or 15.43% of the
outstanding shares of Scudder Pathway Series;  Conservative  Portfolio,  Class S
were held in the name of Union Bank, for the benefit of select omnibus, P.O. Box
85484,  San Diego, CA 92186.  who may deemed to be the beneficial  owner of such
shares.

As of November  30,  2000,  696,055  shares in the  aggregate,  or 22.16% of the
outstanding shares of Scudder Pathway Series;  Conservative  Portfolio,  Class S
were  held  in the  name  of  IBEW  Local  #106  Annuity  Plan,  Zurich  Scudder
Investments,  Trustee, 322 James Avenue,  Jamestown, NY 14701, who may deemed to
be the beneficial owner of such shares.

As of November 30, 2000,  all Trustees and Officers of Scudder  Pathway  Series;
Moderate Portfolio, Scudder Pathway Series; Growth Portfolio and Scudder Pathway
Series;  Conservative Portfolio, as a group, owned beneficially (as that term is
defined in Section 13 (d) of The  Securities and Exchange Act of 1934) less than
1% of the outstanding shares.

To the  knowledge  of the  Funds,  as of  November  30,  2000,  no person  owned
beneficially  more than 5% of the  outstanding  shares of any class of any fund,
except as stated above.





                                       49
<PAGE>



                                  REMUNERATION


The Board of Trustees of the Trust is responsible  for the general  oversight of
the Portfolios'  business.  A majority of the Board's members are not affiliated
with Zurich Scudder Investments,  Inc. These "Independent Trustees" have primary
responsibility  for  assuring  that  the  Portfolios  are  managed  in the  best
interests of their shareholders.

The  Board of  Trustees  meets at  least  quarterly  to  review  the  investment
performance  of the  Portfolios  of the  Trust 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 Scudder and its  affiliates for  investment  advisory  services and
other  administrative and shareholder  services.  In this regard, they evaluate,
among other things,  the quality and  efficiency  of the various other  services
provided,  costs  incurred  by  Scudder  and  its  affiliates,  and  comparative
information  regarding fees and expenses of competitive funds. They are assisted
in  this  process  by the  Portfolios'  independent  public  accountants  and by
independent legal counsel selected by the Independent Trustees.

All of the Independent Trustees serve on the Committee of Independent  Trustees,
which nominates  Independent  Trustees and considers other related matters,  and
the  Audit  Committee,   which  selects  the  Portfolios'   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.

                                  REMUNERATION
                                  ------------


Each Independent  Trustee receives  compensation for his or her services,  which
includes an annual retainer and an attendance fee for each meeting attended. The
Independent Trustee who serves as lead trustee receives additional  compensation
for his or her service.  No additional  compensation  is paid to any Independent
Trustee  for  travel  time to  meetings,  attendance  at  trustee's  educational
seminars  or  conferences,   service  on  industry  or  association  committees,
participation as speakers at trustees' conferences or service on special trustee
task forces or subcommittees.  Independent  Trustees do not receive any employee
benefits   such  as  pension  or  retirement   benefits  or  health   insurance.
Notwithstanding the schedule of fees, the Independent  Trustees have in the past
and may in the future waive a portion of their compensation.






                                       50
<PAGE>

                                   DISTRIBUTOR


The Trust has an underwriting  agreement with Scudder Investor  Services,  Inc.,
Two International Place,  Boston, MA 02110 (the "Distributor"),  a Massachusetts
corporation,  which is a subsidiary of the Advisor, a Delaware corporation.  The
Trust's  underwriting  agreement  dated May 18, 2000 will remain in effect until
September 30, 2001 and from year to year  thereafter  only if its continuance is
approved  annually by a majority of the members of the Board of Trustees who are
not parties to such agreement or interested persons of any such party and either
by vote of a majority of the Board of Trustees or a majority of the  outstanding
voting  securities of the Trust. The underwriting  agreement was approved by the
Trustees on May 18, 2000.

Under the  underwriting  agreement,  the Distributor is not 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 or 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 each Portfolio;  the cost of
printing and mailing  confirmations  of purchases of shares and any prospectuses
accompanying such confirmations;  any issuance taxes and/or any initial transfer
taxes;  a portion of  shareholder  toll-free  telephone  charges and expenses of
shareholder  service  representatives;  the  cost  of  wiring  funds  for  share
purchases  and  redemptions  (unless paid by the  shareholder  who initiates the
transaction);  the cost of printing and postage of business reply envelopes; and
a  portion  of the cost of  computer  terminals  used by both the  Trust and the
Distributor.


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



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

                                      TAXES

Taxation of the Portfolios and Their Shareholders

Each  Portfolio  intends  to  qualify  annually  and  elects to be  treated as a
regulated  investment  company  under  Subchapter M of the Code.  As a regulated
investment company, each Portfolio 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.


If for any  taxable  year a Portfolio  does not qualify for the special  federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its  shareholders).  In such event,  dividend
distributions, would be taxable to shareholders to the extent of the Portfolios'
earnings and profits, and would be eligible for the dividends received deduction
for corporations in the case of corporate shareholders.


                                       51
<PAGE>

Each Portfolio 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 each  Portfolio'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.

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  Portfolio.  Presently,  each
Portfolio has no capital loss carryforwards.


If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by a Portfolio for  reinvestment,  requiring federal
income taxes to be paid thereon by the Portfolio, the Portfolio intends to elect
to treat such capital gains as having been  distributed  to  shareholders.  As a
result,  each  shareholder  will report such capital gains as long-term  capital
gains, will be able to claim a proportionate  share of federal income taxes paid
by the  Portfolio 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 Portfolio shares by the difference between such reported gains
and the shareholder's tax credit. If a Portfolio 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.

To the extent that an Underlying  Scudder Fund derives  dividends  from domestic
corporations, a portion of the income distributions of a Portfolio which invests
in that 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
held by Underlying Scudder 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  Underlying  Scudder  Fund  or the
Portfolio  are  deemed to have been held by the  Underlying  Scudder  Fund,  the
Portfolio or the shareholders,  as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.

Income  received by an  Underlying  Scudder Fund from  sources  within a foreign
country may be subject to  withholding  and other taxes imposed by that country.
If more than 50% of the value of an  Underlying  Scudder  Fund's total assets at
the  close of its  taxable  year  consists  of stock or  securities  of  foreign
corporations,  the  Underlying  Scudder  Fund will be eligible  and may elect to
"pass-through"  to its shareholders,  including a Portfolio,  the amount of such
foreign income and similar taxes paid by the Underlying  Scudder Fund.  Pursuant
to this election, the Portfolio would be required to include in gross income (in
addition to taxable dividends actually received),  its pro rata share of foreign
income and  similar  taxes and to deduct such  amount in  computing  its taxable
income or to use it as a foreign  tax credit  against  its U.S.  federal  income
taxes, subject to limitations.  A Portfolio,  would not, however, be eligible to
elect to  "pass-through" to its shareholders the ability to claim a deduction or
credit with respect to foreign  income and similar taxes paid by the  Underlying
Scudder Fund.

Properly  designated  distributions of the excess of net long-term  capital gain
over net  short-term  capital  loss are  taxable to  shareholders  as  long-term
capital  gains,  regardless of the length of time the shares of a Portfolio 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


                                       52
<PAGE>

another  Scudder  Fund,  may  result in tax  consequences  (gain or loss) to the
shareholder and are also subject to these reporting requirements.


A qualifying  individual may make a deductible IRA  contribution 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 for 2001 ($53,000 for married  individuals filing a
joint  return,  with a phase-out  of the  deduction  for  adjusted  gross income
between $53,000 and $63,000;  $33,000 for a single individual,  with a phase-out
for adjusted gross income between $33,000 and $43,000).  However,  an individual
not permitted to make a deductible  contribution  to an IRA for any such taxable
year may nonetheless make nondeductible contributions up to $2,000 to an IRA (up
to $2,000  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.  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 Portfolio result in a reduction in the net asset value of the
Portfolio'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.

Each  Portfolio  will be  required  to  report to the IRS all  distributions  of
investment  company  taxable  income and capital gains as well as gross proceeds
from the  redemption  or exchange  of  Portfolio  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
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  Portfolio  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  Portfolio  may be  subject  to  state  and  local  taxes  on
distributions  received from the Portfolio and on redemptions of the Portfolio'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 Portfolio,  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.

Taxation of the Underlying Scudder Funds

Each  Underlying  Scudder  Fund  intends  to qualify  annually  and elects to be
treated as a regulated investment company under Subchapter M of the Code. In any
year in which an  Underlying  Scudder Fund  qualifies as a regulated  investment
company and timely  distributes  all of its taxable  income,  the Fund generally
will not pay any federal income or excise tax.

Distributions of an Underlying  Scudder Fund's investment company taxable income
are  taxable  as  ordinary  income to a  Portfolio  which  invests  in the Fund.
Distributions  of the  excess of an  Underlying  Scudder  Fund's  net  long-term
capital gain over its net short-term capital loss, which are properly designated
as  "capital  gain  dividends,"  are  taxable  as  long-


                                       53
<PAGE>

term capital gain to a Portfolio  which  invests in the Fund,  regardless of how
long  the  Portfolio  held  the  Fund's  shares,  and are not  eligible  for the
corporate dividends-received  deduction. Upon the sale or other disposition by a
Portfolio of shares of an Underlying Scudder Fund, the Portfolio  generally will
realize a capital gain or loss which will be long-term or short-term,  generally
depending upon the Portfolio's holding period for the shares.


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


                             PORTFOLIO TRANSACTIONS

Portfolio Turnover

Each  Portfolio'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.  Purchases and
sales are made for each Portfolio whenever necessary,  in management's  opinion,
to meet that Portfolio's objective.


Each  Portfolio is expected to operate at a zero expense  ratio.  To  accomplish
this,  the payment of a  Portfolio's  expenses is subject to the  Administration
Agreement and certain provisions mentioned in the Agreement with the Advisor.



<TABLE>
<CAPTION>
Underlying Scudder Fund                                                          Portfolio Turnover Rate (%) ^(1)
-----------------------                                                          -------------------------------
<S>                                                                                          <C>
Scudder Cash Investment Trust^(2)                                                            n/a
Scudder Money Market Series--Premium Money Market Shares ^(2)                                n/a
Scudder Emerging Markets Income Fund*                                                        339
Scudder Global Bond Fund*                                                                     64
Scudder GNMA Fund - Class AARP*                                                              308
Scudder High Yield Bond Fund*                                                                 81
Scudder Income Fund                                                                          104
Scudder Short Term Bond Fund*                                                                194
Scudder Balanced Fund*                                                                       113
Scudder Capital Growth Fund - Class AARP*                                                     79
Scudder Classic Growth Fund*                                                                  88
Scudder Development Fund                                                                     100
Scudder Dividend & Growth Fund*                                                              123
Scudder Emerging Markets Growth Fund*                                                         49
Scudder Global Fund                                                                           60
Scudder Global Discovery Fund*                                                               126
Scudder Gold Fund*                                                                            24
Scudder Greater Europe Growth Fund*                                                           64
Scudder Growth and Income Fund*                                                               58
Scudder Health Care Fund                                                                     142
Scudder International Fund                                                                    83
Scudder Large Company Growth Fund                                                             56
Scudder Large Company Value Fund                                                              46
Scudder Latin America Fund*                                                                   75
Scudder Pacific Opportunities Fund*                                                          175
Scudder Select 500 Fund*                                                                      53
Scudder Select 1000 Growth Fund*                                                              39
Scudder S&P 500 Index Fund                                                                    11
Scudder Small Company Stock Fund - Class AARP*                                                56
Scudder Small Company Value Fund                                                              29

Scudder Technology Innovation Fund                                                            83

Scudder 21st Century Growth Fund                                                             135


                                       54
<PAGE>

Underlying Scudder Fund                                                          Portfolio Turnover Rate (%) ^(1)
-----------------------                                                          -------------------------------
Scudder Value Fund*                                                                                                   51
The Japan Fund*                                                                                                       87
------------------------------
</TABLE>
^(1)     As of each  Underlying  Scudder  Fund's  most recent  fiscal  reporting
         period.
^(2)     Scudder Cash Investment Trust and Scudder Money Market Series - Scudder
         Premium Shares are money market funds.
*        Annualized

                                 NET ASSET VALUE

The net asset value of  Portfolio  shares 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,
Dr. Martin Luther King,  Jr. Day,  Presidents'  Day, Good Friday,  Memorial Day,
Independence  Day, Labor Day,  Thanksgiving  and Christmas.  Net asset value per
share is  determined  by dividing  the value of the total assets of a Portfolio,
less all liabilities, by the total number of shares outstanding.

The net asset value of each Underlying Scudder Fund is determined based upon the
nature  of the  securities  as set  forth in the  prospectus  and  statement  of
additional   information  of  such  Underlying  Scudder  Fund.  Shares  of  each
Underlying  Scudder  Fund in which a Portfolio  may invest are valued at the net
asset value per share of each Underlying Scudder Fund as of the close of regular
trading on the Exchange on each day the  Exchange is open for  trading.  The net
asset value per share of the  Underlying  Scudder Funds will be  calculated  and
reported to a Portfolio by each  Underlying  Scudder  Fund's  accounting  agent.
Short-term securities with a remaining maturity of sixty days or less are valued
by the amortized cost method.

If,  in the  opinion  of a  Portfolio'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  Portfolio  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.

                             ADDITIONAL INFORMATION

Experts

The Financial Highlights of each Fund included in each Fund's prospectus and the
Financial  Statements  incorporated by reference in this Statement of Additional
Information  have been so included or  incorporated  by reference in reliance on
the  report  of   PricewaterhouseCoopers   LLP,  160  Federal  Street,   Boston,
Massachusetts 02110, independent accountants, and given on the authority of said
firm as  experts  in  accounting  and  auditing.  PricewaterhouseCoopers  LLP 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 each Portfolio's property or the acts,
obligations or affairs of the Trust.  The Declaration of Trust also provides for
indemnification out of a Portfolio's property of any shareholder held personally
liable for the claims and liabilities  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  Portfolio  itself  would  be  unable  to  meet  its
obligations.

Other Information


Many of the investment  changes in a Portfolio will be made at prices  different
from those  prevailing at the time they may be reflected in a regular  report to
shareholders  of the  Portfolio.  These  transactions  will  reflect  investment
decisions  made by the  Advisor in light of the  objective  and  policies of the
particular Portfolio, and other factors such as its other


                                       55
<PAGE>

portfolio  holdings  and tax  considerations,  and  should not be  construed  as
recommendations for similar action by other investors.


The name "Scudder  Pathway  Series" is the  designation  of the Trustees for the
time being under a Declaration of Trust dated July 1, 1994, as amended from time
to time,  and all  persons  dealing  with a  Portfolio  must look  solely to the
property  of the  Portfolio  for  the  enforcement  of any  claims  against  the
Portfolio as neither the Trustees,  officers,  agents or shareholders assume any
personal liability for obligations  entered into on behalf of the Portfolio.  No
series of the Trust  shall be liable for the  obligations  of any other  series.
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.

The CUSIP number of Conservative Portfolio Class AARP is 811189-885.

The CUSIP number of the Conservative Portfolio Class S is 811189-30-7.

The CUSIP number of Moderate Portfolio Class AARP is 811189-703.

The CUSIP number of the Moderate Portfolio Class S is 811189-50-5.

The CUSIP number of Growth Portfolio Class AARP is 811189-802.

The CUSIP number of the Growth Portfolio Class S is 811189-20-8.

Each Portfolio has a fiscal year end of August 31.

The  prospectuses  of each of the Portfolios are combined in this prospectus and
Statement of Additional Information.  Each Portfolio offers only its own shares,
yet it is possible that a Portfolio  might become liable for a  misstatement  or
omission regarding another Portfolio.  The Trustees of the Trust have considered
this and approved the use of a combined  prospectus  and Statement of Additional
Information.

The Series  employs  State  Street Bank and Trust  Company as  Custodian.  State
Street Bank and Trust Company  maintains shares of the Underlying  Scudder Funds
in the  book  entry  system  of such  funds'  transfer  agent,  Scudder  Service
Corporation.

The firm of Dechert is counsel to the Trust.


Scudder Service Corporation  ("Service  Corporation"),  P.O. Box 219669,  Kansas
City,  Missouri,  64121-9669,  a subsidiary of the Advisor,  is the transfer and
dividend  disbursing  agent for the Trust.  Service  Corporation  also serves as
shareholder service agent and provides  subaccounting and recordkeeping services
for shareholder accounts in certain retirement and employee benefit plans.

The  Portfolios,  or the Advisor  (including  any affiliate of the Advisor),  or
both, may pay unaffiliated  third parties for providing  recordkeeping and other
administrative  services with respect to accounts of  participants in retirement
plans or other beneficial owners of Portfolio shares whose interests are held in
an omnibus account.

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


                              FINANCIAL STATEMENTS

The financial statements, including the investment portfolios of Scudder Pathway
Series,  together  with  the  Report  of  Independent   Accountants,   Financial
Highlights  and  notes  to  financial  statements  are  incorporated  herein  by
reference  and are  hereby  deemed to be part of this  Statement  of  Additional
Information.




                                       56
<PAGE>

                                    GLOSSARY

Prospective  investors  should  consider  certain  Underlying  Scudder Funds may
engage in the following investment practices.


INVESTMENT  COMPANY  SECURITIES.   The  Underlying  Scudder  Funds  may  acquire
securities  of other  investment  companies  to the extent  consistent  with its
investment  objective  and  subject  to the  limitations  of the 1940  Act.  The
Underlying  Scudder Fund will  indirectly  bear its  proportionate  share of any
management fees and other expenses paid by such other investment companies.

For example,  the Underlying  Scudder Fund may invest in a variety of investment
companies  which  seek to track the  composition  and  performance  of  specific
indexes or a specific portion of an index.  These  index-based  investments hold
substantially  all of their assets in  securities  representing  their  specific
index. Accordingly, the main risk of investing in index-based investments is the
same as investing in a portfolio of equity securities  comprising the index. The
market prices of index-based  investments will fluctuate in accordance with both
changes in the market value of their underlying  portfolio securities and due to
supply and demand for the  instruments on the exchanges on which they are traded
(which may result in their  trading  at a  discount  or premium to their  NAVs).
Index-based  investments  may not  replicate  exactly the  performance  of their
specified  index  because of  transaction  costs and  because  of the  temporary
unavailability of certain component securities of the index.

Examples of index-based investments include:

SPDRs(R):  SPDRs,  an acronym for "Standard & Poor's  Depositary  Receipts," are
based on the S&P 500  Composite  Stock Price Index.  They are issued by the SPDR
Trust,  a unit  investment  trust that  holds  shares of  substantially  all the
companies  in the S&P 500 in  substantially  the  same  weighting  and  seeks to
closely track the price performance and dividend yield of the Index.

MidCap  SPDRs(R):  MidCap SPDRs are based on the S&P MidCap 400 Index.  They are
issued by the MidCap SPDR Trust, a unit investment  trust that holds a portfolio
of securities  consisting of  substantially  all of the common stocks in the S&P
MidCap 400 Index in substantially  the same weighting and seeks to closely track
the price performance and dividend yield of the Index.

Select Sector SPDRs(R):  Select Sector SPDRs are based on a particular sector or
group of  industries  that are  represented  by a specified  Select Sector Index
within the S&P 500 Index.  They are issued by The Select  Sector SPDR Trust,  an
open-end  management  investment company with nine portfolios that each seeks to
closely track the price  performance  and dividend yield of a particular  Select
Sector Index.

DIAMONDS(SM):  DIAMONDS are based on the Dow Jones Industrial Average(SM).  They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.

Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100  Trust, a unit investment  trust that holds a portfolio
consisting of substantially  all of the securities,  in  substantially  the same
weighting,  as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.

WEBs(SM):  WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific  Morgan Stanley Capital International  Indexes. They are issued
by the WEBs Index Fund,  Inc., an open-end  management  investment  company that
seeks to generally  correspond to the price and yield  performance of a specific
Morgan Stanley Capital International Index.


Common  stocks.  Common  stock is issued by companies to raise cash for business
purposes  and  represents  a  proportionate  interest in the issuing  companies.
Therefore,  an Underlying Scudder Fund may participate 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.


                                       57
<PAGE>

Despite the risk of price volatility,  however,  common stocks have historically
offered a greater potential for gain on investment, compared to other classes of
financial  assets such as bonds or cash  equivalents,  although  there can be no
assurance that this will be true in the future.


Convertible   Securities.   Certain  Underlying  Scudder  Funds  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 an Underlying  Scudder Fund may invest are
either  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
debt 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 debt 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 debt
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.


Of course,  like all debt  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  are  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
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"(TM)).

Small Company  Risk.  The Advisor  believes  that many small  companies may have
sales and earnings growth rates which exceed those of larger  companies and that
such  growth  rates  may  in  turn  be  reflected  in  more  rapid  share  price
appreciation  over time.  However,  investing in smaller company stocks involves
greater risk than is  customarily  associated  with  investing  in larger,  more
established companies.  For example,  smaller companies can have limited product
lines,  markets,  or financial and managerial  resources.  Smaller companies may
also be dependent on one or a few key persons,  and may be more  susceptible  to
losses and risks of bankruptcy. Also, the securities of the smaller companies in
which certain  Underlying  Scudder  Funds may invest,  may be thinly traded (and
therefore  have to be sold at a discount  from current  market prices or sold in
small  lots  over an  extended  period of time).  Transaction  costs in  smaller
company stocks may be higher than those of larger companies.


Investing in emerging  growth  companies.  The investment  risk  associated with
emerging growth  companies is higher than that normally  associated with larger,
older  companies due to the greater  business  risks of small size, the relative
age of the company,  limited product lines,  distribution channels and financial
and managerial  resources.  Further,  there is typically less publicly available
information concerning smaller companies than for larger, more established ones.

                                       58
<PAGE>

The securities of small companies are often traded  over-the-counter and may not
be  traded  in  the  volumes   typical  on  a  national   securities   exchange.
Consequently,  in order to sell this type of holding, an Underlying Scudder Fund
may need to  discount  the  securities  from  recent  prices or  dispose  of the
securities  over a long period of time.  The prices of this type of security may
be more  volatile  than those of larger  companies  which are often  traded on a
national securities exchange.


Investments  Involving  Above-Average Risk. Certain Underlying Scudder Funds may
purchase  securities  involving  above-average  risk. For example, an Underlying
Scudder Fund has invested from time to time in  relatively  new companies but is
limited by a  non-fundamental  policy that it may not invest more than 5% of its
total assets in companies that, with their predecessors, have been in continuous
operation for less than three years. The Underlying Scudder Fund's portfolio may
also  include  the  securities  of small  or  little-known  companies,  commonly
referred  to as  emerging  growth  companies,  that the  Advisor  believes  have
above-average  earnings  growth  potential  and/or may  receive  greater  market
recognition.  Both factors are  believed to offer  significant  opportunity  for
capital  appreciation.  Investment risk is higher than that normally  associated
with larger,  older companies due to the higher  business risks  associated with
small size,  frequently  narrow product lines and relative  immaturity.  To help
reduce risk, the Underlying  Scudder Fund allocates its  investments  among many
companies and different industries.


The securities of such companies are often traded only  over-the-counter and may
not be  traded  in the  volume  typical  of  trading  on a  national  securities
exchange.  As a  result,  the  disposition  by the  Underlying  Scudder  Fund of
holdings of such  securities may require the Underlying  Scudder Fund to offer a
discount from recent prices or to make many small sales over a lengthy period of
time. Such securities may be subject to more abrupt or erratic market  movements
than those typically encountered on national securities exchanges.

Debt  securities.  In general,  the prices of debt securities rise when interest
rates fall,  and vice versa.  This effect is usually more  pronounced for longer
term debt securities.


Investment-Grade  Bonds.  Certain of the  Underlying  Scudder Funds may purchase
"investment-grade bonds" which are those rated, Aaa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P or,  if  unrated,  judged  to be of  equivalent  quality  as
determined  by the  Advisor.  Moody's  considers  bonds  it  rates  Baa to  have
speculative elements as well as investment-grade characteristics.  To the extent
an Underlying Scudder Fund invests in higher-grade securities, it will be unable
to avail itself of  opportunities  for higher income which may be available with
lower grades.  High Yield/High Risk Bonds.  Certain Underlying Scudder Funds may
also purchase debt securities which are rated below  investment-grade  (commonly
referred to as "junk bonds"),  that is, rated below Baa by Moody's or BBB by S&P
and unrated  securities judged to be of equivalent  quality as determined by the
Investment Advisor.  These securities usually entail greater risk (including the
possibility  of  default  or  bankruptcy  of the  issuers  of such  securities),
generally involve greater  volatility of price and risk to principal and income,
and may be less liquid,  than  securities in the higher rating  categories.  The
lower the ratings of such debt securities, the more their risks render them like
equity securities.  Securities rated D may be in default with respect to payment
of principal or interest.  Information  regarding the ratings of debt securities
and  the  identity  of  those  Underlying  Scudder  Funds  that  can  invest  in
investment-grade or below  investment-grade  debt securities may be found in the
Ratings Appendix to this Statement of Additional Information.

 Issuers of such high yielding securities often are highly leveraged and may not
have available to them more  traditional  methods of financing.  Therefore,  the
risk  associated  with  acquiring the  securities  of such issuers  generally is
greater than is the case with higher rated  securities.  For example,  during an
economic  downturn  or a  sustained  period of  rising  interest  rates,  highly
leveraged  issuers of high yield  securities  may experience  financial  stress.
During such periods, such issuers may not have sufficient revenues to


                                       59
<PAGE>

meet their interest  payment  obligations.  The issuer's  ability to service its
debt  obligations  may  also  be  adversely   affected  by  specific   corporate
developments,  or the issuer's  inability to meet  specific  projected  business
forecasts, or the unavailability of additional financing.  The risk of loss from
default by the issuer is  significantly  greater  for the  holders of high yield
securities  because  such  securities  are  generally  unsecured  and are  often
subordinated to other  creditors of the issuer.  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 the 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 Underlying  Fund may have  difficulty  disposing of certain high yield (high
risk)  securities  because they may have a thin trading market.  Because not all
dealers  maintain  markets in all high yield  securities,  the  Underlying  Fund
anticipates  that such  securities  could be sold  only to a  limited  number of
dealers or  institutional  investors.  The lack of a liquid secondary market may
have an adverse effect on the market price and the Underlying  Fund's ability to
dispose  of  particular  issues  and may  also  make it more  difficult  for the
Underlying Fund to obtain accurate market quotations for purposes of valuing the
Underlying Fund's assets. Market quotations generally are available on many high
yield  issues  only from a limited  number of  dealers  and may not  necessarily
represent  firm  bids of such  dealers  or  prices  for  actual  sales.  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
generally  the  policy of the  Investment  Manager  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 the Fund's investment  objective by investment in such securities
may be more  dependent on the  Advisor's  credit  analysis  than is the case for
higher quality bonds.  Should the rating of a portfolio  security be downgraded,
the Advisor will determine whether it is in the best interests of the Underlying
Fund to retain or dispose of such security.

Prices for below investment-grade  securities may be affected by legislative and
regulatory  developments.  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.

Municipal Obligations. Certain Underlying Scudder Funds may acquire municipal
obligations when, due to disparities in the debt securities markets, the
anticipated total return on such obligations is higher than that on taxable
obligations. The Underlying Scudder Fund has no current intention of purchasing
tax-exempt municipal obligations that would amount to greater than 5% of the
Underlying Scudder Fund's total assets.

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."


Zero Coupon Securities. Certain Underlying Scudder Funds 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.


Stripped  Zero Coupon  Securities.  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


                                       60
<PAGE>

("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"(TM)) and
Certificate of Accrual on Treasuries ("CATS"(TM)).  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. The U.S. 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 Fund will be able to have its 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 (i.e.,  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.")


Brady Bonds.  Certain  Underlying Scudder Funds may invest in Brady Bonds, which
are securities created through the exchange of existing commercial bank loans to
public  and  private  entities  in  certain  emerging  markets  for new bonds in
connection with debt  restructurings  under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury,  Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Mexico, Uruguay,
Venezuela, Costa Rica, Argentina, Nigeria, and the Philippines.

Brady Bonds have been issued  only  recently,  and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various  currencies (but primarily the dollar) and are actively traded
in over-the-counter secondary markets.

Dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds or
floating  rate bonds,  are generally  collateralized  in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds.  Interest
payments on these Brady Bonds generally are collateralized by cash or securities
in an amount  that,  in the case of fixed rate  bonds,  is equal to at least one
year of  rolling  interest  payments  or, in the case of  floating  rate  bonds,
initially is equal to at least one year's rolling interest payments based on the
applicable  interest  rate at that time and is  adjusted  at  regular  intervals
thereafter.  Brady  Bonds are often  viewed  as having  three or four  valuation
components:  the  collateralized  repayment of principal at final maturity;  the
collateralized  interest payments;  the uncollateralized  interest payments; and
any uncollateralized  repayment of principal at maturity (these uncollateralized
amounts  constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds, with respect
to commercial  bank loans by public and private  entities,  investments in Brady
Bonds may be viewed as  speculative.  Over $82  billion in Brady Bonds have been
issued by countries in Africa and Latin  America,  with 90% of these Brady Bonds
being denominated in U.S. dollars.





                                       61
<PAGE>



Sovereign Debt.  Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the  principal  and/or  interest when due in accordance
with the terms of such debt. A governmental  entity's  willingness or ability to
repay  principal  and interest due in a timely  manner may be affected by, among
other factors, its cash flow situation,  the extent of its foreign reserves, the
availability  of sufficient  foreign  exchange on the date a payment is due, the
relative  size of the  debt  service  burden  to the  economy  as a  whole,  the
governmental  entity's policy towards the  International  Monetary Fund, and the
political   constraints  to  which  a   governmental   entity  may  be  subject.
Governmental  entities  may also be  dependent  on expected  disbursements  from
foreign governments, multilateral agencies and others abroad to reduce principal
and  interest  arrearages  on their debt.  The  commitment  on the part of these
governments,  agencies and others to make such  disbursements may be conditioned
on a governmental  entity's  implementation  of economic reforms and/or economic
performance  and the timely  service of such  debtor's  obligations.  Failure to
implement  such reforms,  achieve such levels of economic  performance  or repay
principal  or  interest  when due may result in the  cancellation  of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such  debtor's  ability or  willingness  to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of
such debt and to extend  further  loans to  governmental  entities.  There is no
bankruptcy  proceeding by which  sovereign debt on which  governmental  entities
have defaulted may be collected in whole or in part.


Mortgage-Backed   Securities  and  Mortgage  Pass-Through  Securities.   Certain
Underlying  Scudder Funds 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.  Underlying  mortgages may be of a variety of types,  including
adjustable rate, conventional 30-year, graduated payment and 15-year.

                                       62
<PAGE>

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

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 Underlying 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. Some mortgage-related  securities (such as securities issued by the
General  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  Underlying  Scudder  Fund  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  Fannie Mae and the  Federal  Home Loan  Mortgage
Corporation ("FHLMC").  Fannie Mae is a  government-sponsored  corporation owned
entirely by private  stockholders.  It is subject to general  regulation  by the
Secretary of Housing and Urban  Development.  Fannie Mae 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  Fannie  Mae  are
guaranteed as to timely  payment of principal and interest by Fannie Mae 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.

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


                                       63
<PAGE>

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 an
Underlying  Scudder  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 Underlying Scudder
Fund 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 Advisor  determines that the securities
meet the Underlying  Scudder 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.

The principal  risk of CMOs results from the rate of  prepayments  on underlying
mortgages  serving as collateral and from the structure of the deal. An increase
or decrease in prepayment rates will affect the yield, average life and price of
CMOs.


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.

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.

                                       64
<PAGE>


Other  Mortgage-Backed   Securities.  The  Advisor  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.  An Underlying  Scudder Fund will not purchase  mortgage-backed
securities  or any other  assets  which,  in the  opinion  of the  Advisor,  are
illiquid if, as a result,  more than 15% of the value of the Underlying  Scudder
Fund's total  assets will be. As new types of  mortgage-related  securities  are
developed  and offered to  investors,  the  Advisor  will,  consistent  with the
Underlying Scudder Fund's investment objective, 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 an Underlying  Scudder Fund's investment  objectives
and policies, the Underlying Scudder Fund may invest in these and other types of
asset-backed  securities  that may be developed in the future.  In general,  the
collateral  supporting  these  securities  is of shorter  maturity than mortgage
loans and is less likely to  experience  substantial  prepayments  with interest
rate fluctuations.


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


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

Asset-backed  securities are often backed by a pool of assets  representing  the
obligations of a number of different  parties.  To lessen the effect of failures
by obligors on underlying  assets to make  payments,  the securities may contain
elements  of credit  support  which  fall  into two  categories:  (i)  liquidity
protection,  and (ii) protection  against losses resulting from ultimate default
by an obligor  on the  underlying  assets.  Liquidity  protection  refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion.  Protection  against  losses  results  from  payment  of the  insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided  through  guarantees,  policies or letters of credit obtained by the
issuer or sponsor from third parties,  through  various means of structuring the
transaction or through a combination of such approaches.  An Underlying  Scudder
Fund 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.

An Underlying Scudder 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


                                       65
<PAGE>

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  1933  Act  may  be  subject  to  certain
restrictions on  transferability  and would be subject to the Underlying Scudder
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
Underlying  Scudder  Fund  to  dispose  of any  then-existing  holdings  of such
securities.

Illiquid Securities and Restricted Securities.

The Fund  may  purchase  securities  that are  subject  to legal or  contractual
restrictions on resale ("restricted securities"). Generally speaking, restricted
securities  may be sold (i) only to qualified  institutional  buyers;  (ii) in a
privately  negotiated  transaction to a limited  number of purchasers;  (iii) 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 (iv) in
a public offering for which a registration statement is in effect under the 1933
Act.  Issuers of restricted  securities may not be subject to the disclosure and
other  investor  protection  requirements  that  would  be  applicable  if their
securities were publicly traded.

Restricted  securities  are often  illiquid,  but they may also be  liquid.  For
example,  restricted securities that are eligible for resale under Rule 144A are
often deemed to be illiquid.

Each Corporation/Trust's Board of Directors/Trustees has approved guidelines for
use by the  Advisor in  determining  whether a security is  illiquid.  Among the
factors the Advisor may  consider in reaching  liquidity  decisions  relating to
Rule 144A  securities  are:  (1) the  frequency  of trades  and  quotes  for the
security; (2) the number of dealers wishing to purchase or sell the security and
the number of other  potential  purchasers;  (3) dealer  undertakings  to make a
market in the security; and (4) the nature of the security and the nature of the
market for the security (i.e.,  the time needed to dispose of the security,  the
method of soliciting offers, and the mechanics of the transfer).

Issuers of restricted  securities may not be subject to the disclosure and other
investor  protection  requirements  that would be applicable if their securities
were publicly traded. Where a registration  statement is required for the resale
of  restricted  securities,  a Fund may be  required  to bear all or part of the
registration  expenses. A Fund may be deemed to be an "underwriter" for purposes
of the 1933 Act when selling  restricted  securities  to the public and, in such
event,  the  Fund  may  be  liable  to  purchasers  of  such  securities  if the
registration  statement  prepared  by the  issuer is  materially  inaccurate  or
misleading.

The  Fund  may  also  purchase  securities  that  are not  subject  to  legal or
contractual   restrictions  on  resale,  but  that  are  deemed  illiquid.  Such
securities  may be illiquid,  for example,  because  there is a limited  trading
market for them.

The Fund may be unable to sell a restricted or illiquid  security.  In addition,
it may be more  difficult to determine a market value for restricted or illiquid
securities.  Moreover,  if adverse market  conditions were to develop during the
period between the Fund's decision to sell a restricted or illiquid security and
the point at which the Fund is permitted or able to sell such security, the Fund
might  obtain a price  less  favorable  than the price  that  prevailed  when it
decided to sell.


                                       66
<PAGE>

It is a Fund's policy that illiquid securities  (including repurchase agreements
of more than seven  days  duration,  certain  restricted  securities,  and other
securities which are not readily marketable) may not constitute,  at the time of
purchase, more than 15% of the value of the Underlying Fund's net assets.

This  investment  practice,  therefore,  could have the effect of increasing the
level of illiquidity of a Fund.

Repurchase  Agreements.  The  Underlying  Scudder Fund may invest in  repurchase
agreements pursuant to its investment guidelines. In a repurchase agreement, the
Fund acquires ownership of a security and simultaneously  commits to resell that
security to the seller, typically a bank or broker/dealer.

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

It is not clear whether a court would  consider the  Obligation  purchased by an
Underlying Scudder Fund subject to a repurchase  agreement as being owned by the
Underlying  Scudder  Fund or as being  collateral  for a loan by the  Underlying
Scudder Fund to the seller.  In the event of the  commencement  of bankruptcy or
insolvency  proceedings  with  respect  to the seller of the  Obligation  before
repurchase of the Obligation under a repurchase agreement, an Underlying Scudder
Fund may encounter delay and incur costs before being able to sell the security.
Delays may involve  loss of interest or decline in price of the  Obligation.  If
the court  characterizes  the  transaction as a loan and the Underlying  Scudder
Fund has not perfected a security  interest in the  Obligation,  the  Underlying
Scudder Fund may be required to return the Obligation to the seller's estate and
be treated as an unsecured creditor of the seller. As an unsecured creditor, the
Underlying  Scudder Fund would be at risk of losing some or all of the principal
and income  involved in the  transaction.  As with any unsecured debt instrument
purchased for the Underlying  Scudder Fund, the Advisor seeks to reduce 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 an Underlying Scudder Fund may
incur a loss if the  proceeds to the  Underlying  Scudder  Fund of the sale to a
third party are less than the repurchase price.  However, if the market value of
the  Obligation  subject  to the  repurchase  agreement  becomes  less  than the
repurchase price (including  interest),  the Underlying Scudder Fund will direct
the seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the  repurchase  price.  It is possible that an Underlying  Scudder Fund will be
unsuccessful  in  seeking to impose on the seller a  contractual  obligation  to
deliver additional securities.

Repurchase  Commitments.   Certain  Underlying  Scudder  Funds  may  enter  into
repurchase  commitments  with any  party  deemed  creditworthy  by the  Advisor,
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 an


                                       67
<PAGE>

Underlying  Scudder Fund may  purchase.  Such  transactions  may not provide the
Underlying Scudder Fund with collateral  marked-to-market during the term of the
commitment.

Reverse  Repurchase  Agreements.  The Fund may enter  into  "reverse  repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the  securities,  agrees to  repurchase  such  securities  at an agreed time and
price.  The Fund maintains a segregated  account in connection with  outstanding
reverse  repurchase  agreements.  The Fund will  enter into  reverse  repurchase
agreements only when the Advisor  believes that the interest income to be earned
from the investment of the proceeds of the transaction  will be greater than the
interest expense of the transaction. Such transactions may increase fluctuations
in the market value of Fund assets and its yield.


Strategic  Transactions and Derivatives.  Certain  Underlying Scudder Funds may,
but  are not  required  to,  utilize  various  other  investment  strategies  as
described below for a variety of purposes, such as hedging various market risks,
managing the effective  maturity or duration of  fixed-income  securities in the
Fund's portfolio,  or enhancing potential gain. These strategies may be executed
through the use of derivative contracts.


In the course of pursuing these investment  strategies,  the Underlying  Scudder
Fund may purchase and sell  exchange-listed  and  over-the-counter  put and call
options on securities,  equity and fixed-income  indices and other  instruments,
purchase  and sell futures  contracts  and options  thereon,  enter into various
transactions such as swaps, caps, floors,  collars,  currency forward contracts,
currency futures contracts, currency swaps or options on currencies, or currency
futures and various other currency transactions (collectively, all the above are
called "Strategic Transactions").  In addition,  strategic transactions may also
include  new  techniques,  instruments  or  strategies  that  are  permitted  as
regulatory  changes  occur.  Strategic  Transactions  may be used without  limit
(subject to certain  limitations  imposed by the 1940 Act) to attempt to protect
against  possible  changes in the market  value of  securities  held in or to be
purchased for the Underlying Scudder Fund's portfolio  resulting from securities
markets or  currency  exchange  rate  fluctuations,  to protect  the  Underlying
Scudder 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  Underlying
Scudder Fund's portfolio,  or to establish a position in the derivatives markets
as a 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  Underlying  Scudder  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  Underlying  Scudder  Fund to
utilize these Strategic  Transactions  successfully will depend on the Advisor's
ability to predict  pertinent  market  movements,  which cannot be assured.  The
Underlying Scudder Fund will comply with applicable regulatory requirements when
implementing   these   strategies,   techniques   and   instruments.   Strategic
Transactions  will  not be used to alter  fundamental  investment  purposes  and
characteristics  of the Underlying Scudder Fund, and the Underlying Scudder Fund
will  segregate  assets (or as provided by  applicable  regulations,  enter into
certain  offsetting  positions) to cover its obligations under options,  futures
and swaps to limit leveraging of the Fund.

Strategic  Transactions,  including derivative contracts,  have risks associated
with them  including  possible  default by the other  party to the  transaction,
illiquidity and, to the extent the Advisor'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 Underlying  Scudder 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 Underlying Scudder 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  Underlying  Scudder  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 Underlying  Scudder Fund creates the possibility that
losses on the hedging  instrument  may be greater than gains in the value of the
Underlying Scudder 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 Underlying Scudder Fund might
not be able to close out a transaction without incurring  substantial losses, if
at all. Although the use of futures and options  transactions for hedging should
tend to  minimize  the risk of loss due to a decline  in the value of the hedged
position,  at the same time they tend to limit any  potential  gain which  might
result from an increase in value of such position.  Finally, the daily variation
margin  requirements  for  futures  contracts  would  create a  greater  ongoing
potential financial risk than would


                                       68
<PAGE>

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

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

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

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

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

                                       69
<PAGE>


Unless the  parties  provide  for it,  there is no central  clearing or guaranty
function in an OTC option.  As a result,  if the  Counterparty  fails to make or
take delivery of the security,  currency or other  instrument  underlying an OTC
option it has entered into with the  Underlying  Scudder Fund or fails to make a
cash  settlement  payment due in accordance  with the terms of that option,  the
Underlying  Scudder Fund will lose any premium it paid for the option as well as
any anticipated benefit of the transaction. Accordingly, the Advisor must assess
the  creditworthiness  of each  such  Counterparty  or any  guarantor  or credit
enhancement of the  Counterparty's  credit to determine the likelihood  that the
terms of the OTC option will be  satisfied.  The  Underlying  Scudder  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 Advisor. The staff of the SEC currently takes the position
that OTC  options  purchased  by the  Underlying  Scudder  Fund,  and  portfolio
securities  "covering"  the amount of the Underlying  Scudder 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 the  Underlying
Scudder  Fund's  limitation  on  investing no more than 15% of its net assets in
illiquid securities.


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

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

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

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

The  Underlying  Scudder  Fund's use of futures and options  thereon will in all
cases be consistent with applicable  regulatory  requirements  and in particular
the rules and regulations of the Commodity  Futures Trading  Commission and will
be entered  into for bona fide  hedging,  risk  management  (including  duration
management)  or other  portfolio  and return  enhancement  management  purposes.
Typically,  maintaining a futures contract or selling an option thereon requires
the Underlying Scudder 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


                                       70
<PAGE>

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 the Underlying Scudder Fund. If the Underlying Scudder
Fund  exercises  an option on a futures  contract it will be  obligated  to post
initial margin (and  potential  subsequent  variation  margin) for the resulting
futures  position  just as it would  for any  position.  Futures  contracts  and
options thereon are generally settled by entering into an offsetting transaction
but  there  can be no  assurance  that  the  position  can be  offset  prior  to
settlement at an advantageous price, nor that delivery will occur.

The  Underlying  Scudder Fund will not enter into a futures  contract or related
option (except for closing transactions) if, immediately thereafter,  the sum of
the amount of its initial  margin and  premiums on open  futures  contracts  and
options  thereon would exceed 5% of the  Underlying  Scudder 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.  The  Underlying
Scudder  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.  The  Underlying  Scudder  Fund may  engage in  currency
transactions with Counterparties primarily in order to hedge, or manage the risk
of 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. The Underlying Scudder 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 (except for OTC currency  options) are determined to be of equivalent  credit
quality by the Advisor.


The Underlying  Scudder Fund's dealings in forward currency  contracts and other
currency  transactions  such as futures,  options,  options on futures and swaps
generally will be limited to hedging  involving either specific  transactions or
portfolio  positions except as described below.  Transaction hedging is entering
into a currency  transaction  with respect to specific  assets or liabilities of
the Underlying  Scudder 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.

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

The  Underlying  Scudder 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 the  Underlying  Scudder
Fund has or in which the  Underlying  Scudder  Fund  expects  to have  portfolio
exposure.

                                       71
<PAGE>


To reduce  the  effect of  currency  fluctuations  on the value of  existing  or
anticipated  holdings of portfolio  securities,  the Underlying Scudder Fund may
also engage in proxy  hedging.  Proxy hedging is often used when the currency to
which the Underlying  Scudder 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 the Underlying
Scudder 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 the  Underlying  Scudder  Fund's  securities  denominated in
correlated  currencies.  For example, if the Advisor considers that the Austrian
schilling  is  correlated  to  the  German  deutschemark  (the  "D-mark"),   the
Underlying  Scudder Fund holds  securities  denominated  in  schillings  and the
Advisor  believes  that the value of  schillings  will decline  against the U.S.
dollar,  the Advisor 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 the Underlying Scudder 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 the  Underlying
Scudder Fund is engaging in proxy hedging. If the Underlying Scudder Fund enters
into a currency  hedging  transaction,  the Underlying  Scudder 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 the  Underlying  Scudder 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.  The  Underlying  Scudder  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  Advisor,  it is in the  best
interests of the Underlying  Scudder 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  Advisor's  judgment  that  the  combined  strategies  will  reduce  risk or
otherwise more effectively achieve the desired portfolio  management goal, it is
possible  that the  combination  will  instead  increase  such  risks or  hinder
achievement of the portfolio management objective.


Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Underlying Scudder Fund may enter are interest rate,  currency,  index and other
swaps  and the  purchase  or sale of  related  caps,  floors  and  collars.  The
Underlying  Scudder 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  the
Underlying  Scudder Fund anticipates  purchasing at a later date. The Underlying
Scudder  Fund will not sell  interest  rate caps or floors where it does not own
securities  or other  instruments  providing  the income  stream the  Underlying
Scudder Fund may be obligated to pay.  Interest  rate swaps involve the exchange
by  the  Underlying   Scudder  Fund  with  another  party  of  their  respective
commitments  to pay or receive  interest,  e.g.,  an exchange  of floating  rate
payments for fixed rate payments with respect to a notional amount of principal.
A currency swap is an agreement to exchange  cash flows on a notional  amount of
two or more currencies based on the relative value  differential  among them and
an index swap is an agreement  to swap cash flows on a notional  amount based on
changes in the values of the reference  indices.  The purchase of a cap entitles
the purchaser to receive payments on a notional  principal amount from the party
selling such cap to the extent that a specified  index  exceeds a  predetermined
interest  rate or amount.  The  purchase of a floor  entitles  the  purchaser to
receive  payments on a notional  principal  amount from the party  selling  such
floor to the extent that a specified index falls below a predetermined  interest
rate or amount.  A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.

                                       72
<PAGE>


The Underlying  Scudder Fund will usually enter into swaps on a net basis, i.e.,
the two payment  streams are netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Underlying Scudder Fund receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as the Underlying  Scudder Fund will segregate  assets (or enter into offsetting
positions) to cover its obligations  under swaps, the Advisor and the Underlying
Scudder Fund believes 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 Fund will not enter into any swap,  cap,  floor or
collar  transaction  unless, at the time of entering into such transaction,  the
unsecured  long-term  debt  of  the  Counterparty,   combined  with  any  credit
enhancements,  is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO or is determined to be of equivalent credit quality by the Advisor.
If there is a default by the Counterparty,  the Underlying Scudder 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.  The  Underlying  Scudder 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  Underlying  Scudder  Fund  might use  Eurodollar  futures
contracts and options  thereon to hedge against  changes in LIBOR, to which many
interest rate swaps and fixed income instruments are linked.

Risks of Strategic  Transactions  outside the U.S.  When  conducted  outside the
U.S., Strategic  Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees,  and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities,  currencies and other instruments.  The value of such positions also
could be adversely affected by: (i) other complex foreign  political,  legal and
economic factors,  (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Underlying Scudder 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  Underlying  Scudder  Fund
segregate  cash or liquid  assets with its  custodian  to the extent  Underlying
Scudder Fund obligations are not otherwise  "covered"  through  ownership of the
underlying security,  financial instrument or currency.  In general,  either the
full amount of any obligation by the  Underlying  Scudder Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or  currency   required  to  be  delivered,   or,   subject  to  any  regulatory
restrictions,  an amount of cash or liquid  assets at least equal to the current
amount of the obligation must be segregated  with the custodian.  The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example,  a call
option  written by the  Underlying  Scudder  Fund will  require  the  Underlying
Scudder  Fund  to  hold  the  securities  subject  to the  call  (or  securities
convertible into the needed securities without  additional  consideration) or to
segregate  cash  or  liquid  assets  sufficient  to  purchase  and  deliver  the
securities  if the  call is  exercised.  A call  option  sold by the  Underlying
Scudder  Fund on an  index  will  require  the  Underlying  Scudder  Fund to own
portfolio  securities  which  correlate  with the index or to segregate  cash or
liquid assets equal to the excess of the index value over the exercise  price on
a current basis.  A put option  written by the Underlying  Scudder Fund requires
the  Underlying  Scudder  Fund to segregate  cash or liquid  assets equal to the
exercise price.

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

OTC options  entered into by the  Underlying  Scudder Fund,  including  those on
securities,  currency,  financial  instruments  or  indices  and OCC  issued and
exchange listed index options, will generally provide for cash settlement.  As a
result,  when the Underlying  Scudder Fund sells these  instruments it will only
segregate  an  amount  of  cash  or  liquid  assets  equal  to its  accrued  net
obligations,  as there is no  requirement  for payment or delivery of amounts in
excess of the net amount.


                                       73
<PAGE>

These  amounts  will  equal  100% of the  exercise  price  in the  case of a non
cash-settled  put,  the  same as an OCC  guaranteed  listed  option  sold by the
Underlying  Scudder Fund, or the in-the-money  amount plus any sell-back formula
amount  in the  case of a  cash-settled  put or  call.  In  addition,  when  the
Underlying  Scudder  Fund  sells a call  option  on an index at a time  when the
in-the-money amount exceeds the exercise price, the Underlying Scudder Fund will
segregate,  until the option expires or is closed out, cash or cash  equivalents
equal in value to such excess.  OCC issued and exchange  listed  options sold by
the  Underlying  Scudder  Fund other  than those  above  generally  settle  with
physical  delivery,  or with an  election  of either  physical  delivery or cash
settlement and the  Underlying  Scudder Fund will segregate an amount of cash or
liquid assets equal to the full value of the option.  OTC options  settling with
physical  delivery,  or with an  election  of either  physical  delivery or cash
settlement  will be treated the same as other  options  settling  with  physical
delivery.

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

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

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

When-Issued Securities. Certain Underlying Scudder Funds may purchase securities
on a "when-issued",  "delayed  delivery" 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 an Underlying Scudder Fund to the
issuer and no interest on the securities accrues to the Underlying Scudder Fund.
When the Fund purchases  such  securities,  it immediately  assumes the risks of
ownership,  including  the risk of  price  fluctuation.  Failure  to  deliver  a
security  purchased on this basis may result in a loss or missed  opportunity to
make an alternative investment.

 To the  extent  that  assets of the  Underlying  Scudder  Fund are held in cash
pending the settlement of a purchase of securities,  the Underlying Scudder Fund
will earn no income.  While such  securities may be sold prior to the settlement
date, the  Underlying  Scudder Fund intends to purchase them with the purpose of
actually acquiring them unless a sale appears desirable for investment  reasons.
At the time the  Underlying  Scudder  Fund makes the  commitment  to  purchase a
security on this basis,  it will record the transaction and reflect the value of
the security in determining its net asset value. At the time of settlement,  the
market value of the securities may be more or less than the purchase price.  The
Fund will  establish a  segregated  account in which it will  maintain  cash and
liquid securities equal in value to commitments for such securities.

Short Sales  Against the Box.  Certain  Underlying  Scudder Funds may make short
sales of common  stocks  if,  at all times  when a short  position  is open,  an
Underlying  Scudder  Fund  owns  the  stock  or owns  preferred  stocks  or debt
securities   convertible   or   exchangeable,   without   payment   of   further
consideration,  into the shares of common stock sold short.  Short sales of this
kind are referred to as short sales  "against the box." The  broker/dealer  that
executes a short sale generally invests cash proceeds of the sale until they are
paid  to the  Underlying  Scudder  Fund.  Arrangements  may  be


                                       74
<PAGE>

made with the  broker/dealer  to obtain a portion of the interest  earned by the
broker on the  investment of short sale proceeds.  The  Underlying  Scudder Fund
will segregate the common stock or convertible or  exchangeable  preferred stock
or debt securities in a special account with the custodian.

Uncertainty regarding the tax effects of short sales of appreciated  investments
may limit the extent to which the  Underlying  Fund may enter  into short  sales
against the box.

Foreign  Securities.  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  an  Underlying  Scudder  Fund's  performance.   As  foreign
companies  are  not  generally  subject  to  uniform  accounting,  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
securities  markets,   while  growing  in  volume  of  trading  activity,   have
substantially  less volume than the U.S. market,  and securities of some foreign
issuers are less liquid and more volatile than  securities of domestic  issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
U.S. and, at times,  volatility  of price can be greater than in the U.S.  Fixed
commissions  on some foreign  securities  exchanges  and bid to asked spreads in
foreign  bond  markets are  generally  higher than  commissions  or bid to asked
spreads on U.S. markets,  although the Advisor will endeavor to achieve the most
favorable net results on its  portfolio  transactions.  There is generally  less
governmental  supervision  and regulation of securities  exchanges,  brokers and
listed  companies  than in the U.S. It may be more  difficult  for an Underlying
Scudder 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., thus increasing
the  risk  of  delayed   settlements  of  portfolio   transactions  or  loss  of
certificates for portfolio  securities.  Payment for securities without delivery
may be required in certain foreign markets. In addition, with respect to certain
foreign  countries,  there is the possibility of  expropriation  or confiscatory
taxation,  political or social  instability,  or diplomatic  developments  which
could affect U.S. investments in those 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.  The
management of an Underlying  Scudder Fund seeks to mitigate the risks associated
with the foregoing considerations through continuous professional management.

Foreign  Currencies.  Because  investments  in foreign  securities  usually will
involve currencies of foreign countries,  and because certain Underlying Scudder
Funds may hold foreign currencies and forward  contracts,  futures contracts and
options on foreign currencies and foreign currency futures contracts,  the value
of the assets of such Underlying Scudder Fund 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  Underlying  Scudder Fund may incur
costs in connection with conversions between various currencies.

The  strength  or  weakness  of the U.S.  dollar  against  these  currencies  is
responsible for part of the Fund's investment  performance.  If the dollar falls
in value  relative to the  Japanese  yen,  for  example,  the dollar  value of a
Japanese  stock  held in the  portfolio  will rise even  though the price of the
stock remains  unchanged.  Conversely,  if the dollar rises in value relative to
the yen,  the  dollar  value of the  Japanese  stock  will  fall.  Many  foreign
currencies have experienced significant devaluation relative to the dollar.


Although an  Underlying  Scudder  Fund values its assets  daily in terms of U.S.
dollars,  it does not intend to convert its holdings of foreign  currencies into
U.S.  dollars on a daily basis.  It will 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 an  Underlying  Scudder  Fund at one rate,  while  offering a lesser  rate of
exchange  should the  Underlying  Scudder Fund desire to resell that currency to
the dealer.  An  Underlying  Scudder  Fund will  conduct  its  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 entering into
options or forward or futures contracts to purchase or sell foreign currencies.

                                       75
<PAGE>


Investing in Emerging Markets.  The Fund's investments in foreign securities may
be in developed  countries or in countries  considered by the Fund's  Investment
Manager to have  developing or "emerging"  markets,  which involves  exposure to
economic  structures  that are  generally  less  diverse  and mature than in the
United States, and to political systems that may be less stable. A developing or
emerging market country can be considered to be a country that is in the initial
stages of its  industrialization  cycle.  Currently,  emerging markets generally
include every country in the world other than the United States,  Canada, Japan,
Australia,   New  Zealand,  Hong  Kong,  Singapore  and  most  Western  European
countries. Currently, investing in many emerging markets may not be desirable or
feasible  because of the lack of adequate  custody  arrangements  for the Fund's
assets,  overly burdensome  repatriation and similar  restrictions,  the lack of
organized and liquid securities markets,  unacceptable  political risks or other
reasons.  As  opportunities to invest in securities in emerging markets develop,
the Fund may expand and further  broaden the group of emerging  markets in which
it invests. In the past, markets of developing or emerging market countries have
been more  volatile  than the  markets of  developed  countries;  however,  such
markets often have provided higher rates of return to investors.  The Investment
Manager believes that these  characteristics  may be expected to continue in the
future.


Most emerging  securities  markets in which certain Underlying Scudder Funds may
invest,  may have  substantially  less volume and are subject to less government
supervision than U.S. securities markets. Securities of many issuers in emerging
markets may be less  liquid and more  volatile  than  securities  of  comparable
domestic issuers. In addition, there is less regulation of securities exchanges,
securities  dealers,  and listed and unlisted companies in emerging markets than
in the United States.

Emerging markets also 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.  Delays in  settlement  could
result in  temporary  periods  when a  portion  of the  assets of an  Underlying
Scudder Fund is uninvested and no cash is earned  thereon.  The inability of the
Underlying  Scudder Fund to make intended  security  purchases due to settlement
problems could cause the Underlying  Scudder Fund to miss attractive  investment
opportunities.  Inability to dispose of portfolio  securities  due to settlement
problems  could result  either in losses to the  Underlying  Scudder Fund due to
subsequent  declines in value of the  portfolio  security or, if the  Underlying
Scudder Fund has entered into a contract to sell the  security,  could result in
possible  liability to the purchaser.  Costs  associated  with  transactions  in
foreign  securities are generally higher than costs associated with transactions
in U.S.  securities.  Such  transactions  also involve  additional costs for the
purchase or sale of foreign currency.


Certain emerging markets require prior  governmental  approval of investments by
foreign  persons,  limit the  amount  of  investment  by  foreign  persons  in a
particular  company,  limit the investment by foreign persons only to a specific
class of securities of a company that may have less advantageous rights than the
classes  available for purchase by  domiciliaries of the countries and/or impose
additional  taxes  on  foreign  investors.  Certain  emerging  markets  may also
restrict  investment  opportunities in issuers in industries deemed important to
national interest.


Certain emerging markets may require governmental  approval for the repatriation
of investment income,  capital or the proceeds of sales of securities by foreign
investors.  In  addition,  if a  deterioration  occurs in an  emerging  market's
balance of payments  or for other  reasons,  a country  could  impose  temporary
restrictions on foreign capital remittances. An Underlying Scudder Fund could be
adversely   affected  by  delays  in,  or  a  refusal  to  grant,  any  required
governmental approval for repatriation of capital, as well as by the application
to the Underlying Scudder Fund of any restrictions on investments.


In the course of investment in emerging market debt  obligations,  an Underlying
Scudder  Fund  will  be  exposed  to the  direct  or  indirect  consequences  of
political,  social and economic changes in one or more emerging  markets.  While
the Underlying Scudder Fund will manage its assets in a manner that will seek to
minimize the exposure to such risks,  and will further reduce risk by owning the
bonds of many issuers, there can be no assurance that adverse political,  social
or economic changes will not cause the Underlying  Scudder Fund to suffer a loss
of  value  in  respect  of the  securities  in  the  Underlying  Scudder  Fund's
portfolio.

                                       76
<PAGE>

The risk  also  exists  that an  emergency  situation  may  arise in one or more
emerging  markets as a result of which trading of securities may cease or may be
substantially  curtailed and prices for an Underlying  Scudder Fund's securities
in such markets may not be readily available.  The Trust/Corporation may suspend
redemption  of its shares for any period  during which an emergency  exists,  as
determined by the SEC.  Accordingly if the Underlying Scudder Fund believes that
appropriate  circumstances exist, it will promptly apply to the Commission for a
determination  that an emergency is present.  During the period  commencing from
the Underlying Scudder Fund's identification of such condition until the date of
the Commission  action, the Underlying Scudder Fund's securities in the affected
markets  will be valued at fair value  determined  in good faith by or under the
direction of the Board of Directors.


Volume and  liquidity  in most  foreign bond markets are less than in the United
States  and  securities  of many  foreign  companies  are less  liquid  and more
volatile than  securities of comparable  U.S.  companies.  Fixed  commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S.  exchanges,  although an Underlying  Scudder Fund  endeavors to achieve the
most  favorable  net results on its portfolio  transactions.  There is generally
less government  supervision and regulation of business and industry  practices,
securities exchanges,  brokers,  dealers and listed companies than in the United
States.  Mail service  between the United  States and foreign  countries  may be
slower or less reliable than within the United States,  thus increasing the risk
of delayed  settlements of portfolio  transactions or loss of  certificates  for
portfolio  securities.  In addition,  with respect to certain emerging  markets,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect the Underlying
Scudder Fund's  investments in those countries.  Moreover,  individual  emerging
market  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.  The
chart below sets forth the risk ratings of selected  emerging market  countries'
sovereign debt securities.

          Sovereign Risk Ratings for Selected Emerging Market Countries
        (Source: J.P. Morgan Securities, Inc., Emerging Markets Research)


Country                           Moody's                 Standard & Poor's
-------                           -------                 -----------------

Chile                             Baa1                    A-
Turkey                            B1                      B
Mexico                            Ba2                     BB
Czech Republic                    Baa1                    A
Hungary                           Baa3                    BBB-
Colombia                          Baa3                    BBB-
Venezuela                         Ba2                     B+
Morocco                           NR                      NR
Argentina                         Ba3                     BB
Brazil                            B1                      BB-
Poland                            Baa3                    BBB-
Ivory Coast                       NR                      NR


An  Underlying  Scudder Fund may have limited  legal  recourse in the event of a
default with respect to certain debt  obligations  it holds.  If the issuer of a
fixed-income  security  owned  by the  Underlying  Scudder  Fund  defaults,  the
Underlying  Scudder Fund may incur  additional  expenses to seek recovery.  Debt
obligations  issued by  emerging  market  country  governments  differ from debt
obligations  of private  entities;  remedies from  defaults on debt  obligations
issued by emerging  market  governments,  unlike those on private debt,  must be
pursued in the courts of the defaulting  party itself.  The  Underlying  Scudder
Fund's ability to enforce its rights against private issuers may be limited. The
ability to attach assets to enforce a judgment may be limited. Legal recourse is
therefore  somewhat  diminished.  Bankruptcy,  moratorium and other similar laws
applicable to private issuers of debt obligations may be substantially different
from those of other countries.  The political context,  expressed as an emerging
market  governmental  issuer's  willingness  to  meet  the  terms  of  the  debt
obligation,  for  example,  is  of  considerable  importance.  In  addition,  no
assurance can be given that the holders of commercial  bank debt may not contest
payments  to the  holders  of debt  obligations  in the event of  default  under
commercial  bank loan  agreements.


                                       77
<PAGE>

Income from securities held by an Underlying  Scudder Fund could be reduced by a
withholding  tax on the source or other  taxes  imposed by the  emerging  market
countries  in which the  Underlying  Scudder  Fund  makes its  investments.  The
Underlying Scudder Fund's net asset value may also be affected by changes in the
rates or methods of taxation  applicable  to the  Underlying  Scudder Fund or to
entities in which the  Underlying  Scudder Fund has  invested.  The Advisor will
consider the cost of any taxes in determining  whether to acquire any particular
investments,  but can provide no assurance that the taxes will not be subject to
change.


Many  emerging  markets  have  experienced  substantial,  and  in  some  periods
extremely  high  rates  of  inflation  for  many  years.   Inflation  and  rapid
fluctuations  in  inflation  rates  have had and may  continue  to have  adverse
effects on the  economies  and  securities  markets of certain  emerging  market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain  countries.  Of these countries,  some, in recent years, have
begun to control inflation through prudent economic policies.

Emerging market governmental issuers are among the largest debtors to commercial
banks,  foreign  governments,  international  financial  organizations and other
financial  institutions.  Certain emerging market governmental  issuers have not
been able to make  payments of interest on or principal of debt  obligations  as
those  payments  have  come due.  Obligations  arising  from past  restructuring
agreements  may  affect  the  economic  performance  and  political  and  social
stability of those issuers.

Governments  of many emerging  market  countries  have exercised and continue to
exercise  substantial  influence over many aspects of the private sector through
the ownership or control of many companies, including some of the largest in any
given  country.  As a result,  government  actions  in the  future  could have a
significant  effect on economic  conditions in emerging markets,  which in turn,
may adversely affect companies in the private sector,  general market conditions
and prices and yields of certain of the  securities  in the  Underlying  Scudder
Fund's  portfolio.   Expropriation,   confiscatory  taxation,   nationalization,
political,  economic or social  instability or other similar  developments  have
occurred  frequently  over the  history of certain  emerging  markets  and could
adversely  affect the Underlying  Scudder Fund's assets should these  conditions
recur.

The  ability of  emerging  market  country  governmental  issuers to make timely
payments  on their  obligations  is  likely  to be  influenced  strongly  by the
issuer's balance of payments,  including export  performance,  and its access to
international  credits and  investments.  An emerging  market whose  exports are
concentrated  in a few  commodities  could be  vulnerable  to a  decline  in the
international   prices   of  one  or  more  of  those   commodities.   Increased
protectionism  on the part of an emerging  market's  trading partners could also
adversely  affect the country's  exports and diminish its trade account surplus,
if any. To the extent that emerging  markets  receive payment for its exports in
currencies other than dollars or non-emerging market currencies,  its ability to
make debt payments  denominated  in dollars or  non-emerging  market  currencies
could be affected.

To the extent that an emerging  market country cannot  generate a trade surplus,
it must  depend on  continuing  loans  from  foreign  governments,  multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign  investment.  The access of emerging  markets to these
forms of  external  funding  may not be certain,  and a  withdrawal  of external
funding  could  adversely   affect  the  capacity  of  emerging  market  country
governmental  issuers to make payments on their  obligations.  In addition,  the
cost of servicing  emerging market debt  obligations can be affected by a change
in international  interest rates since the majority of these  obligations  carry
interest rates that are adjusted periodically based upon international rates.

Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country.  Fluctuations
in the level of these  reserves  affect the amount of foreign  exchange  readily
available  for  external  debt  payments  and thus  could  have a bearing on the
capacity  of  emerging   market   countries  to  make  payments  on  these  debt
obligations.


To the extent that an emerging  market country cannot  generate a trade surplus,
it must  depend on  continuing  loans  from  foreign  governments,  multilateral
organizations or private commercial banks, aid payments from foreign governments
and inflows of foreign investment. The access of emerging markets to these forms
of external  funding may not be certain,  and a withdrawal  of external  funding
could  adversely  affect the capacity of emerging  market  country  governmental
issuers  to make  payments  on  their  obligations.  In  addition,  the  cost of
servicing  emerging  market  debt  obligations  can be  affected  by a change in
international  interest  rates  since the  majority of these  obligations  carry
interest rates that are adjusted periodically based upon international rates.

                                       78
<PAGE>

Investing in Latin America. Investing in securities of Latin American issuers
may entail risks relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, the
Underlying Fund could lose its entire investment in any such country.

The securities  markets of Latin American  countries are substantially  smaller,
less developed,  less liquid and more volatile than the major securities markets
in the U.S.  Disclosure  and  regulatory  standards  are in many  respects  less
stringent than U.S. standards. Furthermore, there is a lower level of monitoring
and regulation of the markets and the activities of investors in such markets.

The limited size of many Latin American  securities  markets and limited trading
volume in the securities of Latin American issuers compared to volume of trading
in the  securities of U.S.  issuers could cause prices to be erratic for reasons
apart  from  factors  that  affect  the  soundness  and  competitiveness  of the
securities  issuers.  For  example,  limited  market size may cause prices to be
unduly influenced by traders who control large positions.  Adverse publicity and
investors'  perceptions,  whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.

Some Latin American  countries also may have managed  currencies,  which are not
free floating against the U.S. dollar.  In addition,  there is risk that certain
Latin American  countries may restrict the free  conversion of their  currencies
into other  currencies.  Further,  certain Latin American  currencies may not be
internationally  traded.  Certain of these  currencies have  experienced a steep
devaluation  relative to the U.S. dollar.  Any devaluations in the currencies in
which Fund  investments  are  denominated  may have a detrimental  impact on the
Fund's net asset value.

The economies of individual  Latin  American  countries may differ  favorably or
unfavorably  from the U.S.  economy  in such  respects  as the rate of growth of
gross domestic product, the rate of inflation,  capital  reinvestment,  resource
self-sufficiency  and  balance of  payments  position.  Certain  Latin  American
countries  have   experienced   high  levels  of  inflation  which  can  have  a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic  policies.  Furthermore,  certain Latin
American  countries may impose  withholding taxes on dividends payable to a Fund
at a higher rate than those imposed by other foreign countries.  This may reduce
the Fund's investment income available for distribution to shareholders

Certain Latin American countries such as Argentina,  Brazil and Mexico are among
the world's  largest  debtors to commercial  banks and foreign  governments.  At
times,  certain Latin American  countries have declared moratoria on the payment
of principal  and/or interest on outstanding  debt.


                                       79
<PAGE>

The portion of an Underlying  Scudder Fund's assets  invested  directly in Chile
may be less than the  portions  invested  in other  countries  in Latin  America
because,  at present,  capital  invested in Chile normally cannot be repatriated
for as long as five years.

Latin America is a region rich in natural  resources such as oil,  copper,  tin,
silver, iron ore, forestry, fishing, livestock and agriculture. The region has a
large  population  (roughly 300 million)  representing a large domestic  market.
Economic growth was strong in the 1960s and 1970s, but slowed  dramatically (and
in some  instances  was  negative)  in the  1980s as a result  of poor  economic
policies,  higher international  interest rates, and the denial of access to new
foreign  capital.  Although a number of Latin  American  countries are currently
experiencing  lower rates of inflation  and higher rates of real growth in gross
domestic  product  than they have in the past,  other Latin  American  countries
continue to experience


                                       80
<PAGE>

significant  problems,  including high inflation  rates and high interest rates.
Capital  flight has  proven a  persistent  problem  and  external  debt has been
forcibly restructured.  Political turmoil, high inflation,  capital repatriation
restrictions and nationalization have further exacerbated conditions.

Governments  of many Latin  American  countries  have  exercised and continue to
exercise  substantial  influence over many aspects of the private sector through
the  ownership or control of many  companies,  including  some of the largest in
those  countries.  As a result,  government  actions in the future  could have a
significant  effect on economic  conditions which may adversely affect prices of
certain   portfolio   securities.    Expropriation,    confiscatory    taxation,
nationalization,  political,  economic or social  instability  or other  similar
developments,  such as military coups,  have occurred in the past and could also
adversely affect a Fund's investments in this region.


Changes in political leadership,  the implementation of market oriented economic
policies, such as privatization, trade reform and fiscal and monetary reform are
among the recent steps taken to renew  economic  growth.  External debt is being
restructured  and flight capital  (domestic  capital that has left home country)
has begun to return. Inflation control efforts have also been implemented.  Free
Trade Zones are being  discussed in various  areas  around the region,  the most
notable  being a free zone among  Mexico,  the U.S.  and Canada and another zone
among four countries in the southernmost point of Latin America.  Currencies are
typically weak, but most are now relatively free floating, and it is not unusual
for the currencies to undergo wide  fluctuations  in value over short periods of
time due to changes in the market.


Investing in the Pacific Basin. Certain Underlying Scudder Funds are susceptible
to political and economic factors  affecting issuers in Pacific Basin countries.
Many of the countries of the Pacific Basin are developing both  economically and
politically.

Economies of individual Pacific Basin countries in which certain Underlying
Scudder Funds may invest, 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, interest rate levels, and
balance of payments position. Of particular importance, most of the economies in
this region of the world are heavily dependent upon exports, particularly to
developed countries, and, accordingly, have been and may continue to be
adversely affected by trade barriers, managed adjustments in relative currency
values, and other protectionist measures imposed or negotiated by the U.S. and
other countries with which they trade. These economies also have been and may
continue to be negatively impacted by economic conditions in the U.S. and other
trading partners, which can lower the demand for goods produced in the Pacific
Basin.

With  respect to the  Peoples  Republic  of China and other  markets in which an
Underlying   Scudder  Fund  may   participate,   there  is  the  possibility  of
nationalization,  expropriation  or confiscatory  taxation,  political  changes,
government regulation,  social instability or diplomatic developments that could
adversely impact a Pacific Basin country including the Underlying Scudder Fund's
investment in that country.


Foreign companies,  including Pacific Basin companies, are not generally subject
to uniform accounting, auditing and financial reporting standards, practices and
disclosure  requirements  comparable  to  those  applicable  to U.S.  companies.
Consequently,  there  may be less  publicly  available  information  about  such
companies  than  about  U.S.  companies.   Moreover,  there  is  generally  less
government supervision and regulation of Pacific Basin stock exchanges, brokers,
and listed companies than in the U.S.



                                       81
<PAGE>

Investing in Africa.


Africa is a continent of roughly 50 countries with a total population of
approximately 840 million people. Literacy rates (the percentage of people who
are over 15 years of age and who can read and write) are relatively low, ranging
from 20% to 60%. The primary industries include crude oil, natural gas,
manganese ore, phosphate, bauxite, copper, iron, diamond, cotton, coffee, cocoa,
timber, tobacco, sugar, tourism, and cattle.


Many of the countries in which certain  Underlying  Scudder Funds may invest are
fraught with political instability.  However, there has been a trend over recent
years toward  democratization.  Many countries are moving from a military style,
Marxist, or single party government to a multi-party system. Still, there remain
many countries that do not have a stable political process. Other countries have
been enmeshed in civil wars and border clashes.


Economically, the Northern Rim countries (including Morocco, Egypt, and Algeria)
and  Nigeria,  Zimbabwe  and South  Africa are the  wealthier  countries  on the
continent.  The  market  capitalization  of these  countries  has  been  growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges.  However, religious and ethnic strife has been a
significant source of instability.


On the other end of the economic  spectrum are countries,  such as  Burkinafaso,
Madagascar,  and Malawi  that are  considered  to be among the  poorest or least
developed in the world.  These  countries are generally  landlocked or have poor
natural resources. The economies of many African countries are heavily dependent
on international  oil prices.  Of all the African  industries,  oil has been the
most  lucrative,  accounting  for 40% to 60% of many  countries'  GDP.  However,
general decline in oil prices has had an adverse impact on many economies.

Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These  risks  include  (i)  potentially  less  social,  political  and  economic
stability;  (ii) the small current size of the markets for such  securities  and
the low volume of trading,  which result in less  liquidity and in greater price
volatility;  (iii) certain  national  policies which may restrict the Underlying
Scudder Fund's investment opportunities, including restrictions on investment in
issuers or  industries  deemed  sensitive  to national  interests;  (iv) foreign
taxation;  (v) the absence of developed legal  structures  governing  private or
foreign  investment  or  allowing  for  judicial  redress  for injury to private
property;   (vi)  the  absence,  until  recently  in  certain  Eastern  European
countries,  of a capital market structure or market-oriented  economy; and (vii)
the possibility  that recent favorable  economic  developments in Eastern Europe
may be slowed or reversed by  unanticipated  political or social  events in such
countries, or in the countries of the former Soviet Union.

Investments in such countries  involve risks of  nationalization,  expropriation
and  confiscatory  taxation.  The  Communist  governments  of a  number  of East
European  countries  expropriated large amounts of private property in the past,
in many cases without adequate compensation,  and there may be no assurance that
such  expropriation  will  not  occur  in the  future.  In  the  event  of  such
expropriation,  the Underlying Scudder Fund could lose a substantial  portion of
any investments it has made in the affected  countries.  Further,  no accounting
standards exist in East European  countries.  Finally,  even though certain East
European  currencies may be convertible into U.S. dollars,  the conversion rates
may be  artificial  to the  actual  market  values  and  may be  adverse  to the
Underlying Scudder Fund's.

Investing in Europe. An Underlying Scudder Fund's performance may be susceptible
to  political,  social  and  economic  factors  affecting  issuers  in  European
countries.


                                       82
<PAGE>



Most Eastern  European  nations in which  certain  Underlying  Scudder Funds may
invest,  including  Hungary,  Poland,  Czechoslovakia,   and  Romania  have  had
centrally  planned,  socialist  economies  since  shortly  after World War II. A
number of their governments, including those of Hungary, the Czech Republic, and
Poland are currently  implementing or considering  reforms directed at political
and economic  liberalization,  including efforts to foster multi-party political
systems,  decentralize economic planning, and move toward free market economies.
At  present,  no Eastern  European  country has a developed  stock  market,  but
Poland,  Hungary,  and the Czech  Republic  have  small  securities  markets  in
operation.   Ethnic  and  civil  conflict  currently  rage  through  the  former
Yugoslavia. The outcome is uncertain.


Both the European Community ("EC") and Japan, among others,  have made overtures
to establish trading  arrangements and assist in the economic development of the
Eastern European nations. A great deal of interest also surrounds  opportunities
created by the reunification of East and West Germany.  Following reunification,
the Federal  Republic of Germany has remained a firm and reliable  member of the
EC and numerous  other  international  alliances  and  organizations.  To reduce
inflation  caused  by the  unification  of East and West  Germany,  Germany  has
adopted a tight monetary policy which has led to weakened  exports and a reduced
domestic demand for goods and services. However, in the long-term, reunification
could prove to be an engine for domestic and international growth.


The conditions that have given rise to these  developments  are changeable,  and
there is no assurance  that  reforms  will  continue or that their goals will be
achieved.

Portugal is a genuinely emerging market which has experienced rapid growth since
the mid-1980s,  except for a brief period of stagnation over 1990-91. Portugal's
government  remains committed to privatization of the financial system away from
one dependent upon the banking system to a more balanced  structure  appropriate
for the requirements of a modern economy.  Inflation continues to be about three
times the EC average.

Economic  reforms launched in the 1980s continue to benefit Turkey in the 1990s.
Turkey's  economy has grown steadily since the early 1980s,  with real growth in
per capita  Gross  Domestic  Product  (GDP)  increasing  more than 6%  annually.
Agriculture remains the most important economic sector,  employing approximately
55% of the labor force, and accounting for nearly 20% of GDP and 20% of exports.
Inflation  and  interest  rates remain  high,  and a large  budget  deficit will
continue to cause  difficulties  in  Turkey's  substantial  transformation  to a
dynamic free market economy.

Like many other Western economies,  Greece suffered severely from the global oil
price hikes of the 1970s,  with annual GDP growth  plunging from 8% to 2% in the
1980s, and inflation, unemployment, and budget deficits rising sharply. The fall
of the  socialist  government  in 1989  and the  inability  of the  conservative
opposition to obtain a clear majority have led to business  uncertainty  and the
continued  prospects for flat economic  performance.  Once Greece has sorted out
its  political  situation,  it will  have to face  the  challenges  posed by the
steadily increasing integration of the EC, including the progressive lowering of
trade and investment barriers. Tourism continues as a major industry,  providing
a vital offset to a sizable commodity trade deficit.

Securities traded in certain emerging European securities markets may be subject
to risks due to the inexperience of financial intermediaries, the lack of modern
technology  and the  lack  of a  sufficient  capital  base  to  expand  business
operations.  Additionally,  former  Communist  regimes  of a number  of  Eastern
European  countries had  expropriated a large amount of property,  the claims of
which  have  not been  entirely  settled.  There  can be no  assurance  that the
Underlying  Scudder  Fund's  investments  in  Eastern  Europe  would not also be
expropriated,  nationalized  or otherwise


                                       83
<PAGE>

confiscated.  Finally,  any change in leadership or policies of Eastern European
countries,  or  countries  that  exercise  a  significant  influence  over those
countries,  may halt the expansion of or reverse the  liberalization  of foreign
investment  policies now  occurring  and adversely  affect  existing  investment
opportunities.


Depositary  Receipts.  Certain  Underlying Scudder Funds may invest sponsored or
unsponsored  American Depositary  Receipts ("ADRs"),  Global Depositary Receipts
("GDRs"),   International  Depositary  Receipts  ("IDRs")  and  other  types  of
Depositary  Receipts  (which,  together with ADRs, GDRs and IDRs are hereinafter
referred to as "Depositary  Receipts").  Depositary  receipts  provide  indirect
investment  in  securities  of  foreign  issuers.  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 Depositary  Receipts  typically issued by a U.S. bank or trust company which
evidence  ownership of underlying  securities  issued by a foreign  corporation.
GDRs,  IDRs and other  types of  Depositary  Receipts  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 an  Underlying
Scudder Fund's investment policies, the Underlying Scudder Fund's investments in
ADRs,  GDRs  and  other  types  of  Depositary  Receipts  will be  deemed  to be
investments in the underlying securities.  Depositary Receipts,  including those
denominated in U.S.  dollars will be subject to foreign  currency  exchange rate
risk.  However,  by  investing  in U.S.  dollar-denominated  ADR's  rather  than
directly in foreign  issuer's  stock,  the Underlying Fund avoids currency risks
during the settlement period.  However,  certain Depositary  Receipts may not be
listed on an exchange and therefore may be illiquid securities.

Loan Participations and Assignments. Certain Underlying Scudder Funds may invest
in fixed and floating rate loans ("Loans") arranged through private negotiations
between an issuer of emerging market debt  instruments and one or more financial
institutions  ("Lenders").  An Underlying Scudder Fund's investments in Loans in
Latin America are expected in most instances to be in the form of participations
in Loans ("Participations") and assignments of portions of Loans ("Assignments")
from third  parties.  Participations  typically  will  result in the  Underlying
Scudder Fund having a contractual relationship only with the Lender and not with
the  borrower.  The  Underlying  Scudder  Fund will  have the  right to  receive
payments of  principal,  interest and any fees to which it is entitled only from
the Lender selling the  Participation and only upon receipt by the Lender of the
payments from the borrower.  In connection with purchasing  Participations,  the
Underlying  Scudder Fund generally  will have no right to enforce  compliance by
the borrower with the terms of the loan agreement  relating to the Loan, nor any
rights of set-off against the borrower,  and the Underlying Scudder Fund may not
directly  benefit  from  any  collateral  supporting  the  Loan in  which it has
purchased  the  Participation.  As a result,  the  Underlying  Scudder Fund will
assume the credit risk of both the  borrower  and the Lender that is selling the
Participation.  In  the  event  of  the  insolvency  of  the  Lender  selling  a
Participation,  the Underlying Scudder Fund may be treated as a general creditor
of the Lender and may not benefit  from any  set-off  between the Lender and the
borrower.  The Underlying Scudder Fund will acquire  Participations  only if the
Lender  interpositioned  between the Underlying Scudder Fund and the borrower is
determined by the Advisor to be creditworthy.


When  an  Underlying  Scudder  Fund  purchases  Assignments  from  Lenders,  the
Underlying  Scudder Fund will acquire  direct rights against the borrower on the
Loan.  Because  Assignments are arranged  through private  negotiations  between
potential assignees and potential assignors, however, the rights and obligations
acquired by the  Underlying  Scudder Fund as the purchaser of an Assignment  may
differ from, and may be more limited than, those held by the assigning Lender.

An Underlying  Scudder Fund may have  difficulty  disposing of  Assignments  and
Participations. Because no liquid market for these obligations typically exists,
the Underlying  Scudder Fund  anticipates that these  obligations  could be sold
only to a  limited  number  of  institutional  investors.  The  lack of a liquid
secondary  market will have an adverse effect on the  Underlying  Scudder Fund's
ability to dispose of particular Assignments or Participations when necessary to
meet the Underlying  Scudder Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid  secondary  market for Assignments and  Participations  may
also make it more difficult for the Underlying Scudder Fund to assign a value to
those securities for purposes of valuing the Underlying Scudder Fund's portfolio
and calculating its net asset value.



                                       84
<PAGE>

Real Estate Investment Trusts. Certain Underlying Scudder Funds invest in REITs.
REITs are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs.  REITs, which invest the majority of their assets directly in real
property,  derive  their  income  primarily  from rents.  Equity  REITs can also
realize  capital gains by selling  properties  that have  appreciated  in value.
Mortgage  REITs,  which  invest  the  majority  of their  assets in real  estate
mortgages,  derive their income primarily from interest  payments on real estate
mortgages in which they are invested.  Hybrid REITs combine the  characteristics
of both equity  REITs and  mortgage  REITs.  Investment  in REITs may subject an
Underlying  Scudder 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 an  Underlying  Scudder
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 and to maintain exemption from the registration requirements of the 1940
Act. By investing in REITs  indirectly  through an  Underlying  Scudder  Fund, a
shareholder will bear not only his or her proportionate share of the expenses of
an Underlying  Scudder Fund's,  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.

Trust Preferred  Securities.  Certain  Underlying  Scudder Funds 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 Underlying  Scudder Funds 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 Underlying Scudder
Funds, 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  an   Underlying   Scudder  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 1933 Act 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  Underlying  Scudder  Funds,  to sell  their
holdings.


Investment company securities.  Securities of other investment  companies may be
acquired by certain  Underlying  Scudder Funds  consistent with their investment
objectives  and  subject  to the  limitations  of the 1940  Act.  The Fund  will
indirectly  bear its  proportionate  share  of any  management  fees  and  other
expenses paid by such other investment companies.

For example, the Fund may invest in a variety of investment companies which seek
to track the  composition  and  performance  of  specific  indexes or a specific
portion of an index.  These  index-based  investments hold  substantially all of
their assets in securities representing their specific index.  Accordingly,  the
main risk of investing in index-based  investments is the same as investing in a
portfolio  of equity  securities  comprising  the index.  The  market  prices of
index-based  investments  will fluctuate in accordance  with both changes in the
market  value of their  underlying  portfolio


                                       85
<PAGE>

securities and due to supply and demand for the  instruments on the exchanges on
which they are  traded  (which  may  result in their  trading  at a discount  or
premium to their NAVs).  Index-based  investments may not replicate  exactly the
performance of their specified index because of transaction costs and because of
the temporary unavailability of certain component securities of the index.

Examples of index-based investments include:

SPDRs(R):  SPDRs,  an acronym for "Standard & Poor's  Depositary  Receipts," are
based on the S&P 500  Composite  Stock Price Index.  They are issued by the SPDR
Trust,  a unit  investment  trust that  holds  shares of  substantially  all the
companies  in the S&P 500 in  substantially  the  same  weighting  and  seeks to
closely track the price performance and dividend yield of the Index.

MidCap  SPDRs(R):  MidCap SPDRs are based on the S&P MidCap 400 Index.  They are
issued by the MidCap SPDR Trust, a unit investment  trust that holds a portfolio
of securities  consisting of  substantially  all of the common stocks in the S&P
MidCap 400 Index in substantially  the same weighting and seeks to closely track
the price performance and dividend yield of the Index.

Select Sector SPDRs(R):  Select Sector SPDRs are based on a particular sector or
group of  industries  that are  represented  by a specified  Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end  management  investment  company with nine
portfolios  that each seeks to closely track the price  performance and dividend
yield of a particular Select Sector Index.

DIAMONDS(SM):  DIAMONDS are based on the Dow Jones Industrial Average(SM).  They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.

Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100  Trust, a unit investment  trust that holds a portfolio
consisting of substantially  all of the securities,  in  substantially  the same
weighting,  as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.

WEBs(SM):  WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific  Morgan Stanley Capital International  Indexes. They are issued
by the WEBs Index Fund,  Inc., an open-end  management  investment  company that
seeks to generally  correspond to the price and yield  performance of a specific
Morgan Stanley Capital International Index.


Non-diversified   investment  company.  Certain  Underlying  Scudder  Funds  are
classified as  non-diversified  investment  companies  under the 1940 Act, which
means  that an  Underlying  Scudder  Fund is not  limited by the 1940 Act in the
proportion  of its  assets  that it may  invest in the  obligations  of a single
issuer.  The  investment of a large  percentage of an Underlying  Scudder Fund's
assets in the  securities  of a small number of issuers may cause an  Underlying
Scudder  Fund's  share  price  to  fluctuate  more  than  that of a  diversified
investment company.

Precious metals.  Investments in precious metals and in precious  metals-related
securities  and companies  involve a relatively  high degree of risk.  Prices of
gold and  other  precious  metals  can be  influenced  by a  variety  of  global
economic,  financial and political factors and may fluctuate markedly over short
periods of time.  Among other things,  precious metals values can be affected by
changes in inflation,  investment  speculation,  metal sales by  governments  or
central banks, changes in industrial and commercial demand, and any governmental
restrictions on private ownership of gold or other precious metals.


Correlation of gold and gold securities.  The Advisor believes that the value of
the securities of firms that deal in gold will correspond generally,  over time,
with the prices of the underlying metal. At any given time, however,  changes in
the  price of gold may not  strongly  correlate  with  changes  in the  value of
securities  related to gold,  which are expected to  constitute  part of certain
Underlying  Scudder  Funds' assets.  In fact,  there may be periods in which the
price of gold stocks and gold will move in different directions.  The reason for
this  potential  disparity is that  political  and economic  factors,  including
behavior of the stock  market,  may have  differing  impacts on gold versus gold
stocks.


                                       86
<PAGE>

Mining and exploration risks. The business of gold mining by its nature involves
significant  risks and  hazards,  including  environmental  hazards,  industrial
accidents, labor disputes, discharge of toxic chemicals, fire, drought, flooding
and natural acts. The  occurrence of any of these hazards can delay  production,
increase  production costs and result in liability to the operator of the mines.
A mining  operation  may become  subject to  liability  for  pollution  or other
hazards  against which it has not insured or cannot insure,  including  those in
respect of past mining activities for which it was not responsible.

Exploration  for gold and  other  precious  metals  is  speculative  in  nature,
involves many risks and  frequently is  unsuccessful.  There can be no assurance
that any mineralisation  discovered will result in an increase in the proven and
probable reserves of a mining operation.  If reserves are developed, it can take
a number of years from the initial  phases of  drilling  and  identification  of
mineralisation  until  production  is  possible,  during which time the economic
feasibility of production may change.  Substantial  expenditures are required to
establish  ore  reserves  properties  and to  construct  mining  and  processing
facilities.  As a result of these uncertainties,  no assurance can be given that
the  exploration  programs  undertaken  by a particular  mining  operation  will
actually result in any new commercial mining.

Asset-Indexed   Securities.   Certain  Underlying  Scudder  Funds  may  purchase
asset-indexed  securities which are debt securities  usually issued by companies
in precious  metals related  businesses  such as mining,  the principal  amount,
redemption  terms, or interest rates of which are related to the market price of
a specified  precious  metal.  An  Underlying  Scudder Fund will only enter into
transactions  in publicly  traded  asset-indexed  securities.  Market  prices of
asset-indexed  securities will relate  primarily to changes in the market prices
of the  precious  metals to which the  securities  are  indexed  rather  than to
changes  in  market  rates of  interest.  However,  there  may not be a  perfect
correlation between the price movements of the asset-indexed  securities and the
underlying precious metals.  Asset-indexed securities typically bear interest or
pay dividends at below market rates (and in certain cases at nominal rates). The
Underlying  Scudder Fund will  purchase  asset-indexed  securities to the extent
permitted by law.


Special situation securities.  From time to time, an Underlying Scudder Fund may
invest in equity or debt  securities  issued by companies that are determined by
the  Advisor to possess  "special  situation"  characteristics.  In  general,  a
special situation company is a company whose securities are expected to increase
in value solely by reason of a development  particularly or uniquely  applicable
to the company.  Developments that may create special situations include,  among
others,  a liquidation,  reorganization,  recapitalization  or merger,  material
litigation,   technological   breakthrough  and  new  management  or  management
policies.  The principal risk with investments in special situation companies is
that the anticipated development thought to create the special situation may not
occur and the  investments  therefore may not appreciate in value or may decline
in value.

Borrowing. An Underlying Scudder Fund will borrow only when the Advisor believes
that  borrowing  will  benefit the  Underlying  Scudder  Fund after  taking into
account  considerations  such as the costs of the  borrowing.  Borrowing  by the
Underlying Scudder Fund will involve special risk  considerations.  Although the
principal  of the  Underlying  Scudder  Fund's  borrowings  will be  fixed,  the
Underlying Scudder Fund's assets may change in value during the time a borrowing
is outstanding, proportionately increasing exposure to capital risk.

Lending of Portfolio  Securities.  Certain  Underlying Scudder Funds may seek to
increase their income by lending portfolio securities. Such loans may be made to
registered  broker/dealers,  and are  required  to be  secured  continuously  by
collateral in cash, U.S. Government  securities and high grade debt obligations,
maintained  on a current  basis at an amount at least equal to the market  value
and accrued interest of the securities  loaned.  An Underlying  Scudder Fund has
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  Underlying  Scudder Fund
continues to receive the equivalent of any  distributions  paid by the issuer on
the securities loaned and also receives  compensation based on investment of the
collateral.  As with  other  extensions  of  credit  there are


                                       87
<PAGE>

risks of delay in  recovery  and a 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  Advisor  to be of good  standing  and will not be made
unless, in the judgment of the Advisor, the consideration to be earned from such
loans would justify the risk.

Corporate and  Municipal  Bond  Ratings.  The following is a description  of the
ratings given by S&P and Moody's to corporate and  municipal  bonds.  Should the
rating of a portfolio security held by an Underlying Scudder Fund be downgraded,
the Advisor will determine  whether it is in the best interest of the Underlying
Scudder Fund to retain or dispose of such security.


S&P.  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.

Debt rated CCC has a currently  identifiable  vulnerability  to default,  and is
dependent upon favorable  business,  financial,  and economic conditions to meet
timely  payment of interest and repayment of principal.  In the event of adverse
business,  financial,  or  economic  conditions,  it is not  likely  to have the
capacity to pay interest and repay  principal.  The CCC rating  category is also
used for debt  subordinated to senior debt that is assigned an actual or implied
B or B- rating.  The rating CC  typically  is  applied to debt  subordinated  to
senior  debt that is  assigned  an actual or implied  CCC  rating.  The rating C
typically  is applied to debt  subordinated  to senior debt which is assigned an
actual  or  implied  CCC-  debt  rating.  The C  rating  may be used to  cover a
situation where a bankruptcy  petition has been filed, but debt service payments
are  continued.  The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest  payments or principal  payments are not made on the date due even
if the  applicable  grace period had not expired,  unless S&P believes that such
payments will be made during such grace  period.  The D rating also will be used
upon  the  filing  of  a  bankruptcy  petition  if  debt  service  payments  are
jeopardized.

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.

                                       88
<PAGE>

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  other 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.

Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present  elements of danger with  respect to principal or interest.
Bonds which are rated Ca represent  obligations  which are speculative in a high
degree.  Such  issues are often in default  or have other  marked  shortcomings.
Bonds which are rated C are the lowest  rated class of bonds and issues so rated
can be regarded as having  extremely  poor  prospects of ever attaining any real
investment standing.




                                       89
<PAGE>

                       STATEMENT OF ADDITIONAL INFORMATION
                                December 29, 2000

                Scudder Pathway Series (Class A, B and C Shares)

         Conservative Portfolio, Moderate Portfolio and Growth Portfolio
               222 South Riverside Plaza, Chicago, Illinois 60606
                                 1-800-621-1048

This  Statement  of  Additional  Information  is  not a  prospectus.  It is  the
Statement of Additional Information for Class A, Class B and Class C Shares (the
"Shares") of Scudder Pathway Series Portfolios (the "Portfolios"), a diversified
series  of  Scudder  Pathway  Series  (the  "Trust"),   an  open-end  management
investment  company. It should be read in conjunction with the prospectus of the
Shares dated December 29, 2000.  The  prospectus may be obtained  without charge
from the Portfolio at the address or telephone  number on this cover or the firm
from which this Statement of Additional Information was received.

Scudder Pathway Series offers the following classes of shares: Class AARP, Class
S, Class A, Class B and Class C shares (the "Shares"). Only Class A, Class B and
Class C shares of Scudder Pathway Series Portfolios are offered herein.



                                TABLE OF CONTENTS



Investment Restrictions.......................................................2

Investment Policies and Techniques............................................3

Dividends, Distributions and Taxes...........................................24

Performance..................................................................27

Investment Manager and Underwriter...........................................30

Portfolio Transactions.......................................................37

Net Asset Value..............................................................38

Purchase, Repurchase and Redemption of Shares................................39

Purchase of Shares...........................................................39

Redemption or Repurchase of Shares...........................................43

Special Features.............................................................47

Officers and Trustees........................................................50

Shareholder Rights...........................................................53



Zurich  Scudder  Investments,  Inc. (the  "Advisor")  serves as the  Portfolios'
investment manager.




The financial  statements  appearing in the  Portfolios'  August 31, 2000 Annual
Report to Shareholders are incorporated  herein by reference.  The Annual Report
for the Portfolios accompanies this document.




<PAGE>

INVESTMENT RESTRICTIONS

The policies set forth below are fundamental  policies of each Portfolio and may
not be changed with respect to each of the Portfolios  without the approval of a
majority  of such  Portfolio's  outstanding  shares.  As  used in this  combined
Statement  of  Additional  Information,  a "majority of the  outstanding  voting
securities  of a  Portfolio"  means the  lesser of (1) 67% or more of the voting
securities  present  at such  meeting,  if the  holders  of more than 50% of the
outstanding  voting  securities of such  Portfolio are present or represented by
proxy;  or (2)  more  than  50% of the  outstanding  voting  securities  of such
Portfolio.

Each  Portfolio  has  elected to be  classified  as a  diversified  series of an
open-end  investment  company.  In addition,  as a matter of fundamental policy,
each  Portfolio  will not:

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

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

(4)  concentrate   its  investments  in  investment   companies,   as  the  term
     "concentrate" is used in the Investment Company Act of 1940, as amended and
     interpreted by regulatory  authority having jurisdiction from time to time;
     except that each Portfolio may concentrate in an underlying Fund.  However,
     each  Underlying  Scudder  Fund in which  each  Portfolio  will  invest may
     concentrate its investments in a particular industry;

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

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

(7)  make loans except as permitted under the Investment Company Act of 1940, as
     amended,  and as  interpreted  or modified by regulatory  authority  having
     jurisdiction, from time to time.

Nonfundamental  policies  may be changed by the  Trustees  of the Trust  without
shareholder approval. As a matter of nonfundamental  policy, each Portfolio does
not currently intend to:

(a)  invest in companies for the purpose of exercising management or control.

(b)  (i) borrow money in an amount  greater than 5% of its total assets,  except
     for  temporary  or  emergency  purposes  and (ii) by  engaging  in  reverse
     repurchase  agreements,   entering  into  dollar  rolls,  or  making  other
     investments  or  engaging in other  transactions  which may be deemed to be
     borrowings but are consistent with each Portfolio's investment objective.

Any  investment  restrictions  herein  which  involve  a maximum  percentage  of
securities  or assets shall not be  considered  to be violated  unless an excess
over the percentage occurs  immediately  after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Portfolios.

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


                                       2
<PAGE>

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.


Interfund  Borrowing  and Lending  Program.  The Trust's  Board of Trustees  has
approved the filing of an  application  for exemptive  relief with the SEC which
would permit the Portfolios to participate in an interfund lending program among
certain investment  companies advised by the Advisor.  If the Portfolios receive
the  requested   relief,   the  interfund   lending   program  would  allow  the
participating  funds to  borrow  money  from and loan  money to each  other  for
temporary or  emergency  purposes.  The program  would be subject to a number of
conditions  designed to ensure fair and equitable treatment of all participating
funds, including the following: (1) no fund may borrow money through the program
unless it receives a more favorable  interest rate than a rate approximating the
lowest  interest  rate at which  bank  loans  would be  available  to any of the
participating  funds  under a loan  agreement;  and (2) no fund may  lend  money
through  the  program  unless it  receives  a more  favorable  return  than that
available  from an  investment  in  repurchase  agreements  and,  to the  extent
applicable,  money market cash sweep  arrangements.  In  addition,  a fund would
participate in the program only if and to the extent that such  participation is
consistent  with the fund's  investment  objectives  and policies (for instance,
money market  funds would  normally  participate  only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings would extend overnight,
but could have a maximum  duration of seven  days.  Loans could be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed.  Any delay in repayment to a lending
fund could result in a lost  investment  opportunity  or additional  costs.  The
program is subject to the  oversight  and  periodic  review of the Boards of the
participating  funds.  To the  extent the  Portfolios  are  actually  engaged in
borrowing through the interfund lending program, the Portfolios,  as a matter of
non-fundamental  policy,  may not borrow for other than  temporary  or emergency
purposes (and not for leveraging).

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


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

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

INVESTMENT POLICIES AND TECHNIQUES

General Investment Objectives and Policies

Scudder  Pathway  Series  (the  "Trust") is an  open-end  management  investment
company composed of three separate  diversified  portfolios (the  "Portfolios"),
which  invest  primarily  in existing  Scudder  Funds (the  "Underlying  Scudder
Funds"),  according to well-defined  investment  objectives.  The Portfolios may
also  invest in money  market  instruments  to provide for  redemptions  and for
temporary or defensive purposes. It is impossible to accurately predict how long
such   alternate   strategies  may  be  utilized.   Each   Portfolio   offers  a
professionally  managed,  long-term  investment  program  that  can  serve  as a
complete investment program or as a core part of a larger portfolio. Achievement
of each Portfolio's objective cannot be assured.

                                       3
<PAGE>


The  Portfolios  are  professionally  managed  portfolios  which  allocate their
investments among select funds in the Scudder Family of Funds. Each Portfolio is
designed for  investors  seeking a distinct  investment  style:  a  conservative
investment  approach ("Pathway Series:  Conservative  Portfolio"),  a balance of
growth and income ("Pathway  Series:  Moderate  Portfolio") or growth of capital
("Pathway  Series:  Growth  Portfolio").  The  Portfolios  have been  created in
response  to  increasing  demand  by  mutual  fund  investors  for a simple  and
effective  means of  structuring a diversified  mutual fund  investment  program
suited to their  general  needs.  As has been well  documented  in the financial
press,  the  proliferation  of mutual funds over the last several years has left
many  investors  confused  and in  search of a  simpler  means to  manage  their
investments.  Many mutual fund investors realize the value of diversifying their
investments in a number of mutual funds (e.g., a money market fund for liquidity
and price stability,  a growth fund for long-term  appreciation,  an income fund
for current  income and relative  safety of  principal),  but need  professional
management to decide such questions as which mutual funds to select, how much of
their assets to commit to each fund and when to allocate their  selections.  The
Portfolios  will allow  investors  to rely on the Advisor to  determine  (within
clearly explained parameters) the amount to invest in each of several Underlying
Scudder Funds and the timing of such investments. The Portfolios may each borrow
money for temporary,  emergency or other purposes, including investment leverage
purposes, as determined by the Trustees. The Investment Company Act of 1940 (the
"1940 Act") requires borrowings to have 300% asset coverage.  The Portfolios may
each also enter into reverse repurchase agreements.


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


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


The investment objectives of the Portfolios are as follows:

Conservative Portfolio

The Conservative  Portfolio seeks current income and, as a secondary  objective,
long-term  growth of capital.  This portfolio may be suitable for investors with
an investment time horizon of 3-5 years or more.

Moderate Portfolio

The Moderate  Portfolio seeks a balance of current income and growth of capital.
This portfolio may be suitable for investors with an investment  time horizon of
5-10 years.

Growth Portfolio

The Growth  Portfolio seeks long-term  growth of capital.  This portfolio may be
suitable for investors with an investment time horizon of 10 years or more.

The Underlying Scudder Funds


Each Portfolio will purchase or sell  securities to: (a)  accommodate  purchases
and  sales of each  Portfolio's  shares,  (b)  change  the  percentages  of each
Portfolio's  assets invested in each of the Underlying Scudder Funds in response
to changing market conditions, and (c) maintain or modify the allocation of each
Portfolio's assets in accordance with the investment mixes described below.

Portfolio  managers will allocate  Portfolio assets among the Underlying Scudder
Funds in accordance with predetermined percentage ranges, based on the Advisor's
outlook for the  financial  markets,  the  world's  economies  and the  relative
performance  potential of the Underlying  Scudder Funds. The Underlying  Scudder
Funds have been selected to represent a broad spectrum of investment options for
the  Portfolios,  subject to the  following  investment  ranges:  (Conservative)


                                       4
<PAGE>

50-70% bond mutual funds,  30-50% equity mutual funds;  (Moderate) 50-70% equity
mutual funds, 30-50% bond mutual funds; and (Growth) 75-95% equity mutual funds,
5-25% bond mutual funds. The allowed range of international equity investment is
(Conservative)  0-10%, with none in emerging markets;  (Moderate) 0-20%, with up
to 5% in emerging  markets;  (Growth) 0-30%, with up to 10% in emerging markets.
The allowed range of investment in small  capitalization is (Conservative) 0-5%,
(Moderate) 0-10% and (Growth) 0-20%.  None of the Portfolios may invest over 20%
of their fixed income  component  in high yield bonds,  and none may invest over
75% in domestic small-, mid- and large-cap stocks.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
       Conservative Portfolio                   Moderate Portfolio                        Growth Portfolio
      Underlying Scudder Funds               Underlying Scudder Funds                 Underlying Scudder Funds
------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                                     <C>
Bond Mutual Funds                     Equity Mutual Funds                     Equity Mutual Funds
-----------------                     -------------------                     -------------------
Scudder Emerging Markets Income Fund  Classic Growth Fund-Scudder Shares      Classic Growth Fund-Scudder Shares
Scudder Global Bond Fund              Global Discovery Fund-Scudder Shares    Global Discovery Fund-Scudder Shares
Scudder GNMA Fund                     Scudder Balanced Fund                   Scudder Balanced Fund
Scudder High Yield Bond Fund          Scudder Development Fund                Scudder Development Fund
Scudder Income Fund                   Scudder Dividend & Growth Fund          Scudder Dividend & Growth Fund
Scudder Short Term Bond Fund          Scudder Emerging Markets Growth Fund    Scudder Emerging Markets Growth Fund
                                      Scudder Global Fund                     Scudder Global Fund
Equity Mutual Funds                   Scudder Gold Fund                       Scudder Gold Fund
-------------------                   Scudder Greater Europe Growth Fund      Scudder Greater Europe Growth Fund
Classic Growth Fund-Scudder Shares    Scudder Growth and Income Fund          Scudder Growth and Income Fund
Global Discovery Fund-Scudder Shares  Scudder Health Care Fund                Scudder Health Care Fund
Scudder Balanced Fund                 Scudder International Fund              Scudder International Fund
Scudder Development Fund              Scudder Large Company Growth Fund       Scudder Large Company Growth Fund
Scudder Dividend & Growth Fund        Scudder Large Company Value Fund        Scudder Large Company Value Fund
Scudder Emerging Markets Growth Fund  Scudder Latin America Fund              Scudder Latin America Fund
Scudder Global Fund                   Scudder Pacific Opportunities Fund      Scudder Pacific Opportunities Fund
Scudder Gold Fund                     Scudder Select 500 Fund                 Scudder Select 500 Fund
Scudder Greater Europe Growth Fund    Scudder Select 1000 Growth Fund         Scudder Select 1000 Growth Fund
Scudder Growth and Income Fund        Scudder S&P 500 Index Fund              Scudder S&P 500 Index Fund
Scudder Health Care Fund              Scudder Small Company Value Fund        Scudder Small Company Value Fund
Scudder International Fund            Scudder Technology Innovation Fund      Scudder Technology Innovation Fund
Scudder Large Company Growth Fund     Scudder 21st Century Growth Fund        Scudder 21st Century Growth Fund
Scudder Large Company Value Fund      The Japan Fund                          The Japan Fund
Scudder Latin America Fund            Value Fund-Scudder Shares               Value Fund-Scudder Shares
Scudder Pacific Opportunities Fund
Scudder Select 500 Fund               Bond Mutual Funds                       Bond Mutual Funds
Scudder Select 1000 Growth Fund       -----------------                       -----------------
                                      Scudder Emerging Markets Income Fund    Scudder Emerging Markets Income Fund
Scudder S&P 500 Index Fund            Scudder Global Bond Fund                Scudder Global Bond Fund
Scudder Small Company Value Fund      Scudder GNMA Fund                       Scudder GNMA Fund
Scudder Technology Innovation Fund    Scudder High Yield Bond Fund            Scudder High Yield Bond Fund
Scudder 21st Century Growth Fund      Scudder Income Fund                     Scudder Income Fund
The Japan Fund                        Scudder Short Term Bond Fund            Scudder Short Term Bond Fund
Value Fund-Scudder Shares
                                      Money Market Funds                      Money Market Funds
Money Market Funds                    ------------------                      ------------------
------------------                    Scudder Cash Investment Trust           Scudder Cash Investment Trust
Scudder Cash Investment Trust         Scudder Money Market Series -- Scudder  Scudder Money Market Series-- Scudder
Scudder Money Market Series--            Premium Money Market Shares             Premium Money Market Shares
   Scudder Premium Money Market
   Shares
------------------------------------------------------------------------------------------------------------------------
</TABLE>


The following  Underlying  Scudder Funds are the money market funds in which the
Portfolios may invest and will likely serve as the primary cash reserve  portion
of each Portfolio.

Scudder Cash Investment Trust (SCIT) seeks to maintain stability of capital and,
consistent  therewith,  to maintain  liquidity of capital and to provide current
income.  The Fund seeks to achieve its  objectives  by investing in money market
securities.  The Fund seeks to maintain a constant  net asset value of $1.00 per
share and declares  dividends  daily.  There can be no assurance that the stable
net asset  value will be  maintained  and shares of the Fund are not  insured or
guaranteed by the U.S. Government.  The Fund purchases domestic and foreign U.S.
dollar-denominated  money  market  securities.   All  of  the  Fund's  portfolio
securities  must  meet  certain  quality  criteria  at  the  time  of  purchase.
Generally, the Fund may purchase only securities which are rated, or issued by a
company with comparable  securities rated, within the two highest quality rating
categories of one or more of the following  rating agencies:  Moody's  Investors
Service,  Inc.  ("Moody's"),  Standard & Poor's Ratings Services,  a division of
McGraw Hill Companies, Inc. ("S&P") and Fitch Investors Service, Inc. ("Fitch").
The maturity of each investment in the Fund's  portfolio is 397 calendar days or
less, except in the case of U.S. Government securities which may have maturities
of up to 762 calendar days or less. The dollar-weighted  average maturity of the


                                       5
<PAGE>

Fund's portfolio investments varies with money market conditions,  but is always
90 days or less. As a money market fund with a short-term  maturity,  the Fund's
income  fluctuates  with changes in interest  rates but its price is expected to
remain fixed at $1.00 per share.

SCIT may invest in short-term  securities  consisting of:  obligations issued or
guaranteed  by  the  U.S.   Government,   its  agencies  or   instrumentalities;
obligations of supranational  organizations  such as the International  Bank for
Reconstruction  and Development (the World Bank);  obligations of domestic banks
and  foreign  branches  of  domestic  banks,   including  bankers'  acceptances,
certificates  of deposit,  deposit notes and time deposits;  and  obligations of
savings and loan institutions.

SCIT may also invest in:  instruments  whose  credit has been  enhanced by banks
(letters of  credit),  insurance  companies  (surety  bonds) or other  corporate
entities (corporate  guarantees);  corporate  obligations,  including commercial
paper, notes, bonds, loans and loan participations;  securities with variable or
floating  interest  rates;  when-issued  securities,   asset-backed  securities,
including   certificates,   participations  and  notes;   municipal  securities,
including notes, bonds and participation interests,  either taxable or tax free;
and illiquid  securities.  SCIT has adopted 144a procedures for the valuation of
illiquid securities.

In addition,  SCIT may invest in repurchase  agreement and  securities  with put
features. SCIT may also hold cash.

Scudder  Money Market  Series - Scudder  Premium  Money  Market  Shares seeks to
provide  investors with as high a level of current income as is consistent  with
its investment policies and with preservation of capital and liquidity. The Fund
invests exclusively in a broad range of short-term money market instruments that
have  remaining  maturities  of not more  than  397  calendar  days and  certain
repurchase  agreements.  These money market  securities  consist of  obligations
issued   or   guaranteed   by  the   U.S.   Government   or  its   agencies   or
instrumentalities,  taxable and tax-exempt municipal obligations,  corporate and
bank  obligations,  certificates of deposit ("CD's"),  bankers'  acceptances and
variable  amount master demand notes.  The fund will maintain a  dollar-weighted
average  maturity  of 90 days or less in an effort 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  bank   obligations  in  which  the  Fund  may  invest  include   negotiable
certificates  of deposit,  bankers'  acceptances,  fixed time  deposits or other
short-term bank obligations. Generally, the Fund may not invest less than 25% of
the  current  value of its total  assets  in bank  obligations  (including  bank
obligations subject to repurchase  agreements).  The Fund limits its investments
in U.S. bank obligations to banks (including  foreign branches,  the obligations
of which are  guaranteed  by the U.S.  parent)  that have at least $1 billion in
total assets at the time of investment.  "U.S.  banks" include  commercial banks
that  are  members  of  the  Federal  Reserve  System  or  are  examined  by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance  Corporation.  In  addition,  the Fund may  invest in  obligations  of
savings banks and savings and loan  associations  insured by the Federal Deposit
Insurance Corporation that have total assets in excess of $1 billion at the time
of the investment. The Fund may invest in U.S. dollar-denominated obligations of
foreign banks subject to the following conditions: the foreign banks (based upon
their most recent annual  financial  statements)  at the time of investment  (i)
have more than U.S. $10 billion, or the equivalent in other currencies, in total
assets;  (ii) are among the 100 largest  banks in the world as determined on the
basis of assets;  and (iii) have branches or agencies in the U.S.;  and (iv) are
obligations  which, in the opinion of the Advisor,  are of an investment quality
comparable  to  obligations  of U.S.  banks in which the Fund may  invest.  Such
investments may involve greater risks than those affecting U.S. bank or Canadian
affiliates  of U.S.  banks.  In  addition,  foreign  banks  are not  subject  to
examination by any U.S. government agency or instrumentality.

The Fund may  invest in U.S.  dollar-denominated  certificates  of  deposit  and
promissory notes issued by Canadian affiliates of U.S. banks under circumstances
where the  instruments  are  guaranteed as to principal and interest by the U.S.
bank. While foreign  obligations  generally  involve greater risks than those of
domestic  obligations,  such as  risks  relating  to  liquidity,  marketability,
foreign taxation,  nationalization and exchange controls,  generally the Advisor
believes  that these  risks are  substantially  less in the case of  instruments
issued by Canadian affiliates that are guaranteed by U.S. banks than in the case
of other foreign money market instruments.


There is no  limitation  on the amount of the Fund's assets that may be invested
in obligations  of foreign banks that meet the conditions set forth above.  Such
investments  may  involve  greater  risks than  those  affecting  U.S.  banks or
Canadian affiliates of U.S. banks. In addition, foreign banks are not subject to
examination by any U.S. Governmental agency or instrumentality.

Except for obligations of foreign banks and foreign  branches of U.S. banks, the
Fund will not invest in the securities of foreign issuers.  Generally,  the Fund
may not invest  less than 25% of the current  value of its total  assets in bank
obligations (including bank obligations subject to repurchase agreements).

                                       6
<PAGE>


Generally,  the  commercial  paper  purchased  by the Fund is  limited to direct
obligations of domestic  corporate  issuers,  including bank holding  companies,
which  obligations,  at the time of investment,  are (i) rated "P-1" by Moody's,
"A-1" or better  by S&P or "F-1" by  Fitch,  (ii)  issued  or  guaranteed  as to
principal and interest by issuers  having an existing  debt  security  rating of
"Aa" or better by Moody's or "AA" or better by S&P or Fitch, or (iii) securities
that, if not rated,  are of comparable  investment  quality as determined by the
Advisor in accordance  with  procedures  adopted by the  Corporation's  Board of
Directors.

All of the  securities in which the Fund will invest must meet credit  standards
applied  by the  Advisor  pursuant  to  procedures  established  by the Board of
Directors.  Should an issue of securities  cease to be rated or if its rating is
reduced  below the minimum  required for purchase by the Fund,  the Advisor will
dispose of any such security,  as soon as  practicable,  unless the Directors of
the Corporation  determine that such disposal would not be in the best interests
of the Fund.


In  addition,  the Fund may invest in  variable or  floating  rate  obligations,
obligations  backed  by bank  letters  of  credit,  when-issued  securities  and
securities  with put  features.  The Fund has adopted  144a  procedures  for the
valuation of illiquid securities.

The  following  Underlying  Scudder  Funds are bond  mutual  funds which seek to
provide current income.

Scudder Emerging  Markets Income Fund is a  non-diversified  investment  company
which seeks to provide high current income. As a secondary  objective,  the Fund
seeks long-term capital appreciation.  In pursuing these goals, the Fund invests
at least 50% of its total assets in  high-yielding,  high-risk  debt  securities
issued by governments and corporations in emerging  markets.  The Fund considers
"emerging  markets"  to include  any  country  that is defined as an emerging or
developing  economy  by  any  one  of  the  following:  International  Bank  for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation or the United Nations or its  authorities.  To reduce currency risk,
the Fund will invest at least 65% of its assets in U.S.  dollar-denominated debt
securities.  Therefore, no more than 35% of the Fund's assets may be invested in
debt securities  denominated in foreign currencies.  By focusing on fixed-income
instruments issued in emerging markets,  the Fund invests  predominantly in debt
securities that are rated below  investment-grade.  The Fund may invest up to 5%
of its net assets in  non-performing  securities  whose quality is comparable to
securities  rated  as  low  as D by  S&P  or C by  Moody's.  The  Fund  involves
above-average  bond fund risk and can invest  entirely in high  yield/high  risk
bonds.  Investments in emerging markets can be volatile.  The Fund's share price
and yield can fluctuate  daily in response to political  events,  changes in the
perceived  creditworthiness of emerging nations,  fluctuations in interest rates
and, to a certain extent, movements in foreign currencies.

In addition,  Scudder  Emerging  Markets Income Fund may invest up to 35% of its
total  assets in  securities  other  than debt  obligations  issued in  emerging
markets.  These holdings  include debt  securities and money market  instruments
issued by corporations and governments based in developed markets,  including up
to 20% of total assets in U.S.  fixed  income-instruments.  The Fund has adopted
144a procedures for the valuation of illiquid securities.

The Fund may for temporary, defensive or emergency purposes invest without limit
in U.S. debt securities  including  short-term  money market  securities.  It is
impossible to accurately  predict how long such  alternative  strategies  may be
utilized.  In addition,  the Fund may invest in shares of closed end  investment
companies,  warrants, reverse repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.


Scudder Global Bond Fund is a non-diversified  investment company which 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 seeks  capital  appreciation.  The Fund  invests
principally  in a managed  portfolio of high-grade  intermediate-  and long-term
bonds  denominated in the U.S.  dollar and foreign  currencies,  including bonds
denominated  in the  European  Currency  Unit  (ECU).  (Intermediate-term  bonds
generally  have  maturities  between three and eight years and  long-term  bonds
generally have  maturities of greater than eight years.)  Portfolio  investments
are selected on the basis of, among other things,  yields,  credit quality,  and
the  fundamental  outlooks for  currency  and interest  rate trends in different
parts of the  globe,  taking  into  account  the  ability  to hedge a degree  of
currency or local bond price risk. At least 65% of the Fund's  investments  will
consist of high-grade debt securities, which are those rated in one of the three
highest  rating  categories  of one of the major  U.S.  rating  services  or, if
unrated,  considered  to be of  equivalent  quality in local  currency  terms as
determined by the Advisor.  The Fund may also invest up to 15% of its net assets
in debt  securities  rated BBB or BB by S&P or Baa or Ba by Moody's,  or unrated
securities  considered to be of equivalent quality by the Advisor. The Fund does
not invest in any securities rated B or lower.  Under normal market  conditions,
the Fund will invest at least 15% of its total assets in U.S. dollar-denominated
securities,  issued  domestically  or  abroad.  The  Fund  may  invest  in  debt
securities  issued  or  guaranteed  by the  U.S.  government,  its  agencies  or
instrumentalities;   obligations   issued  or  guaranteed  by  foreign  national
governments,  their agencies,  instrumentalities or political subdivisions;  and
debt securities issued or guaranteed by supranational  organizations such as the


                                       7
<PAGE>

European  Investment Bank,  Inter-American  Development Bank and The World Bank.
The Fund may also invest in non-government  securities  including corporate debt
securities,  bank or bank holding  company  obligations  (e.g.,  certificates of
deposit and bankers acceptances), and mortgage and other asset-backed issues.


Scudder  Global Bond Fund may for temporary  defensive  purposes  invest without
limit in U.S.  Government  debt  securities  including  short-term  money market
securities.  It is impossible to  accurately  predict how long such  alternative
strategies may be utilized. In addition,  the Fund may invest in warrants,  zero
coupon securities  mortgage and asset-backed  securities,  illiquid  securities,
reverse  repurchase   agreements,   repurchase  agreements  and  may  engage  in
securities lending, strategic transactions including derivatives.

Scudder GNMA Fund is designed to produce a high level of current income but with
less risk of loss to the Fund's portfolio than other GNMA mutual funds, measured
by the frequency and amount by which total return fluctuates downward.  The Fund
is designed for investors who are seeking high current  income from high quality
securities and who wish to receive a degree of protection from bond market price
risk.  The  Fund's  investment  objective  is to produce a high level of current
income while actively  seeking to reduce  downside risk compared with other GNMA
mutual  funds.  It does this by  investing at least 65% of net assets in "Ginnie
Maes":   mortgage-backed  securities  that  are  issued  or  guaranteed  by  the
Government  National Mortgage  Association (GNMA). The Fund also invests in U.S.
Treasury  securities.  With both  types of  securities,  the  timely  payment of
interest and  principal is  guaranteed  by the full faith and credit of the U.S.
government.  In  addition,  the Fund  does not  invest in  securities  issued by
tobacco-producing  companies.  The Fund has been designed with the conservative,
safety-conscious  investor in mind. Although past performance is no guarantee of
future  performance,  historically,  this Fund  offers  higher  yields than such
short-term   investments  as  insured  savings   accounts,   insured  six  month
certificates of deposit, and fixed-price money market funds.



The Fund  invests in U.S.  Treasury  bills,  notes and bonds;  other  securities
issued or  backed by the full  faith  and  credit of the U.S.  Government  as to
principal  and  interest,  including,  but not limited to,  Government  National
Mortgage Association ("GNMA") mortgage-backed securities,  Merchant Marine Bonds
guaranteed by the Maritime  Administration  and obligations of the Export-Import
Bank;  financial futures  contracts with respect to such securities;  options on
either such securities or such financial futures contracts;  and bank repurchase
agreements.  At least 65% of the Fund's net assets will be directly  invested in
GNMAs.  The Fund may also utilize hedging  techniques  involving  limited use of
financial  futures  contracts and the purchase and writing  (selling) of put and
call  options  on  such  contracts.  Under  certain  market  conditions,   these
strategies  may  reduce  current  income.  At any  time,  the  Fund  may  have a
substantial  portion  of its  assets  in  securities  of a  particular  type  or
maturity.  The Fund may also write covered call options on portfolio  securities
and purchase "when-issued" securities.

GNMA Mortgage-Backed  Securities ("GNMAs"). GNMAs are mortgage-backed securities
representing part ownership of a pool of mortgage loans. These loans,  issued by
lenders  such as  mortgage  bankers,  commercial  banks  and  savings  and  loan
associations,  are either insured by the Federal Housing Administration (FHA) or
guaranteed  by the  Veterans  Administration  (VA).  A  "pool"  or group of such
mortgages  is  assembled  and,  after  being  approved  by GNMA,  is  offered to
investors  through  securities  dealers.  Once  approved by GNMA,  a  Government
corporation  within the U.S.  Department of Housing and Urban  Development,  the
timely  payment of interest and  principal is  guaranteed  by the full faith and
credit of the  United  States  Government.  This is not,  however,  a  guarantee
related to the Fund's yield or the value of your investment principal.

As mortgage-backed securities, GNMAs differ from bonds in that principal is paid
back by the borrower  over the length of the loan rather than returned in a lump
sum at  maturity.  GNMAs  are  called  "pass-through"  securities  because  both
interest and principal payments including  prepayments are passed through to the
holder of the security (in this case, the Fund).

Mortgage-backed  securities 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.

A decline  in  interest  rates  may lead to a faster  rate of  repayment  of the
underlying  mortgages,  and may 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 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. Mortgage-backed securities are subject to the risk or 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.

                                       8
<PAGE>

When  interest  rates rise,  mortgage  prepayment  rates tend to  decline,  thus
lengthening  the life of a  mortgage-related  security and  increasing the price
volatility  of that  security,  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 the 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 Fund 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  Fannie Mae and the  Federal  Home Loan  Mortgage
Corporation ("FHLMC").  Fannie Mae is a  government-sponsored  corporation owned
entirely by private  stockholders.  It is subject to general  regulation  by the
Secretary of Housing and Urban  Development.  Fannie Mae purchases  conventional
(i.e.,  not insured or guaranteed by any governmental  agency)  mortgages from a
list of approved  seller/servicers  which include state and  federally-chartered
savings and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage  bankers.  Pass-through  securities issued by Fannie Mae are
guaranteed as to timely  payment of principal and interest by Fannie Mae 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.


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 the 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 Fund 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  Advisor  determines  that  the
securities  meet the  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.

The payment of  principal  on the  underlying  mortgages  may exceed the minimum
required by the schedule of payments for the  mortgages.  Such  prepayments  are
made at the option of the  mortgagors  for a wide variety of reasons  reflecting


                                       9
<PAGE>

their individual  circumstances  and may involve capital losses if the mortgages
were  purchased at a premium.  For example,  mortgagors may speed up the rate at
which they prepay their  mortgages when interest rates decline  sufficiently  to
encourage refinancing. The Fund, when such prepayments are passed through to it,
may be able to reinvest them only at a lower rate of interest.  The Advisor,  in
determining  the  attractiveness  of GNMAs relative to alternative  fixed-income
securities,  and in choosing specific GNMA issues, will have made assumptions as
to the  likely  speed  of  prepayment.  Actual  experience  may vary  from  this
assumption  resulting in a higher or lower investment  return than  anticipated.
When  interest  rates rise,  mortgage  prepayment  rates tend to  decline,  thus
lengthening  the life of a  mortgage-related  security and  increasing the price
volatility  of that  security,  affecting  the price  volatility  of the  Fund's
shares.


Some  investors may view the Fund as an  alternative  to a bank  certificate  of
deposit.  While an investment in the Fund is not federally insured, and there is
no guarantee of price stability, an investment in the Fund--unlike a certificate
of deposit -- is not locked  away for any  period,  may be  redeemed at any time
without incurring early withdrawal penalties, and may provide a higher yield.

The Fund may also  invest  in  dollar  roll  transactions,  mortgage-backed  and
mortgage pass-though securities, securities purchased on a "forward delivery" or
"when-issued" basis, and covered call options.

For temporary defensive purposes,  the fund may temporarily invest up to 100% of
assets in cash or cash equivalents.

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.  In  pursuit  of  its  investment
objectives,  the Fund, under normal market  conditions,  invests at least 65% of
its total assets in high yield, below investment-grade domestic debt securities.
The Fund defines "domestic debt securities" as securities of companies domiciled
in the U.S.  or  organized  under  the laws of the U.S.  or for  which  the U.S.
trading  market is a primary  market.  The Fund may invest in a variety of other
securities  including  convertible and preferred  securities,  U.S. Treasury and
Agency bonds, Brady bonds,  mortgage-backed and asset-backed securities,  common
stocks and warrants,  securities issued by real estate investment trusts,  trust
preferred  securities,  bank loans, loan  participations,  dollar rolls, indexed
securities and restricted  securities,  such as those acquired  through  private
placements.  The  Fund may  invest  up to 25% of its  total  assets  in  foreign
securities. The Fund considers "emerging markets" to include any country that is
defined as an emerging  or  developing  economy by any one of the  International
Bank  for   Reconstruction   and  Development   (i.e.,   the  World  Bank),  the
International Finance Corporation or the United Nations or its authorities.

Scudder High Yield Bond Fund may for temporary defensive purposes invest without
limit  in  cash or  money  market  instruments  or high  quality  domestic  debt
securities.  It is impossible to  accurately  predict how long such  alternative
strategies  may be  utilized.  In  addition,  the Fund may  invest in  warrants,
securities  lending,   illiquid  securities,   reverse  repurchase   agreements,
repurchase  agreements,  may purchase  securities  on a  when-issued  or forward
delivery basis and may engage in strategic transactions including derivatives.

The Fund has adopted 144a procedures for the valuation of illiquid 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.  The Fund invests  primarily in a broad range of  high-grade,
income-producing  securities such as corporate bonds and government  securities.
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 Advisor,  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 3 or
BBB or, if unrated, of equivalent quality as determined by the Advisor, but will
not purchase bonds rated below B by Moody's or S&P or their equivalent.


Scudder  Income  Fund may  invest  in  bonds,  notes,  zero  coupon  securities,
adjustable rate bonds,  convertible bonds,  preferred and convertible  preferred
securities, U.S. Government 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,  foreign securities and certificates of
deposit  issued by foreign  and  domestic  branches of U.S.  banks.  It may also
invest  in  warrants,   when-issued  or  forward  delivery  securities,  indexed
securities, repurchase agreements, reverse repurchase agreements, and may engage
in  dollar-roll  transactions,  securities  lending and  strategic  transactions
including derivatives.


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. The dollar-weighted average effective maturity of the
Fund's portfolio may not exceed three years.  Within this  limitation,  the Fund
may purchase  individual  securities with remaining stated maturities of greater


                                       10
<PAGE>

than three years.  The net asset value of the Fund is expected to fluctuate with
changes in interest rates and bond market conditions,  although this fluctuation
should be more moderate than that of a fund with a longer average maturity.  The
Advisor,  however, will attempt to minimize principal fluctuation through, among
other  things,  diversification,  credit  analysis and security  selection,  and
adjustment of the Fund's average portfolio maturity. When, in the opinion of the
Advisor,  economic or other conditions warrant, for temporary defensive purposes
the Fund may invest more than 35% of its assets in money market instruments. The
Fund emphasizes high quality investments.  At least 65% of the Fund's net assets
will be invested in (1)  obligations  of the U.S.  Government,  its  agencies or
instrumentalities,  and (2) debt securities  rated, at the time of purchase,  in
one of the two highest categories of S&P or Moody's or, if unrated, judged to be
of comparable quality by the Advisor.  In addition,  the Fund will not invest in
any debt security rated at the time of purchase below investment-grade.


Scudder Short Term Bond Fund may for temporary defensive purposes invest without
limit in money market  assets.  It is impossible to accurately  predict how long
such alternative strategies may be utilized. In addition, the Fund may invest in
warrants,   indexed   securities,   zero  coupon  securities,   trust  preferred
securities,  illiquid  securities,  reverse  repurchase  agreements,  repurchase
agreements,  dollar roll transactions,  may purchase securities on a when-issued
or forward  delivery  basis and may engage in  securities  lending and strategic
transactions including derivatives.

The  following  Underlying  Scudder  Funds are equity  mutual funds which seek a
combination of income and growth.


Scudder  Balanced  Fund seeks a balance of growth and income from a  diversified
portfolio of equity and fixed-income securities.


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.

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 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.

While the Fund  emphasizes  U.S.  equity  and debt  securities,  it may invest a
portion of its assets in foreign securities,  including depositary receipts. The
Fund's  foreign  holdings  will meet the  criteria  applicable  to its  domestic
investments.  The international  component of the Fund's  investment  program is
intended to increase  diversification,  thus reducing risk,  while providing the
opportunity for higher returns.  In addition,  the Fund may invest in securities
on a  when-issued  or  forward  delivery  basis and may  utilize  various  other
strategic transactions.


Scudder Dividend & Growth Fund seeks high current income and long-term growth of
capital  through  investment  in income  paying  equity  securities.  The Fund's
Advisor  expects that the average  gross income yield of the Fund will be higher
than the yield of the  Standard & Poor's  Composite  Stock Price Index (the "S&P
500 Index"),  a commonly accepted  benchmark for U.S. stock market  performance.
The Fund invests  primarily in dividend paying common stocks,  preferred stocks,
securities  convertible  into common stock,  and real estate  investment  trusts
("REITs").

Under normal market conditions,  the Fund will invest at least 80% of net assets
in  income-paying  equity  securities,  which the Advisor  believes offer a high
level of current income and potential for long-term  capital  appreciation.  The
Advisor believes that an actively  managed  portfolio of dividend paying stocks,
convertible  securities,  and REITs offers the  potential  for a higher level of
income and lower average share price  volatility  than the S&P 500 Index.  Under
normal circumstances, the Fund will invest between 40% and 80% of its net assets
in dividend  paying common  stocks.  The Fund may also purchase such  securities
which do not pay  current  dividends  but which  offer  prospects  for growth of
capital and future income.

Under normal circumstances,  the Fund will invest between 40% and 80% of its net
assets in dividend  paying  common  stocks.  The Advisor  applies a  disciplined
investment approach to selecting these stocks of primarily medium-to-large sized
U.S.  companies.  The Fund's portfolio may include stocks which are out of favor
in the  market,  but which,  in the  opinion of the  Advisor,  offer  compelling
valuations and potential for long-term  appreciation in price and dividends.  In
investing the Fund's  portfolio among different  industry  sectors,  the Advisor
evaluates  how each sector  reacts to economic  factors such as interest  rates,


                                       11
<PAGE>

inflation,  Gross Domestic Product, and consumer spending.  The Fund's portfolio
is constructed by attaining a proper balance of stocks in these sectors based on
the Advisor's economic  forecasts.  In summary,  the Advisor applies disciplined
buy and sell criteria,  fundamental company and industry analysis,  and economic
forecasts in managing the Fund to pursue long-term price appreciation and income
with lower overall volatility than the market.


Scudder Growth and Income Fund seeks long-term growth of capital, current income
and growth of income.  The Fund attempts to achieve its investment  objective by
investing  primarily in  dividend-paying  common  stocks,  preferred  stocks and
securities  convertible  into  common  stocks of  companies  with  long-standing
records of earnings growth.  The Fund may also purchase  securities which do not
pay current dividends but which offer prospects for growth of capital and future
income.  Convertible  securities  (which  may be current  coupon or zero  coupon
securities) are bonds, notes, debentures,  preferred stocks and other securities
which may be converted or exchanged at a stated or  determinable  exchange ratio
into  underlying   shares  of  common  stock.   The  Fund  may  also  invest  in
nonconvertible preferred stocks consistent with its objective.

Scudder  Growth and Income  Fund may for  temporary  defensive  purposes  invest
without  limit in cash and cash  equivalents.  It is  impossible  to  accurately
predict how long such alternative  strategies may be utilized. In addition,  the
Fund may invest in warrants, foreign securities,  real estate investment trusts,
illiquid securities,  reverse repurchase  agreements,  repurchase agreements and
may  engage  in  securities   lending  and  strategic   transactions   including
derivatives.

Scudder  International  Fund seeks long-term  growth of capital mainly through a
diversified portfolio of marketable foreign equity securities.  The Fund invests
in companies, wherever organized, which do business primarily outside the United
States. The Fund intends to diversify investments among several countries and to
have  represented  in  the  portfolio,  in  substantial  proportions,   business
activities in not less than three  different  countries  other than the U.S. The
Fund does not intend to concentrate  investments in any particular industry. The
Fund's investments are generally denominated in foreign currencies. The strength
or weakness of the U.S. dollar against these  currencies is responsible for part
of the Fund's investment performance. The Fund may invest up to 20% of its total
assets in investment-grade debt securities except that the Fund may invest up to
5%  of  its  total   assets   in  debt   securities   which   are  rated   below
investment-grade.

Scudder  International Fund may for temporary  defensive purposes invest without
limits in Canadian or U.S. Government  obligations or currencies,  or securities
of companies  incorporated in and having their principal activities in Canada or
the U.S.  It is  impossible  to  accurately  predict  how long such  alternative
strategies may be utilized. In addition, the Fund may invest in warrants,  trust
preferred  securities,  fixed-income  securities,  illiquid securities,  reverse
repurchase  agreements,  repurchase  agreements  and may  engage  in  securities
lending and strategic transactions including derivatives.

The  following  Underlying  Scudder  Funds are equity  mutual  funds  which seek
long-term growth or capital appreciation.


Classic  Growth  Fund -- Scudder  Shares  seeks to provide  long-term  growth of
capital  and to keep the value of its shares  more  stable  than  other  capital
growth mutual funds. Under normal market conditions,  the Fund invests primarily
in a diversified  portfolio of common stocks which the Advisor  believes  offers
above-average  appreciation potential yet, as a portfolio,  offers the potential
for less share price  volatility than other growth mutual funds. In seeking such
investments, the Advisor focuses its investment in high quality, medium-to-large
sized U. S. companies with leading competitive positions. The Fund allocates its
investments among different industries and companies,  and adjusts its portfolio
securities based on long-term investment considerations as opposed to short-term
trading. While the Fund emphasizes U.S. investments,  it can commit a portion of
assets to the  equity  securities  of  foreign  growth  companies  that meet the
criteria  applicable to the Fund's domestic  investments.  The Fund can purchase
other types of equity securities  including  securities  convertible into common
stocks,  preferred stocks, rights and warrants. The Fund may invest up to 20% of
its net assets in debt securities when the Advisor  anticipates that the capital
appreciation  on debt  securities  is  likely  to equal or  exceed  the  capital
appreciation  on common stocks over a selected  time,  such as during periods of
unusually high interest rates.


Classic  Growth  Fund -- Scudder  Shares may for  temporary  defensive  purposes
invest  without limit in high quality money market  securities,  including  U.S.
Treasury bill, repurchase agreements,  commercial paper, certificates of deposit
issued by domestic and foreign branches of U.S. banks, bankers' acceptances, and
other debt securities,  such as U.S.  Government  obligations and corporate debt
instruments.  It is impossible to accurately  predict how long such  alternative
strategies  may be  utilized.  In  addition,  the Fund may  invest  in  illiquid
securities, reverse repurchase agreements,  repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.


Global Discovery Fund -- Scudder Shares seeks above-average capital appreciation
over the long term by  investing  primarily  in the equity  securities  of small
companies  located  throughout the world. In pursuit of its objective,  the Fund
generally invests in small,  rapidly growing companies which offer the potential
for  above-average  returns  relative to larger  companies,  yet are  frequently


                                       12
<PAGE>

overlooked and thus  undervalued by the market.  The Fund has the flexibility to
invest in any region of the world. Under normal circumstances,  the Fund invests
at least 65% of its total assets in the equity  securities  of small  companies.
While the  Advisor  believes  that  smaller,  lesser-known  companies  can offer
greater growth potential than larger,  more  established  firms, the former also
involve  greater  risk and  price  volatility.  To help  reduce  risk,  the Fund
expects,  under normal market  conditions,  to diversify its portfolio widely by
company, industry and country. The Fund intends to allocate investments among at
least three countries at all times,  one of which may be the United States.  The
Fund  invests   primarily   in  companies   whose   individual   equity   market
capitalization  would  place  them  in the  same  size  range  as  companies  in
approximately  the lowest 20% of world market  capitalization  as represented by
the Salomon Brothers Broad Market Index, an index comprised of equity securities
of more than 6,500 small-, medium- and large-sized companies based in 22 markets
around the globe. Based on this policy, the companies held by the Fund typically
will have individual equity market  capitalizations of between approximately $50
million  and $2  billion  (although  the Fund will be free to invest in  smaller
capitalization issues that satisfy the Fund's size standard).  Furthermore,  the
median market capitalization of the companies in which the Fund invests will not
exceed $750 million. The Fund may invest up to 35% of its total assets in equity
securities   of  larger   companies   located   throughout   the  world  and  in
investment-grade  debt  securities  if the Advisor  determines  that the capital
appreciation of debt securities is likely to exceed the capital  appreciation of
equity  securities.  The  Fund may  invest  up to 5% of its net  assets  in debt
securities rated below investment-grade.


Global  Discovery  Fund -- Scudder Shares may for temporary  defensive  purposes
invest  without  limit  in  cash  and  cash  equivalents.  It is  impossible  to
accurately  predict how long such  alternative  strategies  may be utilized.  In
addition,  the Fund may  invest  in  common  stocks,  preferred  stocks  (either
convertible  or  non-convertible),  rights and warrants,  closed end  investment
companies,  bonds, notes, debentures,  government securities,  zero coupon bonds
(any  of  which  may be  convertible  or  nonconvertible),  foreign  securities,
American  Depositary  Receipts,  purchase securities on a when-issued or forward
delivery  basis,  and  enter  into  reverse  repurchase  agreements,  repurchase
agreements  and may engage in  securities  lending  and  strategic  transactions
including derivatives.

Scudder  Capital  Growth Fund is designed to provide  long-term  capital  growth
while actively seeking to reduce downside risk compared with other growth mutual
funds.  The Fund pursues this investment  objective by investing at least 65% of
total  assets in  equities,  mainly  common  stocks of  established  medium- and
large-sized  companies.  Through  a  broadly  diversified  portfolio  consisting
primarily of the securities of high quality,  medium- to  large-sized  companies
with strong  competitive  positions in their  industries  and  reasonable  stock
market  valuation the Fund seeks to offer less share price  volatility than many
growth  funds.  Unlike many other  diversified  growth funds that  typically may
invest  up to 5% in any one  company,  the fund  adheres  to a more  restrictive
policy that limits the amount it invests in any one company to no more than 3.5%
of its total assets. It may also invest in rights to purchase common stocks, the
growth  prospects  of which are greater than most stocks but which may also have
above-average  market  risk.  The Fund  may  also  invest  in  preferred  stocks
consistent with the Fund's objective.  While most of the fund's  investments are
common  stocks,  some  may be  other  types  of  equities,  such as  convertible
securities and preferred  stocks.  The fund does not invest in securities issued
by tobacco-producing companies.

Investments  in  common  stocks  have  a  wide  range  of  characteristics,  and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and  companies  of all sizes.  In addition,  since 1945,  the overall
performance  of  common  stocks  has  exceeded  the rate of  inflation.  It is a
fundamental  policy of the Fund,  which may not be changed without approval of a
majority  of the  Fund's  outstanding  shares  (see  "Investment  Restrictions",
herein,  for majority voting  requirements),  that the Fund will not concentrate
its investments in any particular industry.

The Fund may  invest  up to 100% of its  assets  in  high-quality  money  market
instruments  (including U.S. Treasury bills,  commercial paper,  certificates of
deposit,  and  bankers'  acceptances),  repurchase  agreements  and  other  debt
securities for temporary  defensive  purposes when the Fund Manager deems such a
position advisable in light of economic or market conditions.

The Fund may also invest in real estate investment  trusts,  futures  contracts,
covered call options, options on stock indices, foreign securities,  and foreign
currency exchange contracts.


Scudder  Development  Fund  seeks  long-term  growth  of  capital  by  investing
primarily in U.S.  companies with the potential for  above-average  growth.  The
Fund  generally  invests  in equity  securities,  including  common  stocks  and
convertible  securities,  of  companies  that  the  Advisor  believes  have  the
potential for above-average revenue, earnings,  business value and/ or cash flow
growth.  To help reduce risk,  the Fund  allocates  its  investments  among many
companies. In selecting industries and companies for investment, the Advisor may
consider many factors, including overall growth prospects,  financial condition,
competitive position, technology, research and development,  productivity, labor
costs,  raw material costs and sources,  profit  margins,  return on investment,
structural  changes  in  local  economies,  capital  resources,  the  degree  of


                                       13
<PAGE>

governmental regulation or deregulation, management and other factors. 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  when the  anticipated  performance  of  foreign
securities  is  believed by the Advisor to offer more  potential  than  domestic
alternatives in keeping with the investment  objective of the Fund. However, the
Fund has no current  intention of  investing  more than 20% of its net assets in
foreign securities.

Scudder  Development  Fund may for temporary  defensive  purposes invest without
limit in cash and may invest in high  quality  debt  securities  without  equity
features,  U.S.  Government  securities and money market  instruments  which are
rated in the two  highest  categories  by Moody's  Investor  Services,  Inc.  or
Standard and Poor's  Corporations,  or, if unrated, are deemed by the Advisor to
be of equivalent  quality.  It is impossible to accurately predict how long such
alternative  strategies  may be utilized.  In  addition,  the Fund may invest in
warrants,  convertible bonds,  preferred stocks,  illiquid  securities,  reverse
repurchase  agreements,  repurchase  agreements  and may  engage  in  securities
lending and strategic transactions including derivatives.


Scudder Emerging  Markets Growth Fund is a  non-diversified  investment  company
which seeks long-term growth of capital  primarily  through equity investment in
emerging  markets  around the globe.  The Fund will  invest in the  Asia-Pacific
region,  Latin America,  less developed  nations in Europe,  the Middle East and
Africa,  focusing  investments in countries and regions where there appear to be
the  best  value  and  appreciation  potential,  subject  to  considerations  of
portfolio diversification and liquidity. At least 65% of the Fund's total assets
will be invested in the equity  securities of emerging market issuers.  The Fund
considers  "emerging  markets"  to  include  any  country  that is defined as an
emerging  or  developing  economy  by  any  one of the  International  Bank  for
Reconstruction and Development (i.e., the World Bank), the International Finance
Corporation  or the  United  Nations  or its  authorities.  The Fund  intends to
allocate its investments  among at least three countries at all times,  and does
not expect to concentrate in any particular  industry.  The Fund deems an issuer
to be located in an emerging market if:

     o    the issuer is organized under the laws of an emerging market country;

     o    the issuer's  principal  securities  trading  market is in an emerging
          market; or

     o    at least 50% of the issuer's non-current assets, capitalization, gross
          revenue or profit in any one of the two most  recent  fiscal  years is
          derived (directly or indirectly  through  subsidiaries) from assets or
          activities located in emerging markets.


The Fund may  invest  up to 35% of its  total  assets  in  emerging  market  and
domestic debt securities if the Advisor determines that the capital appreciation
of debt  securities  is likely to equal or exceed the  capital  appreciation  of
equity securities. Under normal market conditions, the Fund may invest up to 35%
of its assets in equity  securities  of issuers in the U.S. and other  developed
markets.


Scudder Emerging Markets Growth Fund may for temporary defensive purposes invest
without limit in debt instruments, cash and cash equivalents,  including foreign
and domestic  money market  instruments,  short-term  government  and  corporate
obligations,  and repurchase agreements.  It is impossible to accurately predict
how long such alternative  strategies may be utilized. In addition, the Fund may
invest in debt instruments such as warrants,  bonds, notes,  bills,  debentures,
convertible securities, bank obligations, short-term paper, loan participations,
loan  assignments  and trust  interests.  The Fund may also invest in closed end
investment   companies  investing   primarily  in  emerging  markets,   illiquid
securities,  purchase  securities on a when-issued  or forward  delivery  basis,
enter into reverse repurchase  agreements,  repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.

The Fund has adopted 144a procedures for the valuation of illiquid securities.


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.  The Fund invests on a worldwide basis in equity securities of companies
which are incorporated in the U.S. or in foreign  countries.  It also may invest
in the debt  securities of U.S. and foreign  issuers.  The Fund will be invested
usually in securities  of issuers  located in at least three  countries,  one of
which may be the U.S. It is expected that investments will include  companies of
varying size as measured by assets, sales or capitalization.  The Fund generally
invests in equity securities of established  companies listed on U.S. or foreign
securities exchanges, but also may invest in securities traded over-the-counter.
It also may invest in debt securities convertible into common stock, convertible
and non-convertible preferred stock, and fixed-income securities of governments,
government  agencies,  supranational  agencies  and  companies  when the Advisor
believes the potential for appreciation will equal or exceed that available from
investments in equity securities. These debt and fixed-income securities will be


                                       14
<PAGE>

investment-grade,  except that the Fund may invest up to 5% of its total  assets
in debt securities rated below investment-grade.


Scudder Global Fund may for temporary defensive purposes invest without limit in
cash and cash equivalents.  It is impossible to accurately predict how long such
alternative  strategies  may be utilized.  In  addition,  the Fund may invest in
warrants,  zero-coupon  securities,   illiquid  securities,  reverse  repurchase
agreements,  repurchase  agreements  and may engage in  securities  lending  and
strategic transactions including derivatives.

Scudder Gold Fund is a  non-diversified  investment  company which seeks maximum
return (principal change and income) consistent with investing in a portfolio of
gold-related  equity  securities  and  gold.  The  Fund  pursues  its  objective
primarily through a portfolio of gold-related  investments.  Under normal market
conditions,  at least 65% of the Fund's  total  assets  will be  invested in (1)
equity securities  (defined as common stock,  investment-grade  preferred stock,
warrants and debt  securities  that are  convertible  into or  exchangeable  for
common  stock)  of  U.S.  and  foreign   companies   primarily  engaged  in  the
exploration,  mining, fabrication,  processing or distribution of gold, (2) gold
bullion, and (3) gold coins. A company will be considered "primarily engaged" in
a business  or an  activity if it devotes or derives at least 50% of its assets,
revenues and/or operating earnings from that business or activity. The remaining
35% of the Fund's assets may be invested in any precious metals other than gold;
in equity  securities of companies engaged in activities  primarily  relating to
precious  metals  and  minerals  other  than  gold;  in  investment-grade   debt
securities,  including  warrants,  zero coupon  bonds,  of companies  engaged in
activities  relating to gold or other precious  metals and minerals;  in certain
debt  securities,  a portion  of the  return on which is indexed to the price of
precious metals;  and, for hedging  purposes,  in precious  metals;  and utilize
various  other  strategic   transactions.   Consistent  with  applicable   state
securities  laws, up to 10% of the Fund's total assets may be invested  directly
in gold, silver, platinum and palladium bullion and in gold and silver coins. In
addition,  the Fund's  assets may be invested in wholly  owned  subsidiaries  of
Scudder Mutual Funds, Inc., of which the Fund is a series,  that invest in gold,
silver, platinum and palladium bullion and in gold and silver coins.

Scudder  Gold Fund may hold  cash,  high  quality  cash  equivalents  (including
foreign money market instruments) such as bankers' acceptances,  certificates of
deposit, commercial paper, short-term government and corporate obligations,  and
repurchase agreements,  obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities without limit for temporary defensive purposes
and up to 30% to  maintain  liquidity.  In  addition,  the  Fund may  invest  in
warrants,  foreign currencies in the form of bank deposits,  short sales against
the  box,  illiquid  securities,   reverse  repurchase  agreements,   repurchase
agreements  and may engage in  securities  lending  and  strategic  transactions
including derivatives.

Scudder Greater Europe Growth Fund is a non-diversified investment company which
seeks long-term  growth of capital through  investments  primarily in the equity
securities of European companies. Although its focus is on long-term growth, the
Fund may provide current income principally  through holdings in dividend-paying
securities.  The Fund will invest, under normal market conditions,  at least 80%
of its total assets in the equity securities of European companies.

The Fund defines a European company as follows:

     o    A company  organized under the laws of a European country or for which
          the principal securities trading market is in Europe; or

     o    A company,  wherever  organized,  where at least 50% of the  company's
          non-current  assets,  capitalization,  gross  revenue or profit in its
          most recent fiscal year  represents  (directly or  indirectly  through
          subsidiaries) assets or activities located in Europe.

The Fund may invest,  under  normal  market  conditions,  up to 20% of its total
assets in European debt  securities.  Within this 20% limit, the Fund may invest
in debt  securities  which are unrated,  rated, or the equivalent of those rated
below investment-grade.

Scudder Greater Europe Growth Fund may hold foreign or U.S. debt  instruments as
well as cash or cash  equivalents,  including  foreign and domestic money market
instruments,  short-term  government and corporate  obligations,  and repurchase
agreements  without  limit for  temporary  defensive  purposes  and up to 20% to
maintain  liquidity.  It is  impossible  to  accurately  predict  how long  such
alternative  strategies  may be utilized.  In  addition,  the Fund may invest in
closed end investment  companies,  warrants,  when-issued  securities,  illiquid
securities, reverse repurchase agreements,  repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.

Scudder Health Care Fund is a non-diversified  fund which seeks long-term growth
of capital primarily  through  investment in common stocks of companies that are
engaged primarily in the development,  production or distribution of products or


                                       15
<PAGE>

services  related to the  treatment or  prevention of diseases and other medical
problems.  These include  companies that operate hospitals and other health care
facilities;  companies  that  design,  manufacture  or  sell  medical  supplies,
equipment and support  services;  and  pharmaceutical  firms.  The Fund may also
invest  in   companies   engaged  in  medical,   diagnostic,   biochemical   and
biotechnological research and development. The Fund "concentrates," for purposes
of the  Investment  Company Act of 1940,  its assets in securities  related to a
particular  industry,  which  means that at least 25% of its net assets  will be
invested in these assets at all times.  As a result,  the Fund may be subject to
greater  market  fluctuation  than a fund which has  securities  representing  a
broader range of investment alternatives.


The Fund  invests in the equity  securities  of health  care  companies  located
throughout the world.  In the opinion of the Advisor,  investments in the health
care  industry  offer  potential  for   significant   growth  due  to  favorable
demographic trends,  technological  advances in the industry, and innovations by
companies in the diagnosis and treatment of illnesses.


Under  normal  circumstances,  the Fund  will  invest  at least 80% of its total
assets in  common  stocks  of  companies  in a group of  related  industries  as
described below. The Fund will invest in securities of U.S.  companies,  but may
invest in foreign  companies as well. A security will be considered  appropriate
for the Fund if at least 50% of its total  assets,  revenues,  or net  income is
related to or derived from the industry or industries  designated  for the Fund.
The  industries  in the health care sector are  pharmaceuticals,  biotechnology,
medical products and supplies, and health care services.  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 stock also offers  greater  potential for long-term  gain on  investment,
compared to other classes of financial assets such as bonds or cash equivalents.


While the Fund invests  predominantly  in common  stocks,  the Fund may purchase
convertible securities,  rights, warrants and illiquid securities.  The Fund may
enter into  repurchase  agreements and reverse  repurchase  agreements,  and may
engage in  strategic  transactions,  using such  derivatives  contracts as index
options and futures, to increase stock market  participation,  enhance liquidity
and manage transaction costs.  Securities may be listed on national exchanges or
traded  over-the-counter.  The Fund may invest up to 20% of its total  assets in
U.S.  Treasury  securities,  and agency  and  instrumentality  obligations.  For
temporary defensive purposes, the Fund may invest without limit in cash and cash
equivalents  when  the  Advisor  deems  such a  position  advisable  in light of
economic or market  conditions.  It is impossible to predict accurately how long
such alternative strategies may be utilized.

Scudder Large Company Growth Fund seeks to provide  long-term  growth of capital
through investment  primarily in the equity securities of seasoned,  large-sized
financially-strong U.S. growth companies.  The Fund's equity investments consist
of common  stocks,  preferred  stocks and  securities  convertible  into  common
stocks,  rights and warrants of companies which 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 & Poor's 500
Composite  Price Index ("S&P  500").  The Fund invests at least 65% of its total
assets in the equity  securities  of seasoned,  financially-strong  U.S.  growth
companies which are considered to be of  above-average  financial  quality.  The
common stocks issued by these companies  qualify,  at the time of purchase,  for
one of the three highest equity ranking  categories  (A+, A or A-) of S&P or, if
not  ranked by S&P,  are  judged to be of  comparable  quality  by the  Advisor.
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 Advisor  conducts its own analysis
of a company's history,  current financial position, and earnings prospects. The
Fund allocates its  investments  among different  industries and companies,  and
adjusts its portfolio securities based on long-term investment considerations as
opposed to short-term trading.  While the Fund emphasizes U.S.  investments,  it
can  commit a portion  of assets to the  equity  securities  of  foreign  growth
companies which meet the criteria applicable to domestic  investments.  The Fund
may invest in convertible securities which must be investment-grade.


Scudder Large Company Growth Fund may for temporary  defensive  purposes  invest
without  limit in cash and cash  equivalents.  It is  impossible  to  accurately
predict how long such alternative  strategies may be utilized. In addition,  the
Fund may invest in warrants,  foreign securities,  illiquid securities,  reverse
repurchase  agreements,  repurchase  agreements  and may  engage  in  securities
lending and strategic transactions including derivatives.


Scudder  Large  Company Value Fund seeks to maximize  long-term  capital  growth
through a value-orientated  investment approach.  The Fund invests in marketable
securities,  principally  common  stocks and,  consistent  with its objective of
long-term capital growth, preferred stocks. The Fund is free to invest in a wide
range of marketable  securities  which the Advisor  believes offer the potential
for long-term,  above-average growth. The Fund will normally invest at least 65%
of its assets in the equity securities of large U.S.  companies.  The Fund looks
for  companies  whose  securities  appear to  present a  favorable  relationship


                                       16
<PAGE>

between market price and opportunity.  These may include securities of companies
whose  fundamentals  or products  may be of only average  promise.  The Fund may
invest  up to  20%  of  its  net  assets  in  debt  securities  when  management
anticipates that the capital  appreciation on debt securities is likely to equal
or exceed the capital  appreciation  on common stocks over a selected time, such
as during periods of unusually high interest rates.  Such debt securities may be
rated below  investment-grade,  or of  equivalent  quality as  determined by the
Advisor.  However,  the Fund will  invest no more than 20% of its net  assets in
securities rated B or lower.


Scudder Large Company Value Fund may for  temporary  defensive  purposes  invest
without  limit  in debt  securities,  short-term  indebtedness,  cash  and  cash
equivalents.  It is impossible to accurately  predict how long such  alternative
strategies  may be  utilized.  In  addition,  the Fund  may  invest  in  rights,
warrants,  convertible  securities,   illiquid  securities,  reverse  repurchase
agreements,  repurchase  agreements  and may engage in  securities  lending  and
strategic transactions including derivatives.


Scudder Latin America Fund is a non-diversified  investment  company which seeks
to provide long-term capital  appreciation  through investment  primarily in the
securities of Latin American issuers. The Fund involves above-average investment
risk.  The Fund seeks to benefit from  economic and  political  trends  emerging
throughout Latin America. These trends are supported by governmental initiatives
designed  to promote  freer  trade and  market-oriented  economies.  The Advisor
believes that efforts by Latin American countries to, among other things, reduce
government  spending and  deficits,  control  inflation,  lower trade  barriers,
stabilize currency exchange rates,  increase foreign and domestic investment and
privatize  state-owned  companies,  will set the stage for attractive investment
returns  over time.  At least 65% of the Fund's total assets will be invested in
the  securities of Latin  American  issuers,  and 50% of the Fund's total assets
will be invested in Latin American equity  securities.  To meet its objective to
provide long-term capital  appreciation,  the Fund normally invests at least 65%
of its total assets in equity  securities.  The Fund  considers  Latin  American
countries  to  include   Mexico,   Central   America,   South  America  and  the
Spanish-speaking  islands of the Caribbean. The Fund defines securities of Latin
American issuers as follows:


     o    Securities of companies  organized  under the laws of a Latin American
          country or for which the  principal  securities  trading  market is in
          Latin America;

     o    Securities  issued or  guaranteed  by the  government  of a country in
          Latin   America,   its   agencies  or   instrumentalities,   political
          subdivisions or the central bank of such country;

     o    Securities of companies,  wherever organized,  when at least 50% of an
          issuer's non-current assets,  capitalization,  gross revenue or profit
          in any one of the two most recent fiscal years represents (directly or
          indirectly through subsidiaries) assets or activities located in Latin
          America; or

     o    Securities of Latin American issuers, as defined above, in the form of
          depositary shares.

The  Fund  may  invest  in debt  securities  which  are  unrated,  rated  or the
equivalent  of those rated  below  investment-grade  although  the Fund will not
invest more than 10% of its net assets in securities rated B or lower by Moody's
or S&P and may invest in securities rated C by Moody's or D by S&P.

Scudder Latin America Fund may for temporary  defensive  purposes invest without
limit  in  cash  and  cash  equivalents  and  money  market  instruments,  or in
securities  of U.S. or other  non-Latin  American  issuers.  It is impossible to
accurately  predict how long such  alternative  strategies  may be utilized.  In
addition,  the Fund may invest in closed end investment  companies  primarily in
Latin  America,  warrants,  loan  participations  and  assignments,  when-issued
securities,  convertible  securities,  illiquid  securities,  reverse repurchase
agreements,  repurchase  agreements  and may engage in  securities  lending  and
strategic transactions including derivatives.

Scudder Pacific Opportunities Fund is a non-diversified investment company which
seeks  long-term  growth of capital through  investment  primarily in the equity
securities of Pacific Basin companies,  excluding Japan. The Fund invests, under
normal market conditions, at least 65% of its assets in the equity securities of
Pacific Basin companies.  Pacific Basin countries include Australia, the Peoples
Republic of China, India, Indonesia, Malaysia, New Zealand, the Philippines, Sri
Lanka, Pakistan and Thailand,  as well as Hong Kong, Singapore,  South Korea and
Taiwan -- the so-called "four tigers." The Fund may invest in other countries in
the Pacific Basin when their markets  become  sufficiently  developed.  The Fund
will not, however,  invest in Japanese securities.  The Fund intends to allocate
investments  among at least three  countries at all times and does not expect to
concentrate  investments in any particular industry. The Fund defines securities
of Pacific Basin companies as follows:

                                       17
<PAGE>

     o    Securities  of companies  organized  under the laws of a Pacific Basin
          country or for which the principal securities trading market is in the
          Pacific Basin; or

     o    Securities of companies,  wherever  organized,  when at least 50% of a
          company's non-current assets, capitalization,  gross revenue or profit
          in any one of the two most recent fiscal years represents (directly or
          indirectly through  subsidiaries)  assets or activities located in the
          Pacific Basin.


Under normal market  conditions,  the Fund may invest up to 35% of its assets in
equity securities of U.S. and other non-Pacific Basin issuers (excluding Japan).
The Fund may  invest  up to 35% of its  total  assets in  foreign  and  domestic
high-grade  debt   securities  if  the  Advisor   determines  that  the  capital
appreciation  of debt  securities  is  likely  to equal or  exceed  the  capital
appreciation of equity securities.


Scudder Pacific  Opportunities Fund may for temporary  defensive purposes invest
without  limit  in  debt  instruments  as well as  cash  and  cash  equivalents,
including foreign and domestic money market instruments,  short-term  government
and  corporate  obligations,  and  repurchase  agreements.  It is  impossible to
accurately  predict how long such  alternative  strategies  may be utilized.  In
addition,  the  Fund  may  invest  in  common  stock,  preferred  stock  (either
convertible or non-convertible), depository receipts, rights, warrants, illiquid
securities,  when-issued securities,  reverse repurchase agreements,  repurchase
agreements  and may engage in  securities  lending  and  strategic  transactions
including derivatives.

Scudder Select 500 Fund is a diversified  fund which seeks long-term  growth and
income  through  investment  in selected  stocks of  companies in the Standard &
Poor's 500 Composite  Stock Price Index,  also known as the S&P 500(R) Index,  a
commonly  recognized  unmanaged  measure of 500 widely held U.S.  common  stocks
listed on the New York Stock  Exchange,  the  American  Stock  Exchange  and the
Nasdaq  National  Market System.  The Fund pursues its objective by investing at
least 80% of its total  assets in the stocks of  companies  in the index.  Under
normal circumstances, the Fund invests primarily in common stocks.

The Fund's portfolio management team will apply a multi-step  investment process
to select certain of the composite  stocks in the Fund's benchmark index for its
portfolio.  This  process  includes  the  following  steps:

     o    Ranking - using a proprietary  computer model, the stocks of companies
          in the  particular  benchmark  index are evaluated and ranked based on
          their  growth  prospects,  relative  valuation,  and history of rising
          prices.


     o    Selection - the 20% lowest  ranking  stocks in the index are generally
          excluded from the portfolio.

     o    Portfolio Construction - From the remaining 80% of stocks, a subset is
          selected and weighted to ensure portfolio diversification and attempts
          to create a portfolio that is similar to the benchmark index.  Factors
          to be considered in the  allocation  of the remaining  stocks  include
          level of exposure to specific  industries,  company specific financial
          data, price volatility, and market capitalization.

     o    Ongoing Active  Management - the fund's  portfolio is rebalanced on an
          ongoing basis as the rankings of the stocks in the  benchmark  indices
          change over time.

The Fund may, but is not  required  to,  invest up to 20% of its total assets in
investment  grade debt  securities.  The Fund can purchase other types of equity
securities   including  preferred  stocks  (convertible   securities),   rights,
warrants,  and  illiquid  securities.  Securities  may  be  listed  on  national
exchanges  or traded  over-the-counter.  The Fund may,  but is not  required to,
utilize  other  investments  and  investment  techniques  that may  impact  fund
performance,   including,  but  not  limited  to,  options,  futures  and  other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).

The Fund manages risk by diversifying widely among industries and companies, and
using disciplined security selection.  The Fund may, but is not required to, use
derivatives in an attempt to manage risk.  The use of derivatives  could magnify
losses. For temporary defensive purposes, the Fund may invest, without limit, in
cash and cash equivalents,  U.S. government securities, money market instruments
and high quality debt securities without equity features.

Scudder Select 1000 Growth Fund is a non-diversified  fund which seeks long-term
growth of capital  through  investment  in selected  stocks of  companies in the
Russell 1000(R) Growth Index, an unmanaged  index of  growth-oriented  mid-sized
and large company  stocks.  The Fund pursues its objective by investing at least
80% of its total assets in the stocks of  companies  in the index.  Under normal
circumstances, the Fund invests primarily in common stocks.

                                       18
<PAGE>

The Fund's portfolio management team will apply a multi-step  investment process
to select certain of the composite  stocks in the Fund's benchmark index for its
portfolio.  This  process  includes  the  following  steps:

     o    Ranking - using a proprietary  computer model, the stocks of companies
          in the  particular  benchmark  index are evaluated and ranked based on
          their  growth  prospects,  relative  valuation,  and history of rising
          prices.

     o    Selection - the 20% lowest  ranking  stocks in the index are generally
          excluded from the portfolio.

     o    Portfolio Construction - From the remaining 80% of stocks, a subset is
          selected and weighted to ensure portfolio diversification and attempts
          to create a portfolio that is similar to the benchmark index.  Factors
          to be considered in the  allocation  of the remaining  stocks  include
          level of exposure to specific  industries,  company specific financial
          data, price volatility, and market capitalization.

     o    Ongoing Active  Management - the fund's  portfolio is rebalanced on an
          ongoing basis as the rankings of the stocks in the  benchmark  indices
          change over time.

The Fund may, but is not  required  to,  invest up to 20% of its total assets in
investment  grade debt  securities.  The Fund can purchase other types of equity
securities   including  preferred  stocks  (convertible   securities),   rights,
warrants,  and  illiquid  securities.  Securities  may  be  listed  on  national
exchanges  or traded  over-the-counter.  The Fund may,  but is not  required to,
utilize  other  investments  and  investment  techniques  that may  impact  fund
performance,   including,  but  not  limited  to,  options,  futures  and  other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).

The Fund manages risk by diversifying widely among industries and companies, and
using disciplined security selection.  The Fund may, but is not required to, use
derivatives in an attempt to manage risk.  The use of derivatives  could magnify
losses. For temporary defensive purposes, the Fund may invest, without limit, in
cash and cash equivalents,  U.S. government securities, money market instruments
and high quality debt securities without equity features.

Scudder Small Company Stock Fund is designed to provide long-term capital growth
while actively seeking to reduce downside risk compared with other small company
stock funds.  The Fund pursues this  investment  objective by investing at least
65% of total assets in common stocks of small U.S.  companies with above-average
long-term  capital  growth.  The fund does not  invest in  securities  issued by
tobacco-producing companies.

Under  normal  circumstances,  the Fund may  invest  up to 5% of its  assets  in
certain short-term fixed income securities  including  high-quality money market
securities such as U.S. Treasury bills, repurchase agreements, commercial paper,
certificates  of deposit  issued by domestic and foreign  branches of U.S. banks
and  bankers'  acceptances,  although  cash or  cash  equivalents  are  normally
expected to represent less than 1% of the Fund's assets.  The Fund may invest up
to 20% of its assets in stock  futures  contracts and options in order to invest
uncommitted   cash  balances,   to  maintain   liquidity  to  meet   shareholder
redemptions, or to minimize trading costs.

The Fund may also invest in  Standard & Poor's  Depositary  Receipts  ("SPDRs").
SPDRs  typically  trade  like a share of  common  stock and  provide  investment
results that  generally  correspond  to the price and yield  performance  of the
component  common stocks of the S&P 500 Composite Stock Index ("S&P 500 Index").
There  can be no  assurance  that  this  can be  accomplished  as it may  not be
possible for the trust to replicate  and maintain  exactly the  composition  and
relative weightings of the component  securities of the S&P 500 Index. SPDRs are
subject to the risks of an  investment  in a broadly  based  portfolio of common
stocks,  including  the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment. SPDRs are also subject
to risks  other than those  associated  with an  investment  in a broadly  based
portfolio of common stocks in that the  selection of the stocks  included in the
trust may affect  trading in SPDRs,  as compared with trading in a broadly based
portfolio of common stocks.

The Fund is neither sponsored by nor affiliated with Standard & Poor's.

In pursuing its objective of long-term capital growth, the Fund normally remains
substantially  invested in the common  stocks of small U.S.  companies.  Using a
quantitative investment approach developed by the Fund Manager, the Fund focuses
on equity  securities of companies with market  capitalization  below $2 billion
and that the Fund  Manager  believes are  undervalued  relative to the stocks in
Russell 2000  Index(R).  The Russell  2000  Index(R) is a widely used measure of
small stock  performance.  The Fund will sell  securities of companies that have
grown in market  capitalization  above this level as  necessary to keep the Fund
focused on small companies.

                                       19
<PAGE>

The Fund takes a diversified approach to investing. It generally invests no more
than 2% of its assets in the securities of any one company and typically invests
in over 150 securities, representing a variety of U.S.
industries.

While the Fund invests  predominantly  in common  stocks,  it can purchase other
types of equity  securities  including  preferred stocks (either  convertible or
non-convertible),  rights and  warrants.  Securities  may be listed on  national
exchanges  or  traded  over-the-counter.  The Fund may  invest  up to 20% of its
assets in U.S. Treasury, agency and instrumentality  obligations, may enter into
repurchase  agreements  and may  make use of  financial  futures  contracts  and
related  options.  The Fund may  purchase  and sell  options or futures on stock
indices for  hedging  purposes as a temporary  investment  to  accommodate  cash
flows. The Fund may also invest in real estate investment  trusts,  covered call
options, foreign securities, and foreign currency exchange contracts.

For  temporary  defensive  purposes,  the Fund may invest  without limit in high
quality money market  securities,  including  U.S.  Treasury  bills,  repurchase
agreements,  commercial  paper,  certificates  of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. government obligations and corporate debt instruments when the Fund
Manager  deems  such a  position  advisable  in  light  of  economic  or  market
conditions.

Scudder  Small  Company  Value  Fund  pursues  long-term  growth of  capital  by
investing  in  undervalued  stocks of small U.S.  companies.  The fund  normally
invests  at least  90% of its  assets in common  stocks  of  companies  that are
similar in size to those  included  in the  Russell  2000  index--a  widely used
benchmark of small stock  performance.  Typically,  these companies have a stock
market value of less than $1.5 billion.  Companies  represented in the portfolio
of  the  Fund  typically  have  the  following  characteristics:

     o    Attractive  valuations  relative to the Russell 2000 Index -- a widely
          used benchmark of small stock performance -- based on measures such as
          price to earnings, price to book value and price to cash flow ratios.

     o    Favorable trends in earnings growth rates and stock price momentum.

While the Fund invests  predominately  in common  stocks,  it can purchase other
types of equity securities including preferred stocks (convertible  securities),
rights,  warrants and illiquid securities.  The Fund may invest up to 20% of its
assets in U.S. Treasury, agency and instrumentality  obligations, may enter into
repurchase  agreements  and  reverse  repurchase  agreements  and may  engage in
strategic  transactions,  using such derivatives  contracts as index options and
futures,  to increase stock market  participation,  enhance liquidity and manage
transaction costs.

Scudder Small Company Value Fund may for  temporary  defensive  purposes  invest
without  limit in cash and cash  equivalents.  It is  impossible  to  accurately
predict how long such alternative strategies may be utilized.

Scudder  Technology  Innovation  Fund is a  non-diversified  fund,  which  seeks
long-term  growth of capital  primarily  through  investment in common stocks of
companies   engaged  in  the   development,   production  or   distribution   of
technology-related  products or  services.  These types of products and services
currently  include  computer  hardware  and  software,  semi-conductors,  office
equipment and automation,  and Internet-related  products and services. The Fund
"concentrates,"  for purposes of the Investment  Company Act of 1940, its assets
in securities related to a particular industry, which means that at least 25% of
its net assets will be invested in these assets at all times. As a result,  each
Fund  may be  subject  to  greater  market  fluctuation  than a fund  which  has
securities representing a broader range of investment alternatives.

Under  normal  circumstances,  the Fund  will  invest  at least 80% of its total
assets in  common  stocks  of  companies  in a group of  related  industries  as
described below. The Fund will invest in securities of U.S.  companies,  but may
invest in foreign  companies as well. A security will be considered  appropriate
for the Fund if at least 50% of its total  assets,  revenues,  or net  income is
related to or derived from the industry or industries  designated  for the Fund.
The  industries  in the  technology  sector are computers  (including  software,
hardware and internet-related businesses), computer services, telecommunications
and  semi-conductors.  Common  stock is issued by  companies  to raise  cash for
business  purposes  and  represents  a  proportionate  interest  in the  issuing
companies.  Therefore,  a 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  stock also
offers greater  potential for long-term  gain on  investment,  compared to other
classes of financial assets such as bonds or cash equivalents.

                                       20
<PAGE>


While the Fund invests  predominantly  in common  stocks,  the Fund may purchase
convertible securities,  rights, warrants and illiquid securities.  The Fund may
enter into  repurchase  agreements and reverse  repurchase  agreements,  and may
engage in  strategic  transactions,  using such  derivatives  contracts as index
options and futures, to increase stock market  participation,  enhance liquidity
and manage transaction costs.  Securities may be listed on national exchanges or
traded  over-the-counter.  The Fund may invest up to 20% of its total  assets in
U.S.  Treasury  securities,  and agency  and  instrumentality  obligations.  For
temporary defensive purposes, the Fund may invest without limit in cash and cash
equivalents  when  the  Advisor  deems  such a  position  advisable  in light of
economic or market  conditions.  It is impossible to predict accurately how long
such alternative strategies may be utilized.


Securities  issued  through an initial  public  offering (IPO) can experience an
immediate  drop in value if the demand for the  securities  does not continue to
support the offering price.  Information  about the issuers of IPO securities is
also  difficult  to  acquire  since  they are new to the market and may not have
lengthy  operating  histories.  The Fund may  engage in  short-term  trading  in
connection  with its IPO  investments,  which could produce higher trading costs
and  adverse  tax  consequences.  The number of  securities  issued in an IPO is
limited,  so it is likely that IPO securities will represent a smaller component
of the Fund's  portfolio  as the Fund's  assets  increase  (and thus have a more
limited effect on the Fund's performance).


The Japan Fund is a  diversified  mutual fund which  seeks to achieve  long-term
capital  appreciation  by investing  primarily in equity  securities  (including
American  Depositary  Receipts) of Japanese  companies.  Equity  securities  are
defined as common and preferred stock,  debt securities  convertible into common
stock  (sometimes  referred to as  "convertible  debentures")  and common  stock
purchase warrants. Under normal conditions, the Fund will invest at least 80% of
its assets in Japanese  securities,  that is, securities issued by entities that
are  organized  under the laws of Japan  ("Japanese  companies"),  securities of
affiliates of Japanese  companies,  wherever organized or traded, and securities
of issuers not  organized  under the laws of Japan but  deriving  50% or more of
their  revenues  from  Japan.  These  securities  may  include  debt  securities
(Japanese  government debt securities and debt securities of Japanese companies)
when the Advisor  believes  that the  potential  for capital  appreciation  from
investment in debt  securities  equals or exceeds that available from investment
in equity  securities.  The Fund may also  invest up to 30% of its net assets in
equity securities of Japanese companies which are traded in an  over-the-counter
market.  These are  generally  securities of  relatively  small or  little-known
companies  that  the  Advisor  believes  have   above-average   earnings  growth
potential.  The Fund may  invest up to 20% of its  assets in cash or  short-term
government or other short-term prime  obligations in order to have funds readily
available  for general  corporate  purposes,  including the payment of operating
expenses,  dividends and  redemptions,  or the investment in securities  through
exercise of rights or otherwise, or in repurchase agreements.  Where the Advisor
determines  that market or economic  conditions  so warrant,  the Fund may,  for
temporary defensive purposes, invest more than 20% of its assets in cash or such
securities.  It is impossible to predict for how long such alternate  strategies
may be  utilized.  In  addition,  the Fund may  invest in  illiquid  securities,
options,  futures contracts,  warrants,  reverse  repurchase  agreements and may
engage in securities lending and strategic transactions.


Scudder  S&P 500 Index Fund seeks to match as closely as  possible  (before  the
deduction of expenses)  the total return of the Standard & Poor's 500  Composite
Stock Price Index ("S&P 500 Index"),  which  emphasizes the stocks of large U.S.
companies.  The Trust seeks to achieve the  investment  objective of the Fund by
investing  substantially all of the investable assets of the Fund in an open-end
management  investment company having the same investment objective as the Fund.
The  investment  company  in which  the Fund  invests  is the  Equity  500 Index
Portfolio (the "Portfolio"), advised by Bankers Trust.

The Portfolio may invest in equity  securities listed on any domestic or foreign
securities exchange or traded in the over-the-counter  market as well as certain
restricted or unlisted  securities.  "Equity  securities"  are defined as common
stock,  preferred  stock,  trust or limited  partnership  interests,  rights and
warrants to subscribe to or purchase such  securities,  sponsored or unsponsored
ADRs, EDRs, GDRs, and convertible  securities,  consisting of debt securities or
preferred  stock that may be converted into common stock or that carry the right
to purchase common stock.  Common stocks,  the most familiar type,  represent an
equity (ownership) interest in a corporation.  They may or may not pay dividends
or carry  voting  rights.  Common stock  occupies the most junior  position in a
company's  capital  structure.  Although  equity  securities  have a history  of
long-term  growth  in  value,  their  prices  fluctuate  based on  changes  in a
company's  financial  condition and on overall  market and economic  conditions.
Smaller companies are especially sensitive to these factors.

When the Portfolio experiences large cash inflows through the sale of securities
and  desirable  equity  securities,  that are  consistent  with the  Portfolio's
investment  objective,  which are  unavailable  in  sufficient  quantities or at
attractive prices,  the Portfolio may hold short-term  investments (or shares of
money  market  mutual  funds) for a limited time  pending  availability  of such
equity securities.  Short-term  instruments consist of foreign and domestic: (i)
short-term    obligations   of   sovereign    governments,    their    agencies,
instrumentalities,  authorities or political subdivisions; (ii) other short-term
debt  securities  rated AA or higher by  Standard & Poor's  Ratings  Corporation
("S&P") or Aa or higher by Moody's Investors  Service,  Inc.  ("Moody's") or, if
unrated, of comparable quality in the opinion of Bankers Trust; (iii) commercial
paper; (iv) bank obligations, including negotiable certificates of deposit, time
deposits and banker's acceptances;  and (v) repurchase  agreements.  At the time


                                       21
<PAGE>

the  Portfolio  invests in  commercial  paper,  bank  obligations  or repurchase
agreements,  the issuer of the issuer's parent must have  outstanding debt rated
AA or higher by S&P or Aa or higher by Moody's or outstanding  commercial  paper
or bank  obligations  rated A-1 by S&P or  Prime-1  by  Moody's;  or, if no such
ratings are  available,  the  instrument  must be of  comparable  quality in the
opinion of Bankers Trust.


Scudder  21st  Century  Growth  Fund  pursues  long-term  growth of  capital  by
investing in emerging growth  companies that have the potential to be leaders in
the next century.  Emerging  growth  companies tend to be small or  little-known
companies  that have strong  prospects  for growth  because  they may offer such
things as  cutting  edge  products,  unique  services,  innovative  distribution
channels or  technological  advances.  The fund normally invests at least 80% of
its  assets in common  stocks of  companies  that are  similar  in size to those
included in the Russell  2000 index -- a widely  used  benchmark  of small stock
performance.  Typically,  these companies have a stock market value of less than
$1.5 billion.  The Advisor  believes  these  companies are  well-positioned  for
above-average earnings growth and/or greater market recognition.  Such favorable
prospects  may be a result of new or  innovative  products  or  services a given
company is developing or provides,  products or services that have the potential
to impact  significantly the industry in which the company competes or to change
dramatically  customer behavior in the 21st century.  To help reduce risk in its
search for high quality,  emerging growth  companies,  the Advisor allocates the
Fund's  investments  among many  companies and different  industries in the U.S.
and, where opportunity  warrants,  abroad as well. Emerging growth companies are
those with the ability,  in the Advisor's opinion,  to expand earnings per share
by at least 15% per annum over the next three to five years at a minimum.

The Fund may for temporary, defensive or emergency purposes invest without limit
in cash and high quality debt  securities  without  equity  features,  which are
rated Aaa, Aa or A by Moody's or AAA, AA or A by S&P, or, if unrated, are deemed
by the Advisor to be of  equivalent  quality,  U.S.  Government  securities  and
invest in money market instruments which are rated in the two highest categories
by Moody's or S&P or, if unrated,  are deemed by the Advisor to be of equivalent
quality.  It is  impossible  to  accurately  predict  how long such  alternative
strategies  may be  utilized.  In  addition,  the Fund may  invest  in shares of
preferred stocks,  convertible securities,  rights, warrants, reverse repurchase
agreements  and may engage in  securities  lending  and  strategic  transactions
including derivatives.


The Fund has adopted 144a procedures for the valuation of illiquid securities.

Value  Fund  --  Scudder  Shares  seeks  long-term  growth  of  capital  through
investment  in  undervalued  equity  securities.  The Fund invests  primarily in
common   stock  of  larger,   established   domestic   companies   with   market
capitalization of at least $1 billion that the Fund's portfolio  management team
believes are  undervalued in the  marketplace.  The Fund invests at least 80% of
its  assets in equity  securities,  which  consist of common  stocks,  preferred
stocks, securities convertible into common stocks, rights and warrants. The Fund
may invest up to 20% of its total  assets in debt  obligations,  including  zero
coupon  securities,  may enter into repurchase  agreements,  reverse  repurchase
agreements and may also engage in strategic  transactions  including derivatives
for hedging  purposes and to seek to increase gain. The debt securities in which
the Fund may be invested may be rated below investment-grade,  although the Fund
will invest no more than 10% of its net assets in securities rated B or lower by
S&P or Moody's,  and may not invest more than 5% of its net assets in securities
rated C by Moody's or D by S&P.

Value Fund -- Scudder Shares may for temporary defensive purposes invest without
limit in cash and cash equivalents.  It is impossible to accurately  predict how
long such  alternative  strategies  may be utilized.  In addition,  the Fund may
invest in illiquid securities and may engage in securities lending.

If you require more detailed  information about an Underlying  Scudder Fund call
Scudder Investor  Relations at  1-800-SCUDDER to obtain the complete  prospectus
and statement of additional information for that fund.

The  following  chart shows the  Average  Annual  Total  Returns for each of the
Underlying  Scudder Funds for their most recent one-,  five-,  ten-year  periods
ended October 31, 2000 or the life of fund if shorter.

<TABLE>
<CAPTION>

                                                            Assets
                                                             as of                     Average Annual Total Returns
                                             Inception     10/31/00         One            Five              Ten          Life of
                                                Date    (in millions)     Year            Years            Years           Fund
                                                ----    -------------     ----            -----            -----           ----

<S>                                           <C>        <C>           <C>           <C>               <C>
Money Market Fund
Scudder Cash Investment Trust                 7/23/76    1,300         5.45          4.87              4.57            --


                                       22
<PAGE>
                                                            Assets
                                                             as of                     Average Annual Total Returns
                                             Inception     10/31/00         One            Five              Ten          Life of
                                                Date    (in millions)     Year            Years            Years           Fund
                                                ----    -------------     ----            -----            -----           ----

Scudder Money Market Series - Scudder         7/7/97     1,085         6.28          --                --              5.61
Premium Money Market Shares

Bond Mutual Funds
Scudder Emerging Markets Income Fund          12/31/93   140           15.32         8.88              --              6.39
Scudder Global Bond Fund                      3/1/91     143           -.84          2.27              --              3.92
Scudder GNMA Fund**                           7/5/85     3,977         6.52          5.79              6.74            --
Scudder High Yield Bond Fund                  6/28/96    123           -3.32         --                --              5.73
Scudder Income Fund                           5/10/28    795           5.96          5.20              7.58            --
Scudder Short Term Bond Fund                  4/2/84     988           5.72          4.61              5.84            --

Equity Mutual Funds
Classic Growth Fund-Scudder Shares            9/9/96     195           25.60         --                --              25.20
Scudder Balanced Fund                         1/4/93     1,084         6.57          14.51             --              12.07
Scudder Capital Growth Fund***                11/30/84   2,442         16.11         23.28             20.26           --
Scudder Development Fund                      1/18/71    790           24.48         13.42             18.59           --
Scudder Dividend & Growth Fund                7/17/98    32            20.95         --                --              10.36
Scudder Emerging Markets Growth Fund          5/8/96     72            -5.61         --                --              -1.52
Global Discovery Fund-Scudder Shares          9/10/91    576           48.67         21.70             --              17.12
Scudder Global Fund                           7/23/86    1,572         8.80          12.67             12.41           --
Scudder Gold Fund                             8/22/88    82            -20.08        -9.06             -1.75           --
Scudder Greater Europe Growth Fund            10/10/94   1,403         11.31         20.25             --              19.46
Scudder Growth and Income Fund                3/15/29    11,252        6.68          15.10             15.92           --
Scudder Health Care Fund                      3/2/98     246           87.76         --                --              31.41

Scudder International Fund                    6/15/54    4,507         .63           13.84             11.26           --
Scudder Large Company Growth Fund             5/15/91    1,410         10.86         22.69             --              17.89
Scudder Large Company Value Fund              6/6/56     2,354         12.18         16.79             17.74           --
Scudder Latin America Fund                    12/08/92   423           14.15         9.83              --              10.87

Scudder Pacific Opportunities Fund            12/08/92   105           -14.14        -7.64             --              -1.56
Scudder S&P 500 Index Fund                    8/29/97    1,120         5.63          --                --              16.79
Scudder Select 500 Fund                       5/17/99    38            12.16         --                --              10.17
Scudder Select 1000 Growth Fund               5/17/99    32            11.47         --                --              13.26
Scudder Small Company Stock Fund***           2/1/97     88            3.48          --                --              4.94
Scudder Small Company Value Fund              10/6/95    166           4.05          9.30              --              8.69
Scudder Technology Innovation Fund            3/2/98     816           66.44         --                --              64.78
Scudder 21st Century Growth Fund              9/9/96     373           33.93         --                --              23.12
Value Fund-Scudder Shares                     12/31/92   350           17.63         17.34             --              15.84
The Japan Fund                                4/19/62*   708           -5.07         12.50             4.69            --


</TABLE>

*    From  April  19,  1962  until  August  14,  1987,  the Fund  operated  as a
     closed-end diversified management investment company.

**   On July 17, 2000, the Fund changed its investment objective.


***  On July 17, 2000,  the Funds were  reorganized  from AARP Growth Trust into
     two  newly-created  series  of  Investment  Trust.  The  performance  above
     reflects  the  performance  of Class AARP shares for the period ended March
     31, 2000 from when the Funds were AARP  Capital  Growth Fund and AARP Small
     Company Stock Fund. If the Advisor had not maintained  expenses,  the total
     returns would have been lower.


     All total return  calculations  assume that  dividends  and  capital  gains
     distributions, if any, were reinvested.

     Performance figures are historical and are not intended  to indicate future
     investment performance.

Risk Factors of Underlying Scudder Funds


In pursuing their investment objectives, each of the Underlying Scudder Funds is
permitted  to engage in a wide  range of  investment  policies.  The  Underlying
Scudder Funds' risks are determined by the nature of the securities held and the


                                       23
<PAGE>

portfolio management  strategies used by the Advisor.  Certain of these policies
are described in the  "Glossary"  and further  information  about the Underlying
Scudder  Funds is  contained  in the  prospectuses  of such funds.  Because each
Portfolio  invests in certain of the Underlying  Scudder Funds,  shareholders of
each  Portfolio  will  be  affected  by  these  investment  policies  in  direct
proportion to the amount of assets each  Portfolio  allocates to the  Underlying
Scudder Funds pursuing such policies.


DIVIDENDS, DISTRIBUTIONS AND TAXES

Dividends and Capital Gains Distributions

Each  Portfolio  intends  to follow  the  practice  of  distributing  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.  Each
Portfolio  may follow the  practice  of  distributing  the entire  excess of net
realized  long-term capital gains over net realized  short-term  capital losses.
However,  a Portfolio may retain all or part of such gain for reinvestment after
paying the related federal income taxes for which the  shareholders  may then be
asked to  claim a credit  against  their  federal  income  tax  liability.  (See
"TAXES.")

If a Portfolio does not  distribute  the amount of capital gain and/or  ordinary
income  required to be  distributed  by an excise tax  provision  of the Code, a
Portfolio  may be  subject  to  that  excise  tax.  (See  "TAXES.")  In  certain
circumstances,  a  Portfolio  may  determine  that  it is  in  the  interest  of
shareholders to distribute less than the required amount.

Earnings and profits  distributed  to  shareholders  on redemptions of Portfolio
shares may be utilized by a Portfolio, to the extent permissible, as part of the
Portfolios' dividends paid deduction on its federal tax return.


The Conservative  Portfolio and the Moderate Portfolio each intend to distribute
investment company taxable income,  exclusive of net short-term capital gains in
excess of net long-term  capital losses, on a quarterly basis, and distributions
of net capital gains realized during the fiscal year will be made in November or
December to avoid federal excise tax, although an additional distribution may be
made  within  three  months of its fiscal  year end,  if  necessary.  The Growth
Portfolios intend to distribute their investment  company taxable income and any
net realized  capital gains in November or December to avoid federal excise tax,
although  an  additional  distribution  may be made within  three  months of the
Portfolios' fiscal year end, if necessary.


Both types of distributions  will be made in Portfolio shares and  confirmations
will be mailed to each  shareholder  unless a shareholder has elected to receive
cash, in which case a check will be sent.  Distributions  of investment  company
taxable income and net realized capital gains are taxable (See "TAXES"), whether
made in shares or cash.

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

Taxation of the Portfolios and Their Shareholders

Each  Portfolio  intends  to  qualify  annually  and  elects to be  treated as a
regulated  investment  company  under  Subchapter M of the Code.  As a regulated
investment company, each Portfolio 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.


If for any  taxable  year a Portfolio  does not qualify for the special  federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its  shareholders).  In such event,  dividend
distributions, would be taxable to shareholders to the extent of the Portfolios'
earnings and profits, and would be eligible for the dividends received deduction
in the case of corporate shareholders.


Each Portfolio 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 each  Portfolio'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.

                                       24
<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  Portfolio.  Presently,  each
Portfolio has no capital loss carryforwards.


If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by a Portfolio for  reinvestment,  requiring federal
income taxes to be paid thereon by the Portfolio, the Portfolio intends to elect
to treat such capital gains as having been  distributed  to  shareholders.  As a
result,  each  shareholder  will report such capital gains as long-term  capital
gains, will be able to claim a proportionate  share of federal income taxes paid
by the  Portfolio 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 Portfolio shares by the difference between such reported gains
and the shareholder's tax credit. If a Portfolio 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.

To the extent that an Underlying  Scudder Fund derives  dividends  from domestic
corporations, a portion of the income distributions of a Portfolio which invests
in that 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
held by Underlying Scudder 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  Underlying  Scudder  Fund  or the
Portfolio  are  deemed to have been held by the  Underlying  Scudder  Fund,  the
Portfolio or the shareholders,  as the case may be, for less than 46 days during
the 90-day period beginning 45 days before the shares become ex-dividend.

Income  received by an  Underlying  Scudder Fund from  sources  within a foreign
country may be subject to  withholding  and other taxes imposed by that country.
If more than 50% of the value of an  Underlying  Scudder  Fund's total assets at
the  close of its  taxable  year  consists  of stock or  securities  of  foreign
corporations,  the  Underlying  Scudder  Fund will be eligible  and may elect to
"pass-through"  to its shareholders,  including a Portfolio,  the amount of such
foreign income and similar taxes paid by the Underlying  Scudder Fund.  Pursuant
to this election, the Portfolio would be required to include in gross income (in
addition to taxable dividends actually received),  its pro rata share of foreign
income and  similar  taxes and to deduct such  amount in  computing  its taxable
income or to use it as a foreign  tax credit  against  its U.S.  federal  income
taxes, subject to limitations.  A Portfolio,  would not, however, be eligible to
elect to  "pass-through" to its shareholders the ability to claim a deduction or
credit with respect to foreign  income and similar taxes paid by the  Underlying
Scudder Fund.

Properly  designated  distributions of the excess of net long-term  capital gain
over net  short-term  capital  loss are  taxable to  shareholders  as  long-term
capital  gains,  regardless of the length of time the shares of a Portfolio 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.


A qualifying  individual may make a deductible IRA contribution of up to 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 for 2001  ($53,000  for  married
individuals  filing  a joint  return,  with a  phase-out  of the  deduction  for
adjusted  gross  income  between  $53,000  and  $63,000;   $33,000for  a  single
individual,  with a phase-out  for  adjusted  gross income  between  $33,000 and
$43,000). However, an individual not permitted to make a deductible contribution
to an  IRA  for  any  such  taxable  year  may  nonetheless  make  nondeductible
contributions  up to $2,000 to an IRA (up to $2,000 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


                                       25
<PAGE>

deductible and nondeductible amounts. In general, a proportionate amount of each
withdrawal will be deemed to be made from nondeductible  contributions;  amounts
treated as a return of nondeductible  contributions  will not be taxable.  Also,
annual  contributions  may be made to a  spousal  IRA  even  if the  spouse  has
earnings  in a given  year if the  spouse  elects  to be  treated  as  having no
earnings (for IRA contribution purposes) for the year.


Distributions by a Portfolio result in a reduction in the net asset value of the
Portfolio'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.

In some cases,  shareholders of a Portfolio will not be permitted to take all or
a portion of their sales  loads into  account for  purposes of  determining  the
amount  of gain or loss  realized  on the  disposition  of  their  shares.  This
prohibition  generally applies where (1) the shareholder  incurs a sales load in
acquiring the shares of the Portfolio, (2) the shares are disposed of before the
91st day after the date on which  they were  acquired,  and (3) the  shareholder
subsequently  acquires shares in the Portfolio or another  regulated  investment
company  and  the  otherwise   applicable   sales  charge  is  reduced  under  a
"reinvestment right" received upon the initial purchase of Portfolio shares. The
term  "reinvestment  right"  means  any right to  acquire  shares of one or more
regulated  investment  companies without the payment of a sales load or with the
payment of a reduced  sales  charge.  Sales  charges  affected  by this rule are
treated as if they were incurred with respect to the shares  acquired  under the
reinvestment right. This provision may be applied to successive  acquisitions of
portfolio shares.

Each  Portfolio  will be  required  to report to the  Internal  Revenue  Service
("IRS") all distributions of investment company taxable income and capital gains
as well as gross proceeds from the  redemption or exchange of Portfolio  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 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  Portfolio  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  Portfolio  may be  subject  to  state  and  local  taxes  on
distributions  received from the Portfolio and on redemptions of the Portfolio'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 Portfolio,  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.

Taxation of the Underlying Scudder Funds

Each  Underlying  Scudder  Fund  intends  to qualify  annually  and elects to be
treated as a regulated investment company under Subchapter M of the Code. In any
year in which an  Underlying  Scudder Fund  qualifies as a regulated  investment
company and timely  distributes  all of its taxable  income,  the Fund generally
will not pay any federal income or excise tax.

 Distributions of an Underlying Scudder Fund's investment company taxable income
are  taxable  as  ordinary  income to a  Portfolio  which  invests  in the Fund.
Distributions  of the  excess of an  Underlying  Scudder  Fund's  net  long-term
capital gain over its net short-term capital loss, which are properly designated
as  "capital  gain  dividends,"  are  taxable  as  long-term  capital  gain to a
Portfolio  which invests in the Fund,  regardless of how long the Portfolio held
the Fund's  shares,  and are not eligible for the  corporate  dividends-received
deduction.  Upon the sale or other  disposition  by a Portfolio  of shares of an
Underlying Scudder Fund, the Portfolio  generally will realize a capital gain or
loss  which  will be  long-term  or  short-term,  generally  depending  upon the
Portfolio's holding period for the shares.

                                       26
<PAGE>


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


PERFORMANCE


From time to time, quotations of the Portfolios'  performance may be included in
advertisements,  sales  literature  or reports to  shareholders  or  prospective
investors.  Performance  information will be computed separately for each class.
Class A, B and C shares  are  newly  offered  and  therefore  have no  available
performance information.


Returns  for  Class A, B and C shares of each  portfolio  are  derived  from the
historical  performance of Class S shares,  adjusted to reflect the higher gross
total  annual  operating  expenses  applicable  to Class A, B and C shares.  The
performance  figures are also  adjusted to reflect the maximum  sales  charge of
5.75 % for Class A shares and the  maximum  current  contingent  deferred  sales
charge of 4% for Class B shares and 1% for Class C shares.



The returns in the chart below assume reinvestment of distributions at net asset
value  and  represent  both  actual  past   performance   figures  and  adjusted
performance  figures  of the  Class  A, B and C  shares  of  each  Portfolio  as
described  above;  they do not guarantee future results.  Investment  return and
principal value will fluctuate so that an investor's shares, when redeemed,  may
be worth more or less than their original cost.

Average Annual Total Return

Average  annual total return is the average  annual  compound rate of return for
the periods of one year,  five years and ten years (or such  shorter  periods as
may be applicable  dating from the commencement of the Portfolio's  operations),
all ended on the last day of a recent  calendar  quarter.  Average  annual total
return  quotations  reflect changes in the price of the  Portfolio's  shares and
assume that all dividends and capital gains distributions  during the respective
periods were  reinvested  in Portfolio  shares.  Average  annual total return is
calculated  by  computing  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:

     T         =    Average Annual Total Return

     P         =    a hypothetical initial investment of $1,000

     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.


                                       27
<PAGE>



    Average Annual Total Returns for the Period Ended August 31, 2000 ^(1)(2)

                                           1 Year      Life of Portfolio

        Conservative Portfolio
  Scudder Pathway Series -- Class A        0.93%             5.45%
  Scudder Pathway Series -- Class B        3.05%             5.68%
  Scudder Pathway Series -- Class C        6.26%             6.27%

                                           1 Year      Life of Portfolio
          Moderate Portfolio
  Scudder Pathway Series -- Class A        8.70%             8.91%
  Scudder Pathway Series -- Class B        10.98%            9.15%
  Scudder Pathway Series -- Class C        14.44%            9.76%


                                           1 Year      Life of Portfolio
           Growth Portfolio
  Scudder Pathway Series -- Class A        16.78%           13.80%
  Scudder Pathway Series -- Class B        19.23%           14.05%
  Scudder Pathway Series -- Class C        22.94%           14.68%

(1)  Because  Class A, B and C shares were not  introduced  until  December  29,
     2000,  the total return for Class A, B and C shares for the period prior to
     their  introduction  are based upon the  performance of Class S shares from
     the  commencement  of  investment  operations,  November 15, 1996,  through
     August 31, 2000, as described above.

(2)  As described  above,  average  annual  total return is based on  historical
     earnings and is not intended to indicate future performance. Average annual
     total  return  for each  Portfolio  or class  will vary based on changes in
     market conditions and the level of each Portfolio's and class' expenses.

In connection with  communicating  its average annual total return to current or
prospective  shareholders,  the Portfolio  also may compare these figures to the
performance  of other mutual funds tracked by mutual fund rating  services or to
unmanaged  indices which may assume  reinvestment  of dividends but generally do
not reflect deductions for administrative and management costs.

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 the  Portfolio's  shares and assume
that all  dividends  and  capital  gains  distributions  during the period  were
reinvested  in  Portfolio  shares.  Cumulative  total  return is  calculated  by
computing 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.


                                       28
<PAGE>

        Cumulative Total Returns for the Period Ended August 31, 2000 ^(1)


                                           1 Year   Life of Portfolio
Conservative Portfolio
Scudder Pathway Series -- Class A          0.93%        22.57%
Scudder Pathway Series -- Class B          3.05%        23.60%
Scudder Pathway Series -- Class C          6.26%        26.24%

                                           1 Year   Life of Portfolio
Moderate Portfolio
Scudder Pathway Series -- Class A          8.70%        38.73%
Scudder Pathway Series -- Class B          10.98%       39.89%
Scudder Pathway Series -- Class C          14.44%       42.88%

                                           1 Year   Life of Portfolio
Growth Portfolio
Scudder Pathway Series -- Class A          16.78%       13.80%
Scudder Pathway Series -- Class B          19.23%       14.05%
Scudder Pathway Series -- Class C          22.94%       14.68%


 (1) Because  Class A, B and C shares were not  introduced  until  December  29,
 2000,  the total  return for Class A, B and C shares  for the  period  prior to
 their  introduction  are based upon the  performance of Class S shares from the
 commencement of investment  operations,  November 15, 1996,  through August 31,
 2000, as described above.


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.

From  time  to  time,  in  advertisements,  sales  literature,  and  reports  to
shareholders  or prospective  investors,  figures  relating to the growth in the
total net assets of each  Portfolio  apart  from  capital  appreciation  will be
cited,  as an update to the  information  in this  section,  including,  but not
limited to: net cash flow, net  subscriptions,  gross  subscriptions,  net asset
growth,  net  account  growth,  and  subscription  rates.  Capital  appreciation
generally will be covered by marketing literature as part of the Portfolios' and
classes' performance data.

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

Comparison of Fund Performance

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

In connection  with  communicating  its  performance  to current or  prospective
shareholders,  the Portfolios  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.

Historical  information on the value of the dollar versus foreign currencies may
be used from time to time in  advertisements  concerning  the  Portfolios.  Such
historical  information is not indicative of future fluctuations in the value of
the U.S. dollar against these currencies.  In addition,  marketing materials may
cite country and economic statistics and historical stock market performance for
any of the countries in which the Portfolios invest.

From time to time, in advertising  and marketing  literature,  each  Portfolio's
performance  may be compared to the  performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations.


From time to time, in marketing and other  literature,  members of the Board and
officers of the Portfolios, the Portfolios' manager, or members of the portfolio
management  team may be  depicted  and quoted to give  prospective  and  current


                                       29
<PAGE>

shareholders  a better sense of the outlook and approach of those who manage the
Portfolios.  In  addition,  the  amount of  assets  that the  Advisor  has under
management  in  various  geographical  areas may be quoted  in  advertising  and
marketing materials.


The  Portfolios may be advertised as an investment  choice in Scudder's  college
planning program.

Marketing  and other  Portfolio  literature  may  include a  description  of the
potential risks and rewards associated with an investment in the Portfolios. The
description  may include a "risk/return  spectrum" which compares the Portfolios
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 Portfolios to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.

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

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

Evaluation  of  each  Portfolio's  performance  or  other  relevant  statistical
information  made by  independent  sources  may  also be used in  advertisements
concerning the Portfolios, including reprints of, or selections from, editorials
or articles about the Portfolios.

INVESTMENT MANAGER AND UNDERWRITER


Investment Manager.  Zurich Scudder Investments,  Inc., Two International Place,
Boston, Massachusetts, an investment counsel firm, acts as investment advisor to
the Portfolios. This organization,  the predecessor of which is Scudder, Stevens
& Clark,  Inc.,  ("Scudder") 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
Advisor  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  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 was changed to Scudder Kemper
Investments,  Inc. On September 7, 1998,  the  businesses  of Zurich  (including
Zurich's 70% interest in the Advisor) and the financial  services  businesses of
B.A.T Industries  p.l.c.  ("B.A.T") were combined to form a new global insurance
and financial  services company known as Zurich Financial Services Group. By way
of a dual holding company structure,  former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former  B.A.T  shareholders.  On October  17,  2000,  the dual  holding
company structure of Zurich Financial Services Group, comprised of Allied Zurich
p.l.c. in the United Kingdom and Zurich Allied A.G. in Switzerland,  was unified
into a single Swiss holding  company,  Zurich  Financial  Services.  The Advisor
manages the  Portfolios'  daily  investment and business  affairs subject to the
policies established by the Trust's Board of Trustees. The Trustees have overall
responsibility for the management of the Portfolios under Massachusetts law. The
Advisor changed its name from Scudder Kemper Investments, Inc. to Zurich Scudder
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.

                                       30
<PAGE>


Pursuant to an investment management agreement with the Portfolios,  the Advisor
acts as the Portfolio's investment Advisor, manages its investments, administers
its business  affairs,  furnishes  office  facilities  and  equipment,  provides
clerical  and  administrative  services  and  permits  any  of its  officers  or
employees  to  serve  without  compensation  as  trustees  or  officers  of  the
Portfolios if elected to such positions.

The principal source of the Advisor'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, industrial
corporations,  and  financial  and banking  organizations,  as well as providing
investment advice to over 280 open and closed-end mutual funds.

The Advisor  maintains a large research  department,  which conducts  continuous
studies of the factors that affect the position of various industries, companies
and  individual   securities.   The  Advisor  receives   published  reports  and
statistical  compilations  from issuers and other  sources,  as well as analyses
from  brokers  and  dealers  who  may  execute  portfolio  transactions  for the
Advisor's clients. However, the Advisor regards this information and material as
an  adjunct  to  its  own  research  activities.   The  Advisor's  international
investment management team travels the world researching hundreds of companies.

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

The present investment management agreements (the "Agreements") were approved by
the Trustees on August 10, 1998,  became  effective  September 7, 1998, and were
approved at a shareholder  meeting held on December 15, 1998. The Agreement will
continue in effect  until  September  30, 2001 and from year to year  thereafter
only if its continuance is approved  annually by the vote of a majority of those
Trustees who are not parties to such  Agreements  or  interested  persons of the
Advisor 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 or of a
majority of the outstanding voting securities of the respective  Portfolio.  The
Agreements  may be terminated  at any time without  payment of penalty by either
party on sixty days' written notice and automatically  terminate in the event of
their  assignment.  The  continuance  of the  Agreement was last approved by the
Trustees on July 10, 2000.

Each  Portfolio  does  not  directly  bear  any  fees  or  expenses  other  than
distribution  fees.  Shareholders of the Trust will still  indirectly bear their
fair and  proportionate  share of the cost of operating the  Underlying  Scudder
Funds in which the Trust invests  because,  the Trust,  as a shareholder  of the
Underlying  Scudder  Funds,  will bear its  proportionate  share of any fees and
expense paid by the Underlying Scudder Funds.

Under  the  Agreement,  the  Advisor  regularly  provides  the  Portfolios  with
continuing  investment  management  for  the  portfolios  consistent  with  each
Portfolio's investment objective,  policies and restrictions and determines what
securities shall be purchased, held or sold and what portion of each Portfolio's
assets shall be held  uninvested,  subject to the Trust's  Declaration of Trust,
By-Laws,  the 1940 Act, the Code and to each Portfolio's  investment  objective,
policies  and  restrictions,   and  subject,   further,  to  such  policies  and
instructions  as the  Board of  Trustees  of the  Trust  may  from  time to time
establish.  The Advisor  also  advises and assists the  officers of the Trust 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 each Portfolio's.

Under the Agreement,  the Advisor renders  significant  administrative  services
(not  otherwise  provided  by third  parties)  necessary  for  each  Portfolio'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 Portfolios  (such as the  Portfolios'  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 Portfolios'  federal,  state and local tax returns;  preparing and
filing the Portfolios'  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
Portfolios under applicable  federal and state securities laws;  maintaining the


                                       31
<PAGE>

Portfolios' books and records to the extent not otherwise  maintained by a third
party;  assisting  in  establishing   accounting  policies  of  the  Portfolios;
assisting in the  resolution of accounting  and legal issues;  establishing  and
monitoring each  Portfolio's  operating  budget;  processing the payment of each
Portfolio's bills; assisting the Portfolios in, and otherwise arranging for, the
payment of distributions and dividends;  and otherwise  assisting the Portfolios
in the  conduct of its  business,  subject to the  direction  and control of the
Trustees.

The Advisor pays the  compensation  and expenses of all  Trustees,  officers and
executive  employees  (except  expenses  incurred  attending Board and committee
meetings  outside  New  York,  New  York;  Boston,  Massachusetts  and  Chicago,
Illinois) of the  Portfolios  affiliated  with the Advisor and makes  available,
without  expense to the Trust,  the  services  of such  Trustees,  officers  and
employees  of the  Advisor 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 Portfolios' office space and facilities.

Under the  Agreement  the  Portfolios  are  responsible  for all of their  other
expenses  including:   organizational  costs,  fees  and  expenses  incurred  in
connection  with  membership  in  investment  company  organizations;   brokers'
commissions;  legal,  auditing and accounting  expenses;  taxes and governmental
fees; the fees and expenses of the Transfer Agent;  any other expenses of issue,
sale,  underwriting,  distribution,  redemption  or  repurchase  of shares;  the
expenses of and the fees for registering or qualifying  securities for sale; the
fees and expenses of Trustees,  officers and employees of the Portfolios who are
not affiliated with the Advisor;  the cost of printing and distributing  reports
and notices to stockholders;  and the fees and disbursements of custodians.  The
Portfolios  may arrange to have third parties assume all or part of the expenses
of  sale,  underwriting  and  distribution  of  shares  of the  Portfolios.  The
Portfolios are also  responsible for their expenses of  shareholders'  meetings,
the cost of responding to shareholders'  inquiries,  and their expenses incurred
in connection with  litigation,  proceedings and claims and the legal obligation
it may have to indemnify  their  officers and  Trustees of the  Portfolios  with
respect thereto.

The Agreement  identifies the Advisor 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 Portfolios,  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 the  Agreement  and in  discussions  with the Advisor
concerning  such  Agreement,  the Trustees of the Trust who are not  "interested
persons" of the Advisor are represented by independent counsel at thePortfolios'
expense.

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

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

The Advisor may serve as advisor to other funds with  investment  objectives and
policies similar to those of the Portfolios 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
Portfolios  as  principals  in the  purchase  or sale of  securities,  except as
individual subscribers to or holders of Shares of the Portfolios.

The term Scudder  Investments is the designation  given to the services provided
by Zurich Scudder Investments,  Inc. and its affiliates to the Scudder Family of
Funds.


Management Fees of Underlying Scudder Funds


The  Advisor  has  agreed not to be paid a  management  fee for  performing  its
services.  However,  the Advisor will receive  management fees from managing the
Underlying Scudder Funds in which each Portfolio invests.

Each Underlying  Scudder Fund pays the Advisor a management fee as determined by
the Investment Management Agreement between each Underlying Scudder Fund and the
Advisor.  As manager of the assets of each Underlying  Scudder Fund, the Advisor
directs the  investments of an Underlying  Scudder Fund in accordance  with each
Underlying Scudder Fund's investment objective,  policies and restrictions.  The
Advisor  determines the securities,  instruments and other contracts relating to
investments to be purchased, sold or entered into by an Underlying Scudder Fund.
If an  Underlying  Scudder  Fund's  expenses,  exclusive of taxes,  interest and
extraordinary expenses, exceed specified limits, such excess up to the amount of
the management fee, will be paid by the Advisor.


                                       32
<PAGE>

The management fees and total operating expenses of the Underlying Scudder Funds
are as follows:

<TABLE>
<CAPTION>

                                                 Fiscal Year       Total        Management          Total          Management
                                                      End         Expenses        Fee (%)        Expenses (%)      Fee (%) after
NAME OF FUND                                                                                        after             waiver
                                                                                              reimbursement and/or
                                                                                                   waiver

<S>                                                  <C>            <C>              <C>
Scudder Cash Investment Trust                        5/31           0.81             0.41
Scudder Money Market Series - Scudder Premium        5/31           0.50             0.25            0.35
Money Market Shares
Scudder Emerging Markets Income Fund                 10/31          1.65             1.00
Scudder Global Bond Fund                             10/31          1.13             0.75
Scudder GNMA Fund                                    3/31           0.70             0.40
Scudder High Yield Bond Fund                         1/31           0.90             0.60
Scudder Income Fund                                  1/31           0.89             0.59
Scudder Short Term Bond Fund                         12/31          0.75             0.45
Scudder Capital Growth Fund                          9/30           0.88             0.58
Scudder Classic Growth Fund                          10/31          1.84             0.70            1.59               0.45
Scudder Balanced Fund                                12/31          0.77             0.47
Scudder Development Fund                             7/31           1.30             0.85
Scudder Dividend & Growth Fund                       12/31          1.07             0.75           1.05
Scudder Emerging Markets Growth Fund                 10/31          1.91             1.25
Scudder Global Fund                                  8/31           1.32             0.94
Scudder Global Discovery Fund                        10/31          1.68             1.10
Scudder Gold Fund                                    6/30           1.66             1.00
Scudder Greater Europe Growth Fund                   10/31          1.35             0.97
Scudder Growth and Income Fund                       12/31          0.75             0.45
Scudder Health Care Fund                             5/31           1.21             0.85
Scudder International Fund                           8/31           1.05             0.67
Scudder Large Company Growth Fund                    7/31           1.00             0.70
Scudder Large Company Value Fund                     7/31           0.89             0.59
Scudder Latin America Fund                           10/31          1.90             1.25
Scudder Pacific Opportunities Fund                   10/31          1.75             1.10
Scudder S&P 500 Index Fund                           12/31          0.40             0.05            0.40
Scudder Select 500 Fund                              2/29           0.76             0.50            0.75
Scudder Select 1000 Growth Fund                      2/29           0.76             0.50            0.75
Scudder Small Company Stock Fund                     9/30           1.20             0.75
Scudder Small Company Value Fund                     7/31           1.20             0.75
Scudder Technology Innovation Fund                   5/31           1.20             0.85
Scudder 21st Century Growth Fund                     8/31           1.44             0.75            1.20
Scudder Value Fund                                   9/30           1.39             0.70
The Japan Fund, Inc.                                 12/31          1.00             0.73
</TABLE>

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

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


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

                                       33
<PAGE>

                           SPECIAL SERVICING AGREEMENT


Prior to the  implementation of each underlying funds'  Administration  Services
Agreement, the Special Servicing Agreement (the "Service Agreement") was entered
into  among  the  Advisor,   the  Underlying  Scudder  Funds,   Scudder  Service
Corporation,  Scudder Fund Accounting  Corporation,  Scudder Investor  Services,
Inc.,  Scudder Trust  Company and the Trust.  Under the Service  Agreement,  the
Advisor  arranged  for all  services  pertaining  to the  operation of the Trust
including  the  services  of  Scudder  Service   Corporation  and  Scudder  Fund
Accounting Corporation to act as Shareholder Servicing Agent and Fund Accounting
Agent,  respectively,  for each Portfolio.  In addition,  the Service  Agreement
provided that, if the officers of any Underlying  Scudder Fund, at the direction
of the Board of Directors/Trustees,  determined that the aggregate expenses of a
Portfolio were less than the estimated  savings to the  Underlying  Scudder Fund
from the operation of that  Portfolio,  the  Underlying  Scudder Fund would bear
those  expenses in  proportion to the average daily value of its shares owned by
that Portfolio. No Underlying Scudder Fund would bear such expenses in excess of
the estimated savings to it. Such savings were expected to result primarily from
the elimination of numerous  separate  shareholder  accounts which were or would
have been invested  directly in the  Underlying  Scudder Funds and the resulting
reduction  in  shareholder  servicing  costs.  In this regard,  the  shareholder
servicing  costs to any  Underlying  Scudder  Fund  for  servicing  one  account
registered to the Trust would have been significantly less than the cost to that
same Underlying Scudder Fund of servicing the same pool of assets contributed in
the typical  fashion by a large group of  individual  shareholders  owning small
accounts in each Underlying Scudder Fund.

The  Special   Servicing   Agreement   terminated  upon   implementation  of  an
Administration   Services  Agreement  by  each  Portfolio  and  each  applicable
Underlying Scudder Fund.

Based on actual expense data from the Underlying  Scudder Funds and certain very
conservative  assumptions with respect to the Trust, the Advisor, the Underlying
Scudder Funds,  Scudder Service  Corporation,  Scudder Investor Services,  Inc.,
Scudder  Fund  Accounting  Corporation,  Scudder  Trust  Company  and the Series
anticipated  that the aggregate  financial  benefits to the  Underlying  Scudder
Funds from these  arrangements  would have  exceeded the costs of operating  the
Portfolios.  If such turned out to be the case,  there would have been no charge
to the Trust for the services under the Service Agreement. Rather, in accordance
with the Service Agreement,  such expenses would have been passed through to the
Underlying  Scudder Funds in proportion to the value of each Underlying  Scudder
Fund's shares held by each Portfolio.

In the event that the aggregate  financial  benefits to the  Underlying  Scudder
Funds did not exceed the costs of a Portfolio,  the Advisor  would have paid, on
behalf of that Portfolio, that portion of costs, as set forth herein, determined
to be greater than the benefits.  The determination of whether and the extent to
which the benefits to the Underlying  Scudder Funds from the organization of the
Trust  would have  exceeded  the costs to such funds  would have been made based
upon the analysis criteria set forth in the Order.  This  cost-benefit  analysis
was initially reviewed by the Directors/Trustees of the Underlying Scudder Funds
before participating in the Service Agreement.

Certain  non-recurring  and  extraordinary  expenses were not paid in accordance
with the Service Agreement  including:  the fees and costs of actions,  suits or
proceedings and any penalties or damages in connection  therewith,  to which the
Trust  and/or a Portfolio  may incur  directly,  or may incur as a result of its
legal  obligation  to provide  indemnification  to its  officers,  director  and
agents;  the fees and costs of any governmental  investigation  and any fines or
penalties  in  connection  therewith;  and any  federal,  state or local tax, or
related  interest  penalties or additions to tax,  incurred,  for example,  as a
result of the Trusts'  failure to  distribute  all of its  earnings,  failure to
qualify  under  subchapter M of the Internal  Revenue Code, or failure to timely
file any required tax returns or other filings;  the fees and expenses  incurred
in connection  with  membership in investment  company  organizations;  fees and
expenses of the  Portfolios'  accounting  agent;  brokers'  commissions;  legal,
auditing and  accounting  expenses;  taxes and  governmental  fees; the fees and
expenses of the  transfer  agent;  the expenses of the fees for  registering  or
qualifying securities for sale; the fees and expenses of Trustees,  officers and
employees of a Portfolio who are not  affiliated  with the Advisor;  the cost of
printing  and  distributing  reports  and notices to  shareholders;  and fees of
disbursements  of custodians.  Under unusual  circumstances,  the parties to the
Service Agreement may agree to exclude certain other expenses.

Certain Underlying Scudder Funds impose a fee upon the redemption or exchange of
shares held for less than one year.  The fees,  which range between 1% and 2% of
the net asset value of the shares being redeemed or exchanged,  are assessed and
retained  by the  Underlying  Scudder  Funds for the  benefit  of the  remaining
shareholders.  The fee is  intended to  encourage  long-term  investment  in the
Underlying  Scudder  Fund.  The fee is not a  deferred  sales  charge,  is not a
commission  paid to the  Advisor  of its  subsidiary  and does not  benefit  the
Advisor in any way. Each such  Underlying  Fund reserves the right to modify the
terms of or terminate this fee at any time. As a shareholder of such  Underlying


                                       34
<PAGE>

Scudder Funds,  the Portfolios will be subject to such fees. Under normal market
conditions, the Portfolios will seek to avoid taking action that would result in
the imposition of such a fee. However, in the event that a fee is incurred,  the
net assets of the Portfolio would be reduced by the amount of such fees that are
assessed and retained by the  Underlying  Scudder Funds for the benefit of their
shareholders.




AMA InvestmentLink(SM) Program


Pursuant  to an  Agreement  between  the  Advisor  and AMA  Solutions,  Inc.,  a
subsidiary of the American Medical  Association (the "AMA"),  dated May 9, 1997,
the Advisor 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  Advisor  with  respect to assets  invested  by AMA  members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
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  advisor
or broker/dealer  under federal  securities laws. Any person who participates in
the AMA  InvestmentLink(SM)  Program  will be a customer of the Advisor (or of a
subsidiary   thereof)   and   not   the   AMA  or  AMA   Solutions,   Inc.   AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.


Code of Ethics


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

Principal  Underwriter.  Pursuant  to  separate  underwriting  and  distribution
services  agreements  ("distribution  agreements"),  Kemper  Distributors,  Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor,  is the principal  underwriter and distributor for the Class A, B and C
shares of the  Portfolios  and acts as agent of the Portfolios in the continuous
offering of its Shares.  KDI bears all of its  expenses  of  providing  services
pursuant  to  the   distribution   agreement,   including  the  payment  of  any
commissions.  The Portfolios  pay the cost for the  prospectus  and  shareholder
reports to be set in type and printed  for  existing  shareholders,  and KDI, as
principal underwriter,  pays for the printing and distribution of copies thereof
used in connection  with the offering of Shares to  prospective  investors.  KDI
also pays for supplementary sales literature and advertising costs.

The distribution agreement continues in effect from year to year so long as such
continuance  is approved for each class at least annually by a vote of the Board
of Trustees of the  Portfolios,  including  the Trustees who are not  interested
persons of the Portfolios and who have no direct or indirect  financial interest
in the  agreement.  The agreement  automatically  terminates in the event of its
assignment and may be terminated for a class at any time without  penalty by the
Portfolios or by KDI upon 60 days' notice.  Termination by the  Portfolios  with
respect to a class may be by vote of a majority  of the Board of  Trustees  or a
majority of the Trustees who are not  interested  persons of the  Portfolios and
who have no direct or indirect financial interest in the distribution  agreement
or a  "majority  of the  outstanding  voting  securities"  of the  class  of the
Portfolios, as defined under the 1940 Act. The distribution agreement may not be
amended  for a class  to  increase  the fee to be  paid by the  Portfolios  with
respect to such class without  approval by a majority of the outstanding  voting
securities of such class of the Portfolios,  and all material amendments must in
any event be approved by the Board of  Trustees  in the manner  described  above
with respect to the continuation of the distribution agreement.

Class B Shares and Class C Shares. The Portfolios have adopted a plan under Rule
12b-1 (the "Rule 12b-1  Plan") that  provides  for fees payable as an expense of
the  Class  B  shares  and  Class  C  shares  that  are  used  by KDI to pay for
distribution and services for those classes.  Because 12b-1 fees are paid out of
portfolio assets on an ongoing basis they will, over time,  increase the cost of
an investment and cost more than other types of sales charges.


Rule 12b-1 Plan. Since the distribution  agreement  provides for fees payable as
an expense of the Class B shares and the Class C shares  that are used by KDI to
pay for distribution  services for those classes, that agreement is approved and
reviewed  separately for the Class B shares and the Class C shares in accordance
with Rule  12b-1  under the 1940 Act,  which  regulates  the  manner in which an
investment   company  may,   directly  or  indirectly,   bear  the  expenses  of
distributing its shares.

                                       35
<PAGE>


If a Rule 12b-1 Plan (the "Plan") is terminated  in  accordance  with its terms,
the  obligation of a Portfolio to make payments to KDI pursuant to the Plan will
cease and the  Portfolio  will not be  required  to make any  payments  past the
termination  date.  Thus,  there is no legal obligation for the Portfolio to pay
any  expenses  incurred  by KDI in excess of its fees  under a Plan,  if for any
reason the Plan is terminated in  accordance  with its terms.  Future fees under
the  Plan  may or may not be  sufficient  to  reimburse  KDI  for  its  expenses
incurred.

For its  services  under the  distribution  agreement,  KDI  receives a fee from
thePortfolio,  payable monthly, at the annual rate of 0.75% of average daily net
assets of the  Portfolio  attributable  to Class B shares.  This fee is  accrued
daily as an expense of Class B shares. KDI also receives any contingent deferred
sales charges. KDI currently  compensates firms for sales of Class B shares at a
commission rate of 3.75%.

For its services under the distribution  agreement,  KDI receives a fee from the
Portfolio,  payable  monthly,  at the annual rate of 0.75% of average  daily net
assets of the  Portfolio  attributable  to Class C shares.  This fee is  accrued
daily as an expense of Class C shares. KDI currently advances to firms the first
year  distribution  fee at a rate of  0.75%  of the  purchase  price  of Class C
shares.  For periods after the first year, KDI currently pays firms for sales of
Class C shares a distribution fee, payable quarterly, at an annual rate of 0.75%
of net assets attributable to Class C shares maintained and serviced by the firm
and the fee continues until terminated by KDI or a Portfolio.  KDI also receives
any contingent deferred sales charges.

Administrative  Fee. The Portfolio has entered into an  administrative  services
agreement with the Advisor (the "Administration  Agreement"),  pursuant to which
the  Advisor  will  provide or pay others to  provide  substantially  all of the
administrative  services required by the Portfolio (other than those provided by
the Advisor under its investment  management  agreements with the Portfolio,  as
described  above).  There is currently  no fee payable by a Portfolio  under the
Administration Agreement.

Various third party service providers (the "Service  Providers"),  some of which
are  affiliated  with the Advisor,  provide  certain  services to the Portfolios
pursuant to separate  agreements  with the  Portfolios.  Scudder Fund Accounting
Corporation,  a  subsidiary  of the  Advisor,  computes  net asset value for the
Portfolios and maintains their accounting  records.  PricewaterhouseCoopers  LLP
audits the financial statements of the Portfolios and provides other audit, tax,
and related services. Dechert acts as general counsel for the Portfolios.

the Advisor will pay the Service  Providers for the provision of their  services
to the Portfolios and will pay other portfolio  expenses,  including  insurance,
registration,  printing and postage fees.

Each  Administration  Agreement  has an initial term of three years,  subject to
earlier termination by the Portfolios' Board.

Certain  expenses of the  Portfolios  will not be borne by the Advisor under the
Administration Agreement,  such as taxes, brokerage,  interest and extraordinary
expenses;  and the fees and expenses of the Independent Directors (including the
fees and expenses of their  independent  counsel).  In addition,  the Portfolios
will continue to pay the fees required by its  investment  management  agreement
with the Advisor.

Administrative Services.  Administrative services are provided to the Portfolios
on  behalf of Class A, B and C  shareholders  under an  administrative  services
agreement  ("administrative  agreement") with KDI. KDI bears all its expenses of
providing services pursuant to the administrative  agreement between KDI and the
Portfolios,  including the payment of service fees.  The  Portfolios  pay KDI an
administrative  services fee, payable monthly,  at an annual rate of up to 0.25%
of the average daily net assets of each class.

KDI enters into related arrangements with various  broker-dealer firms and other
service or  administrative  firms ("firms") that provide services and facilities
for their  customers or clients who are investors in the  Portfolios.  The firms
provide such office space and equipment,  telephone  facilities and personnel as
is necessary  or  beneficial  for  providing  information  and services to their
clients.  Such  services and  assistance  may  include,  but are not limited to,
establishing  and  maintaining  accounts  and records,  processing  purchase and
redemption  transactions,  answering routine inquiries regarding  thePortfolios,
assistance  to clients in changing  dividend  and  investment  options,  account
designations  and  addresses  and such other  administrative  services as may be
agreed  upon from time to time and  permitted  by  applicable  statute,  rule or
regulation.  With  respect to Class A Shares,  KDI pays each firm a service fee,
payable  quarterly,  at an  annual  rate of up to  0.25%  of the net  assets  in
Portfolio  accounts  that it  maintains  and  services  attributable  to Class A
Shares, commencing with the month after investment.  With respect to Class B and
Class C Shares,  KDI currently advances to firms the first-year service fee at a


                                       36
<PAGE>

rate of up to 0.25% of the purchase price of such Shares.  For periods after the
first year, KDI currently  intends to pay firms a service fee at a rate of up to
0.25% (calculated  monthly and paid quarterly) of the net assets attributable to
Class B and Class C Shares  maintained and serviced by the firm. After the first
year,  a firm  becomes  eligible  for  the  quarterly  service  fee  and the fee
continues until terminated by KDI or thePortfolios.  Firms to which service fees
may be paid include  affiliates  of KDI. In addition KDI may, from time to time,
from  its own  resources  pay  certain  firms  additional  amounts  for  ongoing
administrative  services and assistance  provided to their customers and clients
who are shareholders of thePortfolios.

KDI also may provide  some of the above  services  and may retain any portion of
the fee  under  the  administrative  agreement  not paid to firms to  compensate
itself for administrative functions performed for thePortfolios.  Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Portfolio assets in accounts for which a firm provides administrative
services and at the annual rate of 0.25% based upon Portfolio assets in accounts
for which there is no firm of record (other than KDI) listed on the  Portfolio's
records.  The effective  administrative  services fee rate to be charged against
all assets of the Portfolio  while this  procedure is in effect will depend upon
the  proportion  of  Portfolio  assets that is in  accounts  for which a firm of
record  provides   administrative   services.  The  Board  of  Trustees  of  the
Portfolios,  in its discretion,  may approve basing the fee to KDI at the annual
rate of 0.25% on all Portfolio assets in the future

Certain trustees or officers of the Portfolios are also directors or officers of
the Advisor or KDI, as indicated under "Officers and Trustees."

Fund  Accounting  Agent.  Scudder  Fund  Accounting  Corporation  ("SFAC"),  Two
International  Place,  Boston,  Massachusetts,  a  subsidiary  of  the  Advisor,
computes net asset value for the Portfolios.

Custodian,  Transfer Agent and Shareholder  Service Agent. State Street Bank and
Trust Company (the  "Custodian"),  225 Franklin  Street,  Boston,  Massachusetts
02110,  as custodian has custody of all  securities  and cash of the  Portfolios
held outside the United  States.  The  Custodian  attends to the  collection  of
principal and income,  and payment for and  collection of proceeds of securities
bought and sold by the  Portfolios.  Kemper Service Company  ("KSVC"),  811 Main
Street,  Kansas City, Missouri  64105-2005,  an affiliate of the Advisor, is the
Portfolios' transfer agent,  dividend-paying agent and shareholder service agent
for the Portfolios' Class A, B and C shares.  Prior to the implementation of the
Administration  Agreement,  KSVC received as transfer agent, annual account fees
of $5 per account,  transaction and maintenance charges,  annual fees associated
with  the   contingent   deferred   sales  charge  (Class  B  shares  only)  and
out-of-pocket expense reimbursement.

Independent Accountants and Reports to Shareholders. The financial highlights of
the  Portfolios   included  in  thePortfolios'   prospectus  and  the  Financial
Statements incorporated by reference in this Statement of Additional Information
have been so included or  incorporated by reference in reliance on the report of
PricewaterhouseCoopers  LLP, 160 Federal Street,  Boston,  Massachusetts  02110,
independent  accountants,  given on the  authority  of said firm as  experts  in
auditing  and  accounting.   PricewaterhouseCoopers  LLP  audits  the  financial
statements of the Portfolios and provides other audit, tax and related services.
Shareholders  will receive annual audited  financial  statements and semi-annual
unaudited financial statements.


PORTFOLIO TRANSACTIONS

Portfolio Turnover

Each  Portfolio'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.  Purchases and
sales are made for each Portfolio whenever necessary,  in management's  opinion,
to meet that Portfolio's objective.


Each  Portfolio is expected to operate at a zero expense  ratio.  To  accomplish
this,  the payment of a  Portfolio's  expenses is subject to the  Administration
Agreement and certain provisions mentioned in the Agreement with the Advisor.



<TABLE>

<CAPTION>
Underlying Scudder Fund                                             Portfolio Turnover Rate (%)(1)
-----------------------                                             ------------------------------


                                       37
<PAGE>
Underlying Scudder Fund                                             Portfolio Turnover Rate (%)(1)
-----------------------                                             ------------------------------

<S>                                                                          <C>
Scudder Cash Investment Trust(2)                                             n/a
Scudder Money Market Series--Premium Money Market Shares (2)                 n/a
Scudder Emerging Markets Income Fund*                                        339
Scudder Global Bond Fund*                                                    64
Scudder GNMA Fund - Class AARP*                                              308
Scudder High Yield Bond Fund*                                                81
Scudder Income Fund                                                          104
Scudder Short Term Bond Fund*                                                194
Scudder Balanced Fund*                                                       113
Scudder Capital Growth Fund - Class AARP*                                    79
Scudder Classic Growth Fund*                                                 88
Scudder Development Fund                                                     100
Scudder Dividend & Growth Fund*                                              123
Scudder Emerging Markets Growth Fund*                                        49
Scudder Global Fund                                                          60
Scudder Global Discovery Fund*                                               126
Scudder Gold Fund*                                                           24
Scudder Greater Europe Growth Fund*                                          64
Scudder Growth and Income Fund*                                              58
Scudder Health Care Fund                                                     142
Scudder International Fund                                                   83
Scudder Large Company Growth Fund                                            56
Scudder Large Company Value Fund                                             46
Scudder Latin America Fund*                                                  75
Scudder Pacific Opportunities Fund*                                          175
Scudder S&P 500 Index Fund                                                   11
Scudder Select 500 Fund*                                                     53
Scudder Select 1000 Growth Fund*                                             39
Scudder Small Company Stock Fund - Class AARP                                56
Scudder Small Company Value Fund                                             29
Scudder Technology Innovation Fund                                           83
Scudder 21st Century Growth Fund                                             135
Scudder Value Fund*                                                          51
The Japan Fund*                                                              87
</TABLE>


(1)  As of each Underlying Scudder Fund's most recent fiscal reporting period.

(2)  Scudder Cash  Investment  Trust and Scudder  Money Market  Series - Scudder
     Premium Shares are money market funds.

*    Annualized

Net Asset Value


The net asset value of each class of each  Portfolio 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, Dr. Martin Luther King,  Jr. Day,  Presidents'  Day, Good Friday,  Memorial
Day,  Independence  Day,  Labor  Day,  Thanksgiving  and  Christmas  and  on the
preceding  Friday  or  subsequent  Monday  when one of these  holidays  falls on
Saturday  or  Sunday,  respectively.  Net asset  value  per share is  determined
separately for each class of shares by dividing the value of the total assets of
each Portfolio,  less all  liabilities  attributable to that class, by the total
number of shares of that class outstanding. The per share net asset value of the
Class B and Class C Shares of the  Portfolios  will generally be lower than that
of the Class A Shares of the Portfolios  because of the higher expenses borne by
the Class B and Class C Shares.


The net asset value of each Underlying Scudder Fund is determined based upon the
nature  of the  securities  as set  forth in the  prospectus  and  statement  of
additional   information  of  such  Underlying  Scudder  Fund.  Shares  of  each
Underlying  Scudder  Fund in which a Portfolio  may invest are valued at the net
asset value per share of each Underlying Scudder Fund as of the close of regular
trading on the Exchange on each day the  Exchange is open for  trading.  The net
asset value per share of the  Underlying  Scudder Funds will be  calculated  and
reported to a Portfolio by each  Underlying  Scudder  Fund's  accounting  agent.
Short-term securities with a remaining maturity of sixty days or less are valued
by the amortized cost method.

                                       38
<PAGE>

If,  in the  opinion  of a  Portfolio'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  Portfolio  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.

PURCHASE, REPURCHASE AND REDEMPTION OF SHARES


Portfolio Shares are sold at their public offering price, which is the net asset
value per such shares next determined  after an order is received in proper form
plus,  with  respect to Class A Shares,  an initial  sales  charge.  The minimum
initial investment for Class A, B or C is $1,000 ($250 for Individual Retirement
Accounts ("IRAs")) and the minimum subsequent  investment is $100 ($50 for IRAs)
but such minimum  amounts may be changed at any time.  The  Portfolios may waive
the minimum for purchases by trustees,  directors,  officers or employees of the
Portfolios  or the  Advisor  and its  affiliates.  An order for the  purchase of
Shares  that is  accompanied  by a check  drawn on a foreign  bank (other than a
check drawn on a Canadian bank in U.S. Dollars) will not be considered in proper
form and will not be processed  unless and until the  Portfolios  determine that
they have received  payment of the proceeds of the check.  The time required for
such a determination will vary and cannot be determined in advance.


PURCHASE OF SHARES


Alternative Purchase Arrangements.  Class A shares of the Portfolios are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial  sales charge but are subject to higher  ongoing  expenses  than Class A
shares and a contingent deferred sales charge payable upon certain  redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares  are sold  without  an initial  sales  charge but are  subject to
higher  ongoing  expenses  than  Class A shares,  are  subject  to a  contingent
deferred  sales charge  payable upon certain  redemptions  within the first year
following purchase, and do not convert into another class. When placing purchase
orders,  investors  must  specify  whether  the order is for Class A, Class B or
Class C shares.

The  primary  distinctions  among the classes of the  Portfolios'  shares lie in
their  initial and  contingent  deferred  sales charge  structures  and in their
ongoing expenses,  including asset-based sales charges in the form of Rule 12b-1
distribution/services fees. These differences are summarized in the table below.
Each class has distinct  advantages and disadvantages  for different  investors,
and  investors  may choose the class that best  suits  their  circumstances  and
objectives.


<TABLE>
<CAPTION>


                                                    Annual 12b-1 Fees^(1)
                                                    (as a % of average
              Sales Charge                          daily net assets)           Other Information
              ------------                          -----------------           -----------------


<S>           <C>                                             <C>               <C>
Class A       Maximum initial sales charge of                 0.25%             Initial sales charge
              5.75% of the public offering price                                waived or reduced for
              (2)                                                               certain purchases


Class B       Maximum contingent deferred sales               1.00%             Shares convert to Class A
              charge of 4% of redemption                                        shares six years after
              proceeds; declines to zero after                                  issuance
              six years


Class C       Contingent deferred sales charge of             1.00%             No conversion feature
              1% of redemption proceeds for
              redemptions made during first year
              after purchase
</TABLE>

(1)  There is a service fee of 0.25% for each class.


(2)  Class A shares  purchased  at net asset  value  under the "Large  Order NAV
     Purchase Privilege" may be subject to a 1% contingent deferred sales charge
     if redeemed  within one year of purchase  and a 0.50%  contingent  deferred
     sales charge if redeemed within the second year of purchase.

The minimum initial investment for each of Class A, B and C of the Portfolios is
$1,000 and the  minimum  subsequent  investment  is $100.  The  minimum  initial
investment  for an  Individual  Retirement  Account  is  $250  and  the  minimum
subsequent  investment is $50. Under an automatic  investment plan, such as Bank
Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent  investment is $50. These minimum  amounts may be changed
at any time in management's discretion.


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

                                       39
<PAGE>

Initial Sales Charge  Alternative - Class A Shares. The public offering price of
Class A shares for purchasers  choosing the initial sales charge  alternative is
the net asset value plus a sales charge, as set forth below.

<TABLE>
<CAPTION>
                                                                   Sales Charge
                                                                    ------------

                                                                                       Allowed to Dealers
                                           As a Percentage of     As a Percentage of   As a Percentage of
Amount of Purchase                            Offering Price       Net Asset Value*      Offering Price
------------------                            --------------       ----------------      --------------

<S>                                               <C>                   <C>                  <C>
Less than $50,000                                 5.75%                 6.10%                5.20%
$50,000 but less than $100,000                    4.50%                 4.71%                4.00%
$100,000 but less than $250,000                   3.50%                 3.63%                3.00%
$250,000 but less than $500,000                   2.60%                 2.67%                2.25%
$500,000 but less than $1 million                 2.00%                 2.04%                1.75%
$1 million and over                                .00**                 .00**                 ***
</TABLE>


*    Rounded to the nearest one-hundredth percent.

**   Redemption of shares may be subject to a contingent  deferred  sales charge
     as discussed below.

***  Commission is payable by KDI as discussed below.


The Portfolios receive the entire net asset value of all their shares sold. KDI,
the  Portfolios'  principal  underwriter,  retains the sales  charge on sales of
Class A shares  from  which it  allows  discounts  from  the  applicable  public
offering  price to  investment  dealers,  which  discounts  are  uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales  agreements,  KDI may  re-allow  to dealers up to the full  applicable
sales charge,  as shown in the above table,  during periods and for transactions
specified in such notice and such  re-allowances may be based upon attainment of
minimum  sales  levels.  During  periods when 90% or more of the sales charge is
re-allowed,  such  dealers  may be  deemed  to be  underwriters  as that term is
defined in the Securities Act of 1933.

Class A shares of the Portfolios may be purchased at net asset value by: (a) any
purchaser,  provided that the amount  invested in such Portfolio or other Zurich
Scudder Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases"  totals at least  $1,000,000  including  purchases  of Class A shares
pursuant  to the  "Combined  Purchases,"  "Letter  of  Intent"  and  "Cumulative
Discount"   features   described   under   "Special   Features";    or   (b)   a
participant-directed qualified retirement plan described in Code Section 401(a),
a  participant-directed  non-qualified  deferred  compensation plan described in
Code Section 457 or a  participant-directed  qualified retirement plan described
in Code Section  403(b)(7)  which is not  sponsored  by a K-12 school  district,
provided  in each case that such plan has not less than 200  eligible  employees
(the "Large Order NAV Purchase  Privilege").  Redemption within two years of the
purchase of shares purchased under the Large Order NAV Purchase Privilege may be
subject to a contingent  deferred sales charge. See "Redemption or Repurchase of
Shares  --  Contingent  Deferred  Sales  Charge  --  Large  Order  NAV  Purchase
Privilege."

KDI may at its  discretion  compensate  investment  dealers  or other  financial
services  firms in connection  with the sale of Class A shares of the Portfolios
at net asset value in accordance with the Large Order NAV Purchase  Privilege up
to the following amounts: 1.00% of the net asset value of shares sold on amounts
up to $5 million,  0.50% on the next $45  million and 0.25% on amounts  over $50
million.  The  commission  schedule  will be reset on a calendar  year basis for
sales  of  shares  pursuant  to  the  Large  Order  NAV  Purchase  Privilege  to
employer-sponsored  employee  benefit plans using the  subaccount  recordkeeping
system  made  available   through  Kemper  Service  Company.   For  purposes  of
determining the appropriate  commission percentage to be applied to a particular
sale, KDI will consider the cumulative  amount  invested by the purchaser in the
Portfolios and other Zurich  Scudder Mutual Fund listed under "Special  Features
-- Class A Shares -- Combined  Purchases,"  including  purchases pursuant to the
"Combined  Purchases,"  "Letter of Intent" and  "Cumulative  Discount"  features
referred to above.  The privilege of purchasing Class A shares of the Portfolios
at net asset value under the Large Order NAV Purchase Privilege is not available
if another net asset value purchase privilege also applies.

Class A shares of the  Portfolios  or of any other  Zurich  Scudder  Mutual Fund
listed under "Special  Features -- Class A Shares -- Combined  Purchases" may be
purchased at net asset value in any amount by members of the plaintiff  class in
the proceeding known as Howard and Audrey Tabankin,  et al. v. Kemper Short-Term
Global  Income Fund, et al.,  Case No. 93 C 5231 (N.D.  IL).  This  privilege is
generally  non-transferable  and continues for the lifetime of individual  class
members and for a ten-year period for  non-individual  class members.  To make a
purchase at net asset value under this privilege, the investor must, at the time
of  purchase,  submit a written  request  that the  purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin  Class." Shares purchased under this privilege will be
maintained in a separate  account that includes only shares purchased under this
privilege.  For more details  concerning  this  privilege,  class members should
refer to the Notice of (1) Proposed Settlement with Defendants;  and (2) Hearing
to Determine Fairness of Proposed  Settlement,  dated August 31, 1995, issued in
connection  with the  aforementioned  court  proceeding.  For sales of Portfolio
shares at net asset value pursuant to this privilege,  KDI may in its discretion
pay investment dealers and other financial services firms a concession,  payable
quarterly,  at an annual rate of up to 0.25% of net assets  attributable to such
shares  maintained  and serviced by the firm.  A firm  becomes  eligible for the


                                       40
<PAGE>

concession based upon assets in accounts  attributable to shares purchased under
this  privilege  in the month  after the month of  purchase  and the  concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the  Portfolios  at net asset value under this  privilege  is not  available  if
another net asset value purchase privilege also applies.

Class A shares of a Portfolio may be purchased at net asset value by persons who
purchase  such shares  through bank trust  departments  that process such trades
through an  automated,  integrated  mutual fund clearing  program  provided by a
third party clearing firm.

Class A shares of the  Portfolios  may be  purchased  at net asset  value in any
amount by certain  professionals  who assist in the  promotion  of Kemper  Funds
pursuant to personal  services  contracts with KDI, for themselves or members of
their families.  KDI in its discretion may compensate  financial  services firms
for sales of Class A shares under this  privilege at a commission  rate of 0.50%
of the amount of Class A shares purchased.

Class A shares of a Portfolio may be purchased at net asset value by persons who
purchase  shares of the Portfolios  through KDI as part of an automated  billing
and wage  deduction  program  administered  by  RewardsPlus  of America  for the
benefit of employees of participating employer groups.

Class A shares may be sold at net asset  value in any  amount to: (a)  officers,
trustees,  employees  (including  retirees)  and  sales  representatives  of the
Portfolios,  its  investment  manager,  its  principal  underwriter  or  certain
affiliated  companies,   for  themselves  or  members  of  their  families;  (b)
registered  representatives and employees of broker-dealers having selling group
agreements  with KDI and officers,  directors and employees of service agents of
the Portfolios,  for themselves or their spouses or dependent children;  (c) any
trust, pension,  profit-sharing or other benefit plan for only such persons; (d)
persons who purchase  such shares  through bank trust  departments  that process
such  trades  through an  automated,  integrated  mutual fund  clearing  program
provided by a third party clearing firm; and (e) persons who purchase  shares of
the  Portfolios  through KDI as part of an automated  billing and wage deduction
program  administered  by RewardsPlus of America for the benefit of employees of
participating  employer groups. Class A shares may be sold at net asset value in
any  amount  to  selected  employees  (including  their  spouses  and  dependent
children)   of  banks  and  other   financial   services   firms  that   provide
administrative  services  related to order  placement  and payment to facilitate
transactions  in  shares of the  Portfolios  for their  clients  pursuant  to an
agreement with KDI or one of its affiliates.  Only those employees of such banks
and other firms who as part of their usual duties  provide  services  related to
transactions  in Portfolio  shares may purchase  Portfolio Class A shares at net
asset  value  hereunder.  Class A shares  may be sold at net asset  value in any
amount to unit  investment  trusts  sponsored  by Ranson &  Associates,  Inc. In
addition,   unitholders  of  unit  investment   trusts  sponsored  by  Ranson  &
Associates,  Inc. or its predecessors may purchase a Portfolio's  Class A shares
at net asset value through  reinvestment  programs described in the prospectuses
of such trusts that have such programs.  Class A shares of the Portfolios may be
sold at net asset value through certain investment advisors registered under the
1940 Act and other  financial  services  firms acting  solely as agent for their
clients,  that  adhere to certain  standards  established  by KDI,  including  a
requirement  that  such  shares  be  sold  for  the  benefit  of  their  clients
participating  in an investment  advisory program or agency  commission  program
under which such clients pay a fee to the  investment  advisor or other firm for
portfolio  management  or agency  brokerage  services.  Such shares are sold for
investment  purposes and on the  condition  that they will not be resold  except
through  redemption or repurchase by the  Portfolios.  The  Portfolios  may also
issue Class A shares at net asset value in connection  with the  acquisition  of
the assets of or merger or consolidation with another investment  company, or to
shareholders  in connection  with the investment or  reinvestment  of income and
capital gain dividends.


The  sales  charge  scale is  applicable  to  purchases  made at one time by any
"purchaser" which includes: an individual;  or an individual,  his or her spouse
and  children  under the age of 21; or a trustee or other  fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income  tax  under  Section  501(c)(3)  or  (13)  of  the  Code;  or a  pension,
profit-sharing  or other  employee  benefit plan whether or not qualified  under
Section  401  of  the  Code;  or  other   organized  group  of  persons  whether
incorporated  or not,  provided the  organization  has been in existence  for at
least six months and has some  purpose  other than the  purchase  of  redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales  charge,  all orders from an  organized  group will have to be
placed  through a single  investment  dealer  or other  firm and  identified  as
originating from a qualifying purchaser.

Deferred  Sales Charge  Alternative  -- Class B Shares.  Investors  choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are  being  sold  without  an  initial  sales  charge,  the full  amount  of the
investor's  purchase  payment  will be invested in Class B shares for his or her
account.  A contingent  deferred sales charge may be imposed upon  redemption of
Class B shares.  See "Redemption or Repurchase of Shares -- Contingent  Deferred
Sales Charge -- Class B Shares."


KDI  compensates  firms  for  sales of  Class B shares  at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated  by  the  Portfolios  for  services  as  distributor  and  principal
underwriter for Class B shares. See "Investment Manager and Underwriter."

Class B shares of the Portfolios will automatically convert to Class A shares of
the  Portfolios  six years after issuance on the basis of the relative net asset
value per share of the Class B shares.  The purpose of the conversion feature is


                                       41
<PAGE>

to relieve  holders of Class B shares from the  distribution  services  fee when
they have been  outstanding  long  enough for KDI to have been  compensated  for
distribution  related  expenses.  For purposes of  conversion to Class A shares,
shares purchased  through the reinvestment of dividends and other  distributions
paid with respect to Class B shares in a shareholder's Portfolio account will be
converted to Class A shares on a pro rata basis.

Purchase of Class C Shares.  The public  offering price of the Class C shares of
the Portfolios is the next  determined net asset value.  No initial sales charge
is imposed.  Since Class C shares are sold without an initial sales charge,  the
full  amount of the  investor's  purchase  payment  will be  invested in Class C
shares for his or her account. A contingent deferred sales charge may be imposed
upon the  redemption  of Class C shares if they are redeemed  within one year of
purchase.  See "Redemption or Repurchase of Shares -- Contingent  Deferred Sales
Charge -- Class C  Shares."  KDI  currently  advances  to firms  the first  year
distribution  fee at a rate of 0.75% of the purchase  price of such shares.  For
periods after the first year,  KDI  currently  intends to pay firms for sales of
Class C shares a distribution fee, payable quarterly, at an annual rate of 0.75%
of net assets  attributable  to Class C shares  maintained  and  serviced by the
firm. KDI is  compensated  by the  Portfolios  for services as  distributor  and
principal   underwriter  for  Class  C  shares.  See  "Investment   Manager  and
Underwriter."

Which  Arrangement  is Better for You?  The decision as to which class of shares
provides  a more  suitable  investment  for an  investor  depends on a number of
factors,  including the amount and intended length of the investment.  In making
this decision,  investors should review their particular circumstances carefully
with their financial  representative.  Investors making investments that qualify
for reduced sales charges might  consider  Class A shares.  Investors who prefer
not to pay an initial  sales  charge and who plan to hold their  investment  for
more than six years might consider  Class B shares.  Investors who prefer not to
pay an initial sales charge but who plan to redeem their shares within six years
might  consider Class C shares.  KDI has  established  the following  procedures
regarding the purchase of Class A, Class B and Class C shares.  These procedures
do not reflect in any way the suitability of a particular  class of shares for a
particular  investor and should not be relied upon as such.  That  determination
must be made by investors with the assistance of their financial representative.
Orders  for  Class B shares  or  Class C shares  for  $500,000  or more  will be
declined.  Orders  for Class B shares or Class C shares  by  employer  sponsored
employee  benefit  plans (not  including  plans  under Code  Section  403 (b)(7)
sponsored by a K-12 school district) using the subaccount  record keeping system
made available  through the Shareholder  Service Agent ("KemFlex Plans") will be
invested  instead  in Class A shares  at net  asset  value  where  the  combined
subaccount  value in a Portfolio  or other  Kemper  Mutual  Funds  listed  under
"Special  Features  - Class A Shares -  Combined  Purchases"  is in excess of $1
million for Class B shares or $5 million for Class C shares including  purchases
pursuant  to the  "Combined  Purchases,"  "Letter  of  Intent"  and  "Cumulative
Discount" features described under "Special Features." KemFlex Plans that on May
1, 2000 have in excess of $1 million invested in Class B shares of Kemper Mutual
Funds, or have in excess of $850,000 invested in Class B shares of Kemper Mutual
Funds and are able to qualify  for the  purchase  of Class A shares at net asset
value (e.g.,  pursuant to a Letter of Intent), will have future investments made
in Class A shares and will have the option to covert  their  holdings in Class B
shares to Class A shares free of any contingent  deferred sales charge on May 1,
2002.  For more  information  about the three sales  arrangements,  consult your
financial  representative or the Shareholder  Service Agent.  Financial services
firms may receive  different  compensation  depending upon which class of shares
they sell.

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

KDI may, from time to time,  pay or allow to firms a 1% commission on the amount
of  shares  of the  Portfolios  sold  under the  following  conditions:  (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct  "roll  over" of a  distribution  from a qualified  retirement  plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company, (iii) the registered representative placing the trade is
a member of ProStar,  a group of persons  designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.

In addition to the discounts or commissions described above, KDI will, from time
to  tome,  pay  or  allow  additional  discounts,   commissions  or  promotional
incentives, in the form of cash, to firms that sell shares of the Portfolios. In
some instances, such discounts,  commissions or other incentives will be offered
only to certain  firms that sell or are expected to sell during  specified  time
periods  certain  minimum  amounts of shares of the  Portfolios,  or other Funds
underwritten by KDI.

Orders for the purchase of shares of the Portfolios will be confirmed at a price
based on the net asset value of the Portfolios next determined  after receipt in
good order by KDI of the order accompanied by payment.  However, orders received
by dealers or other financial  services firms prior to the  determination of net
asset value (see "Net Asset  Value") and  received in good order by KDI prior to
the close of its  business  day will be  confirmed  at a price  based on the net
asset value  effective on that day ("trade  date").  The Portfolios  reserve the
right to determine the net asset value more frequently than once a day if deemed


                                       42
<PAGE>

desirable.  Dealers and other financial services firms are obligated to transmit
orders promptly. Collection may take significantly longer for a check drawn on a
foreign bank than for a check drawn on a domestic bank.  Therefore,  if an order
is  accompanied  by a check  drawn on a foreign  bank,  funds must  normally  be
collected  before  shares will be purchased.  See  "Purchase  and  Redemption of
Shares."

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

The  Portfolios  reserve the right to withdraw  all or any part of the  offering
made by this prospectus and to reject purchase orders for any reason. Also, from
time to time, the Portfolios may  temporarily  suspend the offering of any class
of their shares to new investors. During the period of such suspension,  persons
who are  already  shareholders  of such  class of such  Portfolio  normally  are
permitted  to continue to purchase  additional  shares of such class and to have
dividends reinvested.

Tax  Identification  Number. Be sure to complete the Tax  Identification  Number
section of the Portfolio's application when you open an account. Federal tax law
requires the  Portfolios  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
Portfolios  reserve  the  right to reject  new  account  applications  without a
correct certified Social Security or tax  identification  number. The Portfolios
also  reserve  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
applicable  Portfolio with a tax identification  number during the 30-day notice
period.


Shareholders  should direct their inquiries to Kemper Service Company,  811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.

REDEMPTION OR REPURCHASE OF SHARES


General. Any shareholder may require the Portfolios to redeem his or her shares.
When  shares  are held  for the  account  of a  shareholder  by the  Portfolio's
transfer  agent,  the  shareholder  may redeem  such shares by sending a written
request  with  signatures  guaranteed  to Kemper  Funds,  Attention:  Redemption
Department, P.O. Box 219153, Kansas City, Missouri 64141-9153. When certificates
for  shares  have been  issued,  they must be  mailed to or  deposited  with the
Shareholder   Service  Agent,  along  with  a  duly  endorsed  stock  power  and
accompanied by a written request for redemption. Redemption requests and a stock
power must be endorsed by the account  holder with  signatures  guaranteed  by a
commercial bank, trust company,  savings and loan  association,  federal savings
bank, member firm of a national  securities exchange or other eligible financial
institution.  The  redemption  request and stock power must be signed exactly as
the  account is  registered  including  any special  capacity of the  registered
owner. Additional  documentation may be requested,  and a signature guarantee is
normally  required,  from  institutional and fiduciary account holders,  such as
corporations,  custodians  (e.g.,  under the Uniform  Transfers  to Minors Act),
executors, administrators, trustees or guardians.

The  redemption  price for shares of a class of the  Portfolios  will be the net
asset value per share of that class of the Portfolios next determined  following
receipt by the Shareholder Service Agent of a properly executed request with any
required documents as described above.  Payment for shares redeemed will be made
in cash as promptly as  practicable  but in no event later than seven days after
receipt of a properly  executed  request  accompanied by any  outstanding  share
certificates  in proper  form for  transfer.  When the  Portfolios  are asked to
redeem  shares  for which they may not have yet  received  good  payment  (i.e.,
purchases by check,  EXPRESS-Transfer  or Bank Direct  Deposit),  they may delay
transmittal  of redemption  proceeds until they have  determined  that collected
funds have been received for the purchase of such shares, which will be up to 10
days from receipt by the  Portfolios  of the  purchase  amount.  The  redemption
within two years of Class A shares  purchased at net asset value under the Large
Order NAV  Purchase  Privilege  may be subject to a  contingent  deferred  sales


                                       43
<PAGE>

charge (see  "Purchase of Shares -- Initial Sales Charge  Alternative -- Class A
Shares"),  the redemption of Class B shares within six years may be subject to a
contingent deferred sales charge (see "Contingent Deferred Sales Charge -- Class
B Shares"  below),  and the  redemption  of Class C shares within the first year
following  purchase  may be subject to a contingent  deferred  sales charge (see
"Contingent Deferred Sales Charge -- Class C Shares" below).

Because of the high cost of  maintaining  small  accounts,  the  Portfolios  may
assess a quarterly  fee of $9 on any account  with a balance  below $800 for the
quarter.  The fee will not apply to accounts enrolled in an automatic investment
program,  Individual Retirement Accounts or employer-sponsored  employee benefit
plans using the  subaccount  record-keeping  system made  available  through the
Shareholder Service Agent.

Shareholders  can request the following  telephone  privileges:  expedited  wire
transfer redemptions and EXPRESS-Transfer  transactions (see "Special Features")
and  exchange  transactions  for  individual  and  institutional   accounts  and
pre-authorized  telephone  redemption  transactions  for  certain  institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone  exchange  privilege is automatic unless the shareholder
refuses  it on the  account  application.  The  Portfolios  or its agents may be
liable  for  any  losses,  expenses  or  costs  arising  out  of  fraudulent  or
unauthorized   telephone  requests  pursuant  to  these  privileges  unless  the
Portfolios  or  their  agents   reasonably   believe,   based  upon   reasonable
verification  procedures,  that the  telephonic  instructions  are genuine.  The
shareholder will bear the risk of loss, including loss resulting from fraudulent
or unauthorized transactions,  so long as reasonable verification procedures are
followed.  Verification  procedures  include recording  instructions,  requiring
certain  identifying  information  before acting upon  instructions  and sending
written confirmations.

Telephone  Redemptions.  If  the  proceeds  of  the  redemption  (prior  to  the
imposition of any contingent  deferred sales charge) are $50,000 or less and the
proceeds  are  payable to the  shareholder  of record at the  address of record,
normally a  telephone  request or a written  request by any one  account  holder
without a signature  guarantee is sufficient  for  redemptions  by individual or
joint  account  holders,  and  trust,  executor  and  guardian  account  holders
(excluding  custodial accounts for gifts and transfers to minors),  provided the
trustee,  executor  or  guardian  is named in the  account  registration.  Other
institutional account holders and guardian account holders of custodial accounts
for gifts and  transfers  to minors  may  exercise  this  special  privilege  of
redeeming  shares by  telephone  request or written  request  without  signature
guarantee  subject to the same  conditions  as  individual  account  holders and
subject  to the  limitations  on  liability  described  under  "General"  above,
provided  that  this  privilege  has been  pre-authorized  by the  institutional
account  holder  or  guardian  account  holder  by  written  instruction  to the
Shareholder Service Agent with signatures guaranteed.  Telephone requests may be
made  by  calling   1-800-621-1048.   Shares   purchased  by  check  or  through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming  shares by telephone  request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone  request or by
written request  without a signature  guarantee may not be used to redeem shares
held in certificated form and may not be used if the  shareholder's  account has
had an address change within 30 days of the redemption  request.  During periods
when it is difficult to contact the Shareholder  Service Agent by telephone,  it
may be difficult to use the telephone redemption  privilege,  although investors
can still  redeem by mail.  The  Portfolios  reserve the right to  terminate  or
modify this privilege at any time.

Repurchases   (Confirmed   Redemptions).   A  request  for   repurchase  may  be
communicated  by a shareholder  through a securities  dealer or other  financial
services firm to KDI,  which the  Portfolio has  authorized to act as its agent.
There is no charge by KDI with respect to repurchases; however, dealers or other
firms may charge  customary  commissions for their  services.  Dealers and other
financial  services  firms  are  obligated  to  transmit  orders  promptly.  The
repurchase  price will be the net asset value of the Portfolios  next determined
after receipt of a request by KDI. However, requests for repurchases received by
dealers or other firms prior to the  determination  of net asset value (see "Net
Asset Value") and received by KDI prior to the close of KDI's  business day will
be  confirmed  at the net  asset  value  effective  on that  day.  The  offer to
repurchase  may be  suspended  at any  time.  Requirements  as to stock  powers,
certificates, payments and delay of payments are the same as for redemptions.

Expedited   Wire  Transfer   Redemptions.   If  the  account  holder  has  given
authorization for expedited wire redemption to the account holder's brokerage or
bank  account,  shares of the  Portfolios  can be redeemed and proceeds  sent by
federal  wire  transfer  to a single  previously  designated  account.  Requests
received by the  Shareholder  Service  Agent prior to the  determination  of net
asset value will result in shares being redeemed that day at the net asset value
per Share  effective on that day and  normally the proceeds  will be sent to the
designated  account the following  business  day.  Delivery of the proceeds of a
wire  redemption  of $250,000 or more may be delayed by the  Portfolio for up to
seven  days  if  the  Portfolio  or  the  Shareholder  Service  Agent  deems  it
appropriate under then-current market conditions. Once authorization is on file,
the Shareholder Service Agent will honor requests by telephone at 1-800-621-1048
or in writing, subject to the limitations on liability described under "General"
above.  The Portfolio is not  responsible for the efficiency of the federal wire
system or the account  holder's  financial  services firm or bank. The Portfolio
currently  does not charge the account  holder for wire  transfers.  The account
holder is responsible  for any charges  imposed by the account  holder's firm or
bank.  There is a $1,000  wire  redemption  minimum  (including  any  contingent
deferred  sales  charge).  To change the  designated  account  to  receive  wire
redemption  proceeds,  send a written request to the  Shareholder  Service Agent
with signatures  guaranteed as described above or contact the firm through which
shares of the Portfolio  were  purchased.  Shares  purchased by check or through
EXPRESS-Transfer  or Bank Direct  Deposit  may not be redeemed by wire  transfer
until such shares have been owned for at least 10 days.  Account holders may not
use this privilege to redeem shares held in  certificated  form.  During periods
when it is difficult to contact the Shareholder  Service Agent by telephone,  it


                                       44
<PAGE>

may be  difficult  to use the  expedited  wire  transfer  redemption  privilege,
although investors can still redeem by mail. The Portfolio reserves the right to
terminate or modify this privilege at any time.

Contingent  Deferred  Sales  Charge - Large  Order  NAV  Purchase  Privilege.  A
contingent  deferred  sales  charge may be imposed  upon  redemption  of Class A
shares  that are  purchased  under the Large  Order NAV  Purchase  Privilege  as
follows:  1% if they are redeemed  within one year of purchase and 0.50% if they
are  redeemed  during the second  year after  purchase.  The charge  will not be
imposed upon  redemption  of  reinvested  dividends or share  appreciation.  The
charge is applied to the value of the shares  redeemed,  excluding  amounts  not
subject to the charge.  The  contingent  deferred sales charge will be waived in
the event of: (a)  redemptions by a  participant-directed  qualified  retirement
plan  described in Code Section  401(a),  a  participant-directed  non-qualified
deferred    compensation   plan   described   in   Code   Section   457   or   a
participant-directed   qualified  retirement  plan  described  in  Code  Section
403(b)(7) which is not sponsored by a K-12 school  district;  (b) redemptions by
employer-sponsored  employee  benefit plans using the subaccount  record keeping
system made available  through the Shareholder  Service Agent; (c) redemption of
shares of a shareholder  (including a registered  joint owner) who has died; (d)
redemption of shares of a shareholder  (including a registered  joint owner) who
after  purchase  of the shares  being  redeemed  becomes  totally  disabled  (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Portfolio's Systematic Withdrawal Plan at a maximum of 10%
per year of the net asset value of the account;  and (f)  redemptions  of shares
whose  dealer  of  record at the time of the  investment  notifies  KDI that the
dealer waives the  discretionary  commission  applicable to such Large Order NAV
Purchase.


Contingent  Deferred Sales Charge - Class B Shares. A contingent  deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon  redemption of any share  appreciation  or reinvested  dividends on Class B
shares.  The charge is computed at the  following  rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.

              Year of Redemption           Contingent Deferred
              After Purchase                   Sales Charge
              --------------                   ------------

              First                                 4%
              Second                                3%
              Third                                 3%
              Fourth                                2%
              Fifth                                 2%
              Sixth                                 1%


The  contingent  deferred  sales charge will be waived:  (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration)  of  the  shareholder   (including  a  registered  joint  owner)
occurring after the purchase of the shares being  redeemed,  (b) in the event of
the death of the  shareholder  (including a  registered  joint  owner),  (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic  Withdrawal Plan" below), (d) for redemptions made pursuant to any
IRA systematic  withdrawal based on the shareholder's life expectancy including,
but not limited to,  substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions
to satisfy required minimum  distributions  after age 70 1/2 from an IRA account
(with the  maximum  amount  subject  to this  waiver  being  based only upon the
shareholder's  Kemper IRA accounts).  The contingent  deferred sales charge will
also be waived in connection  with the following  redemptions  of shares held by
employer  sponsored  employee benefit plans maintained on the subaccount  record
keeping system made available by the Shareholder  Service Agent: (a) redemptions
to satisfy  participant loan advances (note that loan repayments  constitute new
purchases  for  purposes  of  the  contingent  deferred  sales  charge  and  the
conversion   privilege),   (b)   redemptions  in  connection   with   retirement
distributions  (limited at any one time to 10% of the total value of plan assets
invested in the Portfolio),  (c)  redemptions in connection  with  distributions
qualifying  under the hardship  provisions of the Internal  Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.


Contingent  Deferred Sales Charge -- Class C Shares. A contingent deferred sales
charge  of 1% may be  imposed  upon  redemption  of Class C  shares  if they are
redeemed  within  one year of  purchase.  The charge  will not be  imposed  upon
redemption of reinvested dividends or share appreciation.  The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The  contingent  deferred  sales charge will be waived:  (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration)  of  the  shareholder   (including  a  registered  joint  owner)
occurring after the purchase of the shares being  redeemed,  (b) in the event of
the death of the  shareholder  (including a  registered  joint  owner),  (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year,  see "Special  Features --
Systematic  Withdrawal  Plan"),  (d) for  redemptions  made  pursuant to any IRA
systematic withdrawal based on the shareholder's life expectancy including,  but


                                       45
<PAGE>

not limited to,  substantially  equal  periodic  payments  described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy  required  minimum  distributions  after age 70 1/2 from an IRA  account
(with the  maximum  amount  subject  to this  waiver  being  based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed  redemption
of shares held by employer  sponsored  employee  benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
(g)  redemption of shares by an employer  sponsored  employee  benefit plan that
offers  funds in addition to Kemper  Funds and whose dealer of record has waived
the  advance of the first year  administrative  service  and  distribution  fees
applicable  to such shares and agrees to receive  such fees  quarterly,  and (g)
redemption  of shares  purchased  through a  dealer-sponsored  asset  allocation
program  maintained on an omnibus  record-keeping  system provided the dealer of
record had waived the  advance  of the first year  administrative  services  and
distribution  fees applicable to such shares and has agreed to receive such fees
quarterly.


Contingent  Deferred  Sales  Charge  -  General.   The  following  example  will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single  purchase of $10,000 of the  Portfolios'  Class B shares
and that 16 months  later the value of the  shares  has grown by $1,000  through
reinvested  dividends and by an  additional  $1,000 of share  appreciation  to a
total of  $12,000.  If the  investor  were then to redeem the entire  $12,000 in
share value,  the  contingent  deferred  sales charge would be payable only with
respect to $10,000  because  neither the $1,000 of reinvested  dividends nor the
$1,000 of share  appreciation  is subject to the charge.  The charge would be at
the rate of 3% ($300)  because it was in the second year after the  purchase was
made.


The rate of the contingent  deferred sales charge is determined by the length of
the period of ownership.  Investments are tracked on a monthly basis. The period
of  ownership  for this  purpose  begins the first day of the month in which the
order for the investment is received.  For example,  an investment made in March
1998 will be eligible for the second year's charge if redeemed on or after March
1, 1999.  In the event no specific  order is  requested  when  redeeming  shares
subject to a contingent deferred sales charge, the redemption will be made first
from  shares  representing  reinvested  dividends  and then  from  the  earliest
purchase of shares. KDI receives any contingent deferred sales charge directly.


Reinvestment  Privilege.  A shareholder  who has redeemed  Class A shares of the
Portfolios  or any other  Zurich  Scudder  Mutual  Fund  listed  under  "Special
Features  -- Class A Shares --  Combined  Purchases"  (other  than shares of the
Kemper Cash Reserves Fund purchased directly at net asset value) may reinvest up
to the full amount  redeemed at net asset value at the time of the  reinvestment
in Class A shares of the Portfolios or of the other listed Zurich Scudder Mutual
Funds. A shareholder of the Portfolios or other Kemper Funds who redeems Class A
shares purchased under the Large Order NAV Purchase  Privilege (see "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares") or Class B shares
or Class C shares and incurs a contingent  deferred sales charge may reinvest up
to the full amount redeemed at net asset value at the time of the  reinvestment,
in the same  class of shares as the case may be, of the  Portfolios  or of other
Kemper Funds.  The amount of any  contingent  deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the  contingent  deferred  sales charge  schedule.  Also, a
holder of Class B shares who has  redeemed  shares may  reinvest  up to the full
amount redeemed,  less any applicable  contingent deferred sales charge that may
have been imposed  upon the  redemption  of such  shares,  at net asset value in
Class A shares of the  Portfolios  or of the other Zurich  Scudder  Mutual Funds
listed  under  "Special  Features  -- Class A  Shares  --  Combined  Purchases."
Purchases  through  the  reinvestment  privilege  are  subject  to  the  minimum
investment requirements applicable to the shares being purchased and may only be
made for Kemper Funds available for sale in the shareholder's state of residence
as listed  under  "Special  Features -- Exchange  Privilege."  The  reinvestment
privilege can be used only once as to any specific shares and reinvestment  must
be effected  within six months of the  redemption.  If a loss is realized on the
redemption  of  shares  of the  Portfolios,  the  reinvestment  in shares of the
Portfolios may be subject to the "wash sale" rules if made within 30 days of the
redemption,  resulting in a  postponement  of the  recognition  of such loss for
federal  income tax purposes.  The  reinvestment  privilege may be terminated or
modified at any time.

Redemption in Kind.  Although it is the Portfolios'  present policy to redeem in
cash, if the Board of Trustees  determines that a material  adverse effect would
be  experienced  by the  remaining  shareholders  if payment were made wholly in
cash, the Portfolio will satisfy the redemption request in whole or in part by a
distribution  of portfolio  securities in lieu of cash,  in conformity  with the
applicable  rules of the SEC,  taking such  securities at the same value used to
determine net asset value,  and  selecting the  securities in such manner as the
Board of Trustees may deem fair and equitable.  If such a distribution occurred,
shareholders  receiving  securities and selling them could receive less than the
redemption  value  of  such  securities  and in  addition  would  incur  certain
transaction  costs.  Such a  redemption  would not be as liquid as a  redemption
entirely in cash. The Trust has elected,  however,  to be governed by Rule 18f-1
under the 1940 Act, as a result of which the  Portfolio  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 a Share at the
beginning of the period.


                                       46
<PAGE>

SPECIAL FEATURES


Class A Shares -- Combined  Purchases.  The  Portfolio's  Class A shares (or the
equivalent)  may be purchased  at the rate  applicable  to the discount  bracket
attained by  combining  concurrent  investments  in Class A shares of any of the
following Funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund,  Kemper  Small  Capitalization  Equity  Fund,  Kemper  Income and  Capital
Preservation  Fund,  Kemper  Municipal Bond Fund,  Kemper Strategic Income Fund,
Kemper  High Yield  Series,  Kemper  U.S.  Government  Securities  Fund,  Kemper
International Fund, Kemper State Tax-Free Income Series,  Kemper Blue Chip Fund,
Kemper  Global  Income Fund,  Kemper Target Equity Fund (series are subject to a
limited offering period),  Kemper Intermediate  Municipal Bond Fund, Kemper Cash
Reserves Fund (available only upon exchange or conversion from Class A shares of
another  Kemper Fund),  Kemper U.S.  Mortgage  Fund,  Kemper  Short-Intermediate
Government Fund,  Kemper Value Plus Growth Fund, Kemper Horizon Fund, Kemper New
Europe Fund,  Inc.,  Kemper Asian Growth Fund,  Kemper  Aggressive  Growth Fund,
Kemper  Global/International  Series,  Inc.,  Kemper  Equity  Trust  and  Kemper
Securities  Trust,  Scudder 21st  Century  Growth  Fund,  The Japan Fund,  Inc.,
Scudder High Yield Tax Free Fund,  Scudder Pathway Series - Moderate  Portfolio,
Scudder Pathway Series - Conservative Portfolio, Scudder Pathway Series - Growth
Portfolio,  Scudder  International Fund, Scudder Growth and Income Fund, Scudder
Large  Company  Growth  Fund,  Scudder  Health  Care  Fund,  Scudder  Technology
Innovation  Fund,  Global  Discovery  Fund,  Value Fund, and Classic Growth Fund
("Zurich  Scudder Mutual  Funds").  Except as noted below,  there is no combined
purchase  credit for direct  purchases  of shares of Zurich  Money  Funds,  Cash
Equivalent  Fund,  Tax-Exempt  California Money Market Fund, Cash Account Trust,
Investor's  Municipal Cash Fund or Investors Cash Trust ("Money Market  Funds"),
which are not considered a "Zurich Scudder Mutual Fund" for purposes hereof. For
purposes of the Combined  Purchases  feature  described above as well as for the
Letter of Intent and Cumulative  Discount  features  described  below,  employer
sponsored employee benefit plans using the subaccount record keeping system made
available  through the Shareholder  Service Agent may include:  (a) Money Market
Funds as "Kemper Mutual Funds", (b) all classes of shares of any Kemper Fund and
(c) the value of any  other  plan  investments,  such as  guaranteed  investment
contracts and employer  stock,  maintained  on such  subaccount  record  keeping
system.

Class A Shares - Letter of Intent.  The same reduced  sales  charges for Class A
shares,  as shown in the  applicable  prospectus,  also  apply to the  aggregate
amount of purchases of such Zurich Scudder Mutual Funds listed above made by any
purchaser  within a 24-month period under a written Letter of Intent  ("Letter")
provided by KDI. The Letter,  which  imposes no  obligation  to purchase or sell
additional Class A shares,  provides for a price  adjustment  depending upon the
actual amount purchased  within such period.  The Letter provides that the first
purchase following  execution of the Letter must be at least 5% of the amount of
the  intended  purchase,  and that 5% of the  amount  of the  intended  purchase
normally will be held in escrow in the form of shares pending  completion of the
intended  purchase.  If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the  appropriate  number of escrowed  shares are redeemed and the proceeds
used toward  satisfaction  of the obligation to pay the increased  sales charge.
The Letter for an  employer-sponsored  employee  benefit plan  maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special  provisions  regarding  payment of any  increased  sales charge
resulting from a failure to complete the intended  purchase under the Letter.  A
shareholder may include the value (at the maximum  offering price) of all shares
of such Kemper  Funds held of record as of the initial  purchase  date under the
Letter as an "accumulation  credit" toward the completion of the Letter,  but no
price adjustment will be made on such shares. Only investments in Class A shares
are included for this privilege.

Class A Shares - Cumulative Discount.  Class A shares of the Portfolios may also
be purchased at the rate applicable to the discount  bracket  attained by adding
to the cost of shares of the Portfolios being purchased,  the value of all Class
A shares of the above  mentioned  Zurich Scudder  Mutual Funds  (computed at the
maximum  offering  price at the time of the  purchase  for which the discount is
applicable) already owned by the investor.


Class A  Shares  -  Availability  of  Quantity  Discounts.  An  investor  or the
investor's  dealer or other financial  services firm must notify the Shareholder
Service  Agent or KDI  whenever a quantity  discount or reduced  sales charge is
applicable to a purchase. Upon such notification,  the investor will receive the
lowest applicable sales charge.
Quantity discounts described above may be modified or terminated at any time.

Exchange  Privilege.  Shareholders  of Class A,  Class B and Class C shares  may
exchange  their  shares for shares of the  corresponding  class of other  Kemper
Funds in accordance with the provisions below.


Class A Shares.  Class A shares of the Zurich Scudder Mutual Funds and shares of
the Money  Market  Funds  listed  under  "Special  Features -- Class A Shares --
Combined  Purchases" above may be exchanged for each other at their relative net
asset  values.  Shares of Money Market Funds and the Kemper Cash  Reserves  Fund
that were  acquired  by  purchase  (not  including  shares  acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange.  Series of
Kemper  Target  Equity Fund are  available on exchange  only during the Offering
Period  for  such  series  as  described  in  the  applicable  prospectus.  Cash
Equivalent  Fund,  Tax-Exempt  California Money Market Fund, Cash Account Trust,


                                       47
<PAGE>

Investors Municipal Cash Fund and Investors Cash Trust are available on exchange
but only through a financial services firm having a services agreement with KDI.

Class A shares of the  Portfolios  purchased  under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another  Kemper Fund or a Money
Market Fund under the exchange  privilege  described  above  without  paying any
contingent deferred sales charge at the time of exchange.  If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing  requirements  provided that the
shares  redeemed will retain their  original cost and purchase date for purposes
of calculating the contingent deferred sales charge.

Class B Shares. Class B shares of the Portfolios and Class B shares of any other
Zurich Scudder  Mutual Fund listed under "Special  Features -- Class A Shares --
Combined  Purchases" may be exchanged for each other at their relative net asset
values.  Class B shares may be  exchanged  without a contingent  deferred  sales
charge being imposed at the time of exchange.  For purposes of  calculating  the
contingent  deferred sales charge that may be imposed upon the redemption of the
Class B shares  received on exchange,  amounts  exchanged  retain their original
cost and purchase date.

Class C Shares. Class C shares of the Portfolios and Class C shares of any other
Zurich Scudder  Mutual Fund listed under "Special  Features -- Class A Shares --
Combined  Purchases" may be exchanged for each other at their relative net asset
values.  Class C shares may be  exchanged  without a contingent  deferred  sales
charge  being  imposed at the time of  exchange.  For  purposes  of  determining
whether there is a contingent deferred sales charge that may be imposed upon the
redemption of the Class C shares received by exchange,  they retain the cost and
purchase date of the shares that were originally purchased and exchanged.

General.  Shares of a Kemper Fund with a value in excess of  $1,000,000  (except
Kemper Cash Reserves Fund) acquired by exchange  through another Kemper Fund, or
from a Money Market Fund, may not be exchanged  thereafter  until they have been
owned for 15 days (the "15-Day Hold  Policy").  In addition,  shares of a Kemper
fund with a value of  $1,000,000  or less  (except  Kemper Cash  Reserves  Fund)
acquired by exchange from another  Kemper fund, or from a money market fund, may
not be exchanged  thereafter  until they have been owned for 15 days, if, in the
Advisor's  judgment,  the exchange  activity  may have an adverse  effect on the
fund.  In  particular,  a pattern of  exchanges  that  coincides  with a "market
timing"  strategy  may be  disruptive  to the Kemper fund and  therefore  may be
subject to the 15-Day Hold Policy.


For  purposes  of  determining  whether  the  15-Day  Hold  Policy  applies to a
particular  exchange,  the value of the shares to be exchanged shall be computed
by aggregating the value of shares being exchanged for all accounts under common
control,   discretion  or  advice,  including,   without  limitation,   accounts
administered  by  a  financial  services  firm  offering  market  timing,  asset
allocation or similar  services.  The total value of shares being exchanged must
at least equal the minimum investment  requirement of the Kemper Fund into which
they are being exchanged.  Exchanges are made based on relative dollar values of
the shares  involved in the  exchange.  There is no service fee for an exchange;
however,  dealers  or other  firms may charge for their  services  in  effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
fund held and  purchase  of shares of the other  fund.  For  federal  income tax
purposes,  any such exchange constitutes a sale upon which a gain or loss may be
realized, depending upon whether the value of the shares being exchanged is more
or less than the shareholder's adjusted cost basis of such shares.  Shareholders
interested in exercising the exchange  privilege may obtain  prospectuses of the
other Funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to Kemper Service Company, Attention:  Exchange Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder
has given  authorization.  Once the  authorization  is on file, the  Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048, subject to the
limitations on liability under  "Redemption or Repurchase of Shares -- General."
Any share  certificates  must be deposited prior to any exchange of such shares.
During periods when it is difficult to contact the Shareholder  Service Agent by
telephone,  it may be difficult to use the  telephone  exchange  privilege.  The
exchange  privilege is not a right and may be suspended,  terminated or modified
at any time. Exchanges may only be made for Funds that are available for sale in
the shareholder's  state of residence.  Currently,  Tax-Exempt  California Money
Market Fund is available  for sale only in California  and  Investors  Municipal
Cash Fund is  available  for sale only in certain  states.  Except as  otherwise
permitted  by  applicable  regulations,  60 days'  prior  written  notice of any
termination or material change will be provided.

Systematic Exchange  Privilege.  The owner of $1,000 or more of any class of the
shares  of a  Kemper  Fund or Money  Market  Fund may  authorize  the  automatic
exchange  of a specified  amount ($50  minimum) of such shares for shares of the
same class of another such Kemper  Fund.  If  selected,  exchanges  will be made
automatically until the shareholder or the Kemper Fund terminates the privilege.
Exchanges  are  subject  to the  terms  and  conditions  described  above  under
"Exchange Privilege," except that the $1,000 minimum investment  requirement for
the Kemper Fund acquired on exchange is not  applicable.  This privilege may not
be used for the exchange of shares held in certificated form.


EXPRESS-Transfer.  EXPRESS-Transfer  permits  the  transfer  of  money  via  the
Automated  ClearingHouse  System  (minimum  $100  and  maximum  $50,000)  from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Portfolios. Shareholders can also redeem Shares (minimum $100 and maximum
$50,000) from their  Portfolio  account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or


                                       48
<PAGE>

through  EXPRESS-Transfer  or Bank Direct Deposit may not be redeemed under this
privilege  until such Shares have been owned for at least 10 days.  By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon  telephone  instructions  from any person to  transfer  the  specified
amounts between the shareholder's  Portfolio account and the predesignated bank,
savings  and  loan or  credit  union  account,  subject  to the  limitations  on
liability  under  "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer,  a shareholder can initiate a transaction by calling Kemper
Shareholder  Services toll free at 1-800-621-1048,  Monday through Friday,  8:00
a.m. to 3:00 p.m.  Chicago time.  Shareholders  may terminate  this privilege by
sending written notice to Kemper Service Company,  P.O. Box 419415, Kansas City,
Missouri   64141-6415.   Termination  will  become  effective  as  soon  as  the
Shareholder  Service  Agent has had a reasonable  amount of time to act upon the
request.  EXPRESS-Transfer  cannot be used with passbook savings accounts or for
tax-deferred plans such as IRAs.

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

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

Systematic  Withdrawal  Plan.  The  owner  of  $5,000  or more of a class of the
Portfolio's  shares at the offering  price (net asset value plus, in the case of
Class A shares,  the initial  sales charge) may provide for the payment from the
owner's  account  of any  requested  dollar  amount to be paid to the owner or a
designated  payee  monthly,  quarterly,  semiannually  or  annually.  The $5,000
minimum account size is not applicable to Individual  Retirement  Accounts.  The
minimum periodic payment is $50. The maximum annual rate at which Class B shares
may be redeemed (and Class A shares purchased under the Large Order NAV Purchase
Privilege and Class C shares in their first year following the purchase) under a
systematic withdrawal plan is 10% of the net asset value of the account.  Shares
are redeemed so that the payee will receive payment  approximately  the first of
the  month.  Any  income  and  capital  gain  dividends  will  be  automatically
reinvested at net asset value. A sufficient number of full and fractional shares
will be redeemed to make the designated payment.  Depending upon the size of the
payments  requested  and  fluctuations  in the net  asset  value  of the  shares
redeemed, redemptions for the purpose of making such payments may reduce or even
exhaust the account.

The purchase of Class A shares while  participating  in a systematic  withdrawal
plan will  ordinarily be  disadvantageous  to the investor  because the investor
will be paying a sales  charge on the  purchase  of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Portfolios will not knowingly permit additional investments
of less  than  $2,000 if the  investor  is at the same  time  making  systematic
withdrawals.  KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege,  Class
B shares and Class C shares made pursuant to a systematic  withdrawal  plan. The
right is reserved to amend the  systematic  withdrawal  plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Portfolios.


Tax-Sheltered   Retirement   Plans.  The  Shareholder   Service  Agent  provides
retirement plan services and documents and KDI can establish  investor  accounts
in any of the following types of retirement plans:

     o    Traditional,   Roth  and  Education  Individual   Retirement  Accounts
          ("IRAs").  This includes Savings Incentive Match Plan for Employees of
          Small Employers  ("SIMPLE"),  Simplified Employee Pension Plan ("SEP")
          IRA accounts and prototype documents.

     o    403(b)(7)  Custodial  Accounts.  This  type of plan  is  available  to
          employees of most non-profit organizations.

     o    Prototype  money  purchase  pension  and  profit-sharing  plans may be
          adopted by employers.  The maximum annual contribution per participant
          is the lesser of 25% of compensation or $30,000.

                                       49
<PAGE>

Brochures  describing  the above plans as well as model defined  benefit  plans,
target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials
for  establishing  them are available  from the  Shareholder  Service Agent upon
request.   Investors   should  consult  with  their  own  tax  advisors   before
establishing a retirement plan.


The  Portfolios  may suspend the right of  redemption or delay payment more than
seven  days (a)  during  any  period  when the  Exchange  is closed  other  than
customary  weekend and holiday closings or during any period in which trading on
the Exchange is restricted,  (b) during any period when an emergency exists as a
result of which (i) disposal of the  Portfolios'  investments  is not reasonably
practicable,  or (ii) it is not  reasonably  practicable  for the  Portfolios to
determine the value of its net assets,  or (c) for such other periods as the SEC
may by order permit for the protection of the Portfolio's shareholders.

The  conversion  of Class B  Shares  to Class A  Shares  may be  subject  to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other  assurance  acceptable  to the Portfolio to the effect that (a)
the assessment of the  distribution  services fee with respect to Class B Shares
and not Class A Shares does not result in the Portfolio's dividends constituting
"preferential  dividends"  under the  Internal  Revenue  Code,  and (b) that the
conversion  of Class B Shares to Class A Shares  does not  constitute  a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available.  In that event, no
further  conversions of Class B Shares would occur, and Shares might continue to
be subject to the  distribution  services fee for an indefinite  period that may
extend beyond the proposed conversion date as described in the prospectus.


OFFICERS AND TRUSTEES


The officers and trustees of the Trust, their ages, their principal  occupations
and their affiliations, if any, with the Advisor, and Kemper Distributors, Inc.,
are as follows:


<TABLE>

<CAPTION>
---------------------------------- ----------------------- --------------------------------------- -------------------------
                                                                                                   Position with
                                                                                                   Underwriter,
                                                                                                   Kemper Distributors,
Name, Age, and Address             Position with Fund      Principal Occupation**                  Inc.
----------------------             ------------------      --------------------                    ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
<S>                                <C>                     <C>                                     <C>
Henry P. Becton, Jr. (56)          Trustee                 President, WGBH Educational Foundation  --
WGBH
125 Western Avenue
Allston, MA 02134
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Linda C. Coughlin (48)+*           Trustee and President   Managing Director of Zurich Scudder     Director and Vice
                                                           Investments, Inc.                       Chairman
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Dawn-Marie Driscoll (53)           Trustee                 Executive Fellow, Center for Business  --
4909 SW 9th Place                                          Ethics, Bentley College; President,
Cape Coral, FL  33914                                      Driscoll Associates (consulting firm)
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Edgar R. Fiedler (70)              Trustee                 Senior Fellow and Economic Counselor,   --
50023 Brogden                                              The Conference Board,
Chapel Hill, NC                                            Inc.(not-for-profit business research
                                                           organization)
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Keith R. Fox (45)                  Trustee                 General Partner, Exeter Group of Funds  --
10 East 53rd Street
New York, NY  10022
---------------------------------- ----------------------- --------------------------------------- -------------------------


                                       50
<PAGE>
---------------------------------- ----------------------- --------------------------------------- -------------------------
                                                                                                   Position with
                                                                                                   Underwriter,
                                                                                                   Kemper Distributors,
Name, Age, and Address             Position with Fund      Principal Occupation**                  Inc.
----------------------             ------------------      --------------------                    ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
Joan E. Spero (55)                 Trustee                 President, Doris Duke Charitable        --
Doris Duke Charitable Foundation                           Foundation; Department of State -
650 Fifth Avenue                                           Undersecretary of State for Economic,
New York, NY  10128                                        Business and Agricultural Affairs
                                                           (March 1993 to January 1997)
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Jean Gleason Stromberg (56)        Trustee                 Consultant; Director, Financial         --
3816 Military Road, NW                                     Institutions Issues, U.S. General
Washington, D.C.                                           Accounting Office (1996-1997);
                                                           Partner, Fulbright & Jaworski (law
                                                           firm) (1978-1996)
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Jean C. Tempel (56)                Trustee                 Managing  Director, First Light         --
One Boston Place 23rd Floor                                Capital, LLC (venture capital firm)
Boston, MA 02108
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Steven Zaleznick (45)*             Trustee                 President and CEO, AARP Services, Inc.  --
601 E Street
Washington, D.C. 20004
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Ann M. McCreary (43) ++            Vice President          Managing Director of Zurich Scudder     --
                                                           Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Kathryn L. Quirk (47)+             Vice President and      Managing Director of Zurich Scudder     Director, Secretary,
                                   Assistant Secretary     Investments, Inc.                       Chief Legal Officer and
                                                                                                   Vice President
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
John R. Hebble (42)+               Treasurer               Senior Vice President of Zurich         --
                                                           Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Caroline Pearson (38)+             Assistant Secretary     Senior Vice President of Zurich         --
                                                           Scudder Investments, Inc.; Associate,
                                                           Dechert Price & Rhoads (law firm)
                                                           1989 - 1997
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
John Millette (37)+                Vice President and      Vice President of Zurich Scudder        --
                                   Secretary               Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Thomas V. Bruns (43)#              Vice President          Managing Director of Zurich Scudder     President
                                                           Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
James M. Eysenbach (38)@           Vice President          Managing Director of Zurich Scudder     --
                                                           Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
William F. Glavin (41)#            Vice President          Managing Director of Zurich Scudder     Managing Director
                                                           Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
James E. Masur (40)+               Vice President          Senior Vice President of Zurich         --
                                                           Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
Howard S. Schneider (43)#          Vice President          Managing Director of Zurich Scudder     --
                                                           Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

                                       51

<PAGE>

---------------------------------- ----------------------- --------------------------------------- -------------------------
                                                                                                   Position with
                                                                                                   Underwriter,
                                                                                                   Kemper Distributors,
Name, Age, and Address             Position with Fund      Principal Occupation**                  Inc.
----------------------             ------------------      --------------------                    ----
---------------------------------- ----------------------- --------------------------------------- -------------------------
Brenda Lyons (37)+                 Assistant Treasurer     Senior Vice President of Zurich         --
                                                           Scudder Investments, Inc.
---------------------------------- ----------------------- --------------------------------------- -------------------------

---------------------------------- ----------------------- --------------------------------------- -------------------------
</TABLE>

         *    Ms.  Coughlin and Mr.  Zaleznick are  considered by the Portfolios
              and its counsel to be persons who are "interested  persons" of the
              Advisor or of the Trust,  within  the meaning  of  the  Investment
              Company Act of 1940, as amended.

         **   Unless  otherwise  stated,  all of the Trustees and officers  have
              been associated with their respective companies for more than five
              years, but not necessarily in the same capacity.
         +    Address:  Two International Place, Boston, Massachusetts
         ++   Address:  345 Park Avenue, New York, New York
         #    222 South Riverside Plaza, Chicago, Illinois
         @    101 California Street, San Francisco, California

The Trustees and  Officers of the Trusts also serve in similar  capacities  with
other Scudder Funds.


As of  November  30,  2000,  31,434  shares in the  aggregate,  or 14.02% of the
outstanding  shares of Scudder Pathway Series;  Moderate  Portfolio,  Class AARP
were held in the name of Scudder  Trust  Company,  Trustee for the IRA of Arthur
Valla, who may deemed to be the beneficial owner of such shares.

As of November  30,  2000,  104,603  shares in the  aggregate,  or 46.66% of the
outstanding  shares of Scudder Pathway Series;  Moderate  Portfolio,  Class AARP
were held in the name of Scudder  Trust  Company,  Trustee  for the IRA of Wayne
Rambo, who may deemed to be the beneficial owner of such shares.

As of  November  30,  2000,  14,196  shares  in the  aggregate,  or 6.33% of the
outstanding  shares of Scudder Pathway Series;  Moderate  Portfolio,  Class AARP
were  held in the name of Merle and  Betty  Wingo.  They may be deemed to be the
beneficial owner of such shares.


As of November  30,  2000,  484,559  shares in the  aggregate,  or 15.43% of the
outstanding shares of Scudder Pathway Series;  Conservative  Portfolio,  Class S
were held in the name of Union Bank, for the benefit of select omnibus, P.O. Box
85484,  San Diego, CA 92186.  who may deemed to be the beneficial  owner of such
shares.


As of November  30,  2000,  696,055  shares in the  aggregate,  or 22.16% of the
outstanding shares of Scudder Pathway Series;  Conservative  Portfolio,  Class S
were  held  in the  name  of  IBEW  Local  #106  Annuity  Plan,  Zurich  Scudder
Investments,  Trustee, 322 James Avenue,  Jamestown, NY 14701, who may deemed to
be the beneficial owner of such shares.

As of November 30, 2000,  all Trustees and Officers of Scudder  Pathway  Series;
Moderate Portfolio, Scudder Pathway Series; Growth Portfolio and Scudder Pathway
Series;  Conservative Portfolio, as a group, owned beneficially (as that term is
defined in Section 13 (d) of The  Securities and Exchange Act of 1934) less than
1% of the outstanding shares.

To the  knowledge of the  Portfolios,  as of November 30, 2000,  no person owned
beneficially  more  than  5% of  the  outstanding  shares  of any  class  of any
portfolio, except as stated above.




Remuneration

Responsibilities of the Board--Board and Committee Meetings


The Board of Trustees of the Trust is responsible  for the general  oversight of
the Portfolios'  business.  A majority of the Board's members are not affiliated
with Zurich Scudder Investments,  Inc. These "Independent Trustees" have primary
responsibility  for  assuring  that  the  Portfolios  are  managed  in the  best
interests of their shareholders.

                                       52
<PAGE>

The  Board of  Trustees  meets at  least  quarterly  to  review  the  investment
performance  of the  Portfolios  of the  Trust 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 Scudder and its  affiliates for  investment  advisory  services and
other  administrative and shareholder  services.  In this regard, they evaluate,
among other things,  the quality and  efficiency  of the various other  services
provided,  costs  incurred  by  Scudder  and  its  affiliates,  and  comparative
information  regarding fees and expenses of competitive funds. They are assisted
in  this  process  by the  Portfolios'  independent  public  accountants  and by
independent legal counsel selected by the Independent Trustees.

All of the Independent Trustees serve on the Committee of Independent  Trustees,
which nominates  Independent  Trustees and considers other related matters,  and
the  Audit  Committee,   which  selects  the  Portfolios'   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.


                                  REMUNERATION


Each Independent  Trustee receives  compensation for his or her services,  which
includes an annual retainer and an attendance fee for each meeting attended. The
Independent Trustee who serves as lead trustee receives additional  compensation
for his or her service.  No additional  compensation  is paid to any Independent
Trustee  for  travel  time to  meetings,  attendance  at  trustee's  educational
seminars  or  conferences,   service  on  industry  or  association  committees,
participation as speakers at trustees' conferences or service on special trustee
task forces or subcommittees.  Independent  Trustees do not receive any employee
benefits   such  as  pension  or  retirement   benefits  or  health   insurance.
Notwithstanding the schedule of fees, the Independent  Trustees have in the past
and may in the future waive a portion of their compensation.




SHAREHOLDER RIGHTS



The  Portfolios  are  portfolios  of Scudder  Pathway  Series (the  "Trust"),  a
Massachusetts business trust established under a Declaration of Trust dated July
1, 1994.  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 Trust is
comprised  of  three  separate  portfolios:   Conservative  Portfolio,  Moderate
Portfolio (formerly Balanced Portfolio), and Growth Portfolio, all of which were
organized on July 1, 1994.  Each Portfolio is further  divided into five classes
of shares, Class AARP, Class S, Class A, Class B and Class C shares.


Each portfolio  consists of an unlimited number of shares. The Trustees have the
authority to issue additional portfolios to the Trust.

The  Trustees,  in their  discretion,  may authorize the division of shares of a
Portfolio into different  classes  permitting  shares of different classes to be
distributed by different methods.  Although shareholders of different classes of
a Portfolio would have interest in the same portfolio of assets, shareholders of
different  classes may bear  different  expenses in  connection  with  different
methods  of  distribution.  The Trust  will vote its  shares in each  Underlying
Scudder  Fund in  proportion  to the  vote  of all  other  shareholders  of each
respective Underlying Scudder Fund.

The Declaration of Trust (the  "Declaration")  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


                                       53
<PAGE>

judgment or  mistakes of fact or law,  and that the Trust,  will  indemnify  its
Trustees and officers  against  liabilities and expenses  incurred in connection
with litigation in which they may be involved  because of their offices with the
Trust, except if it is determined in the manner provided in the Declaration 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
protects or  indemnifies a Trustee or officer  against any liability to which he
or she would otherwise be subject by reason of willful  misfeasance,  bad faith,
gross negligence, of reckless disregard of duties involved in the conduct of his
or her office.

Under  Massachusetts  law,  shareholders  of such a  trust  may,  under  certain
circumstances,  be held personally liable as partners for the obligations of the
Trust.  The  Declaration of Trust contains an express  disclaimer of shareholder
liability in connection with each Portfolio's property or the acts,  obligations
or  affairs  of  the  Trust.   The   Declaration  of  Trust  also  provides  for
indemnification out of a Portfolio's property of any shareholder held personally
liable for the claims and liabilities  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  Portfolio  itself  would  be  unable  to  meet  its
obligations.


The Portfolios'  activities are supervised by the Trust's Board of Trustees. The
Trust  adopted a plan  pursuant to Rule 18f-3 under the 1940 Act (the "Plan") to
permit the Trust to  establish  a  multiple  class  distribution  system for the
Portfolios.


Each  class  of  shares  will  represent  interests  in the  same  portfolio  of
investments of the Series, and be identical in all respects to each other class,
except as set forth below.  The only  differences  among the various  classes of
shares of the Series  will  relate  solely to: (a)  different  distribution  fee
payments  or  service  fee  payments  associated  with any Rule 12b-1 Plan for a
particular  class of shares and any other  costs  relating  to  implementing  or
amending such Rule 12b-1 Plan (including obtaining  shareholder approval of such
Rule  12b-1  Plan or any  amendment  thereto)  which  will be  borne  solely  by
shareholders of such class;  (b) different  service fees; (c) different  account
minimums;  (d) the  bearing by each class of its Class  Expenses,  as defined in
Section  2(b)  below;  (e) the  voting  rights  related  to any Rule  12b-1 Plan
affecting a specific  class of shares;  (f) separate  exchange  privileges;  (g)
different  conversion  features and (h) different class names and  designations.
Expenses  currently  designated  as "Class  Expenses"  by the  Trust's  Board of
Trustees under the Plan include, for example,  transfer agency fees attributable
to a specific class, and certain securities registration fees.


Each share of each class of the  Portfolios  shall be  entitled  to one vote (or
fraction  thereof in respect of a fractional  share) on matters that such shares
(or class of shares) shall be entitled to vote.  Shareholders  of the Portfolios
shall vote together on any matter,  except to the extent  otherwise  required by
the 1940 Act,  or when the Board of  Trustees  has  determined  that the  matter
affects  only  the  interest  of  shareholders  of one or  more  classes  of the
Portfolios,  in which case only the shareholders of such class or classes of the
Portfolios shall be entitled to vote thereon. Any matter shall be deemed to have
been  effectively  acted upon with  respect to the  Portfolios  if acted upon as
provided  in Rule 18f-2 under the 1940 Act, or any  successor  rule,  and in the
Trust's Declaration of Trust. As used in the Prospectus and in this Statement of
Additional Information,  the term "majority", when referring to the approvals to
be obtained from  shareholders in connection with general matters  affecting the
Trust and all additional  portfolios  (e.g.,  election of directors),  means the
vote of the lesser of (i) 67% of the Trust's shares  represented at a meeting if
the holders of more than 50% of the outstanding  shares are present in person or
by proxy, or (ii) more than 50% of a Portfolio's  outstanding  shares.  The term
"majority",  when referring to the approvals to be obtained from shareholders in
connection  with  matters  affecting  a single  Portfolio  or any  other  single
portfolio (e.g., annual approval of investment management contracts),  means the
vote of the lesser of (i) 67% of the shares of the  portfolio  represented  at a
meeting  if the  holders  of more  than  50% of the  outstanding  shares  of the
portfolio  are  present  in  person  or by  proxy,  or (ii) more than 50% of the
outstanding  shares of the portfolio.  Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.


Additional Information

Other Information


The CUSIP numbers of the classes are:

Conservative Portfolio

                  Class A: 811189-877

                  Class B: 811189-869

                  Class C: 811189-851

Moderate Portfolio

                  Class A: 811189-844

                                       54
<PAGE>

                  Class B: 811189-836

                  Class C: 811189-828

Growth Portfolio

                  Class A: 811189-810

                  Class B: 811189-794

                  Class C: 811189-786

The Portfolios have a fiscal year ending August 31.

Many of the  investment  changes  in the  Portfolios  will  be  made  at  prices
different  from those  prevailing at the time they may be reflected in a regular
report  to  shareholders  of  thePortfolios.  These  transactions  will  reflect
investment decisions made by the Advisor in light of the Portfolio's  investment
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 the  Portfolios  are  held  separately  pursuant  to a
custodian agreement,  by the Portfolios' custodian,  State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110.

The law firm of Dechert is counsel to the Portfolios.


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

 The Portfolios' Shares prospectus and this Statement of Additional  Information
omit  certain  information  contained  in the  Registration  Statement  and  its
amendments which the Portfolios 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 Portfolios 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


The financial statements,  including the investment portfolio of the Portfolios,
together with the Report of Independent  Accountants,  Financial  Highlights and
notes to financial  statements in the Annual Report to the  Shareholders  of the
Portfolios dated August 31, 2000, are  incorporated  herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.



                                       55
<PAGE>

                                    GLOSSARY

Prospective  investors  should  consider  certain  Underlying  Scudder Funds may
engage in the following investment practices.


Common stocks.  Under normal  circumstances,  certain  Underlying  Scudder Funds
invest primarily in common stocks.  Common stock is issued by companies to raise
cash for  business  purposes  and  represents  a  proportionate  interest in the
issuing companies.  Therefore, an Underlying Scudder Fund may participate 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.  Despite the risk of price volatility,  however, common stocks
have historically  offered a greater potential for gain on investment,  compared
to other classes of financial assets such as bonds or cash equivalents, although
there can be no assurance that this will be true in the future.


Convertible   Securities.   Certain  Underlying  Scudder  Funds  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 an Underlying  Scudder Fund may invest are
either  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
debt 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 debt 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 debt
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.


Of course,  like all debt  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  are  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"(TM)).

Small Company  Risk.  The Advisor  believes  that many small  companies may have
sales and earnings growth rates which exceed those of larger companies, and that
such  growth  rates  may  in  turn  be  reflected  in  more  rapid  share  price
appreciation  over time.  However,  investing in smaller company stocks involves
greater risk than is  customarily  associated  with  investing  in larger,  more
established companies.  For example,  smaller companies can have limited product
lines,  markets,  or financial and managerial  resources.  Smaller companies may
also be dependent on one or a few key persons,  and may be more  susceptible  to
losses and risks of bankruptcy. Also, the securities of the smaller companies in
which certain  Underlying  Scudder  Funds may invest,  may be thinly traded (and
therefore  have to be sold at a discount  from current  market prices or sold in
small  lots  over an  extended  period of time).  Transaction  costs in  smaller
company stocks may be higher than those of larger companies.


                                       56
<PAGE>

Investing in emerging  growth  companies.  The investment  risk  associated with
emerging growth  companies is higher than that normally  associated with larger,
older  companies due to the greater  business  risks of small size, the relative
age of the company,  limited product lines,  distribution channels and financial
and managerial  resources.  Further,  there is typically less publicly available
information concerning smaller companies than for larger, more established ones.

The securities of small companies are often traded  over-the-counter and may not
be  traded  in  the  volumes   typical  on  a  national   securities   exchange.
Consequently,  in order to sell this type of holding, an Underlying Scudder Fund
may need to  discount  the  securities  from  recent  prices or  dispose  of the
securities  over a long period of time.  The prices of this type of security may
be more  volatile  than those of larger  companies  which are often  traded on a
national securities exchange.


Investments  Involving  Above-Average Risk. Certain Underlying Scudder Funds may
purchase  securities  involving  above-average  risk. For example, an Underlying
Scudder Fund has invested from time to time in  relatively  new companies but is
limited by a  non-fundamental  policy that it may not invest more than 5% of its
total assets in companies that, with their predecessors, have been in continuous
operation for less than three years. The Underlying Scudder Fund's portfolio may
also  include  the  securities  of small  or  little-known  companies,  commonly
referred  to as  emerging  growth  companies,  that the  Advisor  believes  have
above-average  earnings  growth  potential  and/or may  receive  greater  market
recognition.  Both factors are  believed to offer  significant  opportunity  for
capital  appreciation.  Investment risk is higher than that normally  associated
with larger,  older companies due to the higher  business risks  associated with
small size,  frequently  narrow product lines and relative  immaturity.  To help
reduce risk, the Underlying  Scudder Fund allocates its  investments  among many
companies and different industries.


The securities of such companies are often traded only  over-the-counter and may
not be  traded  in the  volume  typical  of  trading  on a  national  securities
exchange.  As a  result,  the  disposition  by the  Underlying  Scudder  Fund of
holdings of such  securities may require the Underlying  Scudder Fund to offer a
discount from recent prices or to make many small sales over a lengthy period of
time. Such securities may be subject to more abrupt or erratic market  movements
than those typically encountered on national securities exchanges.


Investment-Grade  Bonds. The Fund may purchase  "investment-grade"  bonds, which
are those  rated Aaa,  Aa, or A or Baa by  Moody's or AAA,  AA, A or BBB by S&P.
Investment-grade  securities  are those rated in the four highest  categories by
Moody's  (Aaa,  Aa,  A, or Baa) or by S&P (AAA,  AA, A or BBB) or,  if  unrated,
judged  to be of  equivalent  quality  as  determined  by the  Advisor.  Moody's
considers  bonds  it  rates  Baa  to  have  speculative   elements  as  well  as
investment-grade  characteristics.  To the  extent an  Underlying  Scudder  Fund
invests  in  higher-grade  securities,  it will be  unable  to avail  itself  of
opportunities for higher income which may be available with lower grades.

High Yield/High Risk Bonds.  Certain Underlying Scudder Funds may invest in debt
securities which are rated below investment-grade (commonly referred to as "junk
bonds"; that is, rated below Baa by Moody's or BBB by S&P and unrated securities
judged  to  be of  equivalent  quality  as  determined  by  the  Advisor.  These
securities  usually entail greater risk (including the possibility of default or
bankruptcy  of the  issuers  of such  securities),.  Generally  involve  greater
volatility  of price and risk to principal  and income,  and may be less liquid,
than  securities in higher rating  categories.  ). The lower the ratings of such
debt  securities,  the more their  risks  render  them like  equity  securities.
Securities  rated D may be in default  with  respect to payment of  principal or
interest.  Information regarding the ratings of debt securities and the identity
of those Underlying Scudder Funds that can invest in  investment-grade  or below
investment-grade  debt  securities may be found in the Ratings  Appendix to this
Statement of Additional Information.





                                       57
<PAGE>

Municipal  Obligations.  Certain  Underlying Scudder Funds may acquire municipal
obligations  when,  due to  disparities  in the  debt  securities  markets,  the
anticipated  total  return on such  obligations  is higher  than that on taxable
obligations.  The Underlying Scudder Fund has no current intention of purchasing
tax-exempt  municipal  obligations  that would  amount to greater than 5% of the
Underlying Scudder Fund's total assets.

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.

Zero Coupon  Securities.  Certain  Underlying  Scudder  Funds 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.


Stripped  Zero Coupon  Securities.  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(TM)") and
Certificate of Accrual on Treasuries ("CATS(TM)").  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. The U.S. 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 Fund will be able to have its 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 (i.e.,  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.")


Brady Bonds.  Certain  Underlying Scudder Funds may invest in Brady Bonds, which
are securities created through the exchange of existing commercial bank loans to
public  and  private  entities  in  certain  emerging  markets  for new bonds in
connection with debt  restructurings  under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury,  Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Mexico, Uruguay,
Venezuela, Costa Rica, Argentina, Nigeria, and the Philippines.

Brady Bonds have been issued  only  recently,  and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various  currencies (but primarily the dollar) and are actively traded
in over-the-counter secondary markets.

                                       58
<PAGE>

Dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds or
floating  rate bonds,  are generally  collateralized  in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds.  Interest
payments on these Brady Bonds generally are collateralized by cash or securities
in an amount  that,  in the case of fixed rate  bonds,  is equal to at least one
year of  rolling  interest  payments  or, in the case of  floating  rate  bonds,
initially is equal to at least one year's rolling interest payments based on the
applicable  interest  rate at that time and is  adjusted  at  regular  intervals
thereafter.  Brady  Bonds are often  viewed  as having  three or four  valuation
components:  the  collateralized  repayment of principal at final maturity;  the
collateralized  interest payments;  the uncollateralized  interest payments; and
any uncollateralized  repayment of principal at maturity (these uncollateralized
amounts  constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds, with respect
to commercial  bank loans by public and private  entities,  investments in Brady
Bonds may be viewed as  speculative.  Over $82  billion in Brady Bonds have been
issued by countries in Africa and Latin  America,  with 90% of these Brady Bonds
being denominated in U.S. dollars.


High Yield,  High RiskBonds.  Below investment  grade  securities  (rated Ba and
lower by Moody's and BB and lower by S&P) or unrated  securities judged to be of
equivalent  quality as determined by the Advisor.,  in which certain  Underlying
Scudder Funds may invest. These securities usually entailgreater risk (including
the  possibility  of default or bankruptcy  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 more
their  risks  render  them like  equity  securities.  See the  Appendix  to this
combined Statement of Additional  Information for a more complete description of
the   ratings   assigned   by  ratings   organizations   and  their   respective
characteristics.

Issuers of such high yielding  securities often are highly leveraged and may not
have available to them more  traditional  methods of financing.  Therefore,  the
risk  associated  with  acquiring the  securities  of such issuers  generally is
greater than is the case with higher rated  securities.  For example,  during an
economic  downturn or or a sustained  period of rising  interest  rates,  highly
leveraged  issuers of high yield  securities  may experience  financial  stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest  payment  obligations.   The  issuer's  ability  to  service  its  debt
obligations may also be adversely affected by specific  corporate  developments,
or the issuer's inability to meet specific projected business forecasts,  or the
unavailability  of  additional  financing.  The risk of loss from default by the
issuer is significantly greater for the holders of high yield securities because
such  securities  are generally  unsecured and are often  subordinated  to other
creditors  of the  issuer.  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 the  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 Underlying  Fund may have  difficulty  disposing of certain high yield (high
risk)  securities  because they may have a thin trading market.  Because not all
dealers  maintain  markets in all high yield  securities,  the  Underlying  Fund
anticipates  that such  securities  could be sold  only to a  limited  number of
dealers or  institutional  investors.  The lack of a liquid secondary market may
have an adverse  effect on the market price and the Fund's ability to dispose of
particular issues and may also make it more difficult for the Underlying Fund to
obtain  accurate  market  quotations  for purposes of valuing the Fund's assets.
Market quotations  generally are available on many high yield issues only from a
limited  number of dealers and may not  necessarily  represent firm bids of such
dealers or prices for actual sales.  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
generally  the  policy of the  Investment  Manager  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 the Underlying Fund's investment  objective by investment in such
securities  may be more dependent on the Advisor's  credit  analysis than is the


                                       59
<PAGE>

case for higher  quality  bonds.  Should the rating of a  portfolio  security be
downgraded,  the Advisor will  determine  whether it is in the best interests of
the Underlying Fund to retain or dispose of such security.


Prices for below investment-grade  securities may be affected by legislative and
regulatory developments. For example, new 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.

Sovereign Debt.  Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the  principal  and/or  interest when due in accordance
with the terms of such debt. A governmental  entity's  willingness or ability to
repay  principal  and interest due in a timely  manner may be affected by, among
other factors, its cash flow situation,  the extent of its foreign reserves, the
availability  of sufficient  foreign  exchange on the date a payment is due, the
relative  size of the  debt  service  burden  to the  economy  as a  whole,  the
governmental  entity's policy towards the  International  Monetary Fund, and the
political   constraints  to  which  a   governmental   entity  may  be  subject.
Governmental  entities  may also be  dependent  on expected  disbursements  from
foreign governments, multilateral agencies and others abroad to reduce principal
and  interest  arrearages  on their debt.  The  commitment  on the part of these
governments,  agencies and others to make such  disbursements may be conditioned
on a governmental  entity's  implementation  of economic reforms and/or economic
performance  and the timely  service of such  debtor's  obligations.  Failure to
implement  such reforms,  achieve such levels of economic  performance  or repay
principal  or  interest  when due may result in the  cancellation  of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such  debtor's  ability or  willingness  to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of
such debt and to extend  further  loans to  governmental  entities.  There is no
bankruptcy  proceeding by which  sovereign debt on which  governmental  entities
have defaulted may be collected in whole or in part.


Mortgage-Backed   Securities  and  Mortgage  Pass-Through  Securities.   Certain
Underlying  Scudder Funds 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. An Underlying  Scudder Fund 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.  Underlying  mortgages  may  be of a  variety  of  types,  including
adjustable rate, conventional 30-year, graduated payment and 15-year.

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


                                       60
<PAGE>

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.  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  Underlying  Scudder  Fund  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 Fannie Mae and the Federal Home Loan Mortgage
Corporation ("FHLMC").  Fannie Mae is a  government-sponsored  corporation owned
entirely by private  stockholders.  It is subject to general  regulation  by the
Secretary of Housing and Urban  Development.  Fannie Mae 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  Fannie  Mae  are
guaranteed as to timely  payment of principal and interest by Fannie Mae 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.


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 an Underlying  Scudder
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 Underlying Scudder Fund 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
Advisor  determines  that the  securities  meet the  Underlying  Scudder  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.

                                       61
<PAGE>


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.

The  principal  risk of CMOs results from the rate of  prepayment  on underlying
mortgages  serving as collateral and from the structure of the deal. An increase
or decrease in prepayment rates will affect the yield, average life and price of
CMOs.


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.

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  Advisor  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.  An Underlying  Scudder Fund will not purchase  mortgage-backed
securities  or any other  assets  which,  in the  opinion  of the  Advisor,  are
illiquid if, as a result,  more than 15% of the value of the Underlying  Scudder
Fund's total  assets will be. As new types of  mortgage-related  securities  are
developed  and offered to  investors,  the  Advisor  will,  consistent  with the
Underlying Scudder Fund's investment objective, 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 an Underlying  Scudder Fund's investment  objectives
and policies, the Underlying Scudder 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.

                                       62
<PAGE>


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


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

Asset-backed  securities are often backed by a pool of assets  representing  the
obligations of a number of different  parties.  To lessen the effect of failures
by obligors on underlying  assets to make  payments,  the securities may contain
elements  of credit  support  which  fall  into two  categories:  (i)  liquidity
protection,  and (ii) protection  against losses resulting from ultimate default
by an obligor  on the  underlying  assets.  Liquidity  protection  refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion.  Protection  against  losses  results  from  payment  of the  insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided  through  guarantees,  policies or letters of credit obtained by the
issuer or sponsor from third parties,  through  various means of structuring the
transaction or through a combination of such approaches.  An Underlying  Scudder
Fund 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.

An Underlying Scudder 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 the Underlying Scudder
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
Underlying  Scudder  Fund to  dispose  of any  then  existing  holdings  of such
securities.


Illiquid  Securities  and  Restricted  Securities.


                                       63
<PAGE>

The  Underlying  Fund  may  purchase  securities  that are  subject  to legal or
contractual   restrictions  on  resale  ("restricted   securities").   Generally
speaking,  restricted securities may be sold (i) only to qualified institutional
buyers;  (ii) in a  privately  negotiated  transaction  to a  limited  number of
purchasers;  (iii)  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 (iv)  in a  public  offering  for  which a  registration
statement is in effect under the 1933 Act.

Restricted  securities  are often  illiquid,  but they may also be  liquid.  For
example,  restricted securities that are eligible for resale under Rule 144A are
often deemed to be liquid.

Issuers of restricted  securities may not be subject to the disclosure and other
investor  protection  requirements  that would be applicable if their securities
were publicly traded. Where a registration  statement is required for the resale
of  restricted  securities,  a Fund may be  required  to bear all or part of the
registration  expenses. A Fund may be deemed to be an "underwriter" for purposes
of the 1933 Act when selling  restricted  securities  to the public and, in such
event,  the  Fund  may  be  liable  to  purchasers  of  such  securities  if the
registration  statement  prepared  by the  issuer is  materially  inaccurate  or
misleading.

The  Fund  may  also  purchase  securities  that  are not  subject  to  legal or
contractual limitations on resale, but that are deemed illiquid. Such securities
may be

Illiquid, for example, because there is a limited trading market for them.

The Fund may be unable to sell a restricted or illiquid security.  Moreover,  if
adverse market  conditions  were to develop during the period between the Fund's
decision to sell a  restricted  or illiquid  security and and the point at which
the Fund is  permitted  or able to sell such  security,  the Fund might obtain a
price less favorable than the price that prevailed when it decided to sell.

This  investment  practice,  therefore,  could have the effect of increasing the
level of illiquidity of a Fund.

Repurchase Agreements. Certain Underlying Scudder Funds may invest in repurchase
agreements pursuant to their investment  guidelines.  In a repurchase agreement,
the Fund acquires ownership of a security and  simultaneously  commits to resell
that security to the seller, typically a bank or broker/dealer.

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

                                       64
<PAGE>

It is not clear whether a court would  consider the  Obligation  purchased by an
Underlying Scudder Fund subject to a repurchase  agreement as being owned by the
Underlying  Scudder  Fund or as being  collateral  for a loan by the  Underlying
Scudder Fund to the seller.  In the event of the  commencement  of bankruptcy or
insolvency  proceedings  with  respect  to the seller of the  Obligation  before
repurchase of the Obligation under a repurchase agreement, an Underlying Scudder
Fund may encounter delay and incur costs before being able to sell the security.
Delays may involve  loss of interest or decline in price of the  Obligation.  If
the court  characterizes  the  transaction as a loan and the Underlying  Scudder
Fund has not perfected a security  interest in the  Obligation,  the  Underlying
Scudder Fund may be required to return the Obligation to the seller's estate and
be treated as an unsecured creditor of the seller. As an unsecured creditor, the
Underlying  Scudder Fund would be at risk of losing some or all of the principal
and income  involved in the  transaction.  As with any unsecured debt instrument
purchased for the Underlying  Scudder Fund, the Advisor seeks to reduce 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 an Underlying Scudder Fund may
incur a loss if the  proceeds to the  Underlying  Scudder  Fund of the sale to a
third party are less than the repurchase price.  However, if the market value of
the  Obligation  subject  to the  repurchase  agreement  becomes  less  than the
repurchase price (including  interest),  the Underlying Scudder Fund will direct
the seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the  repurchase  price.  It is possible that an Underlying  Scudder Fund will be
unsuccessful  in  seeking to impose on the seller a  contractual  obligation  to
deliver additional securities.

Repurchase  Commitments.   Certain  Underlying  Scudder  Funds  may  enter  into
repurchase  commitments  with any  party  deemed  creditworthy  by the  Advisor,
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 an  Underlying  Scudder  Fund may
purchase.  Such  transactions  may not provide the Underlying  Scudder Fund with
collateral marked-to-market during the term of the commitment.

Reverse  Repurchase  Agreements.  The Fund may enter  into  "reverse  repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the  securities,  agrees to  repurchase  such  securities  at an agreed time and
price.  The Fund maintains a segregated  account in connection with  outstanding
reverse  repurchase  agreements.  The Fund will  enter into  reverse  repurchase
agreements only when the Advisor  believes that the interest income to be earned
from the investment of the proceeds of the transaction  will be greater than the
interest expense of the transaction. Such transactions may increase fluctuations
in the market value of Fund assets and its yield.


Strategic  Transactions and Derivatives.  Certain  Underlying Scudder Funds may,
but  are not  required  to,  utilize  various  other  investment  strategies  as
described below for a variety of purposes, such as hedging various market risks,
managing the effective  maturity or duration of  fixed-income  securities in the
Fund's portfolio,  or enhancing potential gain. These strategies may be executed
through the use of derivative contracts.


In the course of pursuing these investment  strategies,  the Underlyinhg Scudder
Fund may purchase and sell  exchange-listed  and  over-the-counter  put and call
options on securities,  equity and fixed-income  indices and other  instruments,
purchase  and sell futures  contracts  and options  thereon,  enter into various
transactions such as swaps, caps, floors,  collars,  currency forward contracts,
currency futures contracts, currency swaps or options on currencies, or currency
futures and various other currency transactions (collectively, all the above are
called "Strategic Transactions").  In addition,  strategic transactions may also
include  new  techniques,  instruments  or  strategies  that  are  permitted  as
regulatory  changes  occur.  Strategic  Transactions  may be used without  limit
(subject to certain  limitations  imposed by the 1940 Act) to attempt to protect
against  possible  changes in the market  value of  securities  held in or to be
purchased for the Underlying Scudder Fund's portfolio  resulting from securities
markets or  currency  exchange  rate  fluctuations,  to protect  the  Underlying
Scudder 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  Underlying
Scudder Fund's portfolio,  or to establish a position in the derivatives markets
as a 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  Underlying  Scudder  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  Underlying  Scudder  Fund to
utilize these Strategic  Transactions  successfully will depend on the Advisor's
ability to predict  pertinent  market  movements,  which cannot be assured.  The
Underlying Scudder Fund will comply with applicable regulatory requirements when
implementing   these   strategies,   techniques   and   instruments.   Strategic
Transactions  will  not be used to alter  fundamental  investment  purposes  and
characteristics  of the Underlying Scudder Fund, and the Underlying Scudder Fund


                                       65
<PAGE>

will  segregate  assets (or as provided by  applicable  regulations,  enter into
certain  offsetting  positions) to cover its obligations under options,  futures
and swaps to limit leveraging of the Fund.

Strategic  Transactions,  including derivative contracts,  have risks associated
with them  including  possible  default by the other  party to the  transaction,
illiquidity and, to the extent the Advisor'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 Underlying  Scudder 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 Underlying Scudder 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  Underlying  Scudder  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 Underlying  Scudder Fund creates the possibility that
losses on the hedging  instrument  may be greater than gains in the value of the
Underlying Scudder 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 Underlying Scudder Fund might
not be able to close out a transaction without incurring  substantial losses, if
at all. Although the use of futures and options  transactions for hedging should
tend to  minimize  the risk of loss due to a decline  in the value of the hedged
position,  at the same time they tend to limit any  potential  gain which  might
result from an increase in value of such position.  Finally, the daily variation
margin  requirements  for  futures  contracts  would  create a  greater  ongoing
potential financial risk than would purchases of options,  where the exposure is
limited to the cost of the initial  premium.  Losses  resulting  from the use of
Strategic  Transactions  would reduce net asset value, and possibly income,  and
such  losses  can be greater  than if the  Strategic  Transactions  had not been
utilized.


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

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

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

The  Underlying  Scudder 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


                                       66
<PAGE>

exchange  would cease to exist,  although  outstanding  options on that exchange
would generally continue to be exercisable in accordance with their terms.

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

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


Unless the  parties  provide  for it,  there is no central  clearing or guaranty
function in an OTC option.  As a result,  if the  Counterparty  fails to make or
take delivery of the security,  currency or other  instrument  underlying an OTC
option it has entered into with the  Underlying  Scudder Fund or fails to make a
cash  settlement  payment due in accordance  with the terms of that option,  the
Underlying  Scudder Fund will lose any premium it paid for the option as well as
any anticipated benefit of the transaction. Accordingly, the Advisor must assess
the  creditworthiness  of each  such  Counterparty  or any  guarantor  or credit
enhancement of the  Counterparty's  credit to determine the likelihood  that the
terms of the OTC option will be  satisfied.  The  Underlying  Scudder  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 Advisor. The staff of the SEC currently takes the position
that OTC  options  purchased  by the  Underlying  Scudder  Fund,  and  portfolio
securities  "covering"  the amount of the Underlying  Scudder 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 the  Underlying
Scudder  Fund's  limitation  on  investing no more than 15% of its net assets in
illiquid securities.


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

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

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

General  Characteristics of Futures.  The Underlying Scudder Fund may enter into
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, and
for  duration  management,  risk  management  and return  enhancement  purposes.
Futures are generally  bought and sold on the  commodities  exchanges where they
are listed with payment of initial and variation  margin as described below. The


                                       67
<PAGE>

sale of a futures contract  creates a firm obligation by the Underlying  Scudder
Fund,  as  seller,  to  deliver  to the buyer  the  specific  type of  financial
instrument  called for in the contract at a specific future time for a specified
price (or, with respect to index  futures and  Eurodollar  instruments,  the net
cash amount).  Options on futures contracts are similar to options on securities
except that an option on a futures  contract  gives the  purchaser  the right in
return for the  premium  paid to assume a  position  in a futures  contract  and
obligates the seller to deliver such position.

The  Underlying  Scudder  Fund's use of futures and options  thereon will in all
cases be consistent with applicable  regulatory  requirements  and in particular
the rules and regulations of the Commodity  Futures Trading  Commission and will
be entered  into for bona fide  hedging,  risk  management  (including  duration
management)  or other  portfolio  and return  enhancement  management  purposes.
Typically,  maintaining a futures contract or selling an option thereon requires
the Underlying Scudder 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 the Underlying Scudder Fund. If the Underlying
Scudder Fund  exercises an option on a futures  contract it will be obligated to
post  initial  margin  (and  potential  subsequent  variation  margin)  for  the
resulting futures position just as it would for any position.  Futures contracts
and  options  thereon  are  generally  settled by  entering  into an  offsetting
transaction  but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.

The  Underlying  Scudder Fund will not enter into a futures  contract or related
option (except for closing transactions) if, immediately thereafter,  the sum of
the amount of its initial  margin and  premiums on open  futures  contracts  and
options  thereon would exceed 5% of the  Underlying  Scudder 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.  The  Underlying
Scudder  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.  The  Underlying  Scudder  Fund may  engage in  currency
transactions with Counterparties primarily in order to hedge, or manage the risk
of 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. The Underlying Scudder 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 (except for OTC currency  options) are determined to be of equivalent  credit
quality by the Advisor.


The Underlying  Scudder Fund's dealings in forward currency  contracts and other
currency  transactions  such as futures,  options,  options on futures and swaps
generally will be limited to hedging  involving either specific  transactions or
portfolio  positions except as described below.  Transaction hedging is entering
into a currency  transaction  with respect to specific  assets or liabilities of
the Underlying  Scudder 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.

                                       68
<PAGE>

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

The  Underlying  Scudder 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 the  Underlying  Scudder
Fund has or in which the  Underlying  Scudder  Fund  expects  to have  portfolio
exposure.


To reduce  the  effect of  currency  fluctuations  on the value of  existing  or
anticipated  holdings of portfolio  securities,  the Underlying Scudder Fund may
also engage in proxy  hedging.  Proxy hedging is often used when the currency to
which the Underlying  Scudder 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 the Underlying
Scudder 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 the  Underlying  Scudder  Fund's  securities  denominated in
correlated  currencies.  For example, if the Advisor considers that the Austrian
schilling  is  correlated  to  the  German  deutschemark  (the  "D-mark"),   the
Underlying  Scudder Fund holds  securities  denominated  in  schillings  and the
Advisor  believes  that the value of  schillings  will decline  against the U.S.
dollar,  the Advisor 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 the Underlying Scudder 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 the  Underlying
Scudder Fund is engaging in proxy hedging. If the Underlying Scudder Fund enters
into a currency  hedging  transaction,  the Underlying  Scudder 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 the  Underlying  Scudder 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.  The  Underlying  Scudder  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  Advisor,  it is in the  best
interests of the Underlying  Scudder 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  Advisor's  judgment  that  the  combined  strategies  will  reduce  risk or
otherwise more effectively achieve the desired portfolio  management goal, it is
possible  that the  combination  will  instead  increase  such  risks or  hinder
achievement of the portfolio management objective.


Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Underlying Scudder Fund may enter are interest rate,  currency,  index and other
swaps  and the  purchase  or sale of  related  caps,  floors  and  collars.  The
Underlying  Scudder 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  the
Underlying  Scudder Fund anticipates  purchasing at a later date. The Underlying
Scudder  Fund will not sell  interest  rate caps or floors where it does not own
securities  or other  instruments  providing  the income  stream the  Underlying
Scudder Fund may be obligated to pay.  Interest  rate swaps involve the exchange
by  the  Underlying   Scudder  Fund  with  another  party  of  their  respective
commitments  to pay or receive  interest,  e.g.,  an exchange  of floating  rate
payments for fixed rate payments with respect to a notional amount of principal.
A currency swap is an agreement to exchange  cash flows on a notional  amount of
two or more currencies based on the relative value  differential  among them and
an index swap is an agreement  to swap cash flows on a notional  amount based on
changes in the values of the reference  indices.  The purchase of a cap entitles
the purchaser to receive payments on a notional  principal amount from the party


                                       69
<PAGE>

selling such cap to the extent that a specified  index  exceeds a  predetermined
interest  rate or amount.  The  purchase of a floor  entitles  the  purchaser to
receive  payments on a notional  principal  amount from the party  selling  such
floor to the extent that a specified index falls below a predetermined  interest
rate or amount.  A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.


The Underlying  Scudder Fund will usually enter into swaps on a net basis, i.e.,
the two payment  streams are netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Underlying Scudder Fund receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as the Underlying  Scudder Fund will segregate  assets (or enter into offsetting
positions) to cover its obligations  under swaps, the Advisor and the Underlying
Scudder Fund believes 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 Fund will not enter into any swap,  cap,  floor or
collar  transaction  unless, at the time of entering into such transaction,  the
unsecured  long-term  debt  of  the  Counterparty,   combined  with  any  credit
enhancements,  is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO or is determined to be of equivalent credit quality by the Advisor.
If there is a default by the Counterparty,  the Underlying Scudder 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.  The  Underlying  Scudder 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  Underlying  Scudder  Fund  might use  Eurodollar  futures
contracts and options  thereon to hedge against  changes in LIBOR, to which many
interest rate swaps and fixed income instruments are linked.

Risks of Strategic  Transactions  Outside the U.S.  When  conducted  outside the
U.S., Strategic  Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees,  and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities,  currencies and other instruments.  The value of such positions also
could be adversely affected by: (i) other complex foreign  political,  legal and
economic factors,  (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Underlying Scudder 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  Underlying  Scudder  Fund
segregate  cash or liquid  assets with its  custodian  to the extent  Underlying
Scudder Fund obligations are not otherwise  "covered"  through  ownership of the
underlying security,  financial instrument or currency.  In general,  either the
full amount of any obligation by the  Underlying  Scudder Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or  currency   required  to  be  delivered,   or,   subject  to  any  regulatory
restrictions,  an amount of cash or liquid  assets at least equal to the current
amount of the obligation must be segregated  with the custodian.  The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example,  a call
option  written by the  Underlying  Scudder  Fund will  require  the  Underlying
Scudder  Fund  to  hold  the  securities  subject  to the  call  (or  securities
convertible into the needed securities without  additional  consideration) or to
segregate  cash  or  liquid  assets  sufficient  to  purchase  and  deliver  the
securities  if the  call is  exercised.  A call  option  sold by the  Underlying
Scudder  Fund on an  index  will  require  the  Underlying  Scudder  Fund to own
portfolio  securities  which  correlate  with the index or to segregate  cash or
liquid assets equal to the excess of the index value over the exercise  price on
a current basis.  A put option  written by the Underlying  Scudder Fund requires
the  Underlying  Scudder  Fund to segregate  cash or liquid  assets equal to the
exercise price.

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

OTC options  entered into by the  Underlying  Scudder Fund,  including  those on
securities,  currency,  financial  instruments  or  indices  and OCC  issued and
exchange listed index options, will generally provide for cash settlement.  As a
result,  when the Underlying  Scudder Fund sells these  instruments it will only
segregate  an  amount  of  cash  or  liquid  assets  equal  to its  accrued  net


                                       70
<PAGE>

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

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

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

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


When-Issued Securities. Certain Underlying Scudder Funds may purchase securities
on a "when-issued",  "delayed  delivery" 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  securities  takes place at a
later date.  During the period between  purchase and  settlement,  no payment is
made by an Underlying  Scudder Fund to the issuer and no interest accrues to the
Underlying Scudder Fund. When the Fund purchases such securities, it immediately
assumes the risks of ownership, including the risk of price fluctuation. Failure
to  deliver a  security  purchased  on this basis may result in a loss or missed
opportunity to make an alternative investment.

To the  extent  that  assets  of the  Underlying  Scudder  Fund are held in cash
pending the settlement of a purchase of securities,  the Underlying Scudder Fund
will earn no income.  While such  securities may be sold prior to the settlement
date, the  Underlying  Scudder Fund intends to purchase them with the purpose of
actually acquiring them unless a sale appears desirable for investment  reasons.
At the time the  Underlying  Scudder  Fund makes the  commitment  to  purchase a
security on this basis,  it will record the transaction and reflect the value of
the security in determining its net asset value. At the time of settlement,  the
market value of the securities may be more or less than the purchase price.  The
Fund will  establish a  segregated  account in which it will  maintain  cash and
liquid securities equal in value to commitments for such securities.

Short Sales  Against the Box.  Certain  Underlying  Scudder Funds may make short
sales of common  stocks  if,  at all times  when a short  position  is open,  an
Underlying  Scudder  Fund  owns  the  stock  or owns  preferred  stocks  or debt
securities   convertible   or   exchangeable,   without   payment   of   further
consideration,  into the shares of common stock sold short.  Short sales of this
kind are referred to as short sales  "against the box." The  broker/dealer  that
executes a short sale generally invests cash proceeds of the sale until they are
paid  to the  Underlying  Scudder  Fund.  Arrangements  may  be  made  with  the
broker/dealer  to obtain a portion of the  interest  earned by the broker on the
investment of short sale proceeds.  The  Underlying  Scudder Fund will segregate


                                       71
<PAGE>

the  common  stock  or  convertible  or  exchangeable  preferred  stock  or debt
securities in a special account with the custodian.

Uncertainty regarding the tax effects of short sales of appreciated  investments
may limit the extent to which the Fund may enter into short  sales  against  the
box.

Foreign  Securities.  Certain  Underlying  Scudder  Funds may  invest in foreign
securities.   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  an  Underlying  Scudder  Fund's  performance.   As  foreign
companies  are  not  generally  subject  to  uniform  accounting,  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
securities  markets,   while  growing  in  volume  of  trading  activity,   have
substantially  less volume than the U.S. market,  and securities of some foreign
issuers are less liquid and more volatile than  securities of domestic  issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
U.S. and, at times,  volatility  of price can be greater than in the U.S.  Fixed
commissions  on some foreign  securities  exchanges  and bid to asked spreads in
foreign  bond  markets are  generally  higher than  commissions  or bid to asked
spreads on U.S.  markets,  although an Underlying  Scudder Fund will endeavor to
achieve the most favorable net results on its portfolio  transactions.  There is
generally less government  supervision  and regulation of securities  exchanges,
brokers and listed  companies  than in the U.S. It may be more  difficult for an
Underlying  Scudder  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., thus increasing the risk of delayed settlements of portfolio  transactions
or loss of certificates for portfolio securities. Payment for securities without
delivery may be required in certain foreign markets.  In addition,  with respect
to certain  foreign  countries,  there is the  possibility of  expropriation  or
confiscatory   taxation,   political  or  social   instability,   or  diplomatic
developments which could affect U.S.  investments in those 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.  The  management of an  Underlying  Scudder Fund seeks to mitigate the
risks   associated  with  the  foregoing   considerations   through   continuous
professional management.

Foreign  Currencies.  Because  investments  in foreign  securities  usually will
involve currencies of foreign countries,  and because certain Underlying Scudder
Funds may hold foreign currencies and forward  contracts,  futures contracts and
options on foreign currencies and foreign currency futures contracts,  the value
of the assets of such Underlying Scudder Fund 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  Underlying  Scudder Fund may incur
costs in connection with conversions between various currencies. Fluctuations in
exchange  rates may also affect the earning power and asset value of the foreign
entity issuing the security.

The  strength  or  weakness  of the U.S.  dollar  against  these  currencies  is
responsible for part of the Fund's investment  performance.  If the dollar falls
in value  relative to the  Japanese  yen,  for  example,  the dollar  value of a
Japanese  stock  held in the  portfolio  will rise even  though the price of the
stock remains  unchanged.  Conversely,  if the dollar rises in value relative to
the yen,  the  dollar  value of the  Japanese  stock  will  fall.  Many  foreign
currencies have experienced significant devaluation relative to the dollar.

Although an  Underlying  Scudder  Fund values its assets  daily in terms of U.S.
dollars,  it does not intend to convert its holdings of foreign  currencies into
U.S.  dollars on a daily basis.  It will 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 an  Underlying  Scudder  Fund at one rate,  while  offering a lesser  rate of
exchange  should the  Underlying  Scudder Fund desire to resell that currency to
the dealer.  An  Underlying  Scudder  Fund will  conduct  its  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 entering into
options or forward or futures contracts to purchase or sell foreign currencies.


                                       72
<PAGE>


Investing in Emerging  Markets.  An  Underlying  Fund's  investments  in foreign
securities  may be in  developed  countries or in  countries  considered  by the
Fund's Advisor to have developing or "emerging" markets, which involves exposure
to economic  structures  that are generally  less diverse and mature than in the
United States, and to political systems that may be less stable. A developing or
emerging market country can be considered to be a country that is in the initial
stages of its  industrialization  cycle.  Currently,  emerging markets generally
include every country in the world other than the United States,  Canada, Japan,
Australia,   New  Zealand,  Hong  Kong,  Singapore  and  most  Western  European
countries. Currently, investing in many emerging markets may not be desirable or
feasible  because of the lack of adequate  custody  arrangements  for the Fund's
assets,  overly burdensome  repatriation and similar  restrictions,  the lack of
organized and liquid securities markets,  unacceptable  political risks or other
reasons.  As  opportunities to invest in securities in emerging markets develop,
the Fund may expand and further  broaden the group of emerging  markets in which
it invests. In the past, markets of developing or emerging market countries have
been more  volatile  than the  markets of  developed  countries;  however,  such
markets  often have provided  higher rates of return to  investors.  The Advisor
believes that these characteristics may be expected to continue in the future.

Most emerging  securities markets have substantially less volume and are subject
to less governmental  supervision than U.S.  securities  markets.  Securities of
many  issuers in  emerging  markets may be less  liquid and more  volatile  than
securities of comparable domestic issuers. In addition, there is less regulation
of securities  exchanges,  securities dealers, and listed and unlisted companies
in emerging markets than in the United States.

Emerging markets also 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.  Delays in  settlement  could
result in  temporary  periods  when a  portion  of the  assets of an  Underlying
Scudder Fund is uninvested and no return is earned thereon. The inability of the
Underlying  Scudder Fund to make intended  security  purchases due to settlement
problems could cause the Underlying  Scudder Fund to miss attractive  investment
opportunities.  Inability to dispose of portfolio  securities  due to settlement
problems  could result  either in losses to the  Underlying  Scudder Fund due to
subsequent  declines in value of the  portfolio  security or, if the  Underlying
Scudder Fund has entered into a contract to sell the  security,  could result in
possible  liability to the purchaser.  Costs  associated  with  transactions  in
foreign  securities are generally higher than costs associated with transactions
in U.S.  securities.  Such  transactions  also involve  additional costs for the
purchase or sale of foreign currency.

Certain emerging markets require prior  governmental  approval of investments by
foreign  persons,  limit the  amount  of  investment  by  foreign  persons  in a
particular  company,  limit the investment by foreign persons only to a specific
class of securities of a company that may have less advantageous rights than the
classes  available for purchase by  domiciliaries of the countries and/or impose
additional  taxes  on  foreign  investors.  Certain  emerging  markets  may also
restrict  investment  opportunities in issuers in industries deemed important to
national interest.


Certain emerging markets may require governmental  approval for the repatriation
of investment income,  capital or the proceeds of sales of securities by foreign
investors.  In  addition,  if a  deterioration  occurs in an  emerging  market's
balance of payments  or for other  reasons,  a country  could  impose  temporary
restrictions on foreign capital remittances. An Underlying Scudder Fund could be
adversely   affected  by  delays  in,  or  a  refusal  to  grant,  any  required
governmental approval for repatriation of capital, as well as by the application
to the Underlying Scudder Fund of any restrictions on investments.

In the course of investment in emerging market debt  obligations,  an Underlying
Scudder  Fund  will  be  exposed  to the  direct  or  indirect  consequences  of
political,  social  and  economic  changes  in one  or  more  emerging  markets.
Political  changes in emerging market countries may affect the willingness of an
emerging  market  country  governmental  issuer to make or  provide  for  timely
payments of its obligations.  The country's economic status, as reflected, among
other  things,  in its inflation  rate,  the amount of its external debt and its
gross domestic product, also affects its ability to honor its obligations. While
the Underlying Scudder Fund will manage its assets in a manner that will seek to
minimize the exposure to such risks,  and will further reduce risk by owning the
bonds of many issuers, there can be no assurance that adverse political,  social
or economic changes will not cause the Underlying  Scudder Fund to suffer a loss
of  value  in  respect  of the  securities  in  the  Underlying  Scudder  Fund's
portfolio.


The risk  also  exists  that an  emergency  situation  may  arise in one or more
emerging  markets as a result of which trading of securities may cease or may be
substantially  curtailed and prices for an Underlying  Scudder Fund's securities
in such markets may not be readily available. The Fund may suspend redemption of
its shares for any period during which an emergency exists, as determined by the
Securities and Exchange  Commission.  Accordingly if the Underlying Scudder Fund
believes that  appropriate  circumstances  exist,  it will promptly apply to the


                                       73
<PAGE>

Commission for a determination  that an emergency is present.  During the period
commencing from the Underlying  Scudder Fund's  identification of such condition
until  the  date  of  the  Commission  action,  the  Underlying  Scudder  Fund's
securities  in the affected  markets will be valued at fair value  determined in
good faith by or under the direction of the Fund's Board.


Volume and  liquidity  in most  foreign bond markets are less than in the United
States  and  securities  of many  foreign  companies  are less  liquid  and more
volatile than  securities of comparable  U.S.  companies.  Fixed  commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S.  exchanges,  although an Underlying  Scudder Fund  endeavors to achieve the
most  favorable  net results on its portfolio  transactions.  There is generally
less government  supervision and regulation of business and industry  practices,
securities exchanges,  brokers,  dealers and listed companies than in the United
States.  Mail service  between the United  States and foreign  countries  may be
slower or less reliable than within the United States,  thus increasing the risk
of delayed  settlements of portfolio  transactions or loss of  certificates  for
portfolio  securities.  In addition,  with respect to certain emerging  markets,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect the Underlying
Scudder Fund's  investments in those countries.  Moreover,  individual  emerging
market  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.  The
chart below sets forth the risk ratings of selected  emerging market  countries'
sovereign debt securities.



          Sovereign Risk Ratings for Selected Emerging Market Countries
        (Source: J.P. Morgan Securities, Inc., Emerging Markets Research)

       COUNTRY                MOODY'S              STANDARD & Poor's

       Chile                  Baa1                 A-
       Turkey                 B1                   B
       Mexico                 Ba2                  BB
       Czech Republic         Baa1                 A
       Hungary                Baa3                 BBB-
       Colombia               Baa3                 BBB-
       Venezuela              Ba2                  B+
       Morocco                NR                   NR
       Argentina              Ba3                  BB
       Brazil                 B1                   BB-
       Poland                 Baa3                 BBB-
       Ivory Coast            NR                   NR


An  Underlying  Scudder Fund may have limited  legal  recourse in the event of a
default with respect to certain debt  obligations  it holds.  If the issuer of a
fixed-income  security  owned  by the  Underlying  Scudder  Fund  defaults,  the
Underlying  Scudder Fund may incur  additional  expenses to seek recovery.  Debt
obligations  issued by  emerging  market  country  governments  differ from debt
obligations  of private  entities;  remedies from  defaults on debt  obligations
issued by emerging  market  governments,  unlike those on private debt,  must be
pursued in the courts of the defaulting  party itself.  The  Underlying  Scudder
Fund's ability to enforce its rights against private issuers may be limited. The
ability to attach assets to enforce a judgment may be limited. Legal recourse is
therefore  somewhat  diminished.  Bankruptcy,  moratorium and other similar laws
applicable to private issuers of debt obligations may be substantially different
from those of other countries.  The political context,  expressed as an emerging
market  governmental  issuer's  willingness  to  meet  the  terms  of  the  debt
obligation,  for  example,  is  of  considerable  importance.  In  addition,  no
assurance can be given that the holders of commercial  bank debt may not contest
payments  to the  holders  of debt  obligations  in the event of  default  under
commercial  bank loan  agreements.

Income from securities held by an Underlying  Scudder Fund could be reduced by a
withholding  tax on the source or other  taxes  imposed by the  emerging  market
countries  in which the  Underlying  Scudder  Fund  makes its  investments.  The
Underlying Scudder Fund's net asset value may also be affected by changes in the
rates or methods of taxation  applicable  to the  Underlying  Scudder Fund or to
entities in which the  Underlying  Scudder Fund has  invested.  The Advisor will
consider the cost of any taxes in determining  whether to acquire any particular
investments,  but can provide no assurance that the taxes will not be subject to
change.


                                       74
<PAGE>

Many  emerging  markets  have  experienced  substantial,  and  in  some  periods
extremely  high  rates  of  inflation  for  many  years.   Inflation  and  rapid
fluctuations  in  inflation  rates  have had and may  continue  to have  adverse
effects on the  economies  and  securities  markets of certain  emerging  market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain  countries.  Of these countries,  some, in recent years, have
begun to control inflation through prudent economic policies.

Emerging market governmental issuers are among the largest debtors to commercial
banks,  foreign  governments,  international  financial  organizations and other
financial  institutions.  Certain emerging market governmental  issuers have not
been able to make  payments of interest on or principal of debt  obligations  as
those  payments  have  come due.  Obligations  arising  from past  restructuring
agreements  may  affect  the  economic  performance  and  political  and  social
stability of those issuers.

Governments  of many emerging  market  countries  have exercised and continue to
exercise  substantial  influence over many aspects of the private sector through
the ownership or control of many companies, including some of the largest in any
given  country.  As a result,  government  actions  in the  future  could have a
significant  effect on economic  conditions in emerging markets,  which in turn,
may adversely affect companies in the private sector,  general market conditions
and prices and yields of certain of the  securities  in the  Underlying  Scudder
Fund's  portfolio.   Expropriation,   confiscatory  taxation,   nationalization,
political,  economic or social  instability or other similar  developments  have
occurred  frequently  over the  history of certain  emerging  markets  and could
adversely  affect the Underlying  Scudder Fund's assets should these  conditions
recur.

The  ability of  emerging  market  country  governmental  issuers to make timely
payments  on their  obligations  is  likely  to be  influenced  strongly  by the
issuer's balance of payments,  including export  performance,  and its access to
international  credits and  investments.  An emerging  market whose  exports are
concentrated  in a few  commodities  could be  vulnerable  to a  decline  in the
international   prices   of  one  or  more  of  those   commodities.   Increased
protectionism  on the part of an emerging  market's  trading partners could also
adversely  affect the country's  exports and diminish its trade account surplus,
if any. To the extent that emerging  markets  receive payment for its exports in
currencies other than dollars or non-emerging market currencies,  its ability to
make debt payments  denominated  in dollars or  non-emerging  market  currencies
could be affected.

Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country.  Fluctuations
in the level of these  reserves  affect the amount of foreign  exchange  readily
available  for  external  debt  payments  and thus  could  have a bearing on the
capacity  of  emerging   market   countries  to  make  payments  on  these  debt
obligations.


To the extent that an emerging  market country cannot  generate a trade surplus,
it must  depend on  continuing  loans  from  foreign  governments,  multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign  investment.  The access of emerging  markets to these
forms of  external  funding  may not be certain,  and a  withdrawal  of external
funding  could  adversely   affect  the  capacity  of  emerging  market  country
governmental  issuers to make payments on their  obligations.  In addition,  the
cost of servicing  emerging market debt  obligations can be affected by a change
in international  interest rates since the majority of these  obligations  carry
interest rates that are adjusted periodically based upon international rates.

Investing in Latin America.

                                       75
<PAGE>

Investing in securities of Latin  American  issuers may entail risks relating to
the potential  political  and economic  instability  of certain  Latin  American
countries and the risks of expropriation,  nationalization,  confiscation or the
imposition of restrictions on foreign  investment and on repatriation of capital
invested.  In the event of expropriation,  nationalization or other confiscation
by any country, the Underlying Fund could lose its entire investment in any such
country.

The securities  markets of Latin American  countries are substantially  smaller,
less developed,  less liquid and more volatile than the major securities markets
in the U.S.  Disclosure  and  regulatory  standards  are in many  respects  less
stringent than U.S. standards. Furthermore, there is a lower level of monitoring
and regulation of the markets and the activities of investors in such markets.

The limited size of many Latin American  securities  markets and limited trading
volume in the securities of Latin American issuers compared to volume of trading
in the  securities of U.S.  issuers could cause prices to be erratic for reasons
apart  from  factors  that  affect  the  soundness  and  competitiveness  of the
securities  issuers.  For  example,  limited  market size may cause prices to be
unduly influenced by traders who control large positions.  Adverse publicity and
investors'  perceptions,  whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.

Some Latin American  countries also may have managed  currencies,  which are not
free floating against the U.S. dollar.  In addition,  there is risk that certain
Latin American  countries may restrict the free  conversion of their  currencies
into other  currencies.  Further,  certain Latin American  currencies may not be
internationally  traded.  Certain of these  currencies have  experienced a steep
devaluation  relative to the U.S. dollar.  Any devaluations in the currencies in
which the Underlying  Scudder Fund's  portfolio  securities are  denominated may
have a detrimental impact on the Underlying Scudder Fund's net asset value.

The economies of individual  Latin  American  countries may differ  favorably or
unfavorably  from the U.S.  economy  in such  respects  as the rate of growth of
gross domestic product, the rate of inflation,  capital  reinvestment,  resource
self-sufficiency  and  balance of  payments  position.  Certain  Latin  American
countries  have   experienced   high  levels  of  inflation  which  can  have  a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic  policies.  Furthermore,  certain Latin
American  countries  may impose  withholding  taxes on dividends  payable to the
Underlying  Scudder  Fund at a higher rate than those  imposed by other  foreign
countries.  This may reduce the  Underlying  Scudder  Fund's  investment  income
available for distribution to shareholders.

Certain Latin American countries such as Argentina,  Brazil and Mexico are among
the largest debtors to commercial banks and foreign  governments.  Some of these
countries have in the past defaulted on their sovereign debt. At times,  certain
Latin  American  countries  have declared  moratoria on the payment of principal
and/or interest on outstanding  debt.


                                       76
<PAGE>




Latin America is a region rich in natural  resources such as oil,  copper,  tin,
silver, iron ore, forestry, fishing, livestock and agriculture. The region has a
large  population  (roughly 300 million)  representing a large domestic  market.
Economic  growth was strong in the 1960's and  1970's,  but slowed  dramatically
(and in some  instances was negative) in the 1980's as a result of poor economic
policies,  higher international  interest rates, and the denial of access to new
foreign  capital.  Although a number of Latin  American  countries are currently
experiencing  lower rates of inflation  and higher rates of real growth in Gross
Domestic  Product  than they have in the past,  other Latin  American  countries
continue to experience significant problems,  including high inflation rates and
high interest rates. Capital flight has proven a persistent problem and external
debt has been forcibly restructured.  Political turmoil, high inflation, capital
repatriation   restrictions,   and  nationalization   have  further  exacerbated
conditions.


Governments  of many Latin  American  countries  have  exercised and continue to
exercise  substantial  influence over many aspects of the private sector through
the  ownership or control of many  companies,  including  some of the largest in
those  countries.  As a result,  government  actions in the future  could have a
significant  effect on economic  conditions which may adversely affect prices of
certain   portfolio   securities.    Expropriation,    confiscatory    taxation,
nationalization,  political,  economic or social  instability  or other  similar
developments,  such as military coups,  have occurred in the past and could also
adversely affect the Underlying Scudder Fund's investments in this region.

Changes in political leadership,  the implementation of market oriented economic
policies, such as privatization, trade reform and fiscal and monetary reform are
among the recent steps taken to renew  economic  growth.  External debt is being
restructured  and flight capital  (domestic  capital that has left home country)
has begun to return. Inflation control efforts have also been implemented.  Free
Trade Zones are being  discussed in various  areas  around the region,  the most
notable  being a free zone among  Mexico,  the U.S.  and Canada and another zone
among four countries in the southernmost point of Latin America.  Currencies are
typically weak, but most are now relatively free floating, and it is not unusual
for the currencies to undergo wide  fluctuations  in value over short periods of
time due to changes in the market.

Special  Considerations  Affecting the Pacific Basin. Certain Underlying Scudder
Funds are  susceptible to political and economic  factors  affecting  issuers in
Pacific  Basin  countries.  Many  of the  countries  of the  Pacific  Basin  are
developing both  economically and politically.  Pacific Basin countries may have
relatively  unstable  governments,  economies based on only a few commodities or
industries,  and securities markets trading infrequently or in low volumes. Some
Pacific Basin  countries  restrict the extent to which  foreigners may invest in
their  securities  markets.  Securities of issuers located in some Pacific Basin
countries tend to have volatile prices and may offer  significant  potential for
loss as well as gain.  Further,  certain  companies in the Pacific Basin may not
have firmly established product markets, may lack depth of management, or may be
more vulnerable to political or economic developments such as nationalization of
their own industries.

Economies of  individual  Pacific Basin  countries in which  certain  Underlying
Scudder  Funds may invest,  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,  interest  rate levels,  and
balance of payments position. Of particular importance, most of the economies in
this region of the world are heavily  dependent  upon exports,  particularly  to
developed  countries,  and,  accordingly,  have  been  and  may  continue  to be
adversely affected by trade barriers,  managed  adjustments in relative currency
values, and other  protectionist  measures imposed or negotiated by the U.S. and
other  countries with which they trade.  These  economies also have been and may


                                       77
<PAGE>

continue to be negatively  impacted by economic conditions in the U.S. and other
trading  partners,  which can lower the demand for goods produced in the Pacific
Basin.


With  respect to the  Peoples  Republic  of China and other  markets in which an
Underlying   Scudder  Fund  may   participate,   there  is  the  possibility  of
nationalization,  expropriation  or confiscatory  taxation,  political  changes,
government regulation,  social instability or diplomatic developments that could
adversely impact a Pacific Basin country including the Underlying Scudder Fund's
investment in that country.


Foreign companies,  including Pacific Basin companies, are not generally subject
to uniform accounting, auditing and financial reporting standards, practices and
disclosure  requirements  comparable  to  those  applicable  to U.S.  companies.
Consequently,  there  may be less  publicly  available  information  about  such
companies  than  about  U.S.  companies.   Moreover,  there  is  generally  less
government supervision and regulation of Pacific Basin stock exchanges, brokers,
and listed companies than in the U.S.

Investing in Africa.  Africa is a continent of roughly 50 countries with a total
population of approximately  840 million people.  Literacy rates (the percentage
of  people  who are  over 15  years  of age and who  can  read  and  write)  are
relatively low,  ranging from 20% to 60%. The primary  industries  include crude
oil, natural gas, manganese ore,  phosphate,  bauxite,  copper,  iron,  diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.


Many of the countries in which certain  Underlying  Scudder Funds may invest are
fraught with political  instability.  However,  there has been a trend in recent
years toward  democratization.  Many countries are moving from a military style,
Marxist, or single party government to a multi-party system. Still, there remain
many countries that do not have a stable political process. Other countries have
been enmeshed in civil wars and border clashes.


Economically, the Northern Rim countries (including Morocco, Egypt, and Algeria)
and  Nigeria,  Zimbabwe  and South  Africa are the  wealthier  countries  on the
continent.  The  market  capitalization  of these  countries  has  been  growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges.
However,   religious  and  ethnic  strife  has  been  a  significant  source  of
instability.


On the other end of the economic  spectrum are countries,  such as  Burkinafaso,
Madagascar,  and Malawi,  that are  considered  to be among the poorest or least
developed in the world.  These  countries are generally  landlocked or have poor
natural resources. The economies of many African countries are heavily dependent
on international  oil prices.  Of all the African  industries,  oil has been the
most lucrative, accounting for 40% to 60% of many countries' GDP.
However,  general  decline  in oil  prices  has had an  adverse  impact  on many
economies.


Eastern Europe.  Certain  Underlying  Scudder Funds may invest up to 5% of their
total  assets  in the  securities  of  issuers  domiciled  in  Eastern  European
countries.  Investments in companies domiciled in Eastern European countries may
be subject to  potentially  greater risks than those of other  foreign  issuers.
These  risks  include  (i)  potentially  less  social,  political  and  economic
stability;  (ii) the small current size of the markets for such  securities  and
the low volume of trading,  which result in less  liquidity and in greater price
volatility;  (iii) certain  national  policies which may restrict the Underlying
Scudder Fund's investment opportunities, including restrictions on investment in
issuers or  industries  deemed  sensitive  to national  interests;  (iv) foreign
taxation;  (v) the absence of developed legal  structures  governing  private or
foreign  investment  or  allowing  for  judicial  redress  for injury to private
property;   (vi)  the  absence,  until  recently  in  certain  Eastern  European
countries,  of a capital market structure or market-oriented  economy; and (vii)
the possibility  that recent favorable  economic  developments in Eastern Europe
may be slowed or reversed by  unanticipated  political or social  events in such
countries, or in the countries of the former Soviet Union.

                                       78
<PAGE>

Investments in such countries  involve risks of  nationalization,  expropriation
and  confiscatory  taxation.  The  Communist  governments  of a  number  of East
European  countries  expropriated large amounts of private property in the past,
in many cases without adequate compensation,  and there may be no assurance that
such  expropriation  will  not  occur  in the  future.  In  the  event  of  such
expropriation,  the Underlying Scudder Fund could lose a substantial  portion of
any investments it has made in the affected  countries.  Further,  no accounting
standards exist in East European  countries.  Finally,  even though certain East
European  currencies may be convertible into U.S. dollars,  the conversion rates
may be  artificial  to the  actual  market  values  and  may be  adverse  to the
Underlying Scudder Fund's shareholders.


Investing in Europe.  Most Eastern European nations in which certain  Underlying
Scudder Funds may invest, including Hungary, Poland, Czechoslovakia, and Romania
have had centrally  planned,  socialist  economies since shortly after World War
II. A number  of their  governments,  including  those  of  Hungary,  the  Czech
Republic,  and Poland are currently implementing or considering reforms directed
at  political  and  economic   liberalization,   including   efforts  to  foster
multi-party political systems,  decentralize economic planning,  and move toward
free market economies.  At present,  no Eastern European country has a developed
stock market, but Poland,  Hungary, and the Czech Republic have small securities
markets in  operation.  Ethnic and civil  conflict  currently  rage  through the
former Yugoslavia. The outcome is uncertain.

Both the  European  Community  (the "EC") and  Japan,  among  others,  have made
overtures  to  establish  trading   arrangements  and  assist  in  the  economic
development  of the Eastern  European  nations.  A great deal of  interest  also
surrounds  opportunities  created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable  member  of the EC  and  numerous  other  international  alliances  and
organizations.  To reduce  inflation  caused by the unification of East and West
Germany,  Germany has adopted a tight monetary  policy which has led to weakened
exports and a reduced  domestic demand for goods and services.  However,  in the
long-term,   reunification  could  prove  to  be  an  engine  for  domestic  and
international growth.


The conditions that have given rise to these  developments  are changeable,  and
there is no assurance  that  reforms  will  continue or that their goals will be
achieved.

                                       79
<PAGE>

Portugal is a genuinely emerging market which has experienced rapid growth since
the mid-1980s,  except for a brief period of stagnation over 1990-91. Portugal's
government  remains committed to privatization of the financial system away from
one dependent upon the banking system to a more balanced  structure  appropriate
for the requirements of a modern economy.  Inflation continues to be about three
times the EC average.

Economic  reforms launched in the 1980s continue to benefit Turkey in the 1990s.
Turkey's  economy has grown steadily since the early 1980s,  with real growth in
per capita  Gross  Domestic  Product  (GDP)  increasing  more than 6%  annually.
Agriculture remains the most important economic sector,  employing approximately
55% of the labor force, and accounting for nearly 20% of GDP and 20% of exports.
Inflation  and  interest  rates remain  high,  and a large  budget  deficit will
continue to cause  difficulties  in  Turkey's  substantial  transformation  to a
dynamic free market economy.

Like many other Western economies,  Greece suffered severely from the global oil
price hikes of the 1970s,  with annual GDP growth  plunging from 8% to 2% in the
1980s, and inflation, unemployment, and budget deficits rising sharply. The fall
of the  socialist  government  in 1989  and the  inability  of the  conservative
opposition to obtain a clear majority have led to business  uncertainty  and the
continued  prospects for flat economic  performance.  Once Greece has sorted out
its  political  situation,  it will  have to face  the  challenges  posed by the
steadily increasing integration of the EC, including the progressive lowering of
trade and investment barriers. Tourism continues as a major industry,  providing
a vital offset to a sizable commodity trade deficit.

Securities traded in certain emerging European securities markets may be subject
to risks due to the inexperience of financial intermediaries, the lack of modern
technology  and the  lack  of a  sufficient  capital  base  to  expand  business
operations.  Additionally,  former  Communist  regimes  of a number  of  Eastern
European  countries had  expropriated a large amount of property,  the claims of
which  have  not been  entirely  settled.  There  can be no  assurance  that the
Underlying  Scudder  Fund's  investments  in  Eastern  Europe  would not also be
expropriated,  nationalized  or otherwise  confiscated.  Finally,  any change in
leadership or policies of Eastern European countries, or countries that exercise
a  significant  influence  over those  countries,  may halt the  expansion of or
reverse the  liberalization  of foreign  investment  policies now  occurring and
adversely affect existing investment opportunities.


Depositary Receipts. Certain Underlying Scudder Funds may invest in sponsored or
unsponsored American Depositary Receipts ("ADRs"),  European Depositary Receipts
("EDR"), Global Depositary Receipts ("GDRs"),  International Depositary Receipts
("IDRs") and other types of Depositary Receipts (which, together with ADRs, GDRs
and IDRs are  hereinafter  referred  to as  "Depositary  Receipts").  Depositary
Receipts  provide   indirect   investment  in  securities  of  foreign  issuers.
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 Depositary Receipts typically issued by a U.S. bank or trust
company which evidence  ownership of underlying  securities  issued by a foreign
corporation.  GDRs,  IDRs and other types of  Depositary  Receipts 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 an Underlying
Scudder Fund's investment policies, the Underlying Scudder Fund's investments in
ADRs,  GDRs  and  other  types  of  Depositary  Receipts  will be  deemed  to be
investments in the underlying securities.  Depositary Receipts,  including those
denominated in U.S.  dollars will be subject to foreign  currency  exchange rate
risk. However, by investing in U.S. dollar-denominated ADRs rather than directly
in foreign  issuers' stock, the Underlying Fund avoids currency risks during the
settlement  period.  In general,  there is a large,  liquid market in the United
States for most ADRs. However,  certain Depositary Receipts may not be listed on
an exchange and therefore may be illiquid securities.

Loan Participations and Assignments. Certain Underlying Scudder Funds may invest
in fixed and floating rate loans ("Loans") arranged through private negotiations
between an issuer of emerging market debt  instruments and one or more financial
institutions  ("Lenders").  An Underlying Scudder Fund's investments in Loans in
Latin America are expected in most instances to be in the form of participations
in Loans ("Participations") and assignments of portions of Loans ("Assignments")
from third  parties.  Participations  typically  will  result in the  Underlying
Scudder Fund having a contractual relationship only with the Lender and not with
the  borrower.  The  Underlying  Scudder  Fund will  have the  right to  receive
payments of  principal,  interest and any fees to which it is entitled only from
the Lender selling the  Participation and only upon receipt by the Lender of the
payments from the borrower.  In connection with purchasing  Participations,  the
Underlying  Scudder Fund generally  will have no right to enforce  compliance by
the borrower with the terms of the loan agreement  relating to the Loan, nor any
rights of set-off against the borrower,  and the Underlying Scudder Fund may not
directly  benefit  from  any  collateral  supporting  the  Loan in  which it has
purchased  the  Participation.  As a result,  the  Underlying  Scudder Fund will


                                       80
<PAGE>

assume the credit risk of both the  borrower  and the Lender that is selling the
Participation.  In  the  event  of  the  insolvency  of  the  Lender  selling  a
Participation,  the Underlying Scudder Fund may be treated as a general creditor
of the Lender and may not benefit  from any  set-off  between the Lender and the
borrower.  The Underlying Scudder Fund will acquire  Participations  only if the
Lender  interpositioned  between the Underlying Scudder Fund and the borrower is
determined by the Advisor to be creditworthy.


When  an  Underlying  Scudder  Fund  purchases  Assignments  from  Lenders,  the
Underlying  Scudder Fund will acquire  direct rights against the borrower on the
Loan.  Because  Assignments are arranged  through private  negotiations  between
potential assignees and potential assignors, however, the rights and obligations
acquired by the  Underlying  Scudder Fund as the purchaser of an Assignment  may
differ from, and may be more limited than, those held by the assigning Lender.

An Underlying  Scudder Fund may have  difficulty  disposing of  Assignments  and
Participations. Because no liquid market for these obligations typically exists,
the Underlying  Scudder Fund  anticipates that these  obligations  could be sold
only to a  limited  number  of  institutional  investors.  The  lack of a liquid
secondary  market will have an adverse effect on the  Underlying  Scudder Fund's
ability to dispose of particular Assignments or Participations when necessary to
meet the Underlying  Scudder Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid  secondary  market for Assignments and  Participations  may
also make it more difficult for the Underlying Scudder Fund to assign a value to
those securities for purposes of valuing the Underlying Scudder Fund's portfolio
and calculating its net asset value.

Real Estate Investment Trusts. Certain Underlying Scudder Funds invest in REITs.
REITs are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs.  REITs, which invest the majority of their assets directly in real
property,  derive  their  income  primarily  from rents.  Equity  REITs can also
realize  capital gains by selling  properties  that have  appreciated  in value.
Mortgage  REITs,  which  invest  the  majority  of their  assets in real  estate
mortgages,  derive their income primarily from interest  payments on real estate
mortgages in which they are invested.  Hybrid REITs combine the  characteristics
of both equity  REITs and  mortgage  REITs.  Investment  in REITs may subject an
Underlying  Scudder 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 an  Underlying  Scudder
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 and to maintain exemption from the registration requirements of the 1940
Act. By investing in REITs  indirectly  through an  Underlying  Scudder  Fund, a
shareholder will bear not only his or her proportionate share of the expenses of
an Underlying Scudder 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.


Trust Preferred  Securities.  Certain  Underlying  Scudder Funds 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 Underlying  Scudder Funds 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 Underlying Scudder
Funds, 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  an   Underlying   Scudder  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


                                       81
<PAGE>

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 Underlying Scudder
Funds, to sell their holdings.


Investment  Company  Securities.   The  Underlying  Scudder  Funds  may  acquire
securities  of other  investment  companies  to the extent  consistent  with its
investment  objective  and  subject  to the  limitations  of the 1940  Act.  The
Underlying  Scudder Fund will  indirectly  bear its  proportionate  share of any
management fees and other expenses paid by such other investment companies.


For example,  the Underlying  Scudder Fund may invest in a variety of investment
companies  which  seek to track the  composition  and  performance  of  specific
indexes or a specific portion of an index.  These  index-based  investments hold
substantially  all of their assets in  securities  representing  their  specific
index. Accordingly, the main risk of investing in index-based investments is the
same as investing in a portfolio of equity securities  comprising the index. The
market prices of index-based  investments will fluctuate in accordance with both
changes in the market value of their underlying  portfolio securities and due to
supply and demand for the  instruments on the exchanges on which they are traded
(which may result in their  trading  at a  discount  or premium to their  NAVs).
Index-based  investments  may not  replicate  exactly the  performance  of their
specified  index  because of  transaction  costs and  because  of the  temporary
unavailability of certain component securities of the index.

Examples of index-based investments include:

SPDRs(R):  SPDRs,  an acronym for "Standard & Poor's  Depositary  Receipts," are
based on the S&P 500  Composite  Stock Price Index.  They are issued by the SPDR
Trust,  a unit  investment  trust that  holds  shares of  substantially  all the
companies  in the S&P 500 in  substantially  the  same  weighting  and  seeks to
closely track the price performance and dividend yield of the Index.

MidCap  SPDRs(R):  MidCap SPDRs are based on the S&P MidCap 400 Index.  They are
issued by the MidCap SPDR Trust, a unit investment  trust that holds a portfolio
of securities  consisting of  substantially  all of the common stocks in the S&P
MidCap 400 Index in substantially  the same weighting and seeks to closely track
the price performance and dividend yield of the Index.

Select Sector SPDRs(R):  Select Sector SPDRs are based on a particular sector or
group of  industries  that are  represented  by a specified  Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end  management  investment  company with nine
portfolios  that each seeks to closely track the price  performance and dividend
yield of a particular Select Sector Index.

DIAMONDS(SM):  DIAMONDS are based on the Dow Jones Industrial Average(SM).  They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.

Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100  Trust, a unit investment  trust that holds a portfolio
consisting of substantially  all of the securities,  in  substantially  the same
weighting,  as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.

WEBs(SM):  WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific  Morgan Stanley Capital International  Indexes. They are issued
by the WEBs Index Fund,  Inc., an open-end  management  investment  company that
seeks to generally  correspond to the price and yield  performance of a specific
Morgan Stanley Capital International Index.

Non-diversified   investment  company.  Certain  Underlying  Scudder  Funds  are
classified as  non-diversified  investment  companies  under the 1940 Act, which
means  that an  Underlying  Scudder  Fund is not  limited by the 1940 Act in the
proportion  of its  assets  that it may  invest in the  obligations  of a single
issuer.  The  investment of a large  percentage of an Underlying  Scudder Fund's
assets in the  securities  of a small number of issuers may cause an  Underlying
Scudder  Fund's  share  price  to  fluctuate  more  than  that of a  diversified
investment company.

Precious metals.  Investments in precious metals and in precious  metals-related
securities  and companies  involve a relatively  high degree of risk.  Prices of
gold and  other  precious  metals  can be  influenced  by a  variety  of  global
economic,  financial and political factors and may fluctuate markedly over short


                                       82
<PAGE>

periods of time.  Among other things,  precious metals values can be affected by
changes in inflation,  investment  speculation,  metal sales by  governments  or
central banks, changes in industrial and commercial demand, and any governmental
restrictions on private ownership of gold or other precious metals.


Correlation of gold and gold securities.  The Advisor believes that the value of
the securities of firms that deal in gold will correspond generally,  over time,
with the prices of the underlying metal. At any given time, however,  changes in
the  price of gold may not  strongly  correlate  with  changes  in the  value of
securities  related to gold,  which are expected to  constitute  part of certain
Underlying  Scudder  Funds' assets.  In fact,  there may be periods in which the
price of gold stocks and gold will move in different directions.  The reason for
this  potential  disparity is that  political  and economic  factors,  including
behavior of the stock  market,  may have  differing  impacts on gold versus gold
stocks.


Mining and exploration risks. The business of gold mining by its nature involves
significant  risks and  hazards,  including  environmental  hazards,  industrial
accidents, labor disputes, discharge of toxic chemicals, fire, drought, flooding
and natural acts. The  occurrence of any of these hazards can delay  production,
increase  production costs and result in liability to the operator of the mines.
A mining  operation  may become  subject to  liability  for  pollution  or other
hazards  against which it has not insured or cannot insure,  including  those in
respect of past mining activities for which it was not responsible.

Exploration  for gold and  other  precious  metals  is  speculative  in  nature,
involves many risks and  frequently is  unsuccessful.  There can be no assurance
that any mineralisation  discovered will result in an increase in the proven and
probable reserves of a mining operation.  If reserves are developed, it can take
a number of years from the initial  phases of  drilling  and  identification  of
mineralisation  until  production  is  possible,  during which time the economic
feasibility of production may change.  Substantial  expenditures are required to
establish  ore  reserves  properties  and to  construct  mining  and  processing
facilities.  As a result of these uncertainties,  no assurance can be given that
the  exploration  programs  undertaken  by a particular  mining  operation  will
actually result in any new commercial mining.

Asset-Indexed   Securities.   Certain  Underlying  Scudder  Funds  may  purchase
asset-indexed  securities which are debt securities  usually issued by companies
in precious  metals related  businesses  such as mining,  the principal  amount,
redemption  terms, or interest rates of which are related to the market price of
a specified  precious  metal.  An  Underlying  Scudder Fund will only enter into
transactions  in publicly  traded  asset-indexed  securities.  Market  prices of
asset-indexed  securities will relate  primarily to changes in the market prices
of the  precious  metals to which the  securities  are  indexed  rather  than to
changes  in  market  rates of  interest.  However,  there  may not be a  perfect
correlation between the price movements of the asset-indexed  securities and the
underlying precious metals.  Asset-indexed securities typically bear interest or
pay dividends at below market rates (and in certain cases at nominal rates). The
Underlying  Scudder Fund will  purchase  asset-indexed  securities to the extent
permitted by law.


Special situation securities.  From time to time, an Underlying Scudder Fund may
invest in equity or debt  securities  issued by companies that are determined by
the  Advisor to possess  "special  situation"  characteristics.  In  general,  a
special situation company is a company whose securities are expected to increase
in value solely by reason of a development  particularly or uniquely  applicable
to the company.  Developments that may create special situations include,  among
others,  a liquidation,  reorganization,  recapitalization  or merger,  material
litigation,   technological   breakthrough  and  new  management  or  management
policies.  The principal risk with investments in special situation companies is
that the anticipated development thought to create the special situation may not
occur and the  investments  therefore may not appreciate in value or may decline
in value.

Borrowing.

Certain  Underlying Scudder Funds are authorized to borrow money for
purposes of  liquidity  and to provide for  redemptions  and  distributions.  An
Underlying  Scudder  Fund  will  borrow  only  when the  Advisor  believes  that
borrowing  will  benefit the  Underlying  Scudder Fund after taking into account
considerations  such as the costs of the borrowing.  Borrowing by the Underlying
Scudder Fund will involve special risk considerations. Although the principal of
the Underlying  Scudder Fund's borrowings will be fixed, the Underlying  Scudder
Fund's  assets may change in value during the time a borrowing  is  outstanding,
proportionately increasing exposure to capital risk.

                                       83
<PAGE>

Lending of Portfolio  Securities.  Certain  Underlying Scudder Funds may seek to
increase their income by lending portfolio securities. Such loans may be made to
registered  broker/dealers,  and are  required  to be  secured  continuously  by
collateral in cash, U.S. Government  securities and high grade debt obligations,
maintained  on a current  basis at an amount at least equal to the market  value
and accrued interest of the securities  loaned.  An Underlying  Scudder Fund has
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  Underlying  Scudder Fund
continues to receive the equivalent of any  distributions  paid by the issuer on
the securities loaned and also receives  compensation based on investment of the
collateral.  As with  other  extensions  of  credit  there are risks of delay in
recovery  and a 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  Advisor  to be of good  standing  and  will not be made  unless,  in the
judgment of the Advisor,  the  consideration  to be earned from such loans would
justify the risk.

Corporate and  Municipal  Bond  Ratings.  The following is a description  of the
ratings given by S&P and Moody's to corporate and  municipal  bonds.  Should the
rating of a portfolio security held by an Underlying Scudder Fund be downgraded,
the Advisor will determine  whether it is in the best interest of the Underlying
Scudder Fund to retain or dispose of such security.


S&P.  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.

Debt rated CCC has a currently  identifiable  vulnerability  to default,  and is
dependent upon favorable  business,  financial,  and economic conditions to meet
timely  payment of interest and repayment of principal.  In the event of adverse
business,  financial,  or  economic  conditions,  it is not  likely  to have the
capacity to pay interest and repay  principal.  The CCC rating  category is also
used for debt  subordinated to senior debt that is assigned an actual or implied
B or B- rating.  The rating CC  typically  is  applied to debt  subordinated  to
senior  debt that is  assigned  an actual or implied  CCC  rating.  The rating C
typically  is applied to debt  subordinated  to senior debt which is assigned an
actual  or  implied  CCC-  debt  rating.  The C  rating  may be used to  cover a
situation where a bankruptcy  petition has been filed, but debt service payments
are  continued.  The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest  payments or principal  payments are not made on the date due even
if the  applicable  grace period had not expired,  unless S&P believes that such
payments will be made during such grace  period.  The D rating also will be used
upon  the  filing  of  a  bankruptcy  petition  if  debt  service  payments  are
jeopardized.

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.

                                       84
<PAGE>

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  other 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.

Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present  elements of danger with  respect to principal or interest.
Bonds which are rated Ca represent  obligations  which are speculative in a high
degree.  Such  issues are often in default  or have other  marked  shortcomings.
Bonds which are rated C are the lowest  rated class of bonds and issues so rated
can be regarded as having  extremely  poor  prospects of ever attaining any real
investment standing.




                                       85
<PAGE>



                             SCUDDER PATHWAY SERIES:
                             CONSERVATIVE PORTFOLIO
                               MODERATE PORTFOLIO
                                GROWTH PORTFOLIO

                            PART C. OTHER INFORMATION

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

<S>                <C>                    <C>
                   (a)(1)                 Declaration of Trust dated July 1, 1994 is incorporated by
                                          reference to the original Registration Statement.

                   (a)(2)                 Certificate of Amendment to Declaration of Trust dated January
                                          10, 1995, is incorporated by reference to Pre-Effective
                                          Amendment No. 1 to the Registration Statement.

                   (a)(3)                 Certificate of Amendment to Declaration of Trust dated
                                          September 16, 1996, is incorporated by reference to
                                          Pre-Effective Amendment No. 1 to Registration Statement.

                   (a)(4)                 Establishment and Designation of Shares of Beneficial Interest,
                                          $0.01 par value, Class S and Class AARP with respect to
                                          Balanced Portfolio, Conservative Portfolio and Growth Portfolio
                                          is incorporated by reference to Post-Effective Amendment No. 8
                                          to the Registration Statement.

                   (a)(5)                 Amended and Restated Establishment and Designation of Shares of
                                          Beneficial Interest, Classes A, B, C with respect to
                                          Conservative Portfolio is filed herein.

                   (a)(6)                 Amended and Restated Establishment and Designation of Shares of
                                          Beneficial Interest, Classes A, B, C with respect to Moderate
                                          Portfolio is filed herein.

                   (a)(7)                 Amended and Restated Establishment and Designation of Shares of
                                          Beneficial Interest, Classes A, B, C with respect to Growth
                                          Portfolio is filed herein.

                   (b)(1)                 By-Laws, dated July 1, 1994, is incorporated by reference to
                                          the original Registration Statement.

                   (b)(2)                 Amendment to the By-Laws, dated November 13 ,2000 is filed
                                          herein.

                   (c)                    Inapplicable.


<PAGE>

                   (d)                    Investment Management Agreement between the Registrant and
                                          Scudder Kemper Investments, Inc., dated September 7, 1998, is
                                          incorporated by reference to Post-Effective Amendment No. 5 to
                                          the Registration Statement.

                   (e)(1)                 Underwriting Agreement between the Registrant and Scudder
                                          Investor Services, Inc., dated September 7, 1998, is
                                          incorporated by reference to Post Effective Amendment No. 5 to
                                          the Registration Statement. (Previously filed as Exhibit e to
                                          Post-Effective Amendment No. 5.)

                   (e)(2)                 Underwriting Agreement between the Registrant and Scudder
                                          Investor Services, Inc., dated May 18, 2000, is incorporated by
                                          reference to Post-Effective Amendment No. 9 to the Registration
                                          Statement.

                   (e)(3)                 Underwriting and Distribution Services Agreement between the
                                          Registrant and Kemper Distributors, Inc., (on behalf of
                                          Conservative Portfolio, Moderate Portfolio and Growth
                                          Portfolio) dated November 9, 2000 is filed herein.

                   (f)                    Inapplicable.

                   (g)(1)                 Custodian Contract between the Registrant and State Street Bank
                                          and Trust Company, dated November 15, 1996, is incorporated by
                                          reference to Post-Effective Amendment No. 3 to the Registration
                                          Statement.

                   (g)(2)                 Amendment to Custodian Agreement between Registrant and State
                                          Street Bank and Trust Company is incorporated by reference to
                                          Post-Effective Amendment No. 6 to the Registration Statement.

                   (g)(3)                 Amendment to Custodian Agreement between Registrant and State
                                          Street Bank and Trust Company is filed herein.


                   (h)(1)(a)              Special Servicing Agreement between the Registrant, the
                                          Underlying Scudder Funds, Scudder Service Corporation, Scudder
                                          Fund Accounting Corporation, Scudder Trust Company and Scudder,
                                          Stevens & Clark, Inc. dated November 15, 1996, is incorporated
                                          by reference to Post-Effective Amendment No. 1 to the
                                          Registration Statement.

                                       2

<PAGE>

                   (h)(1)(b)              Amendment to Special Servicing Agreement between Registrant and
                                          the Underlying Scudder Funds, Scudder Servicing Corporation,
                                          Scudder Fund Accounting Corporation, Scudder Trust Company and
                                          Scudder Stevens & Clark dated May 15,1997, is incorporated by
                                          reference to Post-Effective Amendment No. 4 to the Registration
                                          Statement.

                   (h)(2)                 Transfer Agency and Service Agreement between the Registrant
                                          and Scudder Service Corporation dated November 15, 1996, is
                                          incorporated by reference to Post-Effective Amendment No. 1 to
                                          the Registration Statement.

                   (h)(3)                 Agency Agreement between the Registrant (on behalf of
                                          Conservative Portfolio, Moderate Portfolio and Growth
                                          Portfolio) and Kemper Service Company, dated November 8, 2000,
                                          is filed herein.

                   (h)(4)                 COMPASS Service Agreement between the Registrant and Scudder
                                          Trust Company, dated November 15, 1996, is incorporated by
                                          reference to Post-Effective Amendment No. 3 to the Registration
                                          Statement.

                   (h)(5)(a)              Fund Accounting Services Agreement between Scudder Pathway
                                          Series: Conservative Portfolio and Scudder Fund Accounting
                                          Corporation dated November 15, 1996, is incorporated by
                                          reference to Post-Effective Amendment No. 1 to the Registration
                                          Statement.

                   (h)(5)(b)              Fund Accounting Services Agreement between Scudder Pathway
                                          Series: Balanced Portfolio and Scudder Fund Accounting
                                          Corporation dated November 14, 1996, is incorporated by
                                          reference to Post-Effective Amendment No. 1 to the Registration
                                          Statement.

                   (h)(5)(c)              Fund Accounting Services Agreement between Scudder Pathway
                                          Series: Growth Portfolio and Scudder Fund Accounting
                                          Corporation dated November 14, 1996, is incorporated by
                                          reference to Post-Effective Amendment No. 1 to the Registration
                                          Statement.

                   (h)(6)(a)              Revised Fund Accounting Services Agreement between the
                                          Registrant (on behalf of Conservative Portfolio) and Scudder
                                          Fund Accounting Corporation, dated November 13, 2000, is filed
                                          herein.

                   (h)(6)(b)              Revised Fund Accounting Services Agreement between the
                                          Registrant (on behalf of Growth Portfolio) and Scudder Fund
                                          Accounting Corporation, dated November 13, 2000, is filed
                                          herein.

                                       3
<PAGE>

                   (h)(6)(c)              Revised Fund Accounting Services Agreement between the
                                          Registrant (on behalf of Moderate Portfolio) and Scudder Fund
                                          Accounting Corporation, dated November 13, 2000, is filed
                                          herein.

                   (h)(7)                 Administrative Agreement between the Registrant and Scudder
                                          Kemper Investments. Inc. dated September 25, 2000 is filed
                                          herein.

                   (h)(8)                 Shareholder Services Agreement between the Registrant and
                                          Kemper Distributors, Inc. dated November 13, 2000 is filed
                                          herein.

                   (h)(9)                 Amended and Restated Administrative Agreement between the
                                          Registrant and Scudder Kemper Investments. Inc. dated November
                                          13, 2000 is filed herein.

                   (i)                    Opinion and Consent of Counsel is filed herein.

                   (j)                    Consent of Independent Accountants is filed herein.

                   (k)                    Inapplicable.

                   (l)                    Inapplicable.

                   (m)(1)                 Rule 12b-1 Plan between the Registrant, on behalf of Moderate
                                          Portfolio (Class A, B and C shares),dated November 13, 2000, is
                                          filed herein.

                   (m)(2)                 Rule 12b-1 Plan between the Registrant, on behalf of
                                          Conservative Portfolio (Class A, B and C shares), dated
                                          November 13, 2000, is filed herein.

                   (m)(3)                 Rule 12b-1 Plan between the Registrant, on behalf of Growth
                                          Portfolio (Class A, B and C shares), dated November 13, 2000,
                                          is filed herein.

                   (n)(1)                 Plan with respect to Scudder Pathway Balanced Portfolio
                                          pursuant to Rule 18f-3 is incorporated by reference to
                                          Post-Effective Amendment No. 9 to the Registration Statement.

                   (n)(2)                 Plan with respect to Scudder Pathway Conservative Portfolio
                                          pursuant to Rule 18f-3 is incorporated by reference to
                                          Post-Effective Amendment No. 9 to the Registration Statement.

                   (n)(3)                 Plan with respect to Scudder Pathway Growth Portfolio pursuant
                                          to Rule 18f-3 is incorporated by reference to Post-Effective
                                          Amendment No. 9 to the Registration Statement.

                                       4
<PAGE>

                   (n)(4)                 Amended and Restated Plan with respect to Scudder Pathway
                                          Balanced Portfolio pursuant to Rule 18f-3 is incorporated by
                                          reference to Post-Effective Amendment No. 9 to the Registration
                                          Statement.

                   (n)(5)                 Amended and Restated Plan with respect to Scudder Pathway
                                          Conservative Portfolio pursuant to Rule 18f-3 is incorporated
                                          by reference to Post-Effective Amendment No. 9 to the
                                          Registration Statement.

                   (n)(6)                 Amended and Restated Plan with respect to Scudder Pathway
                                          Growth Portfolio pursuant to Rule 18f-3 is incorporated by
                                          reference to Post-Effective Amendment No. 9 to the Registration
                                          Statement.

                   (n)(7)                 Amended and Restated Plan with respect to Scudder Pathway
                                          Series pursuant to Rule 18f-3 is filed herein.

                   (p)(1)                 Scudder Kemper Investments, Inc. and Scudder Investor Services,
                                          Inc. Code of Ethics is incorporated by reference to
                                          Post-Effective Amendment No. 8 Exhibit p to the Registration
                                          Statement.

                   (p)(2)                 Code of Ethics of Scudder Pathway Series is incorporated by
                                          reference to Post-Effective Amendment No. 9 to the Registration
                                          Statement.
</TABLE>

Item 24.          Persons Controlled by or under Common Control with Registrant.
--------          --------------------------------------------------------------

                  All of the outstanding shares of the Registrant,  representing
                  all of the  interests in the Scudder  Pathway  Series,  on the
                  date  Registrant's  Registration  Statement  becomes effective
                  will  be  owned  by  Scudder  Investor  Services,  Inc.  ("The
                  Distributor").

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

                  A policy of insurance covering Scudder Kemper Investments,
                  Inc., its subsidiaries including Scudder Investor Services,
                  Inc., and all of the registered investment companies advised
                  by Scudder Kemper Investments, Inc. insures the Registrant's
                  trustees and officers and others against liability arising by
                  reason of an alleged breach of duty caused by any negligent
                  act, error or accidental omission in the scope of their
                  duties.

                  Article IV, Sections 4.1 - 4.3 of the Registrant's Declaration
                  of Trust provide as follows:

                  Section 4.1. No Personal Liability of Shareholders, Trustees,
                  Etc. No Shareholder shall be subject to any personal liability
                  whatsoever to any Person in connection with Trust Property or
                  the acts, obligations or affairs of the Trust. No Trustee,
                  officer, employee or agent of the Trust shall be subject to
                  any personal liability whatsoever to any Person, other than to
                  the Trust or its Shareholders, in connection with Trust
                  Property or the affairs of the Trust, save only that arising
                  from bad faith, willful misfeasance, gross negligence or
                  reckless disregard of his duties with respect to such Person;
                  and all


                                       5
<PAGE>

                  such Persons shall look solely to the Trust Property for
                  satisfaction of claims of any nature arising in connection
                  with the affairs of the Trust. If any Shareholder, Trustee,
                  officer, employee, or agent, as such, of the Trust, is made a
                  party to any suit or proceeding to enforce any such liability
                  of the Trust, he shall not, on account thereof, be held to any
                  personal liability. The Trust shall indemnify and hold each
                  Shareholder harmless from and against all claims and
                  liabilities, to which such Shareholder may become subject by
                  reason of his being or having been a Shareholder, and shall
                  reimburse such Shareholder for all legal and other expenses
                  reasonably incurred by him in connection with any such claim
                  or liability. The indemnification and reimbursement required
                  by the preceding sentence shall be made only out of the assets
                  of the one or more Series of which the Shareholder who is
                  entitled to indemnification or reimbursement was a Shareholder
                  at the time the act or event occurred which gave rise to the
                  claim against or liability of said Shareholder. The rights
                  accruing to a Shareholder under this Section 4.1 shall not
                  impair any other right to which such Shareholder may be
                  lawfully entitled, nor shall anything herein contained
                  restrict the right of the Trust to indemnify or reimburse a
                  Shareholder in any appropriate situation even though not
                  specifically provided herein.

                  Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
                  officer, employee or agent of the Trust shall be liable to the
                  Trust, its Shareholders, or to any Shareholder, Trustee,
                  officer, employee, or agent thereof for any action or failure
                  to act (including without limitation the failure to compel in
                  any way any former or acting Trustee to redress any breach of
                  trust) except for his own bad faith, willful misfeasance,
                  gross negligence or reckless disregard of the duties involved
                  in the conduct of his office.

                  Section 4.3. Mandatory Indemnification. (a) Subject to the
                  exceptions and limitations contained in paragraph (b) below:

                  (i)      every person who is, or has been, a Trustee or
                           officer of the Trust shall be indemnified by the
                           Trust to the fullest extent permitted by law against
                           all liability and against all expenses reasonably
                           incurred or paid by him in connection with any claim,
                           action, suit or proceeding in which he becomes
                           involved as a party or otherwise by virtue of his
                           being or having been a Trustee or officer and against
                           amounts paid or incurred by him in the settlement
                           thereof;

                  (ii)     the words "claim," "action," "suit," or "proceeding"
                           shall apply to all claims, actions, suits or
                           proceedings (civil, criminal, administrative or
                           other, including appeals), actual or threatened; and
                           the words "liability" and "expenses" shall include,
                           without limitation, attorneys' fees, costs,
                           judgments, amounts paid in settlement, fines,
                           penalties and other liabilities.

                  (b)      No indemnification shall be provided hereunder to a
                           Trustee or officer:

                           (i)      against any liability to the Trust, a Series
                                    thereof, or the Shareholders by reason of a
                                    final adjudication by a court or other body
                                    before which a proceeding was brought that
                                    he engaged in willful misfeasance, bad
                                    faith, gross negligence or reckless
                                    disregard of the duties involved in the
                                    conduct of his office;

                           (ii)     with respect to any matter as to which he
                                    shall have been finally adjudicated not to
                                    have acted in good faith in the reasonable
                                    belief that his action was in the best
                                    interest of the Trust;



                                       6
<PAGE>

                           (iii)    in the event of a settlement or other
                                    disposition not involving a final
                                    adjudication as provided in paragraph (b)(i)
                                    or (b)(ii) resulting in a payment by a
                                    Trustee or officer, unless there has been a
                                    determination that such Trustee or officer
                                    did not engage in willful misfeasance, bad
                                    faith, gross negligence or reckless
                                    disregard of the duties involved in the
                                    conduct of his office:

                                    (A)      by the court or other body
                                             approving the settlement or other
                                             disposition; or

                                    (B)      based upon a review of readily
                                             available facts (as opposed to a
                                             full trial-type inquiry) by (x)
                                             vote of a majority of the
                                             Disinterested Trustees acting on
                                             the matter (provided that a
                                             majority of the Disinterested
                                             Trustees then in office act on the
                                             matter) or (y) written opinion of
                                             independent legal counsel.

                  (c)      The rights of indemnification herein provided may be
                           insured against by policies maintained by the Trust,
                           shall be severable, shall not affect any other rights
                           to which any Trustee or officer may now or hereafter
                           be entitled, shall continue as to a person who has
                           ceased to be such Trustee or officer and shall insure
                           to the benefit of the heirs, executors,
                           administrators and assigns of such a person. Nothing
                           contained herein shall affect any rights to
                           indemnification to which personnel of the Trust other
                           than Trustees and officers may be entitled by
                           contract or otherwise under law.

                  (d)      Expenses of preparation and presentation of a defense
                           to any claim, action, suit or proceeding of the
                           character described in paragraph (a) of this Section
                           4.3 may be advanced by the Trust prior to final
                           disposition thereof upon receipt of an undertaking by
                           or on behalf of the recipient to repay such amount if
                           it is ultimately determined that he is not entitled
                           to indemnification under this Section 4.3, provided
                           that either:

                           (i)      such undertaking is secured by a surety bond
                                    or some other appropriate security provided
                                    by the recipient, or the Trust shall be
                                    insured against losses arising out of any
                                    such advances; or

                           (ii)     a majority of the Disinterested Trustees
                                    acting on the matter (provided that a
                                    majority of the Disinterested Trustees act
                                    on the matter) or an independent legal
                                    counsel in a written opinion shall
                                    determine, based upon a review of readily
                                    available facts (as opposed to a full
                                    trial-type inquiry), that there is reason to
                                    believe that the recipient ultimately will
                                    be found entitled to indemnification.

                           As used in this Section 4.3, a "Disinterested
                  Trustee" is one who is not (i) an "Interested Person" of the
                  Trust (including anyone who has been exempted from being an
                  "Interested Person" by any rule, regulation or order of the
                  Commission), or (ii) involved in the claim, action, suit or
                  proceeding.

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

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



                                       7
<PAGE>

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

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

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

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

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

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

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



                                       8
<PAGE>

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

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

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


                                       9
<PAGE>

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

     *    Two International Place, Boston, MA
       @  333 South Hope Street, Los Angeles, CA
     **   345 Park Avenue, New York, NY
     #    Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
     ***  Toronto, Ontario, Canada
      @@@ Grand Cayman, Cayman Islands, British West Indies
      o   20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
     ###  1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
     xx   222 S. Riverside, Chicago, IL
     xxx  Zurich Towers, 1400 American Ln., Schaumburg, IL
     @@   P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
     ##   Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
          One South Place, 5th Floor, London EC2M 2ZS England
     ooo  One Exchange Square, 29th Floor, Hong Kong
     +    Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku, Tokyo 105-0001
     x    Level 3, Five Blue Street, North Sydney, NSW 2060

</TABLE>
Item 27.          Principal Underwriters.
--------          ----------------------

         (a)

         Scudder Investor Services, Inc. acts as principal underwriter of the
         Registrant's shares and also acts as principal underwriter for other
         funds managed by Scudder Kemper Investments, Inc.

         (b)

         The Underwriter has employees who are denominated officers of an
         operational area. Such persons do not have corporation-wide
         responsibilities and are not considered officers for the purpose of
         this Item 27.



                                       10
<PAGE>

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

 Scudder Investor Services, Inc.         Position and Offices with               Positions and
        Name and Principal            Scudder Investor Services, Inc.       Offices with Registrant
         Business Address             -------------------------------       -----------------------
         ----------------

<S>  <C>                               <C>                                     <C>
     Lynn S. Birdsong                  Senior Vice President                   None
     345 Park Avenue
     New York, NY 10154-0010

     Ann P. Burbank                    Vice President                          None
     Two International Place
     Boston, MA  02110-4103

     Mark S. Casady                    President, Director and Assistant       None
     Two International Place           Treasurer
     Boston, MA  02110-4103

     Linda C. Coughlin                 Director and Senior Vice President      Trustee and President
     Two International Place
     Boston, MA  02110-4103

     Scott B. David                    Vice President                          None
     Two International Place
     Boston, MA 02110-4103

     Richard W. Desmond                Vice President                          None
     345 Park Avenue
     New York, NY  10154-0010

     William F. Glavin                 Vice President                          None
     Two International Place
     Boston, MA 02110-4103

     Robert J. Guerin                  Vice President                          None
     Two International Place
     Boston, MA 02110-4103

     John R. Hebble                    Assistant Treasurer                     Treasurer
     Two International Place
     Boston, MA  02110-4103

     James J. McGovern                 Chief Financial Officer and Treasurer   None
     345 Park Avenue
     New York, NY  10154-0010

     Kimberly S. Nassar                Vice President                          None
     Two International Place
     Boston, MA  02110-4103

     Gloria S. Nelund                  Vice President                          None
     345 Park Avenue
     New York, NY 10154-0010

     Lorie C. O'Malley                 Vice President                          None
     Two International Place
     Boston, MA 02110-4103



                                       11
<PAGE>


 Scudder Investor Services, Inc.         Position and Offices with               Positions and
        Name and Principal            Scudder Investor Services, Inc.       Offices with Registrant
         Business Address             -------------------------------       -----------------------
         ----------------

     Caroline Pearson                  Clerk                                   Assistant Secretary
     Two International Place
     Boston, MA  02110-4103

     Kevin G. Poole                    Vice President                          None
     Two International Place
     Boston, MA  02110-4103

     Kathryn L. Quirk                  Director, Senior Vice President, Chief  Vice President and
     345 Park Avenue                   Legal Officer and Assistant Clerk       Assistant Secretary
     New York, NY  10154-0010

     Howard S. Schneider               Vice President                          None
     Two International Place
     Boston, MA 02110-4103

     Linda J. Wondrack                 Vice President and Chief Compliance     None
     Two International Place           Officer
     Boston, MA  02110-4103
</TABLE>

         (c)
<TABLE>
<CAPTION>

<S>                  <C>                     <C>                 <C>                 <C>                 <C>
                     (1)                     (2)                 (3)                 (4)                 (5)
                                       Net Underwriting    Compensation on
              Name of Principal         Discounts and        Redemptions          Brokerage             Other
                 Underwriter             Commissions       And Repurchases       Commissions        Compensation
                 -----------             -----------       ---------------       -----------        ------------

<S>                  <C>                     <C>                 <C>                 <C>                 <C>
               Scudder Investor              None                None                None               None
                Services, Inc.

</TABLE>
         (d)

         Kemper Distributors, Inc. acts as principal underwriter of the
         Registrant's shares (on behalf of the Class A, B and C shares of
         Conservative Portfolio, Moderate Portfolio and Growth Portfolio) and
         acts as principal underwriter of the Scudder Kemper Funds.

         (e)

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

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


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

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



                                       12
<PAGE>

         Linda C. Coughlin      Director and Vice Chairman                   None

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

         James J. McGovern      Chief Financial Officer and Treasurer        None

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

         Paula Gaccione         Vice President                               None

         Michael E. Harrington  Managing Director                            None

         Todd N. Gierke         Assistant Treasurer                          None

         Philip J. Collora      Assistant Secretary                          Vice President and Secretary

         Diane E. Ratekin       Assistant Secretary                          None

         Mark S. Casady         Director and Chairman                        President

         Terrence S. McBride    Vice President                               None

         Robert Froelich        Managing Director                            None

         C. Perry Moore         Senior Vice President and Managing Director  None

         Lorie O'Malley         Managing Director                            None

         William F. Glavin      Managing Director                            None

         Gary N. Kocher         Managing Director                            None

         Susan K. Crenshaw      Vice President                               None

         Johnston A. Norris     Managing Director and Senior Vice President  None

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

         Robert J. Guerin       Vice President                               None

         Kimberly S. Nassar     Vice President                               None

         Scott B. David         Vice President                               None

</TABLE>
(f)      Not applicable

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

         Certain accounts, books and other documents required to be maintained
         by Section 31(a) of the 1940 Act and the Rules promulgated thereunder
         are maintained by Scudder Kemper Investments, Inc., Two International
         Place, Boston, MA 02110-4103. Records relating to the duties of the
         Registrant's custodian are maintained by State Street Bank


                                       13
<PAGE>

         & Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
         Records relating to the duties of the Registrant's transfer agent are
         maintained by Scudder Service Corporation, Two International Place,
         Boston, Massachusetts 02110-4103. Records relating to the duties of the
         Registrant's pricing agent are maintained by Scudder Fund Accounting
         Corporation, Two International Place, Boston, Massachusetts 02110-4103.
         Records relating to the duties of the Registrant's underwriter are
         maintained by Scudder Investor Services, Inc., Two International Place,
         Boston, Massachusetts 02110-4103.

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

                  Inapplicable.

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

                  Inapplicable.



                                       14
<PAGE>

                                   SIGNATURES
                                   ----------

         Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 22nd day of December 2000.

                                            SCUDDER PATHWAY SERIES

                                            By /s/ John Millette
                                               -----------------
                                               John Millette
                                               Secretary

         Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                   TITLE                                        DATE
---------                                   -----                                        ----
<S>                                         <C>                                          <C>
/s/ Linda C. Coughlin
--------------------------------------
Linda C. Coughlin                           Trustee and President (Chief                 December 22, 2000
                                            Executive Officer)

/s/ Henry P. Becton, Jr.
--------------------------------------
Henry P. Becton, Jr.*                       Trustee                                      December 22, 2000

/s/Dawn-Marie Driscoll
--------------------------------------
Dawn-Marie Driscoll*                        Trustee                                      December 22, 2000

/s/ Edgar R. Fiedler
--------------------------------------
Edgar R. Fiedler *                          Trustee                                      December 22, 2000

/s/ Keith R. Fox
--------------------------------------
Keith R. Fox*                               Trustee                                      December 22, 2000

/s/ Joan E. Spero
--------------------------------------
Joan E. Spero*                              Trustee                                      December 22, 2000

/s/ Jean Gleason Stromberg
--------------------------------------
Jean Gleason Stromberg *                    Trustee                                      December 22, 2000

/s/ Jean C. Tempel
--------------------------------------
Jean C. Tempel*                             Trustee                                      December 22, 2000

/s/ Steven Zaleznick
--------------------------------------
Steven Zaleznick*                           Trustee                                      December 22, 2000

/s/ John R. Hebble
--------------------------------------
John R. Hebble                              Treasurer (Chief Financial Officer)          December 22, 2000
</TABLE>

<PAGE>


*By:     /s/ John Millette
         -----------------
         John Millette**
         Secretary

**Attorney-in-fact pursuant to the powers of attorney
contained in and incorporated by reference to Post-
Effective Amendment No. 9 to the Registration Statement, as
filed on July 14, 2000.

<PAGE>

                                                               File No. 33-86070
                                                               File No. 811-8606


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



                                    EXHIBITS

                                       TO

                                    FORM N-1A

                         POST-EFFECTIVE AMENDMENT NO. 11
                            TO REGISTRATION STATEMENT

                                      UNDER

                           THE SECURITIES ACT OF 1933

                                       AND

                                AMENDMENT NO. 13
                            TO REGISTRATION STATEMENT

                                      UNDER

                       THE INVESTMENT COMPANY ACT OF 1940



                             SCUDDER PATHWAY SERIES


<PAGE>



                             SCUDDER PATHWAY SERIES

                                  EXHIBIT INDEX

                                 Exhibit (a)(5)

                                 Exhibit (a)(6)

                                 Exhibit (a)(7)

                                 Exhibit (b)(2)

                                 Exhibit (e)(3)

                                 Exhibit (g)(3)

                                 Exhibit (h)(3)

                                Exhibit (h)(6)(a)

                                Exhibit (h)(6)(b)

                                Exhibit (h)(6)(c)

                                 Exhibit (h)(7)

                                 Exhibit (h)(8)

                                 Exhibit (h)(9)

                                   Exhibit (i)

                                   Exhibit (j)

                                 Exhibit (m)(1)

                                 Exhibit (m)(2)

                                 Exhibit (m)(3)

                                 Exhibit (n)(7)



                                        2


© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission