SCUDDER PATHWAY SERIES /NEW/
497, 2001-01-19
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<PAGE>

                               IMPORTANT NEWS FOR
                  FARMERS MUTUAL FUND PORTFOLIOS SHAREHOLDERS

While  we  encourage   you  to  read  the  full  text  of  the  enclosed   Proxy
Statement/Prospectus,  here is a  brief  overview  of a  matter  affecting  your
Farmers Fund that will be the subject of a shareholder vote.

                              QUESTIONS AND ANSWERS

Q:   WHAT AM I BEING ASKED TO VOTE ON?

A:   You are being asked to vote on a proposed  combination of your Farmers Fund
     into  a  corresponding  Scudder  Pathway  Fund.  The  Board  of  your  Fund
     recommends that you vote in favor of this proposal.

Q:   WHY HAS THE BOARD RECOMMENDED THAT I VOTE IN FAVOR OF THE COMBINATION?

A:   The  Board of your Fund is recommending that shareholders vote in favor  of
     this proposal for the following reasons:

     o   LOWER FUND  OPERATING  EXPENSES.  Each  Farmers  Fund  bears fund level
         operating expenses, which are currently capped by contract at an annual
         rate of 1.00% and 1.75% of average daily net assets attributable to the
         Class A and Class B shares of each Farmers Fund, respectively.  Class A
         and Class B shares of each Scudder  Pathway Fund,  through an agreement
         with Zurich  Scudder  Investments,  Inc.,  currently bear no fund level
         operating  expenses other than distribution  expenses at an annual rate
         of 0.25% and 1.00% of  average  daily net  assets  attributable  to the
         Class A and Class B shares of each Scudder Pathway Fund,  respectively.
         Thus, if the combination of your Fund is approved, shareholders of your
         Fund will  benefit  from lower total fund level  operating  expenses as
         shareholders of a corresponding Scudder Pathway Fund.

     o   EXPANDED EXCHANGE  PRIVILEGES.  The shareholders of the Scudder Pathway
         Funds  are able to  exchange  into any fund in the  Scudder  Family  of
         Funds,  while  shareholders of the Farmers Funds currently may exchange
         only into other Farmers Funds.

<PAGE>


     o   SIMILAR  INVESTMENT  OBJECTIVES  AND  POLICIES.  As  described  in more
         detail  below,  the Farmers  Funds and Scudder  Pathway  Funds are both
         portfolios   that  invest  in  mutual  funds  rather  than   individual
         securities,   using  an  asset   allocation   strategy  to  meet  their
         objectives.  Each Scudder Pathway Fund allocates its assets among other
         mutual  funds  in  proportions   similar  to  the  allocations  of  its
         corresponding  Farmers Fund.  There are differences  between the target
         allocations for each Farmers Fund and its  corresponding  Pathway Fund,
         as described in the enclosed Proxy Statement/ Prospectus.

     o   TAX-FREE REORGANIZATION.  It is a condition of the proposed combination
         that your Fund receive an opinion of tax counsel  that the  transaction
         would be a TAX-FREE transaction.

Q:   ARE  THE  INVESTMENT  POLICIES  OF  THE  CORRESPONDING SCUDDER PATHWAY FUND
     SIMILAR TO THOSE OF MY FUND?

A:   Like  each  Farmers  Fund,  each  Scudder  Pathway  Fund is a fund of funds
     advised  by Zurich  Scudder  Investments.  Each  Scudder  Pathway  Fund has
     similar  investment  objectives,  policies  and risks as its  corresponding
     Farmers  Fund.  Your Fund seeks its  objective  by  investing  from among a
     select group of 12 mutual funds,  advised by Zurich Scudder Investments and
     other investment  advisors.  Each Scudder Pathway Fund seeks its investment
     objective by investing in a  diversified  group of more than 30  underlying
     funds advised by Zurich Scudder Investments.

Q:   WHOM SHOULD I CALL FOR MORE INFORMATION ABOUT THIS PROXY STATEMENT?

A:   Please  call  the  Shareholder  Communications  Corporation,   your  Fund's
     information agent, at 1-888-676-7706.

<PAGE>

                                                                January 12, 2001

Dear Farmers Fund Shareholder:

      Zurich Scudder  Investments,  Inc. ("ZSI"), the investment manager for the
Farmers  Funds,  Kemper  Funds and  Scudder  Funds,  has  initiated a program to
reorganize  and  combine its fund  families  in  response  to changing  industry
conditions  and  investor  needs.   Our  goal  is  to  create  one  streamlined,
multi-class family of funds under the Scudder brand. As part of the program, you
are being  asked to approve a proposed  combination  of your Fund with a similar
Scudder Pathway Fund.

      Please take the time to read the enclosed materials.

      The  question  and answer  section  that  begins on the front cover of the
proxy  statement  summarizes the proposed  transaction  involving your Fund. The
proxy statement itself provides greater detail about the proposals, why they are
being made and how they apply to your fund.  After careful review,  the Board of
Farmers Investment Trust has approved these proposals. The Board recommends that
you read the enclosed materials carefully and vote in favor of the proposal that
relates to the  combination of your Fund with a  corresponding  Scudder  Pathway
Fund.

      To vote,  simply fill out the  enclosed  proxy card -- be sure to sign and
date it -- and return it to us in the enclosed  postage-paid  envelope.  Because
many  of the  funds  for  which  ZSI  acts as  investment  manager  are  holding
shareholder meetings regarding these and other issues, you may receive more than
one proxy card. If so, please vote each one.

      Your vote is very  important to us. If we do not hear from you by February
12, 2001 our proxy  solicitor  may contact you.  Thank you for your response and
for your continued investment with ZSI.

Sincerely,

/s/ Edmond D. Villani                   /s/ Brian Cohen

Edmond D. Villani                       Brian Cohen
Chief Executive Officer                 President
Zurich Scudder Investments, Inc.        Farmers Investment Trust

<PAGE>




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<PAGE>

                  NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
                            FARMERS INVESTMENT TRUST

      Please take notice that a Special Meeting of Shareholders  (the "Meeting")
of each series (each, a "Farmers Fund") of Farmers Investment Trust will be held
at  the  offices  of  Zurich  Scudder   Investments,   Inc.,  13th  Floor,   Two
International  Place,  Boston,  MA 02110-4103,  on March 14, 2001, at 4:30 p.m.,
Eastern time, for the following purposes:

PROPOSAL 1:     To approve an Agreement and Plan of Reorganization  (the "Plan")
(Farmers        as it relates to (i) the transfer of all or substantially all of
Income          the  assets  and  all  of  the  liabilities  of  Farmers  Income
Portfolio)      Portfolio  to Scudder  Pathway  Series:  Conservative  Portfolio
                ("Pathway  Conservative  Portfolio"),  (ii) the  distribution to
                each  shareholder of Farmers Income  Portfolio shares of Pathway
                Conservative Portfolio of a corresponding class to those held by
                the  shareholder in Farmers Income  Portfolio in an amount equal
                to the value of the  shareholder's  holdings  in Farmers  Income
                Portfolio and (iii) the termination of Farmers Income Portfolio.

PROPOSAL 2:     To approve the Plan as it relates to (i) the transfer of all  or
(Farmers        substantially  all of the assets and all of the  liabilities  of
Income          Farmers Income with Growth  Portfolio to Scudder Pathway Series:
with Growth     Moderate  Portfolio  ("Pathway  Moderate  Portfolio"),  (ii) the
Portfolio)      distribution  to each  shareholder of Farmers Income with Growth
                Portfolio   shares   of   Pathway   Moderate   Portfolio   of  a
                corresponding  class to those held by the shareholder in Farmers
                Income with Growth  Portfolio in an amount equal to the value of
                the  shareholder's   holdings  in  Farmers  Income  with  Growth
                Portfolio  and (iii) the  termination  of  Farmers  Income  with
                Growth Portfolio.

PROPOSAL 3:     To approve the Plan as it relates to (i) the transfer  of all or
(Farmers        substantially  all of the assets and all of the  liabilities  of
Balanced        Farmers Balanced Portfolio to Pathway Moderate  Portfolio,  (ii)
Portfolio)      the   distribution  to  each  shareholder  of  Farmers  Balanced
                Portfolio   shares   of   Pathway   Moderate   Portfolio   of  a
                corresponding  class to those held by the shareholder in Farmers
                Balanced  Portfolio  in an  amount  equal  to the  value  of the
                shareholder's  holdings in Farmers Balanced  Portfolio and (iii)
                the termination of Farmers Balanced Portfolio.

PROPOSAL 4:     To approve the Plan as it relates to (i) the  transfer of all or
(Farmers        substantially all of the assets and all of the liabilities of
Growth          Farmers Growth with Income Portfolio to Pathway Moderate
with Income     Portfolio, (ii) the distribution to each shareholder of Farmers
Portfolio)      Growth with Income Portfolio shares of Pathway Moderate
                Portfolio of a corresponding class to those held by the
                shareholder in Farmers

<PAGE>

                Growth with Income  Portfolio in an amount equal to the value of
                the  shareholder's   holdings  in  Farmers  Growth  with  Income
                Portfolio  and (iii) the  termination  of  Farmers  Growth  with
                Income Portfolio.

PROPOSAL 5:     To approve the Plan as it relates to (i) the transfer of all  or
(Farmers        substantially  all of the assets and all of the  liabilities  of
Growth          Farmers  Growth  Portfolio  to Scudder  Pathway  Series:  Growth
Portfolio)      Portfolio ("Pathway Growth Portfolio"), (ii) the distribution to
                each  shareholder of Farmers Growth  Portfolio shares of Pathway
                Growth  Portfolio of a corresponding  class to those held by the
                shareholder  in Farmers  Growth  Portfolio in an amount equal to
                the  value  of the  shareholder's  holdings  in  Farmers  Growth
                Portfolio and (iii) the termination of Farmers Growth Portfolio.

      The persons  named as proxies will vote in their  discretion  on any other
business  that may  properly  come  before the  Meeting or any  adjournments  or
postponements thereof.

      Holders of record of shares of each  Farmers Fund at the close of business
on January 10, 2001 are entitled to vote at the Meeting and at any  adjournments
or postponements thereof.

      In the event that the  necessary  quorum to transact  business or the vote
required to approve any  Proposal is not  obtained at the  Meeting,  the persons
named  as  proxies  may  propose  one or more  adjournments  of the  Meeting  in
accordance  with  applicable law to permit further  solicitation of proxies with
respect to that Proposal.  Any such  adjournment as to a matter will require the
affirmative  vote of the holders of a majority of the  relevant  Farmers  Fund's
shares  present  in  person or by proxy at the  Meeting.  The  persons  named as
proxies will vote FOR any such adjournment those proxies which they are entitled
to vote in favor of that  Proposal  and will vote  AGAINST any such  adjournment
those proxies to be voted against that Proposal.

                                        By Order of the Board,

                                        /s/ John Millette

                                        John Millette
                                        Secretary

January 12, 2001

      IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED  PROXY  CARD(S) AND
RETURN  IT IN THE  ENCLOSED  ENVELOPE  WHICH  REQUIRES  NO  POSTAGE  (OR TO TAKE
ADVANTAGE OF THE TELEPHONIC VOTING  PROCEDURES  DESCRIBED ON THE PROXY CARD(S)).
YOUR PROMPT  RETURN OF THE ENCLOSED  PROXY  CARD(S) MAY SAVE THE  NECESSITY  AND
EXPENSE OF FURTHER  SOLICITATIONS.  IF YOU WISH TO ATTEND THE  MEETING  AND VOTE
YOUR SHARES IN PERSON AT THAT TIME, YOU WILL STILL BE ABLE TO DO SO.

<PAGE>

                                TABLE OF CONTENTS

INTRODUCTION       .........................................................   1

PROPOSALS  1-5:    APPROVAL OF AGREEMENT AND PLAN OF .......................   4
                   REORGANIZATION

                   SYNOPSIS ................................................   4

                   PRINCIPAL RISK FACTORS ..................................  38

                   THE PROPOSED TRANSACTIONS ...............................  40

ADDITIONAL INFORMATION .....................................................  47

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<PAGE>

                           PROXY STATEMENT/PROSPECTUS

                                January 12, 2001

           Relating to the acquisition of the assets of the series of

                FARMERS INVESTMENT TRUST (the "Acquired Trust")
                           222 South Riverside Plaza
                             Chicago, Illinois 60606
                                 (800) 621-1048

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

     by and in exchange for shares of beneficial interest of the series of
                 SCUDDER PATHWAY SERIES (the "Acquiring Trust")
                             Two International Place
                        Boston, Massachusetts 02110-4103
                                 (800) 621-1048

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


                                  INTRODUCTION

      This Proxy  Statement/Prospectus is being furnished in connection with the
solicitation  of  proxies  by the Board of  Trustees  of the  Acquired  Trust in
connection  with the  Special  Meeting  of  Shareholders  of each  series of the
Acquired Trust (Farmers Income Portfolio,  Farmers Income with Growth Portfolio,
Farmers  Balanced  Portfolio,  Farmers Growth with Income  Portfolio and Farmers
Growth Portfolio) (each, a "Farmers Fund" and collectively, the "Farmers Funds")
to be held on March 14, 2001, at the offices of Zurich Scudder Investments, Inc.
("ZSI" or the  "Investment  Manager"),  13th  Floor,  Two  International  Place,
Boston,  MA 02110-4103 at 4:30 p.m.  (Eastern  time), or at such later time made
necessary by all  adjournments or postponements  thereof (the  "Meeting").  This
Proxy Statement/Prospectus,  the Notice of Special Meeting and the proxy card(s)
are first being mailed to  shareholders  on or about January 12, 2001 or as soon
as practicable thereafter.

      At the meeting, shareholders of each Farmers Fund, voting separately, will
be  asked  to vote on an  Agreement  and  Plan of  Reorganization  (the  "Plan")
pursuant to which all or  substantially  all of the assets of each  Farmers Fund
would be acquired by a  corresponding  series of the  Acquiring  Trust  (Scudder
Pathway  Series:  Conservative  Portfolio;   Scudder  Pathway  Series:  Moderate
Portfolio  (formerly known as Balanced  Portfolio);  and Scudder Pathway Series:
Growth

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

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

<PAGE>

Portfolio)  (each, a "Pathway Fund" and collectively,  the "Pathway Funds"),  in
exchange for shares of beneficial  interest of the  applicable  Pathway Fund and
the  assumption  by  each  Pathway  Fund  of  all  of  the  liabilities  of  its
corresponding  Farmers Fund, listed in the chart below (each, a "Reorganization"
and collectively,  the "Reorganizations").  Shares of each Pathway Fund received
would then be distributed to the shareholders of the corresponding  Farmers Fund
in  complete   liquidation   of  each   Farmers   Fund.   As  a  result  of  the
Reorganizations, each shareholder of a Farmers Fund will become a shareholder of
a  corresponding  Pathway Fund,  as listed in the chart below,  and will receive
shares of the  applicable  Pathway Fund in an amount equal to the value of their
holdings in the Farmers  Fund as of the close of  business on the  business  day
preceding the closing of each Reorganization (the "Valuation Date"). The closing
of each  Reorganization  (each,  a "Closing")  is  contingent  upon  shareholder
approval of the Plan as it relates to such  Reorganization.  Each  Farmers  Fund
will vote  separately on the Proposal  relating to its  reorganization  into its
corresponding  Pathway  Fund  and the  approval  of each  Reorganization  is not
contingent upon the approval of any other Reorganization.  A copy of the Plan is
attached  as Exhibit A. Each  Reorganization  is  expected  to occur on or about
April 9, 2001.

      The  Plan   provides   that  each  Farmers  Fund  will   transfer  all  or
substantially  all of its assets and all of its liabilities to the corresponding
Pathway Fund listed opposite its name in the following chart:

<TABLE>
<CAPTION>


     Farmers Fund (Acquired Fund)                            Pathway Fund (Acquiring Fund)
-----------------------------------------         -------------------------------------------------
<S>                                               <C>
Farmers Income Portfolio                            Scudder Pathway Series: Conservative Portfolio
Farmers Income with Growth Portfolio                Scudder Pathway Series: Moderate Portfolio
Farmers Balanced Portfolio                          Scudder Pathway Series: Moderate Portfolio
Farmers Growth with Income Portfolio                Scudder Pathway Series: Moderate Portfolio
Farmers Growth Portfolio                            Scudder Pathway Series: Growth Portfolio
</TABLE>

     Class A shareholders of each Farmers Fund will receive an amount of Class A
shares of the corresponding  Pathway Fund equal in value to their Class A shares
of the Farmers Fund.  Class B shareholders  of each Farmers Fund will receive an
amount of Class B shares of the  corresponding  Pathway  Fund  equal in value to
their Class B shares of the Farmers Fund.

     In the  descriptions of the Proposals  below,  the word "fund" is sometimes
used to mean an  investment  company  or series  thereof in  general,  and not a
Farmers Fund whose proxy statement this is. In addition, for simplicity, actions
are  described  in this Proxy  Statement/Prospectus  as being  taken by either a
Farmers  Fund or a Pathway  Fund  (which  are  collectively  referred  to as the
"Funds" and each  referred to as a "Fund"),  although  all actions are  actually
taken either by the Acquired  Trust or the Acquiring  Trust  (together  with the
Acquired Trust, the "Trusts"), on behalf of the applicable Fund.

                                        2
<PAGE>


     This Proxy  Statement/Prospectus sets forth concisely the information about
each Pathway Fund that a prospective  investor should know before  investing and
should be retained for future reference.  For a more detailed  discussion of the
investment  objectives,  policies,  restrictions and risks of each Pathway Fund,
see the Pathway Funds'  prospectus dated December 29, 2000, as supplemented from
time to time, which is included in the materials you received with this document
and  incorporated  herein by reference  (meaning that it is legally part of this
document).  For  a  more  detailed  discussion  of  the  investment  objectives,
policies,  restrictions  and risks of each Farmers Fund,  see the Farmers Funds'
prospectus dated September 1, 2000, as supplemented  from time to time, which is
also  incorporated  herein by reference and a copy of which may be obtained upon
request  and  without  charge by  calling or writing  the  Farmers  Funds at the
telephone number or address listed above.


     Also  incorporated  herein by reference is the Pathway Funds'  statement of
additional  information  dated December 29, 2000, as  supplemented  from time to
time,  which may be  obtained  upon  request  and  without  charge by calling or
writing the Pathway Funds at the  telephone  number or address  listed above.  A
Statement  of  Additional   Information  dated  January  12,  2001,   containing
additional  information  about  each  Reorganization  has  been  filed  with the
Securities  and  Exchange  Commission  (the  "SEC" or the  "Commission")  and is
incorporated by reference into this Proxy  Statement/Prospectus.  A copy of this
Statement of Additional Information is available upon request and without charge
by calling or  writing  the  Pathway  Funds at the  telephone  number or address
listed above.  Shareholder inquiries regarding the Pathway Funds and the Farmers
Funds may be made by calling (800) 621-1048.  The information  contained in this
document  concerning  each Fund has been provided by, and is included  herein in
reliance upon, that Fund.

     The Pathway Funds and the Farmers Funds are diversified series of shares of
beneficial interest of the Acquiring Trust and the Acquired Trust, respectively,
which are open-end  management  investment  companies organized as Massachusetts
business trusts.

     The Board of Trustees of the Acquired  Trust  unanimously  recommends  that
shareholders  of each  Farmers  Fund vote FOR the  Proposal  that relates to the
Reorganization of their Fund into a corresponding Pathway Fund.

                                        3
<PAGE>

        PROPOSALS 1-5: APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION

I.   SYNOPSIS

     The following is a summary of certain  information  contained in this Proxy
Statement/Prospectus relating to the Reorganizations.  This summary is qualified
by reference to the more complete information  contained elsewhere in this Proxy
Statement/Prospectus,  the prospectuses and statements of additional information
of  the  Funds  and  the  Plan.  Shareholders  should  read  this  entire  Proxy
Statement/Prospectus carefully.

Introduction

     The Board of  Trustees  of the  Acquired  Trust  (unless  otherwise  noted,
references  to the  "Board of  Trustees"  or  "Trustees"  refers to the Board of
Trustees or Trustees of the Acquired  Trust),  including all of the Trustees who
have no affiliation  with ZSI and who are not considered  "interested"  Trustees
(the "Independent Trustees"), approved the Plan at a meeting held on November 9,
2000.  Subject to its approval by  shareholders  of each Farmers Fund,  the Plan
provides for (a) the transfer of all or substantially  all of the assets and all
of the  liabilities  of each Farmers Fund to its  corresponding  Pathway Fund in
exchange for Class A and Class B shares of the applicable Pathway Fund, as noted
in the  chart  above;  (b) the  distribution  of such  Pathway  Fund  shares  to
shareholders of its corresponding  Farmers Fund in complete  liquidation of each
Farmers Fund;  and (c) the  termination of each Farmers Fund. As a result of the
Reorganizations, each shareholder of a Farmers Fund will become a shareholder of
a corresponding Pathway Fund, as noted in the chart above. Immediately after the
Reorganizations,  each  shareholder  of a Farmers  Fund will hold  shares of the
class of shares of a Pathway Fund that corresponds to the class of shares of the
Farmers Fund held by that shareholder on the Valuation Date, having an aggregate
net asset value  equal to the  aggregate  net asset value of such  shareholder's
shares of the Farmers Fund on the Valuation  Date. No front-end sales charges or
contingent  deferred  sales  charges  will be  imposed  on shares  issued in the
Reorganizations.

     ZSI is the  investment  manager of the Farmers Funds and the Pathway Funds.
If the  Reorganizations  are  completed,  the Farmers Funds'  shareholders  will
continue  to enjoy  all of the same  shareholder  privileges  as they  currently
enjoy,  such as access to  professional  service  representatives  and automatic
dividend reinvestment,  as well as expanded exchange privileges. See "Purchases,
Exchanges and Redemptions" below.

                                        4
<PAGE>

Reasons for the Proposed Reorganizations; Board Approval

     The  Trustees  have  conducted  a  thorough  review of all  aspects of each
proposed Reorganization.  See "The Proposed Transactions - Board Approval of the
Proposed Transactions" below. The Trustees believe that the Reorganizations will
provide shareholders of each Farmers Fund with the following benefits:

     o LOWER FUND OPERATING  EXPENSES.  Each Fund invests in certain  underlying
       mutual funds  ("Underlying  Funds") and therefore  bears a portion of the
       expenses of those Underlying  Funds. In addition,  each Farmers Fund also
       has fund level operating expenses, which are currently capped by contract
       at an  annual  rate of  1.00%  and  1.75% of  average  daily  net  assets
       attributable  to the  Class A and Class B shares  of each  Farmers  Fund,
       respectively. Class A and Class B shares of each Pathway Fund, through an
       agreement with ZSI, currently bear no fund level operating expenses other
       than  distribution  expenses  at an  annual  rate of 0.25%  and  1.00% of
       average daily net assets  attributable  to the Class A and Class B shares
       of each Pathway  Fund,  respectively.  Thus, if the  Reorganizations  are
       approved, shareholders of each Farmers Fund will benefit from lower total
       fund level operating expenses as shareholders of a corresponding  Pathway
       Fund. See "Comparison of Expenses" below.

     o EXPANDED EXCHANGE  PRIVILEGES.  The shareholders of the Pathway Funds are
       able to exchange into any fund in the Scudder  Family of Funds  ("Scudder
       Funds"),  while  shareholders of the Farmers Funds currently may exchange
       only into other Farmers Funds.

     o SIMILAR  INVESTMENT  OBJECTIVES  AND  POLICIES.  The combined  Funds will
       continue to allocate their assets among other mutual funds in proportions
       similar to the  allocations  of the  applicable  Farmers Fund.  There are
       differences  between the target allocations for each Farmers Fund and its
       corresponding Pathway Fund, as described below in "Investment Objectives,
       Policies and  Restrictions of the Funds." As described below, the Pathway
       Funds may  invest  in a group of more  than  thirty  Scudder  Funds.  The
       Farmers Funds may invest in a group of twelve  funds,  consisting of both
       Scudder Funds and funds that are not managed by ZSI.

     o TAX-FREE  REORGANIZATION.  It is a condition of each  Reorganization that
       each Farmers Fund receive an opinion of tax counsel that the  transaction
       would be a TAX-FREE transaction.

     For these  reasons,  as more fully  described  below  under  "The  Proposed
Transactions  - Board  Approval  of the  Proposed  Transactions,"  the  Board of
Trustees, including the Independent Trustees, has concluded that:

                                        5
<PAGE>

     o each  Reorganization  is in the best interests of the applicable  Farmers
       Fund and its shareholders;  and

     o the interests of the existing  shareholders of each Farmers Fund will not
       be diluted as a result of the Reorganization.

     Accordingly,  the Board of Trustees unanimously  recommends approval of the
Plan  effecting  each  Reorganization.  If the Plan is not approved by a Farmers
Fund, that Farmers Fund will continue in existence  unless other action is taken
by the Board of Trustees,  which could include the  liquidation  of that Farmers
Fund in a taxable transaction.

Investment Objectives, Policies and Restrictions of the Funds

     This Section will help you compare the investment objective and policies of
each Farmers Fund with its corresponding Pathway Fund. Please be aware that this
is only a summary.  More complete information may be found in the Farmers Funds'
and Pathway Funds' prospectuses.

   Farmers Income Portfolio - Scudder Pathway Series: Conservative Portfolio
                       ("Pathway Conservative Portfolio")

     The  investment  objectives,  policies and  restrictions  of Farmers Income
Portfolio and Pathway  Conservative  Portfolio are similar.  Some differences do
exist.  The investment  objective of Farmers Income  Portfolio is to seek a high
level of current  income.  The  investment  objective  of  Pathway  Conservative
Portfolio is to seek  current  income and, as a secondary  objective,  long-term
growth of capital.  There can be no assurance  that either Fund will achieve its
investment objective.

     Each  Fund  invests  mainly  in  the  securities  of  Underlying  Funds.  A
significant  difference  in the Funds'  investment  policies is that the Pathway
Conservative  Portfolio may invest in a group of more than thirty  Scudder Funds
while the  Farmers  Income  Portfolio  may  invest  in a group of twelve  funds,
consisting of both Scudder Funds and funds that are not managed by ZSI.  Farmers
Income Portfolio and Pathway Conservative Portfolio invest different percentages
of their  assets in  Underlying  Funds with  particular  goals.  Each Fund has a
target  allocation,  which the  portfolio  managers use as a reference  point in
setting each Fund's actual allocation. While the actual allocation may vary, the
portfolio  managers  expect  that over the long term it will  average  out to be
similar to that Fund's target  allocation.  Farmers  Income  Portfolio's  target
allocation  is as follows:  97% of its total  assets in bond funds and 3% of its
total assets in money funds. The portfolio  managers of Farmers Income Portfolio
have the  flexibility  to adjust the  allocation of the Fund's assets within the
following ranges: investments in

                                        6
<PAGE>

bond funds must account for between 80% and 100% of total assets and money funds
must account for between 0% and 20% of total assets.

     Pathway  Conservative  Portfolio's target allocation is as follows:  60% of
its total assets in bond funds and 40% of its total assets in equity funds.  The
portfolio  managers of Pathway  Conservative  Portfolio have the  flexibility to
adjust  the  allocation  of the  Fund's  assets  within  the  following  ranges:
investments  in bond funds must account for between 50% and 70% of total assets,
of which no more than 20% of this  allocation may be invested in high yield bond
funds, and equity funds must account for between 30% and 50% of total assets, of
which no more than 75% of this  allocation  may be invested in either all growth
or all value funds.  Within the allocation of Pathway  Conservative  Portfolio's
assets in equity funds,  the portfolio  managers have the  flexibility to invest
between 0% and 10% of the Fund's total assets in international equity funds, but
may not invest in funds that invest in emerging markets,  and may invest between
0% and 5% of the Fund's  total  assets in small-cap  stock  equity  funds.  As a
temporary  defensive measure,  each Fund may shift up to 100% of its assets into
investments such as money market securities. This would mean that the Fund would
not be pursuing its objective.

     The Funds are  currently  managed  by  different  portfolio  managers.  The
respective managers of both Funds regularly review the actual allocation of each
respective  Fund,  and may adjust it in seeking to take  advantage of current or
expected  market  conditions  or to  manage  risk.  In making  their  allocation
decisions  for each  respective  Fund,  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
of the respective  Funds then decide which funds to use as Underlying  Funds and
how much to invest in each Underlying Fund.

     Each Fund's  Underlying  Funds may use a range of investment  styles,  with
those of Farmers Income Portfolio  emphasizing  high-grade bonds. The Underlying
Funds  of  Farmers  Income  Portfolio  can buy many  types  of  income-producing
securities,  among  them,  corporate  bonds  of  varying  credit  qualities  and
maturities,  U.S.  government  and  agency  bonds,  mortgage-  and  asset-backed
securities,  money  market  instruments,  and others.  The  Underlying  Funds of
Pathway  Conservative  Portfolio  can buy many types of  securities,  among them
common  stock 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. Each Fund's Underlying Funds
invest mainly in securities from U.S.  issuers but may also invest in securities
from foreign issuers.

                                        7
<PAGE>

     The Funds'  investment  restrictions  (as such  restrictions  are set forth
under  "Investment  Restrictions of the Portfolios" in each Fund's  statement of
additional  information)  are  identical,  except that, as noted above,  Pathway
Conservative  Portfolio may invest only in Underlying Funds managed by ZSI while
Farmers Income  Portfolio has no such  restriction.  Investment  restrictions of
each Fund that are fundamental  policies may not be changed without the approval
of Fund shareholders,  while non-fundamental policies may be changed by a Fund's
Board  without  shareholder  approval.  Investors  should  refer to each  Fund's
statement of  additional  information  for a more detailed  description  of that
Fund's investment policies and restrictions.

                           Farmers Income with Growth
             Portfolio - Scudder Pathway Series: Moderate Portfolio
                         ("Pathway Moderate Portfolio")

     The investment objectives, policies and restrictions of Farmers Income with
Growth Portfolio and Pathway Moderate Portfolio are similar. Some differences do
exist.  The investment  objective of Farmers Income with Growth  Portfolio is to
seek current income and, as a secondary objective,  long-term growth of capital.
The investment  objective of Pathway Moderate  Portfolio is to seek a balance of
current income and growth of capital. There can be no assurance that either Fund
will achieve its investment objective.

     Each  Fund  invests  mainly  in  the  securities  of  Underlying  Funds.  A
significant  difference  in the Funds'  investment  policies is that the Pathway
Moderate Portfolio may invest in a group of more than thirty Scudder Funds while
the Farmers Income with Growth  Portfolio may invest in a group of twelve funds,
consisting of both Scudder Funds and funds that are not managed by ZSI.  Farmers
Income with Growth  Portfolio and Pathway  Moderate  Portfolio  invest different
percentages of their assets in Underlying Funds with particular goals. Each Fund
has a target  allocation,  which the portfolio managers use as a reference point
in setting each Fund's actual allocation.  While the actual allocation may vary,
the portfolio  managers expect that over the long term it will average out to be
similar to that Fund's target allocation. Farmers Income with Growth Portfolio's
target  allocation is as follows:  69% of its total assets in bond funds, 30% of
its total assets in equity funds, and 1% of its total assets in money funds. The
portfolio  managers of Farmers Income with Growth Portfolio have the flexibility
to adjust the  allocation  of the Fund's  assets  within the  following  ranges:
investments  in bond funds must account for between 60% and 80% of total assets;
equity  funds must  account for between 20% and 40% of total  assets;  and money
funds must account for between 0% and 15% of total assets.

                                        8
<PAGE>

     Pathway Moderate  Portfolio's  target allocation is as follows:  60% of its
total  assets in equity  funds and 40% of its total  assets in bond  funds.  The
portfolio  managers of Pathway Moderate Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following  ranges:  investment in
equity funds must account for between 50% and 70% of total  assets,  of which no
more than 75% of this  allocation  may be  invested  in either all growth or all
value  funds,  and bond  funds must  account  for  between  30% and 50% of total
assets,  of which no more than 20% of this  allocation  may be  invested in high
yield bond funds.  Within the allocation of Pathway Moderate  Portfolio's assets
in equity funds,  the portfolio  managers have the flexibility to invest between
0% and 20% of the Fund's total assets in international  equity funds,  including
up to 5% in equity funds that invest in emerging markets, and between 0% and 10%
of the Fund's  total  assets in small-cap  stock  equity  funds.  As a temporary
defensive measure, each Fund may shift up to 100% of its assets into investments
such as money  market  securities.  This  would  mean that the Fund would not be
pursuing its objective.

     The Funds are  currently  managed  by  different  portfolio  managers.  The
respective managers of both Funds regularly review the actual allocation of each
respective  Fund,  and may adjust it in seeking to take  advantage of current or
expected  market  conditions  or to  manage  risk.  In making  their  allocation
decisions  for each  respective  Fund,  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
of the respective  Funds then decide which funds to use as Underlying  Funds and
how much to invest in each Underlying Fund.

     Each Fund's  Underlying Funds may use a range of investment  styles.  These
Underlying  Funds can buy many types of securities,  among them common stocks of
companies  of  any  size,  corporate  bonds  of  varying  credit  qualities  and
maturities,  U.S.  government  and  agency  bonds,  mortgage-  and  asset-backed
securities,  money market instruments,  and others. Each Fund's Underlying Funds
invest mainly in securities from U.S.  issuers but may also invest in securities
from foreign issuers.

The Funds'  investment  restrictions  (as such  restrictions are set forth under
"Investment  Restrictions  of  the  Portfolios"  in  each  Fund's  statement  of
additional  information)  are  identical,  except that, as noted above,  Pathway
Moderate  Portfolio  may invest only in  Underlying  Funds  managed by ZSI while
Farmers  Income  with  Growth  Portfolio  has no  such  restriction.  Investment
restrictions  of each  Fund that are  fundamental  policies  may not be  changed
without the approval of Fund shareholders, while non-fundamental policies may be
changed by a Fund's Board without shareholder  approval.  Investors should refer
to each Fund's

                                        9
<PAGE>

statement of  additional  information  for a more detailed  description  of that
Fund's investment policies and restrictions.

            Farmers Balanced Portfolio - Pathway Moderate Portfolio

     The investment  objectives,  policies and  restrictions of Farmers Balanced
Portfolio and Pathway Moderate Portfolio are similar. Some differences do exist.
The investment  objective of Farmers Balanced  Portfolio is to seek a balance of
current  income and long-term  growth of capital.  The  investment  objective of
Pathway Moderate  Portfolio is to seek a balance of current income and growth of
capital.  There can be no assurance that either Fund will achieve its investment
objective.

     Each  Fund  invests  mainly  in  the  securities  of  Underlying  Funds.  A
significant  difference  in the Funds'  investment  policies is that the Pathway
Moderate Portfolio may invest in a group of more than thirty Scudder Funds while
the Farmers Balanced Portfolio may invest in a group of twelve funds, consisting
of both Scudder  Funds and funds that are not managed by ZSI.  Farmers  Balanced
Portfolio and Pathway Moderate  Portfolio invest different  percentages of their
assets  in  Underlying  Funds  with  particular  goals.  Each  Fund has a target
allocation,  which the  portfolio  managers use as a reference  point in setting
each  Fund's  actual  allocation.  While the  actual  allocation  may vary,  the
portfolio  managers  expect  that over the long term it will  average  out to be
similar to that Fund's target  allocation.  Farmers Balanced  Portfolio's target
allocation  is as follows:  49% of its total  assets in bond  funds,  50% of its
total assets in equity  funds,  and 1% of its total  assets in money funds.  The
portfolio  managers of Farmers Balanced Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following ranges:  investments in
bond funds must  account for between 40% and 60% of total  assets;  equity funds
must  account  for  between  40% and 60% of total  assets;  and money funds must
account for between 0% and 10% of total assets.

     Pathway Moderate  Portfolio's  target allocation is as follows:  60% of its
total  assets in equity  funds and 40% of its total  assets in bond  funds.  The
portfolio  managers of Pathway Moderate Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following  ranges:  investment in
equity funds must account for between 50% and 70% of total  assets,  of which no
more than 75% of this  allocation  may be  invested  in either all growth or all
value  funds,  and bond  funds must  account  for  between  30% and 50% of total
assets,  of which no more than 20% of this  allocation  may be  invested in high
yield bond funds.  Within the allocation of Pathway Moderate  Portfolio's assets
in equity funds,  the portfolio  managers have the flexibility to invest between
0% and 20% of the Fund's total assets in international  equity funds,  including
up to 5% in equity

                                       10
<PAGE>

funds that  invest in  emerging  markets,  and  between 0% and 10% of the Fund's
total assets in small-cap stock equity funds. As a temporary  defensive measure,
each  Fund may shift up to 100% of its  assets  into  investments  such as money
market  securities.  This  would mean that the Fund  would not be  pursuing  its
objective.

     The Funds are  currently  managed  by  different  portfolio  managers.  The
respective managers of both Funds regularly review the actual allocation of each
respective  Fund,  and may adjust it in seeking to take  advantage of current or
expected  market  conditions  or to  manage  risk.  In making  their  allocation
decisions  for each  respective  Fund,  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
of the respective  Funds then decide which funds to use as Underlying  Funds and
how much to invest in each Underlying Fund.

     Each Fund's  Underlying Funds may use a range of investment  styles.  These
Underlying  Funds can buy many types of securities,  among them common stocks of
companies  of  any  size,  corporate  bonds  of  varying  credit  qualities  and
maturities,  U.S.  government  and  agency  bonds,  mortgage-  and  asset-backed
securities,  money market instruments,  and others. Each Fund's Underlying Funds
invest mainly in securities from U.S.  issuers but may also invest in securities
from foreign issuers.

     The Funds'  investment  restrictions  (as such  restrictions  are set forth
under  "Investment  Restrictions of the Portfolios" in each Fund's  statement of
additional  information)  are  identical,  except that, as noted above,  Pathway
Moderate  Portfolio  may invest only in  Underlying  Funds  managed by ZSI while
Farmers Balanced Portfolio has no such restriction.  Investment  restrictions of
each Fund that are fundamental  policies may not be changed without the approval
of Fund shareholders,  while non-fundamental policies may be changed by a Fund's
Board  without  shareholder  approval.  Investors  should  refer to each  Fund's
statement of  additional  information  for a more detailed  description  of that
Fund's investment policies and restrictions.

       Farmers Growth with Income Portfolio - Pathway Moderate Portfolio

     The investment objectives, policies and restrictions of Farmers Growth with
Income Portfolio and Pathway Moderate Portfolio are similar. Some differences do
exist.  The investment  objective of Farmers Growth with Income  Portfolio is to
seek long-term growth of capital and modest income. The investment  objective of
Pathway Moderate Portfolio is to seek a balance of current income and growth of

                                       11
<PAGE>

capital.  There can be no assurance that either Fund will achieve its investment
objective.

     Each  Fund  invests  mainly  in  the  securities  of  Underlying  Funds.  A
significant  difference  in the Funds'  investment  policies is that the Pathway
Moderate Portfolio may invest in a group of more than thirty Scudder Funds while
the Farmers Growth with Income  Portfolio may invest in a group of twelve funds,
consisting of both Scudder Funds and funds that are not managed by ZSI.  Farmers
Growth with Income  Portfolio and Pathway  Moderate  Portfolio  invest different
percentages of their assets in Underlying Funds with particular goals. Each Fund
has a target  allocation,  which the portfolio managers use as a reference point
in setting each Fund's actual allocation.  While the actual allocation may vary,
the portfolio  managers expect that over the long term it will average out to be
similar to that Fund's target allocation. Farmers Growth with Income Portfolio's
target allocation is as follows: 70% of its total assets in equity funds, 29% of
its total assets in bond funds,  and 1% of its total assets in money funds.  The
portfolio  managers of Farmers Growth with Income Portfolio have the flexibility
to adjust the  allocation  of the Fund's  assets  within the  following  ranges:
investments  in equity  funds  must  account  for  between  60% and 80% of total
assets;  bond funds must  account for between 20% and 40% of total  assets;  and
money funds must account for between 0% and 10% of total assets.

     Pathway Moderate  Portfolio's  target allocation is as follows:  60% of its
total  assets in equity  funds and 40% of its total  assets in bond  funds.  The
portfolio  managers of Pathway Moderate Portfolio have the flexibility to adjust
the allocation of the Fund's assets within the following  ranges:  investment in
equity funds must account for between 50% and 70% of total  assets,  of which no
more than 75% of this  allocation  may be  invested  in either all growth or all
value  funds,  and bond  funds must  account  for  between  30% and 50% of total
assets,  of which no more than 20% of this  allocation  may be  invested in high
yield bond funds.  Within the allocation of Pathway Moderate  Portfolio's assets
in equity funds,  the portfolio  managers have the flexibility to invest between
0% and 20% of the Fund's total assets in international  equity funds,  including
up to 5% in equity funds that invest in emerging markets, and between 0% and 10%
of the Fund's  total  assets in small-cap  stock  equity  funds.  As a temporary
defensive measure, each Fund may shift up to 100% of its assets into investments
such as money  market  securities.  This  would mean that each Fund would not be
pursuing its objective.

     The Funds are  currently  managed  by  different  portfolio  managers.  The
respective managers of both Funds regularly review the actual allocation of each
respective  Fund,  and may adjust it in seeking to take  advantage of current or
expected market conditions or to manage risk. In making their allocation

                                       12
<PAGE>

decisions  for each  respective  Fund,  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
of the respective  Funds then decide which funds to use as Underlying  Funds and
how much to invest in each Underlying Fund.

     Each Fund's  Underlying Funds may use a range of investment  styles.  These
Underlying  Funds can buy many types of securities,  among them common stocks of
companies  of  any  size,  corporate  bonds  of  varying  credit  qualities  and
maturities,  U.S.  government  and  agency  bonds,  mortgage-  and  asset-backed
securities,  money market instruments,  and others. Each Fund's Underlying Funds
invest mainly in securities from U.S.  issuers but may also invest in securities
from foreign issuers.

     The Funds'  investment  restrictions  (as such  restrictions  are set forth
under  "Investment  Restrictions of the Portfolios" in each Fund's  statement of
additional  information)  are  identical,  except that, as noted above,  Pathway
Moderate  Portfolio  may invest only in  Underlying  Funds  managed by ZSI while
Farmers  Growth  with  Income  Portfolio  has no  such  restriction.  Investment
restrictions  of each  Fund that are  fundamental  policies  may not be  changed
without the approval of Fund shareholders, while non-fundamental policies may be
changed by a Fund's Board without shareholder  approval.  Investors should refer
to  each  Fund's  statement  of  additional  information  for  a  more  detailed
description of that Fund's investment policies and restrictions.

               Farmers Growth Portfolio - Scudder Pathway Series:
                 Growth Portfolio ("Pathway Growth Portfolio")

     The  investment  objectives,  policies and  restrictions  of Farmers Growth
Portfolio and Pathway Growth  Portfolio are similar.  Some differences do exist.
The investment  objective of each Fund is to seek  long-term  growth of capital.
There  can  be no  assurance  that  either  Fund  will  achieve  its  investment
objective.

     Each  Fund  invests  mainly  in  the  securities  of  Underlying  Funds.  A
significant  difference  in the Funds'  investment  policies is that the Pathway
Growth  Portfolio may invest in a group of more than thirty  Scudder Funds while
the Farmers Growth  Portfolio may invest in a group of twelve funds,  consisting
of both  Scudder  Funds and funds that are not  managed by ZSI.  Farmers  Growth
Portfolio and Pathway Growth  Portfolio  invest  different  percentages of their
assets  in  Underlying  Funds  with  particular  goals.  Each  Fund has a target
allocation,  which the  portfolio  managers use as a reference  point in setting
each  Fund's  actual  allocation.  While the  actual  allocation  may vary,  the
portfolio  managers  expect  that over the long term it will  average  out to be
similar to that Fund's target

                                       13
<PAGE>

allocation.  Farmers Growth Portfolio's target allocation is as follows:  99% of
its total assets in equity funds and 1% of its total assets in money funds.  The
portfolio  managers of Farmers Growth  Portfolio have the  flexibility to adjust
the allocation of the Fund's assets within the following ranges:  investments in
equity  funds must  account for  between 95% and 100% of total  assets and money
funds must account for between 0% and 5% of total assets.

     Pathway  Growth  Portfolio's  target  allocation is as follows:  85% of its
total  assets in equity  funds and 15% of its total  assets in bond  funds.  The
portfolio  managers of Pathway Growth  Portfolio have the  flexibility to adjust
the allocation of the Fund's assets within the following  ranges:  investment in
equity funds must account for between 75% and 95% of total  assets,  of which no
more than 75% of this  allocation  may be  invested  in either all growth or all
value funds, and bond funds must account for between 5% and 25% of total assets,
of which no more than 20% of this  allocation may be invested in high yield bond
funds.  Within the  allocation of Pathway  Growth  Portfolio's  assets in equity
funds, the portfolio  managers have the flexibility to invest between 0% and 30%
of the Fund's total assets in international equity funds, including up to 10% in
equity  funds that  invest in  emerging  markets,  and between 0% and 20% of the
Fund's total assets in small-cap  stock equity funds.  As a temporary  defensive
measure,  each Fund may shift up to 100% of its assets into  investments such as
money market securities. This would mean that the Fund would not be pursuing its
objective.

     The Funds are  currently  managed  by  different  portfolio  managers.  The
respective managers of both Funds regularly review the actual allocation of each
respective  Fund,  and may adjust it in seeking to take  advantage of current or
expected  market  conditions  or to  manage  risk.  In making  their  allocation
decisions  for each  respective  Fund,  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
of the respective  Funds then decide which funds to use as Underlying  Funds and
how much to invest in each Underlying Fund.

     Each Fund's  Underlying  Funds may use a range of investment  styles,  with
those of Farmers  Growth  Portfolio  emphasizing  the growth  component of their
holdings. The Underlying Funds of Farmers Growth Portfolio can buy many types of
securities,  among them common  stocks of  companies  of any size,  money market
instruments,  and others.  The Underlying  Funds of Pathway Growth Portfolio 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.
Each Fund's  Underlying  Funds invest mainly in securities from U.S. issuers but
may also invest in securities from foreign issuers.

                                       14
<PAGE>

     The Funds'  investment  restrictions  (as such  restrictions  are set forth
under  "Investment  Restrictions of the Portfolios" in each Fund's  statement of
additional  information)  are  identical,  except that, as noted above,  Pathway
Growth  Portfolio  may  invest  only in  Underlying  Funds  managed by ZSI while
Farmers Growth  Portfolio has no such  restriction.  Investment  restrictions of
each Fund that are fundamental  policies may not be changed without the approval
of Fund shareholders,  while non-fundamental policies may be changed by a Fund's
Board  without  shareholder  approval.  Investors  should  refer to each  Fund's
statement of  additional  information  for a more detailed  description  of that
Fund's investment policies and restrictions.

Portfolio  Turnover

     The portfolio  turnover rate for each Pathway Fund,  i.e., the ratio of the
lesser  of  annual  sales  or  purchases  to the  monthly  average  value of the
portfolio (excluding from both the numerator and the denominator securities with
maturities at the time of acquisition of one year or less),  for the fiscal year
ended August 31, 2000,  along with the portfolio  turnover rate for each Farmers
Fund  for the  fiscal  year  ended  April  30,  2000,  is  listed  in the  chart
immediately below.

<TABLE>
<CAPTION>
    Turnover Rates for the                           Turnover Rates for the
    Farmers Funds for the                             Pathway Funds for the
Fiscal Year Ended April 30, 2000                Fiscal Year ended August 31, 2000
--------------------------------                ---------------------------------
<S>                                       <C>   <C>                                  <C>
Farmers Income Portfolio ................ 59%   Pathway Conservative Portfolio ..... 26%
Farmers Income with Growth Portfolio .... 38%   Pathway Moderate Portfolio ......... 28%
Farmers Balanced Portfolio .............. 20%   Pathway Moderate Portfolio ......... 28%
Farmers Growth with Income Portfolio .... 56%   Pathway Moderate Portfolio ......... 28%
Farmers Growth Portfolio ................ 31%   Pathway Growth Portfolio ........... 27%
</TABLE>

Performance

     The  following  tables  show how the returns of each  Farmers  Fund and its
corresponding Pathway Fund over different periods average out. For context, each
table also includes broad-based market indices (which,  unlike the Funds, do not
have any fees or expenses).  The  performances of each Fund and the indices vary
over time, and past performance is not necessarily indicative of future results.
All figures assume reinvestment of dividends and distributions.

                                       15
<PAGE>


           Farmers Income Portfolio - Pathway Conservative Portfolio

                           Average Annual Total Return
                     for the Periods Ended December 31, 2000

                                                      Since           Since
                                    Past Year       Inception**     Inception***
                                    ---------       -----------     ------------
Farmers Income Portfolio
Class A ..........................    2.11%            1.16%
Class B ..........................    2.78%            1.80%
Pathway Conservative Portfolio
Class A* .........................   (3.08%)                           4.73%
Class B* .........................   (0.84%)                           5.05%
LBAB (1) .........................   11.63%            6.28%           6.78%
S&P 500 (2) ......................   (9.09%)           2.73%          16.26%
3-Month Treasury Bill ............    6.07%                            5.21%
MSCI EAFE (3) ....................  (14.16%)                           6.91%

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

Class A performance is adjusted for maximum sales charge.

Class B performance is adjusted for maximum contingent deferred sales charge.

*     Class A and Class B shares  were not offered  during the periods  covered.
      Performance shown is for shares of Pathway Conservative Portfolio existing
      during the  periods  covered,  adjusted to reflect the impact of the sales
      charges and distribution fees borne by Class A and Class B shares.

**    Inception  date of  Farmers  Income  Portfolio  is  March 9,  1999.  Index
      comparisons begin March 31, 1999.

***   Inception  date of Pathway  Conservative  Portfolio  is November 15, 1996.
      Index comparisons begin November 30, 1996.

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

(2)   The  Standard & Poor's  500  Composite  Stock  Price (S&P 500) Index is an
      unmanaged,  capitalization-weighted index that includes 500 large-cap U.S.
      stocks. The index is designed to measure performance of the broad domestic
      economy  through  changes  in the  aggregate  market  value of 500  stocks
      representing all major industries.

(3)   The MSCI EAFE Index is an  unmanaged,  capitalization-weighted  measure of
      international stock markets.

                                       16
<PAGE>

       Farmers Income with Growth Portfolio - Pathway Moderate Portfolio

                           Average Annual Total Return
                     for the Periods Ended December 31, 2000

                                                       Since          Since
                                       Past Year    Inception**    Inception***
                                       ---------    -----------    ------------
Farmers Income with Growth Portfolio
Class A ............................     (2.61%)       3.96%
Class B ............................     (1.90%)       4.70%
Pathway Moderate Portfolio
Class A* ...........................     (8.47%)                      6.75%
Class B* ...........................     (6.16%)                      7.11%
LBAB (1) ...........................     11.63%        6.28%          6.78%
S&P 500 (2) ........................     (9.09%)       2.73%         16.26%
3-Month Treasury Bill ..............      6.07%                       5.21%
MSCI EAFE (3) ......................    (14.16%)                      6.91%
Russell 2000 (4) ...................     (3.03%)                      9.31%

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

Class A performance is adjusted for maximum sales charge.

Class B performance is adjusted for maximum contingent deferred sales charge.

*     Class A and Class B shares  were not offered  during the periods  covered.
      Performance  shown is for shares of Pathway  Moderate  Portfolio  existing
      during the  periods  covered,  adjusted to reflect the impact of the sales
      charges and distribution fees borne by Class A and Class B shares.

**    Inception date of Farmers  Income with Growth  Portfolio is March 9, 1999.
      Index comparisons begin March 31, 1999.

***   Inception date of Pathway  Moderate  Portfolio is November 15, 1996. Index
      comparisons begin November 30, 1996.

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

(2)   The  Standard & Poor's  500  Composite  Stock  Price (S&P 500) Index is an
      unmanaged,  capitalization-weighted index that includes 500 large-cap U.S.
      stocks. The index is designed to measure performance of the broad domestic
      economy  through  changes  in the  aggregate  market  value of 500  stocks
      representing all major industries.

(3)   The MSCI EAFE Index is an  unmanaged,  capitalization-weighted  measure of
      international stock markets.

(4)   The Russell  2000 Index is an  unmanaged  measure of 2000  companies  that
      typically have a market capitalization of less than $2 billion.

                                       17
<PAGE>

            Farmers Balanced Portfolio - Pathway Moderate Portfolio

                           Average Annual Total Return
                     for the Periods Ended December 31, 2000

                                                        Since          Since
                                        Past Year    Inception**    Inception***
                                        ---------    -----------    ------------
Farmers Balanced Portfolio
Class A ..............................    (5.71%)       1.80%
Class B ..............................    (4.21%)       2.74%
Pathway Moderate Portfolio
Class A* .............................    (8.47%)                       6.75%
Class B* .............................    (6.16%)                       7.11%
LBAB (1) .............................    11.63%        6.28%           6.78%
S&P 500 (2) ..........................    (9.09%)       2.73%          16.26%
3-Month Treasury Bill ................     6.07%                        5.21%
MSCI EAFE (3) ........................   (14.16%)                       6.91%
Russell 2000 (4) .....................    (3.03%)                       9.31%

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

Class A performance is adjusted for maximum sales charge.

Class B performance is adjusted for maximum contingent deferred sales charge.

*    Class A and Class B shares  were not offered  during the  periods  covered.
     Performance  shown is for shares of  Pathway  Moderate  Portfolio  existing
     during the  periods  covered,  adjusted  to reflect the impact of the sales
     charges and distribution fees borne by Class A and Class B shares.

**   Inception  date of  Farmers  Balanced  Portfolio  is March 9,  1999.  Index
     comparisons begin March 31, 1999.

***  Inception date of Pathway  Moderate  Portfolio is November 15, 1996.  Index
     comparisons begin November 30, 1996.

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

(2)  The  Standard  & Poor's  500  Composite  Stock  Price (S&P 500) Index is an
     unmanaged,  capitalization-weighted  index that includes 500 large-cap U.S.
     stocks. The index is designed to measure  performance of the broad domestic
     economy  through  changes  in the  aggregate  market  value  of 500  stocks
     representing all major industries.

(3)  The MSCI EAFE  Index is an  unmanaged,  capitalization-weighted  measure of
     international stock markets.

(4)  The  Russell  2000 Index is an  unmanaged  measure of 2000  companies  that
     typically have a market capitalization of less than $2 billion.

                                       18
<PAGE>

       Farmers Growth with Income Portfolio - Pathway Moderate Portfolio

                           Average Annual Total Return
                     for the Periods Ended December 31, 2000

                                                        Since          Since
                                        Past Year    Inception**    Inception***
                                        ---------    -----------    ------------
Farmers Growth with Income Portfolio
Class A ..............................   (10.29%)      (1.22%)
Class B ..............................    (9.27%)      (0.35%)
Pathway Moderate Portfolio
Class A* .............................    (8.47%)                      6.75%
Class B* .............................    (6.16%)                      7.11%
LBAB (1) .............................    11.63%        6.28%          6.78%
S&P 500 (2) ..........................    (9.09%)       2.73%         16.26%
3-Month Treasury Bill ................     6.07%                       5.21%
MSCI EAFE (3) ........................   (14.16%)                      6.91%
Russell 2000 (4) .....................    (3.03%)                      9.31%

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

Class A performance is adjusted for maximum sales charge.

Class B performance is adjusted for maximum contingent deferred sales charge.

*    Class A and Class B shares  were not offered  during the  periods  covered.
     Performance  shown is for shares of  Pathway  Moderate  Portfolio  existing
     during the  periods  covered,  adjusted  to reflect the impact of the sales
     charges and distribution fees borne by Class A and Class B shares.

**   Inception  date of Farmers  Growth with Income  Portfolio is March 9, 1999.
     Index comparisons begin March 31, 1999.

***  Inception date of Pathway  Moderate  Portfolio is November 15, 1996.  Index
     comparisons begin November 30, 1996.

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

(2)  The  Standard  & Poor's  500  Composite  Stock  Price (S&P 500) Index is an
     unmanaged,  capitalization-weighted  index that includes 500 large-cap U.S.
     stocks. The index is designed to measure  performance of the broad domestic
     economy  through  changes  in the  aggregate  market  value  of 500  stocks
     representing all major industries.

(3)  The MSCI EAFE  Index is an  unmanaged,  capitalization-weighted  measure of
     international stock markets.

(4)  The  Russell  2000 Index is an  unmanaged  measure of 2000  companies  that
     typically have a market capitalization of less than $2 billion.


                                       19
<PAGE>

              Farmers Growth Portfolio - Pathway Growth Portfolio

                           Average Annual Total Return
                     for the Periods Ended December 31, 2000


                                                       Since           Since
                                    Past Year       Inception**     Inception***
                                    ---------       -----------     ------------
Farmers Growth Portfolio
Class A .........................   (13.98%)          (1.19%)
Class B .........................   (13.05%)          (0.34%)
Pathway Growth Portfolio
Class A* ........................   (11.90%)                           10.61%
Class B* ........................    (9.69%)                           10.97%
LBAB (1) ........................    11.63%            6.28%            6.78%
S&P 500 (2) .....................    (9.09%)           2.73%           16.26%
MSCI EAFE (3) ...................   (14.16%)                            6.91%
Russell 2000 (4) ................    (3.03%)                            9.31%

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

Class A performance is adjusted for maximum sales charge.

Class B performance is
adjusted for maximum contingent deferred sales charge.

*    Class A and Class B shares  were not offered  during the  periods  covered.
     Performance shown is for shares of Pathway Growth Portfolio existing during
     the periods  covered,  adjusted to reflect the impact of the sales  charges
     and distribution fees borne by Class A and Class B shares.

**   Inception  date of  Farmers  Growth  Portfolio  is  March  9,  1999.  Index
     comparisons begin March 31, 1999.

***  Inception  date of Pathway  Growth  Portfolio is November  15, 1996.  Index
     comparisons begin November 30, 1996.

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

(2)  The  Standard  & Poor's  500  Composite  Stock  Price (S&P 500) Index is an
     unmanaged,  capitalization-weighted  index that includes 500 large-cap U.S.
     stocks. The index is designed to measure  performance of the broad domestic
     economy  through  changes  in the  aggregate  market  value  of 500  stocks
     representing all major industries.

(3)  The MSCI EAFE  Index is an  unmanaged,  capitalization-weighted  measure of
     international stock markets.

(4)  The  Russell  2000 Index is an  unmanaged  measure of 2000  companies  that
     typically have a market capitalization of less than $2 billion.

     Total  return for each  Farmers  Fund would have been lower for all periods
shown in the tables  above if the  Investment  Manager had not  maintained  each
Farmers  Fund's  expenses  since  inception.  In addition,  total return for the
Farmers  Funds and the Pathway Funds would have been lower for all periods shown
in the

                                       20
<PAGE>

tables above if the Investment  Manager had not  maintained  expenses of certain
Underlying Funds during those periods.

     For  management's  discussion of each Pathway  Fund's  performance  for the
fiscal year ended  August 31, 2000,  please refer to Exhibit B attached  hereto.
Exhibit B presents  information  for the Pathway  Funds prior to the creation of
Class A and Class B shares.  Farmers Fund shareholders  should be aware that the
performance  discussion  and data in Exhibit B has not been  adjusted to reflect
the impact of the sales charges and distribution fees borne by Class A and Class
B shares, which would reduce performance.

Investment Manager; Fees and Expenses

     Each Fund  retains  the  investment  management  firm of ZSI,  pursuant  to
separate contracts, to manage its daily investment and business affairs, subject
to  the  policies  established  by  each  Fund's  Trustees.  ZSI  is a  Delaware
corporation   located  at  Two  International   Place,   Boston,   Massachusetts
02110-4103.

     The  Investment  Manager  receives a fee for its  services  pursuant to its
investment management agreement with each Farmers Fund. For these services, each
Farmers Fund pays the Investment Manager a fee at an annual rate of 0.75% of the
average daily net assets of each class of the Farmers Funds payable monthly.  As
of April 30,  2000,  the total net  assets for  Farmers  Income  Portfolio  were
$106,712,  for Farmers Income with Growth  Portfolio were $870,103,  for Farmers
Balanced  Portfolio were  $1,363,832,  for Farmers Growth with Income  Portfolio
were $1,084,360 and for Farmers Growth Portfolio were $2,463,887. For the fiscal
year ended April 30, 2000,  each class of the Farmers Funds paid the  Investment
Manager a fee of 0.75% of its  average  daily net  assets.  Shareholders  pay no
direct  charges  or fees  for  investment  management  or  other  services.  The
Investment  Manager also receives  management  fees for managing  certain of the
Underlying Funds in which the Farmers Funds invest.

     The  Investment  Manager  has  agreed not to be paid a  management  fee for
performing  its  services for the Pathway  Funds.  The  Investment  Manager does
receive  management fees for managing the Underlying  Funds in which each of the
Pathway Funds invest. Each Pathway Fund and Farmers Fund, as shareholders of the
Underlying Funds in which they invest,  bear their  proportionate  share of fees
and expenses paid by the Underlying Funds.

Administration  Agreement

     The Acquiring  Trust,  on behalf of each Pathway Fund,  has entered into an
administrative  services  agreement with ZSI (the  "Administration  Agreement"),
pursuant to which ZSI  provides or pays others to provide  substantially  all of
the

                                       21
<PAGE>

administrative  services  required  by the  Class A and  Class B shares  of each
Pathway Fund (other than those provided by ZSI under its  investment  management
agreement  with the  Pathway  Funds).  There is no fee  currently  payable  by a
Pathway Fund under the Administration  Agreement. One effect of this arrangement
is to make each  Pathway  Fund's  future  expense  ratio more  predictable.  The
details of this arrangement are set out below.

     Various  service  providers  (the "Service  Providers"),  some of which are
affiliated with ZSI,  provide certain  services to each Pathway Fund pursuant to
separate  agreements with each Pathway Fund. These Service  Providers may differ
from current  Service  Providers of each Farmers Fund.  Scudder Fund  Accounting
Corporation, a subsidiary of ZSI, computes net asset value for each Pathway Fund
and maintains its accounting records.  Kemper Service Company, also a subsidiary
of ZSI, is the transfer, shareholder servicing and dividend-paying agent for the
Class A and Class B shares of each  Pathway  Fund.  Scudder  Trust  Company,  an
affiliate  of  ZSI,  provides   subaccounting  and  recordkeeping  services  for
shareholder  accounts in certain  retirement  and  employee  benefit  plans.  As
custodian, State Street Bank and Trust Company holds the portfolio securities of
each Pathway Fund,  pursuant to a custodian  agreement.  Other Service Providers
include the  independent  public  accountants and legal counsel for each Pathway
Fund.

     Under the  Administration  Agreement,  each Service  Provider  provides the
services  to each  Pathway  Fund  described  above,  except  that ZSI pays these
entities for the provision of their  services to each Pathway Fund and pays most
other fund expenses,  including  insurance,  registration,  printing and postage
fees.

     The  Administration  Agreement  will remain in effect  with  respect to the
Class A and Class B shares  for an  initial  term  ending  September  30,  2003,
subject to earlier  termination  by the trustees that oversee each Pathway Fund.
ZSI has also agreed to bear certain other expenses of the Pathway Funds that are
not borne by ZSI under the Administration  Agreement,  such as taxes, brokerage,
interest  and  extraordinary   expenses,  and  the  fees  and  expenses  of  the
Independent  Trustees  (including  the fees and  expenses  of their  independent
counsel).  In  addition,  each  Pathway  Fund  pays  any  fees  required  by its
investment management agreement with ZSI.

Comparison of Expenses

     The tables and examples  below are designed to assist you in  understanding
the various  costs and expenses  that you will bear directly or indirectly as an
investor  in the Class A and Class B shares of each  Pathway  Fund,  and compare
these with the  expenses of the Class A and Class B shares of the  corresponding
Farmers Fund. As indicated below, it is expected that the total expense ratio of

                                       22
<PAGE>

each  class  of  each  Pathway  Fund  following  the  Reorganizations   will  be
substantially lower than the current expense ratio for the corresponding classes
of each  corresponding  Farmers Fund.  The  information is based on each Pathway
Fund's  expenses  and average  daily net assets  during the twelve  months ended
September  30, 2000 and on each Farmers  Fund's  expenses and average  daily net
assets during the twelve months ended April 30, 2000. The information  shown for
each Pathway Fund also reflects the fees, expenses and examples for the combined
Funds on a pro  forma  basis as of  September  30,  2000,  giving  effect to the
Reorganization.

           Farmers Income Portfolio - Pathway Conservative Portfolio
                        Shareholder Transaction Expenses

<TABLE>
<CAPTION>
                                                          Maximum Sales             Maximum
                                                          Charge (Load)        Contingent Deferred
                                                           Imposed on           Sales Charge (Load)
                                                         Purchases (as a           (as a % of
FUND                                                   % of offering price)    redemption proceeds)
----                                                   --------------------    --------------------
<S>                                                    <C>                     <C>
Farmers Income Portfolio (Class A) ..................         5.00%                   None*
Pathway  Conservative  Portfolio  (Class A) .........         5.75%                   None*
Farmers Income Portfolio (Class B) ..................          None                  4.00%**
Pathway  Conservative  Portfolio (Class B) ..........          None                  4.00%**
</TABLE>

------------
*    Class A shares purchased under the Large Order NAV Purchase  Privilege have
     a 1% contingent  deferred  sales charge if sold during the first year after
     purchase and 0.50% if sold during the second year after purchase.

**   Contingent  deferred  sales charges on Class B shares sold during the first
     six years of ownership are 4% in the first year, 3% in the second and third
     year, 2% in the fourth and fifth year, and 1% in the sixth year.


                                       23
<PAGE>

                   Annual Fund Operating Expenses (Unaudited)
                    (as a percentage of average net assets)

<TABLE>
<CAPTION>
                                                  Distri-
                                                   bution                     Total            Net
                                                   and/or                    Annual           Annual
                                       Manage-    Service                     Fund           Expense          Fund
                                        ment      (12b-1)     Other         Operating       Reimburse-      Operating
FUND                                    Fees       Fees     Expenses        Expenses           ment         Expenses
------                                ---------   -------   --------        ---------       ----------      ---------
<S>                                   <C>         <C>       <C>             <C>             <C>             <C>
Farmers Income Portfolio ...........     0.75%      0.25%     3.92%*           4.92%          3.92%**          1.00%
(Class A)

Pathway Conservative Portfolio .....      None      0.25%      None            0.25%              N/A            N/A
(Class A)

Farmers Income Portfolio ...........     0.75%      1.00%     3.92%*           5.67%          3.92%**          1.75%
(Class B)

Pathway Conservative Portfolio .....      None      1.00%      None            1.00%              N/A            N/A
(Class B)
</TABLE>

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

* Includes compensation and expenses of the Board of Trustees.

**   By  contract,  compensation  and  expenses  of the  Board of  Trustees  are
     reimbursed  by  the  Investment  Manager  until  the  Fund's  assets  reach
     $50,000,000.

     The range for the average  weighted  expense ratio borne by Farmers  Income
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.43% to 0.87%.  The range has been  restated  to  reflect  new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
provided  as a range  since the  average  assets  of  Farmers  Income  Portfolio
invested in each of the Underlying Funds will fluctuate.

     The  range  for  the  average  weighted  expense  ratio  borne  by  Pathway
Conservative  Portfolio in connection  with its  investments  in the  Underlying
Funds is expected to be 0.59% to 1.01%.  The range has been  restated to reflect
new fixed rate administrative fees for certain affiliated Underlying Funds. This
information  is  provided  as a  range  since  the  average  assets  of  Pathway
Conservative Portfolio invested in each of the Underlying Funds will fluctuate.

Examples

     Based on the costs above  (including both Fund and Underlying Fund fees and
expenses),  the following  examples are intended to help you compare the cost of
investing in the Funds with the cost of investing  in other  mutual  funds.  The
examples  assume  that you  invest  $10,000  in each  Fund for the time  periods
indicated  and that  each  Fund  bears the  midpoint  of the  range of  expenses
expected  to be  borne  by the  Fund  in  connection  with  its  investments  in
Underlying  Funds  (discussed   above).  The  examples  also  assume  that  your
investment  has  a 5%  return  each  year,  you  reinvested  all  dividends  and
distributions, each Fund's

                                       24
<PAGE>

operating expenses remain the same, and includes one year of reimbursed expenses
for Farmers Income Portfolio in each period.  The examples reflect the impact of
the maximum  applicable  sales charges  (although,  as discussed below, no sales
charges  will be  imposed  on  shares  issued  in the  Reorganization).  Expense
examples for Class B shares assume  conversion to Class A shares six years after
purchase.  Although  your  actual  costs may be higher or lower,  based on these
assumptions, your costs would be as follows:

     Expenses assuming you sold your shares at the end of each period:

FUND                                   1 year    3 years   5 years   10 years
------                                 ------    -------   -------   --------
Farmers Income Portfolio ............   $659      $1,747    $2,822    $5,457
(Class A)
Pathway Conservative Portfolio ......   $676        $890    $1,121    $1,784
(Class A)
Farmers Income Portfolio ............   $643      $1,823    $2,969    $5,494
(Class B)
Pathway Conservative Portfolio ......   $583        $866    $1,175    $1,738
(Class B)


                                       25
<PAGE>

     Expenses assuming you held your shares at the end of each period:

FUND                                   1 year    3 years    5 years   10 years
----                                   ------    -------    -------   -------
Farmers Income Portfolio ............   $659     $1,747     $2,822    $5,457
(Class A)
Pathway Conservative Portfolio ......   $676       $890     $1,121    $1,784
(Class A)
Farmers Income Portfolio ............   $243     $1,523     $2,769    $5,494
(Class B)
Pathway Conservative Portfolio ......   $183       $566       $975    $1,738
(Class B)

       Farmers Income with Growth Portfolio - Pathway Moderate Portfolio
                        Shareholder Transaction Expenses

                                       Maximum Sales               Maximum
                                       Charge (Load)         Contingent Deferred
                                         Imposed on          Sales Charge (Load)
                                      Purchases (as a           (as a % of
FUND                                % of offering price)    redemption proceeds)
-------                             --------------------    --------------------
Farmers Income with Growth
  Portfolio (Class A) ............         5.25%                   None*
Pathway Moderate Portfolio
(Class A) ........................         5.75%                   None*
Farmers Income with Growth
Portfolio (Class B) ..............          None                  4.00%**
Pathway Moderate Portfolio
(Class B) ........................          None                  4.00%**

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

*    Class A shares purchased under the Large Order NAV Purchase  Privilege have
     a 1% contingent  deferred  sales charge if sold during the first year after
     purchase and 0.50% if sold during the second year after purchase.

**   Contingent  deferred  sales charges on Class B shares sold during the first
     six years of ownership are 4% in the first year, 3% in the second and third
     year, 2% in the fourth and fifth year, and 1% in the sixth year.

                                       26
<PAGE>

                   Annual Fund Operating Expenses (Unaudited)
                    (as a percentage of average net assets)

<TABLE>
<CAPTION>
                                                    Distri-
                                                     bution                    Total                            Net
                                                     and/or                    Annual                          Annual
                                     Manage-        Service                     Fund           Expense          Fund
                                      ment          (12b-1)     Other         Operating       Reimburse-      Operating
FUND                                  Fees           Fees     Expenses        Expenses           ment         Expenses
------                              ---------       -------   ---------       ---------       ----------      ---------
<S>                                 <C>             <C>       <C>             <C>             <C>             <C>
Farmers Income with
Growth Portfolio ..................   0.75%          0.25%      1.41%*           2.41%          1.41%**         1.00%
(Class A)
Pathway Moderate Portfolio ........   None           0.25%       None            0.25%            N/A            N/A
(Class A)
Farmers Income with
Growth Portfolio ..................   0.75%          1.00%      1.41%*           3.16%          1.41%**         1.75%
(Class B)
Pathway Moderate Portfolio ........   None           1.00%       None            1.00%            N/A            N/A
(Class B)
</TABLE>

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

* Includes compensation and expenses of the Board of Trustees.

**   By  contract,  compensation  and  expenses  of the  Board of  Trustees  are
     reimbursed  by  the  Investment  Manager  until  the  Fund's  assets  reach
     $50,000,000.

     The range for the average  weighted  expense ratio borne by Farmers  Income
with Growth Portfolio in connection with its investments in the Underlying Funds
is  expected  to be 0.54% to 0.88%.  The range has been  restated to reflect new
fixed rate  administrative  fees for certain  affiliated  Underlying Funds. This
information  is provided as a range since the average  assets of Farmers  Income
with Growth Portfolio invested in each of the Underlying Funds will fluctuate.

     The range for the average  weighted expense ratio borne by Pathway Moderate
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.73% to 1.11%.  The range has been  restated  to  reflect  new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
provided  as a range  since the  average  assets of Pathway  Moderate  Portfolio
invested in each of the Underlying Funds will fluctuate.

Examples

     Based on the costs above  (including both Fund and Underlying Fund fees and
expenses),  the following  examples are intended to help you compare the cost of
investing in the Funds with the cost of investing  in other  mutual  funds.  The
examples  assume  that you  invest  $10,000  in each  Fund for the time  periods
indicated  and that  each  Fund  bears the  midpoint  of the  range of  expenses
expected  to be  borne  by the  Fund  in  connection  with  its  investments  in
Underlying Funds

                                       27
<PAGE>

(discussed above). The examples also assume that your investment has a 5% return
each year, you reinvested all dividends and distributions, each Fund's operating
expenses  remain the same,  and  includes  one year of  reimbursed  expenses for
Farmers Income with Growth  Portfolio in each period.  The examples  reflect the
impact of the maximum applicable sales charges (although, as discussed below, no
sales charges will be imposed on shares issued in the  Reorganization).  Expense
examples for Class B shares assume  conversion to Class A shares six years after
purchase.  Although  your  actual  costs may be higher or lower,  based on these
assumptions,  your costs would be as follows:  Expenses  assuming  you sold your
shares at the end of each period:

<TABLE>
<CAPTION>
FUND                                     1 year    3 years   5 years    10 years
----                                     ------    -------   -------    --------
<S>                                      <C>       <C>       <C>        <C>
Farmers Income with Growth
Portfolio ............................     $690     $1,312    $1,958     $3,682
(Class A)
Pathway Moderate Portfolio ...........     $687       $925    $1,182     $1,914
(Class A)
Farmers Income with Growth
Portfolio ............................     $649     $1,352    $2,073     $3,695
(Class B)
Pathway Moderate Portfolio ...........     $595       $903    $1,237     $1,869
(Class B)
</TABLE>

     Expenses assuming you held your shares at the end of each period:

<TABLE>
<CAPTION>
FUND                                       1 year    3 years   5 years    10 years
----                                       ------    -------   -------    --------
<S>                                        <C>       <C>       <C>        <C>
Farmers Income with Growth Portfolio ...    $690      $1,312    $1,958     $3,682
(Class A)
Pathway Moderate Portfolio .............    $687        $925    $1,182     $1,914
(Class A)
Farmers Income with Growth Portfolio ...    $249      $1,052    $1,873     $3,695
(Class B)
Pathway Moderate Portfolio .............    $195        $603    $1,037     $1,869
(Class B)
</TABLE>

                                       28
<PAGE>

            Farmers Balanced Portfolio - Pathway Moderate Portfolio

                        Shareholder Transaction Expenses


<TABLE>
<CAPTION>
                                                      Maximum Sales              Maximum
                                                      Charge (Load)         Contingent Deferred
                                                       Imposed on           Sales Charge (Load)
                                                     Purchases (as a           (as a % of
FUND                                               % of offering price)    redemption proceeds)
-------                                            --------------------    --------------------
<S>                                                <C>                     <C>
Farmers Balanced Portfolio (Class A) ............          5.75%                   None*
Pathway Moderate Portfolio (Class A) ............          5.75%                   None*
Farmers Balanced Portfolio (Class B) ............           None                  4.00%**
Pathway Moderate Portfolio (Class B) ............           None                  4.00%**
</TABLE>

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

*    Class A shares purchased under the Large Order NAV Purchase  Privilege have
     a 1% contingent  deferred  sales charge if sold during the first year after
     purchase and 0.50% if sold during the second year after purchase.

**   Contingent  deferred  sales charges on Class B shares sold during the first
     six years of ownership are 4% in the first year, 3% in the second and third
     year, 2% in the fourth and fifth year, and 1% in the sixth year.

                   Annual Fund Operating Expenses (Unaudited)
                    (as a percentage of average net assets)

<TABLE>
<CAPTION>
                                                    Distri-
                                                     bution                    Total                            Net
                                                     and/or                    Annual                          Annual
                                     Manage-        Service                     Fund           Expense          Fund
                                      ment          (12b-1)     Other         Operating       Reimburse-      Operating
FUND                                  Fees           Fees     Expenses        Expenses           ment         Expenses
------                              ---------       -------   ---------       ---------       ----------      ---------
<S>                                 <C>             <C>       <C>             <C>             <C>             <C>
Farmers Balanced Portfolio            0.75%           0.25%     0.95%*           1.95%          0.95%**          1.00%
(Class A)
Pathway Moderate Portfolio             None           0.25%      None            0.25%            N/A             N/A
(Class A)
Farmers Balanced Portfolio            0.75%           1.00%     0.95%*           2.70%           0.95%**         1.75%
(Class B)
Pathway Moderate Portfolio             None           1.00%      None            1.00%            N/A             N/A
(Class B)
</TABLE>

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

* Includes compensation and expenses of the Board of Trustees.

**   By  contract,  compensation  and  expenses  of the  Board of  Trustees  are
     reimbursed  by  the  Investment  Manager  until  the  Fund's  assets  reach
     $50,000,000.

     The range for the average  weighted expense ratio borne by Farmers Balanced
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.59% to 0.88%.  The range has been  restated  to  reflect  new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is

                                       29
<PAGE>

provided  as a range  since the  average  assets of Farmers  Balanced  Portfolio
invested in each of the Underlying Funds will fluctuate.

     The range for the average  weighted expense ratio borne by Pathway Moderate
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.73% to 1.11%.  The range has been  restated  to  reflect  new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
provided  as a range  since the  average  assets of Pathway  Moderate  Portfolio
invested in each of the Underlying Funds will fluctuate.

Examples

     Based on the costs above  (including both Fund and Underlying Fund fees and
expenses),  the following  examples are intended to help you compare the cost of
investing in the Funds with the cost of investing  in other  mutual  funds.  The
examples  assume  that you  invest  $10,000  in each  Fund for the time  periods
indicated  and that  each  Fund  bears the  midpoint  of the  range of  expenses
expected  to be  borne  by the  Fund  in  connection  with  its  investments  in
Underlying  Funds  (discussed   above).  The  examples  also  assume  that  your
investment  has  a 5%  return  each  year,  you  reinvested  all  dividends  and
distributions,  each Fund's operating expenses remain the same, and includes one
year of reimbursed  expenses for Farmers Balanced  Portfolio in each period. The
examples reflect the impact of the maximum  applicable sales charges  (although,
as discussed  below,  no sales  charges will be imposed on shares  issued in the
Reorganization).  Expense examples for Class B shares assume conversion to Class
A shares six years after  purchase.  Although your actual costs may be higher or
lower, based on these assumptions, your costs would be as follows:


     Expenses assuming you sold your shares at the end of each period:

FUND                                     1 year    3 years   5 years    10 years
----                                     ------    -------   -------    --------
Farmers Balanced Portfolio ............   $742     $1,277     $1,838     $3,358
(Class A)
Pathway Moderate Portfolio ............   $687       $925     $1,182     $1,914
(Class A)
Farmers Balanced Portfolio ............   $652     $1,268     $1,907     $3,333
(Class B)
Pathway Moderate Portfolio ............   $595       $903     $1,237     $1,869
(Class B)

                                       30
<PAGE>

     Expenses assuming you held your shares at the end of each period:

FUND                                     1 year    3 years   5 years    10 years
----                                     ------    -------   -------    --------
Farmers Balanced Portfolio ............   $742      $1,277    $1,838     $3,358
(Class A)
Pathway Moderate Portfolio ............   $687        $925    $1,182     $1,914
(Class A)
Farmers Balanced Portfolio ............   $252        $968    $1,707     $3,333
(Class B)
Pathway Moderate Portfolio ............   $195        $603    $1,037     $1,869
(Class B)


       Farmers Growth with Income Portfolio - Pathway Moderate Portfolio
                        Shareholder Transaction Expenses


                                       Maximum Sales               Maximum
                                       Charge (Load)         Contingent Deferred
                                         Imposed on          Sales Charge (Load)
                                      Purchases (as a           (as a % of
FUND                                % of offering price)    redemption proceeds)
-------                             --------------------    --------------------
Farmers Growth with Income
Portfolio (Class A) ...............         5.75%                  None*
Pathway Moderate
Portfolio (Class A) ...............         5.75%                  None*
Farmers Growth with Income
Portfolio (Class B) ...............          None                 4.00%**
Pathway Moderate
Portfolio (Class B) ...............          None                 4.00%**

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

*    Class A shares purchased under the Large Order NAV Purchase  Privilege have
     a 1% contingent  deferred  sales charge if sold during the first year after
     purchase and 0.50% if sold during the second year after purchase.

**   Contingent  deferred  sales charges on Class B shares sold during the first
     six years of ownership are 4% in the first year, 3% in the second and third
     year, 2% in the fourth and fifth year, and 1% in the sixth year.

                                       31
<PAGE>

                   Annual Fund Operating Expenses (Unaudited)
                    (as a percentage of average net assets)

<TABLE>
<CAPTION>
                                                    Distri-
                                                     bution                    Total                            Net
                                                     and/or                    Annual                          Annual
                                     Manage-        Service                     Fund           Expense          Fund
                                      ment          (12b-1)     Other         Operating       Reimburse-      Operating
FUND                                  Fees           Fees     Expenses        Expenses           ment         Expenses
------                              ---------       -------   ---------       ---------       ----------      ---------
<S>                                 <C>             <C>       <C>             <C>             <C>             <C>
Farmers Growth with
Income Portfolio .................    0.75%          0.25%      1.18%*          2.18%           1.18%**         1.00%
(Class A)
Pathway Moderate Portfolio .......     None          0.25%       None           0.25%             N/A            N/A
(Class A)
Farmers Growth with
Income Portfolio .................    0.75%          1.00%      1.18%*          2.93%           1.18%**         1.75%
(Class B)
Pathway Moderate Portfolio              None         1.00%       None           1.00%             N/A            N/A
(Class B)
</TABLE>

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

* Includes compensation and expenses of the Board of Trustees.

**   By  contract,  compensation  and  expenses  of the  Board of  Trustees  are
     reimbursed  by  the  Investment  Manager  until  the  Fund's  assets  reach
     $50,000,000.

     The range for the average  weighted  expense ratio borne by Farmers  Growth
with Income Portfolio in connection with its investments in the Underlying Funds
is  expected  to be 0.66% to 1.00%.  The range has been  restated to reflect new
fixed rate  administrative  fees for certain  affiliated  Underlying Funds. This
information  is provided as a range since the average  assets of Farmers  Growth
with Income Portfolio invested in each of the Underlying Funds will fluctuate.

     The range for the average  weighted expense ratio borne by Pathway Moderate
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.73% to 1.11%.  The range has been  restated  to  reflect  new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is
provided  as a range  since the  average  assets of Pathway  Moderate  Portfolio
invested in each of the Underlying Funds will fluctuate.

Examples

     Based on the  costs  above  (including  Fund and  Underlying  Fund fees and
expenses),  the following  examples are intended to help you compare the cost of
investing in the Funds with the cost of investing  in other  mutual  funds.  The
examples  assume  that you  invest  $10,000  in each  Fund for the time  periods
indicated  and that  each  Fund  bears the  midpoint  of the  range of  expenses
expected  to be  borne  by the  Fund  in  connection  with  its  investments  in
Underlying Funds

                                       32
<PAGE>

(discussed above). The examples also assume that your investment has a 5% return
each year, you reinvested all dividends and distributions, each Fund's operating
expenses  remain the same,  and  includes  one year of  reimbursed  expenses for
Farmers Growth with Income  Portfolio in each period.  The examples  reflect the
impact of the maximum applicable sales charges (although, as discussed below, no
sales charges will be imposed on shares issued in the  Reorganization).  Expense
examples for Class B shares assume  conversion to Class A shares six years after
purchase.  Although  your  actual  costs may be higher or lower,  based on these
assumptions, your costs would be as follows:


     Expenses assuming you sold your shares at the end of each period:


FUND                                      1 year   3 years   5 years    10 years
----                                      ------   -------   -------    --------
Farmers Growth with Income Portfolio ...   $750    $1,347     $1,968     $3,632
(Class A)
Pathway Moderate Portfolio .............   $687      $925     $1,182     $1,914
(Class A)
Farmers Growth with Income Portfolio ...   $661    $1,341     $2,040     $3,612
(Class B)
Pathway Moderate Portfolio .............   $595      $903     $1,237     $1,869
(Class B)

     Expenses assuming you held your shares at the end of each period:

FUND                                      1 year   3 years   5 years    10 years
----                                      ------   -------   -------    --------
Farmers Growth with Income Portfolio ...   $750     $1,347    $1,968     $3,632
(Class A)
Pathway Moderate Portfolio .............   $687       $925    $1,182     $1,914
(Class A)
Farmers Growth with Income Portfolio ...   $261     $1,041    $1,840     $3,612
(Class B)
Pathway Moderate Portfolio .............   $195       $603    $1,037     $1,869
(Class B)

                                       33
<PAGE>

              Farmers Growth Portfolio - Pathway Growth Portfolio
                        Shareholder Transaction Expenses


<TABLE>
<CAPTION>
                                            Maximum Sales               Maximum
                                            Charge (Load)         Contingent Deferred
                                             Imposed on          Sales Charge (Load)
                                           Purchases (as a           (as a % of
FUND                                     % of offering price)    redemption proceeds)
-------                                  --------------------    --------------------
<S>                                      <C>                     <C>
Farmers Growth Portfolio (Class A)              5.75%                   None*
Pathway Growth Portfolio (Class A)              5.75%                   None*
Farmers Growth Portfolio (Class B)               None                  4.00%**
Pathway Growth Portfolio (Class B)               None                  4.00%**
</TABLE>

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

*    Class A shares purchased under the Large Order NAV Purchase  Privilege have
     a 1% contingent  deferred  sales charge if sold during the first year after
     purchase and 0.50% if sold during the second year after purchase.

**   Contingent  deferred  sales charges on Class B shares sold during the first
     six years of ownership are 4% in the first year, 3% in the second and third
     year, 2% in the fourth and fifth year, and 1% in the sixth year.

                   Annual Fund Operating Expenses (Unaudited)
                    (as a percentage of average net assets)

<TABLE>
<CAPTION>
                                                    Distri-
                                                     bution                    Total                            Net
                                                     and/or                    Annual                          Annual
                                     Manage-        Service                     Fund           Expense          Fund
                                      ment          (12b-1)     Other         Operating       Reimburse-      Operating
FUND                                  Fees           Fees     Expenses        Expenses           ment         Expenses
------                              ---------       -------   ---------       ---------       ----------      ---------
<S>                                 <C>             <C>       <C>             <C>             <C>             <C>
Farmers Growth Portfolio .........    0.75%           0.25%     0.66%*          1.66%           0.66%**         1.00%
(Class A)
Pathway Growth Portfolio .........     None           0.25%      None           0.25%             N/A            N/A
(Class A)
Farmers Growth Portfolio .........    0.75%           1.00%     0.66%*          2.41%           0.66%**         1.75%
(Class B)
Pathway Growth Portfolio .........     None           1.00%      None           1.00%             N/A            N/A
(Class B)

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

*    Includes compensation and expenses of the Board of Trustees.

**   By  contract,  compensation  and  expenses  of the  Board of  Trustees  are
     reimbursed  by  the  Investment  Manager  until  the  Fund's  assets  reach
     $50,000,000.

     The range for the average  weighted  expense ratio borne by Farmers  Growth
Portfolio in connection with its investments in the Underlying Funds is expected
to be 0.75% to 1.21%.  The range has been  restated  to  reflect  new fixed rate
administrative fees for certain affiliated Underlying Funds. This information is

                                       34
<PAGE>

provided  as a range  since the  average  assets  of  Farmers  Growth  Portfolio
invested  in each of the  Underlying  Funds  will  fluctuate.  The range for the
average  weighted  expense ratio borne by Pathway Growth Portfolio in connection
with its investments in the Underlying Funds is expected to be 0.47% to 1.22%.

     The range has been restated to reflect new fixed rate  administrative  fees
for certain affiliated Underlying Funds. This information is provided as a range
since the average  assets of Pathway  Growth  Portfolio  invested in each of the
Underlying Funds will fluctuate.

Examples

Based on the  costs  above  (including  both Fund and  Underlying  Fund fees and
expenses),  the following  examples are intended to help you compare the cost of
investing in the Funds with the cost of investing  in other  mutual  funds.  The
examples  assume  that you  invest  $10,000  in each  Fund for the time  periods
indicated  and that  each  Fund  bears the  midpoint  of the  range of  expenses
expected  to be  borne  by the  Fund  in  connection  with  its  investments  in
Underlying  Funds  (discussed   above).  The  examples  also  assume  that  your
investment  has  a 5%  return  each  year,  you  reinvested  all  dividends  and
distributions,  each Fund's operating expenses remain the same, and includes one
year of reimbursed  expenses for Farmers  Growth  Portfolio in each period.  The
examples reflect the impact of the maximum  applicable sales charges  (although,
as discussed  below,  no sales  charges will be imposed on shares  issued in the
Reorganization).  Expense examples for Class B shares assume conversion to Class
A shares six years after  purchase.  Although your actual costs may be higher or
lower, based on these assumptions, your costs would be as follows:

     Expenses assuming you sold your shares at the end of each period:

FUND                                      1 year   3 years   5 years    10 years
----                                      ------   -------   -------    --------
Farmers Growth Portfolio ..............    $764     $1,289    $1,839     $3,332
(Class A)
Pathway Growth Portfolio ..............    $681       $905    $1,146     $1,838
(Class A)
Farmers Growth Portfolio ..............    $676     $1,281    $1,908     $3,307
(Class B)
Pathway Growth Portfolio ..............    $588       $882    $1,201     $1,793
(Class B)

                                       35
<PAGE>

     Expenses assuming you held your shares at the end of each period:

FUND                                      1 year   3 years   5 years    10 years
----                                      ------   -------   -------    --------
Farmers Growth Portfolio ..............    $764     $1,289    $1,839     $3,332
(Class A)
Pathway Growth Portfolio ..............    $681       $905    $1,146     $1,838
(Class A)
Farmers Growth Portfolio ..............    $276       $981    $1,708     $3,307
(Class B)
Pathway Growth Portfolio ..............    $188       $582    $1,001     $1,793
(Class B)


Distribution and Services Fees

     Pursuant to a  shareholder  services and  distribution  agreement  with the
Acquiring Trust, Kemper  Distributors,  Inc. ("KDI"), 222 South Riverside Plaza,
Chicago,  Illinois  60606,  an affiliate of the  Investment  Manager,  serves as
principal  underwriter  and distributor of the Class A and Class B shares of the
Pathway Funds and acts as agent of each Pathway Fund in the continuous  offering
of its shares.  KDI also  provides  execution  services for the Pathway Funds in
connection with the purchase of Underlying Fund shares and receives compensation
of up to 1% of the  purchase  price of such  shares from the  Underlying  Funds'
underwriters in connection therewith.

     Each Pathway Fund has adopted a substantially  similar shareholder services
and distribution plan on behalf of Class A and Class B shares in accordance with
Rule 12b-1 (the "12b-1  Plan")  under the  Investment  Company  Act of 1940,  as
amended (the "1940 Act").  The 12b-1 Plan  provides for fees payable as expenses
of the Class A and Class B shares that are used by KDI to pay for  services  for
Class A shares and services  and  distribution  for Class B shares.  Each fee is
payable monthly to KDI at an annual rate of 0.25% and 1.00% of average daily net
assets  attributable  to the Class A and Class B shares  of each  Pathway  Fund,
respectively.  KDI may engage other firms to provide information and shareholder
services for  shareholders  of each Pathway  Fund.  KDI may pay each such firm a
service  fee at an annual  rate of up to 0.25% of net  assets of the Class A and
Class B shares maintained and serviced by the firm.

Purchases,  Exchanges and Redemptions

     The  procedures  for  purchases,  exchanges and  redemptions of Class A and
Class B shares of the Pathway Funds are identical to those of the Farmers Funds.
Each Pathway Fund has a maximum initial sales charge of 5.75% on Class A shares.
Class A shares of Farmers  Income  Portfolio  and  Farmers  Income  with  Growth
Portfolio have maximum initial sales charges of 5.00% and 5.25%,

                                       36
<PAGE>

respectively,  while  Class A shares of the other  Farmers  Funds have a maximum
initial sales charge of 5.75%.  Shareholders  who purchase $1 million or more of
Class A shares pay no  initial  sales  charge  but may have to pay a  contingent
deferred  sales charge (a "CDSC") of up to 1.00% if the shares are sold within 2
years of the date on which they were purchased.  Class B shares are sold without
a  front-end  sales  charge,  but  may be  subject  to a CDSC  upon  redemption,
depending  on the length of time the shares are held.  The CDSC  begins at 4.00%
for shares  sold in the first  year,  declines to 1.00% in the sixth year and is
eliminated after the sixth year. After six years,  Class B shares  automatically
convert to Class A shares.

     Class  A  and  Class  B  shares  of  the  Pathway  Funds  received  in  the
Reorganizations  will be issued at net asset value,  without a sales charge, and
no CDSC  will be  imposed  on any  shares of the  Farmers  Funds  exchanged  for
corresponding  shares  of the  Pathway  Funds in the  Reorganizations.  However,
following  the  Reorganizations,  any CDSC that applies to shares of the Farmers
Funds  will  continue  to apply to shares  of the  corresponding  Pathway  Funds
received  in the  Reorganizations,  using the  original  purchase  date for such
shares to  calculate  the holding  period,  rather than the date such shares are
received in the Reorganizations.

     Services available to Class A and Class B shareholders of Pathway Funds are
identical to those  available to  shareholders  of the Farmers Funds and include
the purchase and redemption of shares through an automated  telephone system and
over  the  Internet,  telephone  redemptions  and  reinvestment  privileges.  In
addition, as noted above, unlike shareholders of the Farmers Funds, shareholders
of Pathway  Funds may exchange  their shares into most other  Scudder Funds that
offer Class A and Class B shares.  Please see the Pathway Funds'  prospectus for
additional information.

Dividends and Other Distributions

     Pathway Conservative Portfolio,  Pathway Moderate Portfolio, Farmers Income
Portfolio,  Farmers Income with Growth Portfolio and Farmers Balanced  Portfolio
intend to declare dividends from their net investment income and distribute them
quarterly.  Farmers Growth with Income  Portfolio and Farmers  Growth  Portfolio
intend to declare dividends from their net investment income and distribute them
in  November  or  December of each year.  Pathway  Growth  Portfolio  intends to
declare dividends from its net investment income and distribute them in December
of each year.  Each Fund intends to distribute net realized  capital gains after
utilization  of capital loss  carryforwards,  if any, in November or December of
each year. An additional  distribution  may be made if necessary.  Dividends and
distributions of each Fund will be invested in additional

                                       37
<PAGE>

shares of the same  class of that Fund at net asset  value and  credited  to the
shareholder's  account on the payment  date or, at the  shareholder's  election,
paid in cash. For retirement plans, reinvestment is the only option.

     If the Plan is  approved by a Farmers  Fund's  shareholders,  that  Farmers
Funds  will  pay  its  shareholders  a  distribution  of all  undistributed  net
investment income and undistributed realized net capital gains immediately prior
to the Closing.

Tax Consequences

As a condition to each  Reorganization,  each Pathway Fund and Farmers Fund will
have  received an opinion of Willkie  Farr & Gallagher  in  connection  with the
Reorganization,  to the effect that,  based upon certain facts,  assumptions and
representations,  each Reorganization will constitute a tax-free  reorganization
within the meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). If a Reorganization constitutes a tax-free reorganization,
no gain or loss will be recognized by the Farmers Funds or their shareholders as
a direct result of the Reorganization.  See "The Proposed Transactions - Federal
Income Tax Consequences" below.

II.  PRINCIPAL  RISK FACTORS

           Farmers Income Portfolio - Pathway Conservative Portfolio

     Because of their similar  investment  objectives,  policies and strategies,
the types of principal  risks  presented by Pathway  Conservative  Portfolio are
similar to those  presented by Farmers  Income  Portfolio.  Some  differences do
exist.  The main  risks  applicable  to each Fund stem from  investments  in the
Underlying Funds and include,  among others,  market risk, credit risk, interest
rate risk and risk associated with exposure to foreign  markets.  Unlike Farmers
Income Portfolio, Pathway Conservative Portfolio has equity fund exposure in its
target  allocation,  including  exposure  to  international  equity  funds,  and
therefore  Pathway  Conservative  Portfolio has a greater level of equity market
risk and risk  associated  with exposure to foreign  markets.  The Funds are not
insured or guaranteed by the FDIC or any other government  agency.  Share prices
will go up and down, so be aware that you could lose money.

       Farmers Income with Growth Portfolio - Pathway Moderate Portfolio

     Because of their similar  investment  objectives,  policies and strategies,
the types of principal risks presented by Pathway Moderate Portfolio are similar
to those presented by Farmers Income with Growth Portfolio.  Some differences do
exist.  The main  risks  applicable  to each Fund stem from  investments  in the
Underlying Funds and include,  among others,  market risk, credit risk, interest
rate

                                       38
<PAGE>

risk and risk  associated  with exposure to foreign  markets.  Pathway  Moderate
Portfolio has  substantially  greater  equity fund exposure than Farmers  Income
with  Growth  Portfolio  in  its  target   allocation,   including  exposure  to
international  equity funds,  and  therefore  Pathway  Moderate  Portfolio has a
greater level of equity market risk and risk associated with exposure to foreign
markets.  The  Funds  are not  insured  or  guaranteed  by the FDIC or any other
government agency.  Share prices will go up and down, so be aware that you could
lose money.

            Farmers Balanced Portfolio - Pathway Moderate Portfolio

     Because of their similar  investment  objectives,  policies and strategies,
the types of principal risks presented by Pathway Moderate Portfolio are similar
to those presented by Farmers Balanced  Portfolio.  The main risks applicable to
each Fund stem from  investments  in the  Underlying  Funds and  include,  among
others,  market risk,  credit risk,  interest rate risk and risk associated with
exposure to foreign markets. The Funds are not insured or guaranteed by the FDIC
or any other  government  agency.  Share prices will go up and down, so be aware
that you could lose money.

       Farmers Growth with Income Portfolio - Pathway Moderate Portfolio

     Because of their similar  investment  objectives,  policies and strategies,
the types of principal risks presented by Pathway Moderate Portfolio are similar
to those  presented  by Farmers  Growth  with Income  Portfolio.  The main risks
applicable  to each Fund  stem  from  investments  in the  Underlying  Funds and
include,  among others,  market risk,  credit risk,  interest rate risk and risk
associated  with  exposure  to  foreign  markets.  The Funds are not  insured or
guaranteed by the FDIC or any other government  agency.  Share prices will go up
and down, so be aware that you could lose money.

              Farmers Growth Portfolio - Pathway Growth Portfolio

     Because of their similar  investment  objectives,  policies and strategies,
the types of principal risks  presented by Pathway Growth  Portfolio are similar
to those presented by Farmers Growth  Portfolio.  Some differences do exist. The
main risks applicable to each Fund stem from investments in the Underlying Funds
and include,  among  others,  market risk and risk  associated  with exposure to
foreign markets.  Unlike Farmers Growth Portfolio,  Pathway Growth Portfolio has
bond fund  exposure  in its target  allocation,  and  therefore  Pathway  Growth
Portfolio may be subject to a higher level of interest rate risk.  The Funds are
not insured or  guaranteed  by the FDIC or any other  government  agency.  Share
prices will go up and down, so be aware that you could lose money.

                                       39
<PAGE>

                           * * * * * * * * * * * * *

     For a further  discussion  of the  investment  techniques  and risk factors
applicable to each Fund, see "Investment  Objectives,  Policies and Restrictions
of  the  Funds"  above,  and  the  prospectuses  and  statements  of  additional
information for the Funds.

III. THE PROPOSED TRANSACTIONS

Description of the Plan

     As stated above, the Plan provides for the transfer of all or substantially
all of the assets of each  Farmers  Fund to its  corresponding  Pathway  Fund in
exchange  for that  number  of full and  fractional  Class A and  Class B shares
having an aggregate  net asset value equal to the  aggregate  net asset value of
the shares of the  corresponding  classes of the Farmers Fund as of the close of
business  on the  Valuation  Date.  Each  Pathway  Fund will  assume  all of the
liabilities of its corresponding Farmers Fund. Each Farmers Fund will distribute
the Class A and Class B shares  received in the exchange to the  shareholders of
that Farmers Fund in complete liquidation of the Farmers Fund. Each Farmers Fund
will then be terminated.

     Upon completion of the  Reorganization,  each shareholder of a Farmers Fund
will own that number of full and fractional Class A and Class B shares having an
aggregate  net  asset  value  equal to the  aggregate  net  asset  value of such
shareholder's  shares of the corresponding class held in that Farmers Fund as of
the close of  business  on the  Valuation  Date.  Such shares will be held in an
account with the Pathway Fund identical in all material  respects to the account
currently  maintained by the Farmers Fund for such shareholder.  In the interest
of economy and convenience,  Class A and Class B shares issued to Farmers Funds'
shareholders in the Reorganizations  will be in uncertificated  form. If Class A
or Class B shares of the Farmers Funds are represented by certificates  prior to
the  Closing,  such  certificates  should  be  returned  to the  Farmers  Funds'
shareholder servicing agent. Any Class A and Class B shares of the Pathway Funds
distributed in the  Reorganizations to shareholders in exchange for certificated
shares  of the  Farmers  Funds may not be  transferred,  exchanged  or  redeemed
without delivery of such certificates.

     Until the Closing,  shareholders  of the Farmers  Funds will continue to be
able to redeem their shares at the net asset value next determined after receipt
by  Farmers  Funds'  transfer  agent of a  redemption  request  in proper  form.
Redemption and purchase  requests received on or after the Valuation Date by the
transfer  agent will be treated  as  requests  received  for the  redemption  or
purchase

                                       40
<PAGE>

of Class A or Class B shares of the  applicable  Pathway  Fund  received  by the
shareholder in connection with each Reorganization.

     The  obligations of each Trust on behalf of the respective  Funds under the
Plan are subject to various conditions,  as stated therein.  Among other things,
the Plan requires  that all filings be made with,  and all authority be received
from,  the SEC and  state  securities  commissions  as may be  necessary  in the
opinion  of  counsel  to  permit  the  parties  to  carry  out the  transactions
contemplated  by the Plan.  Each Fund is in the process of making the  necessary
filings.  To provide for unforeseen events,  the Plan may be terminated:  (i) by
the mutual agreement of the parties; (ii) by either party if the Closing has not
occurred by June 1, 2001,  unless such date is extended by mutual  agreement  of
the parties; or (iii) by either party if the other party has materially breached
its obligations under the Plan or made a material  misrepresentation in the Plan
or in  connection  with the  Reorganizations.  The Plan may also be  amended  by
mutual  agreement in writing.  However,  no amendment may be made  following the
Meeting if such  amendment  would have the effect of changing the provisions for
determining  the  number  of  shares  of each  Pathway  Fund to be issued to its
corresponding  Farmers Fund in the Plan to the  detriment of the Farmers  Funds'
shareholders without their approval. For a complete description of the terms and
conditions of each Reorganization, please refer to the Plan at Exhibit A.

Board  Approval  of  the  Proposed Transactions

     ZSI  presented   the   Reorganizations   to  the  Trustees   based  on  its
determination that the investment  portfolios offered through the Acquired Trust
as presently  configured had been unable to achieve an efficient operating size,
and in ZSI's  judgment  were  unlikely to do so as  currently  structured.  As a
result, ZSI proposed, and the Trustees considered,  the merger of each portfolio
of the  Acquired  Trust  with and into a Pathway  Fund with  similar  investment
objectives and policies.  The Independent Trustees of the Farmers Funds reviewed
the potential  implications  of these proposals for each Farmers Fund. They were
assisted in this review by their  independent  legal counsel and by  independent
consultants  with  special  expertise  in  financial  and mutual  fund  industry
matters.

     Following the  conclusion of this process,  the Board of each Farmers Fund,
including the Independent  Trustees of each Farmers Fund,  approved the terms of
the Reorganizations and certain related proposals. The Independent Trustees have
also  unanimously  agreed to recommend that the  Reorganizations  be approved by
each Farmers Fund's shareholders.

     In  determining  to recommend  that the  shareholders  of each Farmers Fund
approve the Reorganizations,  the Board considered, among other factors: (a) the
fees and expense ratios of the Funds, including comparisons between the expenses

                                       41
<PAGE>

of each Farmers Fund and the estimated  operating expenses of each corresponding
Pathway Fund, and between the estimated  operating expenses of each Pathway Fund
and other  mutual funds with similar  investment  objectives;  (b) the terms and
conditions of each  Reorganization and whether a Reorganization  would result in
the dilution of shareholder  interests;  (c) the  compatibility  of each Farmers
Fund's and Pathway Fund's  investment  objectives,  policies,  restrictions  and
portfolios;  (d) the service features  available to shareholders of each Farmers
Fund and Pathway  Fund;  (e) prospects  for each  participating  Pathway Fund to
attract additional  assets;  (f) the tax consequences of each  Reorganization on
the relevant Farmers Fund, Pathway Fund and their respective  shareholders;  and
(g) the investment performance of each Farmers Fund and Pathway Fund.

     The Trustees also considered the impact of each Reorganization on the total
expenses to be borne by  shareholders of each Farmers Fund. As noted above under
"Comparison  of  Expenses,"  the pro forma  expense ratio for each combined Fund
following the  Reorganization  is  substantially  lower than the current expense
ratio  for the  relevant  Farmers  Fund.  The  Board  also  considered  that the
Reorganizations  would  permit the  shareholders  of each Farmers Fund to pursue
similar  investment  goals in a larger fund.  Finally,  the Board considered the
fact that ZSI would pay all costs associated with the proposed Reorganizations.


     Based on all of the foregoing, the Board concluded that each Farmers Fund's
participation  in the  Reorganizations  would  be in the best  interests  of the
Farmers  Fund  and  would  not  dilute  the  interests  of  the  Farmers  Fund's
shareholders.  The  Board  of  Trustees,  including  the  Independent  Trustees,
unanimously  recommends  that  shareholders  of the  Farmers  Funds  approve the
Reorganizations.

Description  of the  Securities to Be Issued

     The  Pathway  Funds are  series of the  Acquiring  Trust,  a  Massachusetts
business trust  established  under a Declaration of Trust dated July 1, 1994, as
amended.  The  Acquiring  Trust's  authorized  capital  consists of an unlimited
number of shares of beneficial interest, par value $0.01 per share. The Trustees
of the Acquiring  Trust are  authorized to divide the Acquiring  Trust's  shares
into separate series.  The Pathway Funds are the only three active series of the
Acquiring  Trust  that the  Board  has  created  to date.  The  Trustees  of the
Acquiring  Trust are also  authorized to further divide the shares of the series
of the  Acquiring  Trust  into  classes.  The  shares of the  Pathway  Funds are
currently  divided into five classes,  Class S, Class AARP, Class A, Class B and
Class C. Although shareholders of different classes of a series have an interest
in the  same  portfolio  of  assets,  shareholders  of  different  classes  bear
different expense levels because

                                       42
<PAGE>

distribution  costs and certain other  expenses  approved by the Trustees of the
Pathway Funds are borne directly by the class incurring such expenses.

     Each share of each class of a Pathway  Fund  represents  an interest in the
Pathway  Fund that is equal to and  proportionate  with each other share of that
class of the Pathway Fund.  Pathway Fund  shareholders  are entitled to one vote
per share held on matters on which they are  entitled  to vote.  In the areas of
shareholder  voting  and the powers and  conduct of the  Trustees,  there are no
material differences between the rights of shareholders of the Farmers Funds and
the rights of shareholders of the Pathway Funds.

Federal Income Tax Consequences

     Each  Reorganization  is  conditioned  upon the  receipt by each Fund of an
opinion from Willkie Farr & Gallagher  substantially  to the effect that,  based
upon certain facts,  assumptions and representations of the parties, for federal
income  tax  purposes:  (i)  the  transfer  to  each  Pathway  Fund  of  all  or
substantially  all of the assets of its  corresponding  Farmers Fund in exchange
solely for Class A and Class B shares of the Pathway Fund and the  assumption by
the Pathway Fund of all of the liabilities of the Farmers Fund,  followed by the
distribution  of such shares to the Farmers Fund's  shareholders in exchange for
their shares of Farmers Fund in complete  liquidation of the Farmers Fund,  will
constitute  a  "reorganization"  within the meaning of Section  368(a)(1) of the
Code,  and the  Pathway  Fund  and  Farmers  Fund  will  each be "a  party  to a
reorganization"  within the meaning of Section 368(b) of the Code;  (ii) no gain
or loss will be  recognized  by the  Farmers  Fund upon the  transfer  of all or
substantially  all of its assets to its  corresponding  Pathway Fund in exchange
solely for Class A and Class B shares and the  assumption by the Pathway Fund of
all of the liabilities of the Farmers Fund or upon the distribution of the Class
A and Class B shares to  shareholders  of the Farmers Fund in exchange for their
shares of the Farmers Fund; (iii) the basis of the assets of the Farmers Fund in
the  hands of the  corresponding  Pathway  Fund will be the same as the basis of
such assets of the Farmers  Fund  immediately  prior to the  transfer;  (iv) the
holding  period of the assets of the  Farmers  Fund in the hands of the  Pathway
Fund will  include the period  during which such assets were held by the Farmers
Fund;  (v) no gain or loss  will be  recognized  by the  Pathway  Fund  upon the
receipt of the assets of its corresponding  Farmers Fund in exchange for Class A
and  Class  B  shares  and  the  assumption  by the  Pathway  Fund of all of the
liabilities of the Farmers Fund;  (vi) no gain or loss will be recognized by the
shareholders  of the  Farmers  Fund upon the  receipt of the Class A and Class B
shares  solely in exchange  for their  shares of the Farmers Fund as part of the
transaction;  (vii) the basis of the Class A and Class B shares received by each
shareholder  of the Farmers  Fund will be the same as the basis of the shares of
the Farmers Fund  exchanged  therefor;  and (viii) the holding period of Class A
and

                                       43
<PAGE>

Class B shares received by each shareholder of the Farmers Fund will include the
holding  period during which the shares of the Farmers Fund  exchanged  therefor
were held,  provided  that at the time of the exchange the shares of the Farmers
Fund were held as  capital  assets in the hands of such  shareholder  of Farmers
Fund.

     After the  Closing,  each  Pathway  Fund may dispose of certain  securities
received by it from a Farmers Fund in connection with the Reorganizations, which
may result in transaction costs and capital gains.

     While the  Farmers  Funds are not aware of any  adverse  state or local tax
consequences of the proposed Reorganizations, they have not requested any ruling
or  opinion  with  respect to such  consequences  and  shareholders  may wish to
consult their own tax adviser with respect to such matters.

Expenses of the  Transaction

     ZSI  has  agreed  to pay all  expenses  incurred  in  connection  with  the
Reorganizations.  The Independent Trustees of the Farmers Funds are not entitled
to benefits  under any pension or  retirement  plan. A one-time  benefit will be
provided to each Independent  Trustee of the Farmers Funds who will not serve on
the board of the  Pathway  Funds.  Inasmuch  as ZSI will also  benefit  from the
administrative  efficiencies  of  merging  the  Farmers  Funds with and into the
Pathway Funds,  ZSI has agreed to pay the entire cost of this benefit,  which is
expected  to be an amount  equal to two times  each  non-continuing  Independent
Trustee's annual  compensation from the Farmers Funds,  without giving effect to
any fee waiver or deferral arrangements.

Legal  Matters

     Certain legal matters concerning the federal income tax consequences of the
Reorganizations  will be passed on by  Willkie  Farr &  Gallagher,  787  Seventh
Avenue, New York, New York 10019.  Certain legal matters concerning the issuance
of shares of the  Pathway  Funds will be passed on by  Dechert,  Ten Post Office
Square-South, Boston, Massachusetts 02109.

Capitalization

     The  following  table shows on an  unaudited  basis the  capitalization  of
Pathway Conservative  Portfolio and Farmers Income Portfolio as of September 30,
2000  and  on a  pro  forma  basis,  as of  that  date,  giving  effect  to  the
Reorganization:

                                       44
<PAGE>


                                           Pathway     Farmers
                                        Conservative    Income        Pro Forma       Pro Forma
                                         Portfolio     Portfolio     Adjustments    (Combined)(1)
                                        ------------   ---------     -----------    -------------
<S>                                     <C>            <C>           <C>            <C>
Net Asset Value
S Class .............................   $ 28,443,661                                $  28,443,661
AARP Shares .........................   $ 75,448,906                                $  75,448,906
Class A Shares ......................                  $ 287,115                         $287,115
Class B Shares ......................                  $  70,102                          $70,102
                                                                                    -------------
Total Net Assets ....................                                               $ 104,249,784
                                                                                    =============

Shares Outstanding
S Class .............................      2,336,452                                    2,336,452
AARP Shares .........................      6,196,137                                    6,196,137
Class A Shares ......................                     25,332        (1,740)            23,592
Class B Shares ......................                      6,184          (424)             5,760

Net Asset Value per Share
S Class .............................   $      12.17                                $       12.17
AARP Shares .........................   $      12.18                                $       12.18
Class A Shares ......................                  $   11.33                    $       12.17
Class B Shares ......................                  $   11.34                    $       12.17
</TABLE>

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

(1)  Assumes the  Reorganization had been consummated on September 30, 2000, and
     is for  informational  purposes  only.  No assurance can be given as to how
     many  shares of Pathway  Conservative  Portfolio  will be  received  by the
     shareholders  of Farmers  Income  Portfolio on the date the  Reorganization
     takes  place,  and the  foregoing  should not be relied upon to reflect the
     number of shares of Pathway  Conservative  Portfolio  that actually will be
     received on or after such date.

     The  following  table shows on an  unaudited  basis the  capitalization  of
Pathway  Moderate  Portfolio,  Farmers  Income  with Growth  Portfolio,  Farmers
Balanced  Portfolio and Farmers Growth with Income Portfolio as of September 30,
2000  and  on a  pro  forma  basis,  as of  that  date,  giving  effect  to  the
Reorganizations:

                                       45
<PAGE>


<TABLE>
<CAPTION>
                                                   Farmers                         Farmers
                                                   Income                          Growth           Pro
                                   Pathway          with          Farmers           with           Forma
                                  Moderate         Growth         Balanced         Income         Adjust-     Pro Forma
                                  Portfolio       Portfolio       Portfolio       Portfolio        ments    (Combined)(1)
                                  ----------      ---------       ---------       ---------       -------   -------------
<S>                              <C>             <C>             <C>             <C>             <C>        <C>
Net Asset Value
S Class .......................  $251,643,694                                                                $251,643,694
Class A Shares ................                   $ 608,243      $  867,951      $   873,525                 $  2,349,719
Class B Shares ................                   $ 384,699      $1,148,062      $ 1,110,665                 $  2,643,426
                                                                                                             ------------
Total Net Assets ..............                                                                              $256,636,839
                                                                                                             ============
Shares Outstanding
S Class .......................    18,211,066                                                                  18,211,066
Class A Shares ................                      46,786          66,615           67,369     (10,747)         170,023
Class B Shares ................                      29,642          88,205           85,935     (12,507)         191,275

Net Asset Value per Share
S Class .......................  $      13.82                                                                $      13.82
Class A Shares ................                   $   13.00      $    13.03      $     12.97                 $      13.82
Class B Shares ................                   $   12.98      $    13.02      $     12.92                 $      13.82
</TABLE>

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

(1)  Assumes the Reorganizations had been consummated on September 30, 2000, and
     is for  informational  purposes  only.  No assurance can be given as to how
     many  shares  of  Pathway  Moderate  Portfolio  will  be  received  by  the
     shareholders  of Farmers  Income with Growth  Portfolio,  Farmers  Balanced
     Portfolio  and  Farmers  Growth  with  Income  Portfolio  on the  date  the
     Reorganization  takes place, and the foregoing should not be relied upon to
     reflect the number of shares of Pathway  Moderate  Portfolio  that actually
     will be received on or after such date.

     The  following  table shows on an  unaudited  basis the  capitalization  of
Pathway Growth  Portfolio and Farmers Growth  Portfolio as of September 30, 2000
and on a pro forma basis, as of that date, giving effect to the Reorganization:

                                       46
<PAGE>

<TABLE>
<CAPTION>
                                   Pathway         Farmers
                                   Growth          Growth          Pro Forma       Pro Forma
                                  Portfolio       Portfolio       Adjustments     (Combined)(1)
                                  ---------       ---------       ------------    -------------
<S>                             <C>              <C>              <C>             <C>
Net Asset Value
S Class ......................  $123,151,028                                     $ 123,151,028
AARP Shares ..................  $133,314,183                                     $ 133,314,183
Class A Shares ...............                   $2,755,302                      $   2,755,302
Class B Shares ...............                   $1,698,677                      $   1,698,677
                                                                                 -------------
Total Net Assets .............                                                   $ 260,919,190
                                                                                 =============
Shares Outstanding
S Class ......................     8,047,782                                         8,047,782
AARP Shares ..................     8,711,832                                         8,711,832
Class A Shares ...............                      204,709          (24,624)          180,085
Class B Shares ...............                      126,759          (15,734)          111,025

Net Asset Value per Share
S Class ......................  $      15.30                                     $       15.30
AARP Shares ..................  $      15.30                                     $       15.30
Class A Shares ...............                   $    13.46                      $       15.30
Class B Shares ...............                   $    13.40                      $       15.30
</TABLE>

------------
(1)  Assumes the  Reorganization had been consummated on September 30, 2000, and
     is for  informational  purposes  only.  No assurance can be given as to how
     many  shares  of  Pathway   Growth   Portfolio  will  be  received  by  the
     shareholders  of Farmers  Growth  Portfolio on the date the  Reorganization
     takes  place,  and the  foregoing  should not be relied upon to reflect the
     number of shares of Pathway Growth Portfolio that actually will be received
     on or after such date.

     The Board of Trustees  unanimously  recommends  that  shareholders  of each
     Farmers Fund vote FOR the Proposal that relates to the Reorganization
                of their Fund into a corresponding Pathway Fund.

                             ADDITIONAL INFORMATION

Information about the Funds

     Additional  information about the Trusts, the Funds and the Reorganizations
has been filed  with the SEC and may be  obtained  without  charge by writing to
Kemper Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606-5808, or
by calling 1-800-621-1048.

     The Trusts are subject to the informational  requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith,
file reports,  proxy material and other information about each of the Funds with
the SEC.  Such  reports,  proxy  material  and  other  information  filed by the
Acquiring Trust, and those filed by the Acquired Trust, can be inspected and

                                       47
<PAGE>

copied at the Public  Reference Room  maintained by the SEC at 450 Fifth Street,
N.W.,  Washington,  D.C.  20549  and  at the  following  SEC  Regional  Offices:
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, NY 10048;
Southeast  Regional Office,  1401 Brickell  Avenue,  Suite 200, Miami, FL 33131;
Midwest Regional Office,  Citicorp Center,  500 W. Madison Street,  Chicago,  IL
60661-2511; Central Regional Office, 1801 California Street, Suite 4800, Denver,
CO 80202-2648; and Pacific Regional Office, 5670 Wilshire Boulevard, 11th Floor,
Los Angeles,  CA  90036-3648.  Copies of such material can also be obtained from
the  Public  Reference  Branch,  Office  of  Consumer  Affairs  and  Information
Services,   Securities  and  Exchange   Commission,   450  Fifth  Street,  N.W.,
Washington,  D.C. 20549 at prescribed rates. The SEC maintains an Internet World
Wide  Web site (at  http://www.sec.gov)  which  contains  the  prospectuses  and
statements  of  additional   information  for  the  Funds,  materials  that  are
incorporated  by reference  into the  prospectuses  and statements of additional
information, and other information about the Trusts and the Funds.

Interests of Certain Persons

     The  Investment  Manager  has a financial  interest in the  Reorganizations
because  it  manages  all of the  Underlying  Funds in which the  Pathway  Funds
invest,  but only  certain of the  Underlying  Funds in which the Farmers  Funds
invest. Accordingly, the Investment Manager may benefit from increased fees as a
result of the Reorganizations.

General

     Proxy   Solicitation.   Proxy   solicitation   costs  will  be   considered
Reorganization  expenses  and will be  allocated  accordingly.  In  addition  to
solicitation  by mail,  certain  officers  and  representatives  of the Acquired
Trust,  officers and employees of ZSI and certain  financial  services firms and
their  representatives,  who  will  receive  no  extra  compensation  for  their
services, may solicit proxies by telephone, telegram or personally.

     Any shareholder of a Farmers Fund giving a proxy has the power to revoke it
by mail  (addressed to the Secretary at the  principal  executive  office of the
Farmers Funds, c/o Zurich Scudder Investments,  Inc., at the address for Farmers
Funds shown at the beginning of this Proxy Statement/Prospectus) or in person at
the  Meeting,  by  executing a  superseding  proxy or by  submitting a notice of
revocation  to the  applicable  Farmers  Fund.  All  properly  executed  proxies
received in time for the Meeting  will be voted as specified in the proxy or, if
no specification is made, in favor of each Proposal.

The presence at any shareholders' meeting, in person or by proxy, of the holders
of one-third of the shares of a Farmers Fund entitled to be cast shall be

                                       48
<PAGE>

necessary and sufficient to constitute a quorum for the  transaction of business
for that  Farmers  Fund.  In the event  that the  necessary  quorum to  transact
business or the vote  required to approve  any  Proposal is not  obtained at the
Meeting,  the persons named as proxies may propose one or more  adjournments  of
the Meeting in accordance with applicable law to permit further  solicitation of
proxies with respect to that Proposal.  Any such adjournment as to a matter will
require the  affirmative  vote of the holders of a majority of a Farmers  Fund's
shares  present  in  person or by proxy at the  Meeting.  The  persons  named as
proxies will vote in favor of any such adjournment  those proxies which they are
entitled  to vote in  favor of that  Proposal  and will  vote  against  any such
adjournment  those  proxies to be voted against that  Proposal.  For purposes of
determining  the presence of a quorum for  transacting  business at the Meeting,
abstentions  and broker  "non-votes"  will be treated as shares that are present
but which have not been voted.  Broker non-votes are proxies received by Farmers
Funds from brokers or nominees  when the broker or nominee has neither  received
instructions from the beneficial owner or other persons entitled to vote nor has
discretionary  power to vote on a particular matter.  Accordingly,  shareholders
are urged to forward their voting instructions promptly.

     Each Farmers  Fund will vote  separately  on the  Proposal  relating to its
reorganization  into its  corresponding  Pathway  Fund.  Approval  of a Proposal
requires  the  affirmative  vote of the holders of a majority of the  applicable
Farmers Fund's shares outstanding and entitled to vote thereon.  Abstentions and
broker non-votes will have the effect of a "no" vote on the applicable Proposal.

     Holders  of  record  of the  shares  of each  Farmers  Fund at the close of
business  on  January  10,  2001 will be  entitled  to one vote per share on all
business of the Meeting.  As of January 4, 2001 there were 30,422 Class A shares
and 3,343 Class B shares of Farmers  Income  Portfolio  outstanding;  there were
61,822  Class A shares and 41,478  Class B shares of Farmers  Income with Growth
Portfolio  outstanding;  there were 91,744  Class A shares and  111,179  Class B
shares of Farmers  Balanced  Portfolio  outstanding;  there were 128,820 Class A
shares  and  151,282  Class B shares of Farmers  Growth  with  Income  Portfolio
outstanding; and there were 279,500 Class A shares and 250,999 Class B shares of
Farmers Growth Portfolio outstanding.

     As of November 30, 2000, the officers and Trustees of the Acquired Trust as
a group owned  beneficially less than 1% of the outstanding shares of each class
of each Farmers Fund and the officers and Trustees of the  Acquiring  Trust as a
group owned beneficially less than 1% of the outstanding shares of each class of
each Pathway Fund. The Appendix hereto sets forth the beneficial  owners of more
than 5% of each class of shares of each  Farmers Fund and Pathway  Fund.  To the
best of each Trust's knowledge, as of November 30, 2000, no person owned

                                       49
<PAGE>

beneficially  more than 5% of any class of shares of any Pathway Fund or Farmers
Fund, except as stated on the Appendix.

     Shareholder  Communications  Corporation ("SCC") has been engaged to assist
in the  solicitation  of proxies,  at an estimated cost of $2,875,  all of which
will be borne by ZSI. As the Meeting date  approaches,  certain  shareholders of
Farmers Funds may receive a telephone call from a representative of SCC if their
votes have not yet been received. Authorization to permit SCC to execute proxies
may be obtained by telephonically  transmitted instructions from shareholders of
Farmers  Funds.  Proxies  that are obtained  telephonically  will be recorded in
accordance with the procedures  described below. The Trustees believe that these
procedures  are  reasonably  designed  to ensure  that both the  identity of the
shareholder  casting the vote and the voting instructions of the shareholder are
accurately determined.

     In all cases where a telephonic proxy is solicited,  the SCC representative
is required to ask for each  shareholder's  full name and  address,  or the last
four digits of the  shareholder's  social  security  or employer  identification
number,  or both,  and to confirm  that the  shareholder  has received the proxy
materials in the mail. If the shareholder is a corporation or other entity,  the
SCC  representative  is required to ask for the person's title and  confirmation
that the  person is  authorized  to direct  the  voting  of the  shares.  If the
information  solicited agrees with the information provided to SCC, then the SCC
representative has the responsibility to explain the process,  read the Proposal
on the  proxy  card(s),  and  ask  for  the  shareholder's  instructions  on the
Proposal. Although the SCC representative is permitted to answer questions about
the process,  he or she is not permitted to recommend to the  shareholder how to
vote,   other  than  to  read  any   recommendation   set  forth  in  the  Proxy
Statement/Prospectus.  SCC will  record the  shareholder's  instructions  on the
card.  Within 72 hours,  the  shareholder  will be sent a letter or  mailgram to
confirm his or her vote and asking the  shareholder  to call SCC  immediately if
his or her instructions are not correctly reflected in the confirmation.

     If a shareholder wishes to participate in the Meeting, but does not wish to
give a proxy by telephone,  the  shareholder  may still submit the proxy card(s)
originally sent with the Proxy  Statement/Prospectus or attend in person. Should
shareholders require additional  information  regarding the proxy or replacement
proxy card(s), they may contact SCC toll-free at 1-888-676-7706. Any proxy given
by a shareholder is revocable until voted at the Meeting.

     Shareholder  Proposals for  Subsequent  Meetings.  Shareholders  wishing to
submit  proposals for inclusion in a proxy  statement for a shareholder  meeting
subsequent to the Meeting,  if any,  should send their written  proposals to the
Secretary of the Acquired Trust, c/o Zurich Scudder Investments, Inc., 222 South

                                       50
<PAGE>

Riverside Plaza,  Chicago,  Illinois 60606,  within a reasonable time before the
solicitation  of proxies for such meeting.  The timely  submission of a proposal
does not guarantee its inclusion.

     Other  Matters to Come  Before the  Meeting.  The Board is not aware of any
matters that will be presented  for action at the Meeting other than the matters
described  in this  material.  Should  any  other  matters  requiring  a vote of
shareholders  arise,  the proxy in the  accompanying  form will  confer upon the
person or  persons  entitled  to vote the shares  represented  by such proxy the
discretionary  authority  to vote the  shares as to any such  other  matters  in
accordance with their best judgment in the interest of the Acquired Trust and/or
the applicable Farmers Fund.

     PLEASE  COMPLETE,  SIGN AND  RETURN THE  ENCLOSED  PROXY  CARD(S)  (OR TAKE
ADVANTAGE OF AVAILABLE  TELEPHONIC VOTING  PROCEDURES)  PROMPTLY.  NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED STATES.

                                        By Order of the Board,

                                        /s/ John Millette

                                        John Millette
                                        Secretary


                                       51
<PAGE>

                         INDEX OF EXHIBITS AND APPENDIX


EXHIBIT A:     FORM OF AGREEMENT AND PLAN OF REORGANIZATION

EXHIBIT B:     MANAGEMENT'S DISCUSSION OF PATHWAY CONSERVATIVE PORTFOLIO'S,
               PATHWAY MODERATE PORTFOLIO'S AND PATHWAY GROWTH PORTFOLIO'S
               PERFORMANCE

APPENDIX:      BENEFICIAL OWNERS OF FUND SHARES




                                       52

<PAGE>

                                                                       EXHIBIT A

                  FORM OF AGREEMENT AND PLAN OF REORGANIZATION

     THIS AGREEMENT AND PLAN OF  REORGANIZATION  (the "Agreement") is made as of
this [ ] day of [ ], 2001, by and among Scudder  Pathway Series (the  "Acquiring
Trust"),  a  Massachusetts  business trust, on behalf of each of Scudder Pathway
Series:  Conservative Portfolio,  Scudder Pathway Series: Moderate Portfolio and
Scudder  Pathway  Series:  Growth  Portfolio  (each,  an  "Acquiring  Fund"  and
collectively,  the "Acquiring  Funds"),  each a separate series of the Acquiring
Trust,  Farmers  Investment Trust (the "Acquired  Trust" and,  together with the
Acquiring Trust, each a "Trust" and collectively the "Trusts"),  a Massachusetts
business  trust, on behalf of each of Farmers Income  Portfolio,  Farmers Income
with Growth Portfolio,  Farmers Balanced  Portfolio,  Farmers Growth with Income
Portfolio  and  Farmers  Growth   Portfolio   (each,   an  "Acquired  Fund"  and
collectively,  the "Acquired Funds" and, together with an Acquiring Fund, each a
"Fund" and  collectively,  the "Funds"),  each a separate series of the Acquired
Trust, and Zurich Scudder Investments,  Inc. ("ZSI"),  investment adviser to the
Funds (for  purposes of Paragraph  10.2 of the  Agreement  only).  The principal
place of business of the Acquiring  Trust is Two  International  Place,  Boston,
Massachusetts 02110-4103.  The principal place of business of the Acquired Trust
is 222 South Riverside Plaza, Chicago, Illinois 60606.

     This Agreement is intended to be and is adopted as a plan of reorganization
and  liquidation  within the meaning of Section  368(a) of the Internal  Revenue
Code  of  1986,  as  amended  (the  "Code").   The   reorganizations   (each,  a
"Reorganization" and collectively,  the  "Reorganizations")  will consist of the
transfer of all or substantially  all of the assets of each Acquired Fund to its
corresponding  Acquiring Fund in exchange  solely for Class A and Class B voting
shares of beneficial  interest ($0.01 par value per share) of its  corresponding
Acquiring Fund (the "Acquiring Fund Shares") as set forth on Schedule A attached
hereto,  the assumption by each Acquiring Fund of all of the  liabilities of its
corresponding Acquired Fund and the distribution of the Acquiring Fund Shares to
the  Class  A and  Class  B  shareholders  of each  Acquired  Fund  in  complete
liquidation  of each  Acquired Fund as provided  herein,  all upon the terms and
conditions hereinafter set forth in this Agreement.  Notwithstanding anything to
the contrary in this  Agreement,  the rights and  obligations  of each  Acquired
Fund,  and the  Acquired  Trust with  respect to that  Acquired  Fund,  and each
Acquiring Fund, and the Acquiring Trust with respect to that Acquiring Fund, are
not  contingent  upon the  satisfaction  by any other Acquired Fund or Acquiring
Fund, as applicable, of its obligations under this Agreement.

                                       A-1
<PAGE>

     NOW,  THEREFORE,  in consideration of the premises and of the covenants and
agreements  hereinafter  set forth,  the parties  hereto  covenant  and agree as
follows:

1.   TRANSFER OF ASSETS  OF EACH  ACQUIRED  FUND TO ITS  CORRESPONDING ACQUIRING
     FUND IN EXCHANGE FOR ACQUIRING  FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED
     FUND LIABILITIES AND THE LIQUIDATION OF EACH ACQUIRED FUND

     1.1. Subject to the terms and conditions  herein set forth and on the basis
of the  representations  and  warranties  contained  herein,  each Acquired Fund
agrees to transfer to its corresponding  Acquiring Fund all or substantially all
of the Acquired  Fund's  assets as set forth in section 1.2, and each  Acquiring
Fund agrees in exchange  therefor (i) to deliver to its  corresponding  Acquired
Fund that  number of full and  fractional  Class A and  Class B  Acquiring  Fund
Shares  determined by dividing the value of its  corresponding  Acquired  Fund's
assets net of any  liabilities of each Acquired Fund with respect to the Class A
and Class B shares of Acquired  Fund,  computed in the manner and as of the time
and date set forth in section 2.1, by the net asset value of one Acquiring  Fund
Share of the corresponding class,  computed in the manner and as of the time and
date set forth in section 2.2; and (ii) to assume all of the  liabilities of its
corresponding Acquired Fund. All Acquiring Fund Shares delivered to the Acquired
Funds shall be delivered at net asset value without a sales load,  commission or
other  similar  fee being  imposed.  Such  transactions  shall take place at the
closing provided for in section 3.1 (the "Closing").

     1.2. The assets of each Acquired  Fund to be acquired by its  corresponding
Acquiring Fund (the "Assets")  shall consist of all assets,  including,  without
limitation,  all cash,  cash  equivalents,  securities,  commodities and futures
interests and dividends or interest or other  receivables  that are owned by the
Acquired  Fund and any  deferred  or  prepaid  expenses  shown on the  unaudited
statement of assets and  liabilities  of such  Acquired  Fund prepared as of the
effective time of its respective  Closing in accordance with generally  accepted
accounting  principles ("GAAP") applied  consistently with those of the Acquired
Fund's most recent audited balance sheet.  The Assets shall  constitute at least
90% of the fair  market  value of the net  assets,  and at least 70% of the fair
market value of the gross assets,  held by each Acquired Fund immediately before
its respective  Closing  (excluding  for these  purposes  assets used to pay the
dividends and other distributions paid pursuant to section 1.4).

     1.3.  Each  Acquired  Fund  will  endeavor  to  discharge  all of its known
liabilities and obligations prior to the Closing Date as defined in section 3.6.

                                       A-2
<PAGE>

     1.4. On or as soon as  practicable  prior to the Closing Date as defined in
section 3.1,  each  Acquired  Fund will declare and pay to its  shareholders  of
record one or more  dividends  and/or other  distributions  so that it will have
distributed substantially all of its investment company taxable income (computed
without  regard to any deduction  for  dividends  paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.

     1.5.  Immediately after the transfer of Assets provided for in section 1.1,
each Acquired  Fund will  distribute to such  Acquired  Fund's  shareholders  of
record  with  respect  to  each  class  of  its  shares  (the   "Acquired   Fund
Shareholders"), determined as of the Valuation Time (as defined in section 2.1),
on a pro rata basis  within that class,  the  Acquiring  Fund Shares of the same
class received by such Acquired Fund pursuant to section 1.1 and will completely
liquidate.  Such  distribution and liquidation will be accomplished with respect
to each class of each Acquired Fund by the transfer of the Acquiring Fund Shares
then credited to the account of the applicable Acquired Fund on the books of the
Acquiring  Fund to open accounts on the share  records of the Acquiring  Fund in
the names of the Acquired Fund  Shareholders.  Each Acquiring Fund shall have no
obligation  to inquire as to the  validity,  propriety  or  correctness  of such
records,  but shall assume that such  transaction is valid,  proper and correct.
The aggregate net asset value of Class A and Class B Acquiring Fund Shares to be
so credited to the Class A and Class B Acquired Fund  Shareholders  shall,  with
respect  to each  class,  be  equal  to the  aggregate  net  asset  value of the
applicable  Acquired Fund shares of the same class owned by such shareholders as
of the Valuation Time. All issued and  outstanding  shares of each Acquired Fund
will  simultaneously  be cancelled on the books of that Acquired Fund,  although
share certificates  representing interests in Class A and Class B shares of each
Acquired Fund will represent a number of Acquiring Fund Shares after the Closing
Date as determined in accordance  with section 2.3. The Acquiring Funds will not
issue  certificates  representing  Acquiring Fund Shares in connection with such
exchange.

     1.6.  Ownership of Acquiring Fund Shares will be shown on the books of each
Acquiring  Fund.  Shares of each  Acquiring  Fund  will be issued in the  manner
described in the  Acquiring  Funds'  then-current  prospectus  and  statement of
additional information.

     1.7. Any reporting responsibility of each Acquired Fund including,  without
limitation, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange  Commission (the "Commission"),
any state securities commission, and any federal, state or local tax authorities
or  any  other  relevant   regulatory   authority,   is  and  shall  remain  the
responsibility of the applicable Acquired Fund.

                                       A-3
<PAGE>

     1.8. All books and records of each Acquired  Fund,  including all books and
records required to be maintained  under the Investment  Company Act of 1940, as
amended (the "1940 Act"),  and the rules and  regulations  thereunder,  shall be
available to its  corresponding  Acquiring  Fund from and after its Closing Date
and  shall  be  turned  over  to its  corresponding  Acquiring  Fund  as soon as
practicable following the Closing Date.

2.   VALUATION

     2.1.  The value of the Assets  shall be computed as of the close of regular
trading on The New York Stock  Exchange,  Inc.  (the "NYSE") on the business day
immediately  preceding  the  Closing  Date,  as  defined  in  section  3.1  (the
"Valuation  Time") after the  declaration  and payment of any  dividends  and/or
other  distributions on that date,  using the valuation  procedures set forth in
the  Acquiring  Trust's  Declaration  of  Trust,  as  amended,  and  thencurrent
prospectus  or statement of  additional  information,  copies of which have been
delivered to each Acquired Fund.

     2.2.  The net asset  value of a Class A and Class B  Acquiring  Fund  Share
shall be the net asset value per share computed with respect to that class as of
the Valuation  Time using the valuation  procedures  referred to in section 2.1.
Notwithstanding  anything to the contrary  contained in this  Agreement,  in the
event  that,  as of the  Valuation  Time,  there  are no Class A and/or  Class B
Acquiring  Fund  Shares  issued and  outstanding,  then,  for  purposes  of this
Agreement,  the per share net asset value of a Class A and/or Class B share,  as
applicable,  shall be equal to the net asset value of one Class S Acquiring Fund
Share.

     2.3.  The  number of the Class A and Class B  Acquiring  Fund  Shares to be
issued (including fractional shares, if any) in exchange for the Assets shall be
determined  with  respect to each such class by dividing the value of the Assets
with respect to Class A and Class B shares of the  applicable  Acquired Fund, as
the case may be,  determined  in  accordance  with  section 2.1 by the net asset
value of an Acquiring Fund Share of the same class determined in accordance with
section 2.2.

     2.4.  All  computations  of value  hereunder  shall be made by or under the
direction  of  each  Fund's  respective  accounting  agent,  if  applicable,  in
accordance  with its regular  practice and the  requirements of the 1940 Act and
shall  be  subject  to  confirmation  by  each  Fund's  respective   independent
accountants upon the reasonable request of the other Fund.

                                       A-4
<PAGE>

3.   CLOSING AND CLOSING DATE

     3.1. The Closing of the  transactions  contemplated by this Agreement shall
be April 9, 2001,  or such later date as the parties  may agree in writing  (the
"Closing  Date").  All acts taking place at the Closing  shall be deemed to take
place  simultaneously as of 9:00 a.m., Eastern time, on the Closing Date, unless
otherwise agreed to by the parties.  The Closing shall be held at the offices of
Dechert,  Ten Post Office  Square - South,  Boston,  MA 02109,  or at such other
place and time as the parties may agree.

     3.2. Each Acquired Fund shall deliver to its  corresponding  Acquiring Fund
on the  Closing  Date a schedule  of Assets.  3.3.  State  Street Bank and Trust
Company ("State Street"), custodian for each Acquired Fund, shall deliver at the
Closing a certificate of an authorized officer stating that (a) the Assets shall
have been delivered in proper form to State Street, custodian for each Acquiring
Fund,  prior to or on the Closing Date and (b) all necessary taxes in connection
with the  delivery of the Assets,  including  all  applicable  federal and state
stock transfer stamps,  if any, have been paid or provision for payment has been
made. Each Acquired Fund's portfolio securities  represented by a certificate or
other written  instrument  shall be presented by the custodian for each Acquired
Fund to the custodian for each Acquiring Fund for examination no later than five
business days preceding the Closing Date and  transferred  and delivered by each
Acquired  Fund as of the Closing Date by each  Acquired  Fund for the account of
its  corresponding  Acquiring  Fund duly endorsed in proper form for transfer in
such  condition as to constitute  good delivery  thereof.  Each Acquired  Fund's
portfolio securities and instruments deposited with a securities depository,  as
defined in Rule 17f-4 under the 1940 Act,  shall be  delivered as of the Closing
Date  by  book  entry  in  accordance  with  the  customary  practices  of  such
depositories and the custodian for its corresponding Acquiring Fund. The cash to
be  transferred  by each  Acquired  Fund shall be delivered by wire  transfer of
federal funds on the Closing Date.

     3.4. Kemper Service  Company,  as transfer agent for each Acquired Fund, on
behalf of each Acquired  Fund,  shall deliver at the Closing a certificate of an
authorized  officer  stating that its records contain the names and addresses of
the Acquired Fund Shareholders and the number and percentage ownership (to three
decimal  places) of  outstanding  each Class A and Class B Acquired  Fund shares
owned by each such shareholder  immediately prior to the Closing. Each Acquiring
Fund shall issue and deliver a confirmation evidencing the Acquiring Fund Shares
to be credited on the Closing Date to its corresponding Acquired Fund or provide
evidence  satisfactory  to its  corresponding  Acquired Fund that such Acquiring
Fund Shares have been credited to that Acquired  Fund's  account on the books of
the Acquiring Fund. At the Closing, each party shall deliver to

                                       A-5
<PAGE>

the other such bills of sale, checks, assignments,  share certificates,  if any,
receipts or other  documents  as such other party or its counsel may  reasonably
request to effect the transactions contemplated by this Agreement.

     3.5. In the event that immediately prior to the Valuation Time (a) the NYSE
or another primary trading market for portfolio  securities of an Acquiring Fund
or an  Acquired  Fund shall be closed to trading or trading  thereupon  shall be
restricted,  or (b)  trading or the  reporting  of trading on such  Exchange  or
elsewhere  shall be disrupted so that,  in the judgment of the Board  members of
either  party to this  Agreement,  accurate  appraisal  of the  value of the net
assets with respect to the Class A and Class B shares of an Acquiring Fund or an
Acquired Fund is  impracticable,  the Closing Date shall be postponed  until the
first  business day after the day when trading shall have been fully resumed and
reporting shall have been restored.

     3.6.  The  liabilities  of each  Acquired  Fund shall  include  all of such
Acquired Fund's liabilities,  debts, obligations, and duties of whatever kind or
nature,  whether absolute,  accrued,  contingent,  or otherwise,  whether or not
arising in the ordinary course of business,  whether or not  determinable at the
Closing  Date,  and whether or not  specifically  referred to in this  Agreement
including but not limited to any deferred  compensation  to such Acquired Fund's
board members.

4.   REPRESENTATIONS  AND WARRANTIES

     4.1. The Acquired  Trust,  on behalf of each Acquired Fund,  represents and
warrants to the respective Acquiring Fund as follows:

          (a) The Acquired Trust is a voluntary  association  with  transferable
     shares  commonly  referred  to  as  a  Massachusetts  business  trust  duly
     organized  and  validly  existing  under  the laws of The  Commonwealth  of
     Massachusetts  with power under the Acquired Trust's  Declaration of Trust,
     as  amended,  to own all of its  properties  and assets and to carry on its
     business  as  it is  now  being  conducted  and,  subject  to  approval  of
     shareholders of the Acquired Fund, to carry out the Agreement. The Acquired
     Fund  is a  separate  series  of the  Acquired  Trust  duly  designated  in
     accordance  with  the  applicable   provisions  of  the  Acquired   Trust's
     Declaration of Trust. The Acquired Trust and Acquired Fund are qualified to
     do  business  in all  jurisdictions  in which  they are  required  to be so
     qualified,  except  jurisdictions  in which the failure to so qualify would
     not have material  adverse  effect on the Acquired  Trust or Acquired Fund.
     The Acquired Fund has all material federal,  state and local authorizations
     necessary  to own all of the  properties  and  assets  and to  carry on its
     business

                                       A-6
<PAGE>

     as now being conducted,  except  authorizations  which the failure to so so
     obtain would not have a material adverse effect on the Acquired Fund;

          (b) The  Acquired  Trust  is  registered  with  the  Commission  as an
     open-end  management  investment  company  under  the  1940  Act,  and such
     registration  is in full  force  and  effect  and the  Acquired  Fund is in
     compliance  in all  material  respects  with the 1940 Act and the rules and
     regulations thereunder;

          (c) No  consent,  approval,  authorization,  or order of any  court or
     governmental  authority  is required for the  consummation  by the Acquired
     Fund of the  transactions  contemplated  herein,  except  such as have been
     obtained under the Securities Act of 1933, as amended (the "1933 Act"), the
     Securities  Exchange Act of 1934,  as amended (the "1934 Act") and the 1940
     Act and such as may be required by state securities laws;

          (d) Other than with  respect to contracts  entered into in  connection
     with the portfolio management of the Acquired Fund which shall terminate on
     or prior to the Closing Date, the Acquired Trust is not, and the execution,
     delivery and  performance  of this Agreement by the Acquired Trust will not
     result (i) in violation  of  Massachusetts  law or of the Acquired  Trust's
     Declaration of Trust, as amended, or By-Laws, (ii) in a violation or breach
     of, or  constitute  a default  under,  any material  agreement,  indenture,
     instrument, contract, lease or other undertaking to which the Acquired Fund
     is a party  or by  which  it is  bound,  and the  execution,  delivery  and
     performance  of this  Agreement by the Acquired Fund will not result in the
     acceleration of any obligation, or the imposition of any penalty, under any
     agreement,  indenture,  instrument,  contract, lease, judgment or decree to
     which the Acquired Fund is a party or by which it is bound, or (iii) in the
     creation or imposition of any lien,  charge or  encumbrance on any property
     or assets of the Acquired Fund;

          (e)  No  material   litigation   or   administrative   proceeding   or
     investigation  of or before  any court or  governmental  body is  presently
     pending or to its  knowledge  threatened  against the Acquired  Fund or any
     properties  or assets held by it. The Acquired Fund knows of no facts which
     might form the basis for the  institution of such  proceedings  which would
     materially  and  adversely  affect  its  business  and is not a party to or
     subject to the provisions of any order,  decree or judgment of any court or
     governmental  body which  materially and adversely  affects its business or
     its ability to consummate the transactions herein contemplated;

          (f) The Statements of Assets and Liabilities,  Operations, and Changes
     in Net Assets, the Financial  Highlights, and  the  Investment Portfolio of
     the

                                       A-7
<PAGE>

     Acquired  Fund at and for the fiscal year ended April 30,  2000,  have been
     audited by PricewaterhouseCoopers LLP, independent accountants,  and are in
     accordance with GAAP consistently  applied,  and such statements (a copy of
     each of which  has been  furnished  to its  corresponding  Acquiring  Fund)
     present fairly,  in all material  respects,  the financial  position of the
     Acquired  Fund as of such date in  accordance  with GAAP,  and there are no
     known contingent  liabilities of the Acquired Fund required to be reflected
     on a balance sheet (including the notes thereto) in accordance with GAAP as
     of such date not disclosed therein;

          (g) Since  April 30,  2000,  there has not been any  material  adverse
     change in the Acquired Fund's financial condition,  assets,  liabilities or
     business other than changes  occurring in the ordinary  course of business,
     or any incurrence by the Acquired Fund of  indebtedness  maturing more than
     one year from the date such  indebtedness  was incurred except as otherwise
     disclosed to and accepted in writing by the Acquiring Fund. For purposes of
     this subsection (g), a decline in net asset value per share of the Acquired
     Fund due to declines in market values of securities in the Acquired  Fund's
     portfolio, the discharge of Acquired Fund liabilities, or the redemption of
     Acquired Fund shares by Acquired Fund  Shareholders  shall not constitute a
     material adverse change;

          (h) At the date hereof and at the Closing Date,  all federal and other
     tax returns and reports of the Acquired  Fund  required by law to have been
     filed by such dates  (including any  extensions)  shall have been filed and
     are or will be correct in all material respects,  and all federal and other
     taxes  shown as due or  required  to be shown  as due on said  returns  and
     reports  shall  have been paid or  provision  shall  have been made for the
     payment thereof, and, to the best of the Acquired Fund's knowledge, no such
     return is currently  under audit and no  assessment  has been asserted with
     respect to such returns;

          (i) For each taxable year of its operation (including the taxable year
     ending on the Closing Date),  the Acquired Fund has met the requirements of
     Subchapter  M of the  Code  for  qualification  as a  regulated  investment
     company and has elected to be treated as such, has been eligible to and has
     computed  its federal  income tax under  Section 852 of the Code,  and will
     have  distributed  all of its  investment  company  taxable  income and net
     capital gain (as defined in the Code) that has accrued  through the Closing
     Date;

          (j) All issued and  outstanding  shares of the Acquired  Fund (i) have
     been  offered  and sold in every  state and the  District  of  Columbia  in
     compliance   in  all  material   respects  with   applicable   registration
     requirements  of the 1933 Act and state  securities  laws, (ii) are, and on
     the Closing Date

                                       A-8
<PAGE>

     will  be,  duly  and  validly  issued  and  outstanding,   fully  paid  and
     non-assessable   and  not  subject  to  preemptive  or  dissenter's  rights
     (recognizing  that, under  Massachusetts  law, Acquired Fund  Shareholders,
     under  certain   circumstances,   could  be  held  personally   liable  for
     obligations  of the Acquired  Fund),  and (iii) will be held at the time of
     the  Closing by the  persons and in the amounts set forth in the records of
     Kemper Service Company,  as provided in section 3.4. The Acquired Fund does
     not have outstanding any options, warrants or other rights to subscribe for
     or purchase any of the Acquired Fund shares,  nor is there  outstanding any
     security convertible into any of the Acquired Fund shares;

          (k) At the  Closing  Date,  the  Acquired  Fund  will  have  good  and
     marketable  title to the Acquired  Fund's assets to be  transferred  to the
     Acquiring Fund pursuant to section 1.2 and full right, power, and authority
     to sell,  assign,  transfer and deliver such assets  hereunder  free of any
     liens or other encumbrances, except those liens or encumbrances as to which
     the Acquiring Fund has received notice at or prior to the Closing, and upon
     delivery and payment for such assets,  the Acquiring Fund will acquire good
     and  marketable  title  thereto,  subject  to no  restrictions  on the full
     transfer thereof, including such restrictions as might arise under the 1933
     Act and the 1940 Act,  except those  restrictions as to which the Acquiring
     Fund has received  notice and  necessary  documentation  at or prior to the
     Closing;

          (l) The  execution,  delivery and  performance  of this Agreement will
     have been duly authorized prior to the Closing Date by all necessary action
     on the part of the Board  members of the  Acquired  Trust,  (including  the
     determinations  required by Rule 17a-8(a) under the 1940 Act), and, subject
     to  the  approval  of  the  Acquired  Fund  Shareholders,   this  Agreement
     constitutes a valid and binding obligation of the Acquired Trust, on behalf
     of the Acquired Fund, enforceable in accordance with its terms, subject, as
     to   enforcement,   to   bankruptcy,   insolvency,   fraudulent   transfer,
     reorganization,   moratorium  and  other  laws  relating  to  or  affecting
     creditors' rights and to general equity principles;

          (m) The  information  to be furnished by the Acquired  Fund for use in
     applications for orders,  registration statements or proxy materials or for
     use in any other document  filed or to be filed with any federal,  state or
     local  regulatory   authority   (including  the  National   Association  of
     Securities  Dealers,  Inc.  (the  "NASD")),   which  may  be  necessary  in
     connection with the transactions contemplated hereby, shall be accurate and
     complete in all material respects and shall comply in all material respects
     with federal securities and other laws and regulations applicable thereto;

                                       A-9
<PAGE>

          (n) The current prospectus and statement of additional  information of
     the  Acquired  Fund  conform in all  material  respects  to the  applicable
     requirements of the 1933 Act and the 1940 Act and the rules and regulations
     of the Commission  thereunder and do not include any untrue  statement of a
     material  fact or omit to state any  material  fact  required  to be stated
     therein  or  necessary  to make  the  statements  therein,  in light of the
     circumstances under which they were made, not materially misleading; and

          (o) The proxy  statement  of the  Acquired  Fund to be included in the
     Registration  Statement referred to in section 5.7 (the "Proxy Statement"),
     insofar as it relates to the Acquired Fund,  will, on the effective date of
     the  Registration  Statement  and on the  Closing  Date,  (i) comply in all
     material respects with the provisions and Regulations of the 1933 Act, 1934
     Act and 1940 Act, as applicable,  and (ii) not contain any untrue statement
     of a material  fact or omit to state a material  fact required to be stated
     therein  or  necessary  to make  the  statements  therein,  in light of the
     circumstances   under  which  such  statements  are  made,  not  materially
     misleading;  provided,  however, that the representations and warranties in
     this section shall not apply to  statements in or omissions  from the Proxy
     Statement  and the  Registration  Statement  made in  reliance  upon and in
     conformity  with  information  that  was  furnished  or  should  have  been
     furnished by the Acquiring Fund for use therein.

     4.2. The Acquiring Trust, on behalf of each Acquiring Fund,  represents and
warrants to the respective Acquired Fund as follows:

          (a) The Acquiring Trust is a voluntary  association with  transferable
     shares  commonly  referred  to  as  a  Massachusetts  business  trust  duly
     organized  and  validly  existing  under  the laws of The  Commonwealth  of
     Massachusetts with power under the Acquiring Trust's  Declaration of Trust,
     as  amended,  to own all of its  properties  and assets and to carry on its
     business  as it is now being  conducted  and,  subject to the  approval  of
     shareholders  of the  Acquired  Fund,  to  carry  out  the  Agreement.  The
     Acquiring Fund is a separate  series of the Acquiring Trust duly designated
     in accordance  with the  applicable  provisions  of the  Acquiring  Trust's
     Declaration of Trust.  The Acquiring Trust and Acquiring Fund are qualified
     to do business  in all  jurisdictions  in which they are  required to be so
     qualified,  except  jurisdictions  in which the failure to so qualify would
     not have material  adverse effect on the Acquiring Trust or Acquiring Fund.
     The Acquiring Fund has all material federal, state and local authorizations
     necessary  to own all of the  properties  and  assets  and to  carry on its
     business as now being conducted, except authorizations which the failure to
     so obtain would not have a material adverse effect on the Acquiring Fund;

                                      A-10
<PAGE>

          (b) The  Acquiring  Trust  is  registered  with the  Commission  as an
     open-end  management  investment  company  under  the  1940  Act,  and such
     registration  is in full  force and  effect  and the  Acquiring  Fund is in
     compliance  in all  material  respects  with the 1940 Act and the rules and
     regulations thereunder;

          (c) No  consent,  approval,  authorization,  or order of any  court or
     governmental  authority is required for the  consummation  by the Acquiring
     Fund of the  transactions  contemplated  herein,  except  such as have been
     obtained  under the 1933 Act, the 1934 Act and the 1940 Act and such as may
     be required by state securities laws;

          (d) The  Acquiring  Trust  is not,  and the  execution,  delivery  and
     performance of this Agreement by the Acquiring Trust will not result (i) in
     violation of Massachusetts law or of the Acquiring  Trust's  Declaration of
     Trust,  as  amended,  or  By-Laws,  (ii) in a  violation  or breach  of, or
     constitute a default under, any material agreement, indenture,  instrument,
     contract,  lease  or  other  undertaking  known to  counsel  to  which  the
     Acquiring  Fund is a party  or by  which it is  bound,  and the  execution,
     delivery and  performance  of this Agreement by the Acquiring Fund will not
     result in the  acceleration  of any  obligation,  or the  imposition of any
     penalty,  under any  agreement,  indenture,  instrument,  contract,  lease,
     judgment or decree to which the Acquiring Fund is a party or by which it is
     bound,  or (iii) in the  creation  or  imposition  of any  lien,  charge or
     encumbrance on any property or assets of the Acquiring Fund;

          (e)  No  material   litigation   or   administrative   proceeding   or
     investigation  of or before  any court or  governmental  body is  presently
     pending or to its knowledge  threatened  against the Acquiring  Fund or any
     properties or assets held by it. The Acquiring Fund knows of no facts which
     might form the basis for the  institution of such  proceedings  which would
     materially  and  adversely  affect  its  business  and is not a party to or
     subject to the provisions of any order,  decree or judgment of any court or
     governmental  body which  materially and adversely  affects its business or
     its ability to consummate the transactions herein contemplated;

          (f) The Statements of Assets and Liabilities,  Operations, and Changes
     in Net Assets, the Financial  Highlights,  and the Investment  Portfolio of
     the Acquiring  Fund at and for the fiscal year ended August 31, 2000,  have
     been audited by  PricewaterhouseCoopers  LLP, independent accountants,  and
     are in accordance with GAAP  consistently  applied,  and such statements (a
     copy of each of which has been  furnished  to the  Acquired  Fund)  present
     fairly, in all material  respects,  the financial position of the Acquiring
     Fund as of such  date in  accordance  with  GAAP,  and  there  are no known
     contingent liabilities

                                      A-11
<PAGE>

     of  the  Acquiring  Fund  required  to  be  reflected  on a  balance  sheet
     (including the notes  thereto) in accordance  with GAAP as of such date not
     disclosed therein;

          (g) Since  August 31, 2000,  there has not been any  material  adverse
     change in the Acquiring Fund's financial condition,  assets, liabilities or
     business other than changes  occurring in the ordinary  course of business,
     or any incurrence by the Acquiring Fund of indebtedness  maturing more than
     one year from the date such  indebtedness  was incurred except as otherwise
     disclosed to and accepted in writing by the Acquired  Fund. For purposes of
     this  subsection  (g),  a  decline  in net  asset  value  per  share of the
     Acquiring  Fund due to  declines  in  market  values of  securities  in the
     Acquiring Fund's portfolio, the discharge of Acquiring Fund liabilities, or
     the  redemption  of Acquiring  Fund shares by Acquiring  Fund  shareholders
     shall not constitute a material adverse change;

          (h) At the date hereof and at the Closing Date,  all federal and other
     tax returns and reports of the Acquiring  Fund required by law to have been
     filed by such dates  (including any  extensions)  shall have been filed and
     are or will be correct in all material respects,  and all federal and other
     taxes  shown as due or  required  to be shown  as due on said  returns  and
     reports  shall  have been paid or  provision  shall  have been made for the
     payment  thereof,  and, to the best of the Acquiring Fund's  knowledge,  no
     such return is currently  under audit and no  assessment  has been asserted
     with respect to such returns;

          (i) For each taxable year of its operation, the Acquiring Fund has met
     the  requirements  of  Subchapter  M of the  Code  for  qualification  as a
     regulated  investment  company and has  elected to be treated as such,  has
     been eligible to and has computed its federal  income tax under Section 852
     of the Code,  and will do so for the  taxable  year  including  the Closing
     Date;

          (j) All issued and  outstanding  shares of the Acquiring Fund (i) have
     been  offered  and sold in every  state and the  District  of  Columbia  in
     compliance   in  all  material   respects  with   applicable   registration
     requirements of the 1933 Act and state securities laws and (ii) are, and on
     the Closing Date will be, duly and validly  issued and  outstanding,  fully
     paid and  non-assessable,  and not  subject to  preemptive  or  dissenter's
     rights   (recognizing   that,  under   Massachusetts  law,  Acquiring  Fund
     Shareholders, under certain circumstances,  could be held personally liable
     for the  obligations  of the Acquiring  Fund).  The Acquiring Fund does not
     have outstanding any options,  warrants or other rights to subscribe for or
     purchase any of the Acquiring  Fund shares,  nor is there  outstanding  any
     security convertible into any of the Acquiring Fund shares;

                                      A-12
<PAGE>

          (k) The  Acquiring  Fund  Shares to be  issued  and  delivered  to the
     Acquired Fund, for the account of the Acquired Fund Shareholders,  pursuant
     to the terms of this  Agreement,  will at the  Closing  Date have been duly
     authorized  and,  when so issued and  delivered,  will be duly and  validly
     issued and  outstanding  Acquiring Fund Shares,  and will be fully paid and
     non-assessable  (recognizing that, under  Massachusetts law, Acquiring Fund
     Shareholders, under certain circumstances,  could be held personally liable
     for the obligations of the Acquiring Fund);

          (l) At the  Closing  Date,  the  Acquiring  Fund  will  have  good and
     marketable title to the Acquiring Fund's assets, free of any liens or other
     encumbrances,  except those liens or  encumbrances as to which the Acquired
     Fund has received notice at or prior to the Closing;

          (m) The  execution,  delivery and  performance  of this Agreement will
     have been duly authorized prior to the Closing Date by all necessary action
     on the part of the Board  members of the  Acquiring  Trust  (including  the
     determinations  required  by Rule  17a-8(a)  under  the 1940  Act) and this
     Agreement will  constitute a valid and binding  obligation of the Acquiring
     Trust, on behalf of the Acquiring Fund,  enforceable in accordance with its
     terms, subject, as to enforcement,  to bankruptcy,  insolvency,  fraudulent
     transfer,  reorganization,   moratorium  and  other  laws  relating  to  or
     affecting creditors' rights and to general equity principles;

          (n) The  information  to be furnished by the Acquiring Fund for use in
     applications for orders,  registration statements or proxy materials or for
     use in any other document  filed or to be filed with any federal,  state or
     local regulatory  authority (including the NASD), which may be necessary in
     connection with the transactions contemplated hereby, shall be accurate and
     complete in all material respects and shall comply in all material respects
     with federal securities and other laws and regulations applicable thereto;

          (o) The current prospectus and statement of additional  information of
     the  Acquiring  Fund  conform in all  material  respects to the  applicable
     requirements of the 1933 Act and the 1940 Act and the rules and regulations
     of the Commission  thereunder and do not include any untrue  statement of a
     material  fact or omit to state any  material  fact  required  to be stated
     therein  or  necessary  to make  the  statements  therein,  in light of the
     circumstances under which they were made, not materially misleading;

          (p) The Proxy Statement to be included in the Registration  Statement,
     only insofar as it relates to the  Acquiring  Fund,  will, on the effective
     date of the  Registration  Statement and on the Closing Date, (i) comply in
     all material  respects with the provisions and Regulations of the 1933 Act,
     1934

                                      A-13
<PAGE>

     Act,  and 1940 Act and (ii) not contain any untrue  statement of a material
     fact or omit to state a  material  fact  required  to be stated  therein or
     necessary to make the  statements  therein,  in light of the  circumstances
     under which such statements were made, not materially misleading; provided,
     however,  that the representations and warranties in this section shall not
     apply to  statements  in or  omissions  from the  Proxy  Statement  and the
     Registration  Statement  made  in  reliance  upon  and in  conformity  with
     information  that was  furnished  or  should  have  been  furnished  by the
     Acquired Fund for use therein; and (q) The Acquiring Fund agrees to use all
     reasonable efforts to obtain the approvals and  authorizations  required by
     the 1933 Act, the 1940 Act and such of the state  securities laws as may be
     necessary in order to continue its operations after the Closing Date.

5.  COVENANTS OF EACH  ACQUIRING  FUND AND EACH ACQUIRED FUND

     5.1. Each  Acquiring  Fund and each Acquired Fund  covenants to operate its
business in the ordinary course between the date hereof and the Closing Date, it
being  understood that (a) such ordinary course of business will include (i) the
declaration and payment of customary  dividends and other distributions and (ii)
such changes as are contemplated by the Funds' normal  operations;  and (b) each
Fund shall retain  exclusive  control of the  composition of its portfolio until
the Closing Date. No party shall take any action that would, or reasonably would
be expected to, result in any of its representations and warranties set forth in
this Agreement being or becoming untrue in any material respect.  Each Acquiring
Fund and each Acquired Fund  covenants and agrees to coordinate  the  respective
portfolios  of each  Acquiring  Fund and each Acquired Fund from the date of the
Agreement up to and  including  the Closing Date in order that at Closing,  when
the Assets are added to each Acquiring Fund's portfolio, the resulting portfolio
will meet the applicable  Acquiring Fund's  investment  objective,  policies and
restrictions,  as set forth in the Acquiring Funds' Prospectus,  a copy of which
has been delivered to each Acquired Fund.

     5.2. Upon  reasonable  notice,  each Acquiring  Fund's  officers and agents
shall have  reasonable  access to its  corresponding  Acquired  Fund's books and
records necessary to maintain current  knowledge of its  corresponding  Acquired
Fund  and  to  ensure  that  the  representations  and  warranties  made  by its
corresponding Acquired Fund are accurate.

     5.3. Each  Acquired  Fund  covenants to call a meeting of the Acquired Fund
Shareholders  entitled to vote thereon to consider  and act upon this  Agreement
and to take all other  reasonable  action  necessary  to obtain  approval of the
transactions

                                      A-14
<PAGE>

contemplated  herein.  Such  meeting  shall  be  scheduled  for  no  later  than
March 14, 2001.

     5.4.  Each  Acquired Fund  covenants  that the Acquiring  Fund Shares to be
issued  hereunder  are  not  being  acquired  for  the  purpose  of  making  any
distribution thereof other than in accordance with the terms of this Agreement.

     5.5.  Each Acquired Fund  covenants  that it will assist its  corresponding
Acquiring  Fund in obtaining such  information as the Acquiring Fund  reasonably
requests concerning the beneficial ownership of the Acquired Fund shares.

     5.6.  Subject to the provisions of this Agreement,  each Acquiring Fund and
Acquired Fund will each take, or cause to be taken, all actions, and do or cause
to be done,  all  things  reasonably  necessary,  proper,  and/or  advisable  to
consummate and make effective the transactions contemplated by this Agreement.

     5.7. Each Fund  covenants to prepare in  compliance  with the 1933 Act, the
1934  Act and the  1940  Act  the  Registration  Statement  on  Form  N-14  (the
"Registration  Statement")  in connection  with the meeting of the Acquired Fund
Shareholders  to  consider  approval  of this  Agreement  and  the  transactions
contemplated  herein. Each Acquiring Fund will file the Registration  Statement,
including  the Proxy  Statement,  with the  Commission.  Each Acquired Fund will
provide its corresponding  Acquiring Fund with information  reasonably necessary
for the  preparation  of a  prospectus,  which will include the Proxy  Statement
referred to in section 4.1(o), all to be included in the Registration Statement,
in compliance  in all material  respects with the 1933 Act, the 1934 Act and the
1940 Act.

     5.8. Each Acquired Fund covenants  that it will,  from time to time, as and
when  reasonably  requested by its  corresponding  Acquiring  Fund,  execute and
deliver or cause to be executed and  delivered  all such  assignments  and other
instruments,  and will  take or cause to be taken  such  further  action  as the
Acquiring  Fund may  reasonably  deem necessary or desirable in order to vest in
and confirm the Acquiring  Fund's title to and  possession of all the assets and
otherwise to carry out the intent and purpose of this Agreement.

     5.9. Each Acquiring Fund covenants to use all reasonable  efforts to obtain
the approvals and authorizations required by the 1933 Act and 1940 Act, and such
of the state  securities  laws as it deems  appropriate in order to continue its
operations   after  the  Closing  Date  and  to  consummate   the   transactions
contemplated herein;  provided,  however, that each Acquiring Fund may take such
actions it reasonably  deems advisable  after the Closing Date as  circumstances
change.

                                      A-15
<PAGE>

     5.10. Each Acquiring Fund covenants that it will, from time to time, as and
when  reasonably  requested  by its  corresponding  Acquired  Fund,  execute and
deliver or cause to be executed and delivered all such  assignments,  assumption
agreements,  releases, and other instruments, and will take or cause to be taken
such further  action,  as its  corresponding  Acquired Fund may reasonably  deem
necessary or  desirable  in order to (i) vest and confirm to the  Acquired  Fund
title to and  possession of all Acquiring  Fund shares to be  transferred to the
Acquired Fund pursuant to this  Agreement and (ii) assume the  liabilities  from
the Acquired Fund.

     5.11. As soon as reasonably  practicable  after the Closing,  each Acquired
Fund shall make a liquidating distribution to its shareholders consisting of the
Acquiring Fund Shares received at the Closing.

     5.12.  Each  Acquiring Fund and each Acquired Fund shall use its reasonable
best efforts to fulfill or obtain the fulfillment of the conditions precedent to
effect  the   transactions   contemplated  by  this  Agreement  as  promptly  as
practicable.

     5.13. The intention of the parties is that each transaction will qualify as
a reorganization  within the meaning of Section 368(a) of the Code.  Neither the
Trusts  nor the Funds  shall  take any  action,  or cause any action to be taken
(including,   without  limitation,  the  filing  of  any  tax  return)  that  is
inconsistent  with such  treatment or results in the failure of a transaction to
qualify as a reorganization within the meaning of Section 368(a) of the Code. At
or prior to the Closing Date, each Trust and each Fund will take such action, or
cause such action to be taken, as is reasonably necessary to enable Willkie Farr
& Gallagher to render the tax opinion contemplated herein in section 8.5.

     5.14.  At or  immediately  prior to the  Closing,  each  Acquired  Fund may
declare  and pay to its  stockholders  a dividend  or other  distribution  in an
amount large enough so that it will have distributed  substantially  all (and in
any event not less than 98%) of its investment  company taxable income (computed
without  regard to any deduction  for  dividends  paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.

6.   CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH ACQUIRED FUND

     The  obligations  of each  Acquired  Fund to  consummate  the  transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring  Fund of all the  obligations  to be  performed  by it hereunder on or
before the Closing  Date,  and,  in  addition  thereto,  the  following  further
conditions:

     6.1. All  representations  and warranties of the Acquiring Trust, on behalf
of each Acquiring Fund, contained in this Agreement shall be true and correct in
all

                                      A-16
<PAGE>

material  respects as of the date hereof and,  except as they may be affected by
the  transactions  contemplated by this Agreement,  as of the Closing Date, with
the same force and effect as if made on and as of the  Closing  Date;  and there
shall be (i) no pending or  threatened  litigation  brought by any person (other
than an  Acquired  Fund,  its  adviser  or any of their  affiliates)  against an
Acquiring Fund or its investment  adviser(s),  Board members or officers arising
out of this  Agreement  and (ii) no facts  known to an  Acquiring  Fund which an
Acquiring Fund reasonably believes might result in such litigation.

     6.2. Each Acquiring Fund shall have delivered to its corresponding Acquired
Fund on the Closing Date a certificate  executed in its name by its President or
a Vice President,  in a form  reasonably  satisfactory to the Acquired Trust, on
behalf of the Acquired  Fund,  and dated as of the Closing  Date,  to the effect
that the  representations  and  warranties  of the  Acquiring  Fund made in this
Agreement are true and correct on and as of the Closing Date, except as they may
be affected by the transactions  contemplated by this Agreement,  and as to such
other matters as the Acquired Fund shall reasonably request.

     6.3.  Each Acquired Fund shall have received on the Closing Date an opinion
of Dechert, in a form reasonably satisfactory to the Acquired Fund, and dated as
of the Closing Date, to the effect that:

          (a) The  Acquiring  Trust  has been  duly  formed  and is an  existing
     business  trust;  (b) the  Acquiring  Fund  has the  power  to carry on its
     business as presently  conducted in accordance with the description thereof
     in the Acquiring Fund's registration  statement under the 1940 Act; (c) the
     Agreement has been duly authorized, executed and delivered by the Acquiring
     Trust, on behalf of the Acquiring Fund, and constitutes a valid and legally
     binding obligation of the Acquiring Trust, on behalf of the Acquiring Fund,
     enforceable   in  accordance   with  its  terms,   subject  to  bankruptcy,
     insolvency,  fraudulent  transfer,  reorganization,  moratorium and laws of
     general  applicability  relating to or affecting  creditors'  rights and to
     general equity principles;  (d) the execution and delivery of the Agreement
     did not, and the exchange of the Acquired  Fund's assets for Acquiring Fund
     Shares  pursuant to the Agreement will not,  violate the Acquiring  Trust's
     Declaration of Trust, as amended,  or By-laws;  and (e) to the knowledge of
     such counsel, and without any independent investigation,  (i) the Acquiring
     Trust is not subject to any litigation or other proceedings that might have
     a materially  adverse effect on the operations of the Acquiring Trust, (ii)
     the Acquiring  Trust is duly  registered as an investment  company with the
     Commission  and is not subject to any stop order;  and (iii) all regulatory
     consents,  authorizations,  approvals or filings required to be obtained or
     made by the  Acquiring  Fund under the federal laws of the United States or
     the laws of

                                      A-17
<PAGE>

     The Commonwealth of  Massachusetts  for the exchange of the Acquired Fund's
     assets for  Acquiring  Fund  Shares,  pursuant to the  Agreement  have been
     obtained or made.


     The  delivery of such  opinion is  conditioned  upon  receipt by Dechert of
customary  representations  it shall reasonably request of each of the Acquiring
Trust and the Acquired  Trust,  on behalf of each of the Acquiring Funds and the
Acquired Funds, respectively.

     6.4.  Each  Acquiring  Fund shall have  performed  all of the covenants and
complied with all of the  provisions  required by this Agreement to be performed
or complied with by each Acquiring Fund on or before the Closing Date.

7.   CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH ACQUIRING FUND

     The  obligations  of each  Acquiring  Fund to consummate  the  transactions
provided for herein shall be subject, at its election, to the performance by its
corresponding  Acquired  Fund of all of the  obligations  to be  performed by it
hereunder on or before the Closing Date and, in addition thereto,  the following
further conditions:

     7.1. All representations and warranties of the Acquired Trust, on behalf of
each Acquired Fund, contained in this Agreement shall be true and correct in all
material  respects as of the date hereof and,  except as they may be affected by
the  transactions  contemplated by this Agreement,  as of the Closing Date, with
the same force and effect as if made on and as of the  Closing  Date;  and there
shall be (i) no pending or  threatened  litigation  brought by any person (other
than an  Acquiring  Fund,  its  adviser or any of their  affiliates)  against an
Acquired Fund or its investment  adviser(s),  Board members or officers  arising
out of this  Agreement  and (ii) no facts  known to an  Acquired  Fund  which an
Acquired Fund reasonably believes might result in such litigation.

     7.2. Each Acquired Fund shall have delivered to its corresponding Acquiring
Fund a statement of the Acquired Fund's assets and liabilities as of the Closing
Date, certified by the Treasurer of the Acquired Fund.

     7.3. Each Acquired Fund shall have delivered to its corresponding Acquiring
Fund on the Closing Date a certificate  executed in its name by its President or
a Vice President,  in a form reasonably  satisfactory to the Acquiring Trust, on
behalf of the  Acquiring  Fund,  and dated as of the Closing Date, to the effect
that the  representations  and  warranties of the Acquired Trust with respect to
the Acquired  Fund made in this  Agreement are true and correct on and as of the
Closing Date, except as they may be affected by the transactions contemplated by

                                      A-18
<PAGE>

this  Agreement,  and as to such  other  matters  as the  Acquiring  Fund  shall
reasonably request.

     7.4. Each Acquiring Fund shall have received on the Closing Date an opinion
of Dechert,  in a form reasonably  satisfactory to the Acquiring Fund, and dated
as of the Closing Date, to the effect that:

          (a) The  Acquired  Trust  has  been  duly  formed  and is an  existing
     business  trust;  (b) the  Acquired  Fund  has the  power  to  carry on its
     business as presently  conducted in accordance with the description thereof
     in the Acquired Trust's registration  statement under the 1940 Act; (c) the
     Agreement has been duly authorized,  executed and delivered by the Acquired
     Trust,  on behalf of the Acquired Fund, and constitutes a valid and legally
     binding  obligation of the Acquired  Trust, on behalf of the Acquired Fund,
     enforceable   in  accordance   with  its  terms,   subject  to  bankruptcy,
     insolvency,  fraudulent  transfer,  reorganization,  moratorium and laws of
     general  applicability  relating to or affecting  creditors'  rights and to
     general equity principles;  (d) the execution and delivery of the Agreement
     did not, and the exchange of the Acquired  Fund's assets for Acquiring Fund
     Shares  pursuant to the Agreement  will not,  violate the Acquired  Trust's
     Declaration of Trust, as amended,  or By-laws;  and (e) to the knowledge of
     such counsel, and without any independent  investigation,  (i) the Acquired
     Trust is not subject to any litigation or other proceedings that might have
     a materially  adverse effect on the operations of the Acquired Trust,  (ii)
     the Acquired  Trust is duly  registered as an  investment  company with the
     Commission  and is not subject to any stop order,  and (iii) all regulatory
     consents,  authorizations,  approvals or filings required to be obtained or
     made by the Acquired  Fund under the federal  laws of the United  States or
     the laws of The  Commonwealth  of  Massachusetts  for the  exchange  of the
     Acquired Fund's assets for Acquiring Fund Shares, pursuant to the Agreement
     have been obtained or made.

     The  delivery of such  opinion is  conditioned  upon  receipt by Dechert of
customary  representations  it shall reasonably request of each of the Acquiring
Trust and the Acquired  Trust,  on behalf of each of the Acquiring Funds and the
Acquired Funds, respectively.

     7.5.  Each  Acquired  Fund shall have  performed  all of the  covenants and
complied with all of the  provisions  required by this Agreement to be performed
or complied with by each Acquired Fund on or before the Closing Date.

8.   FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH ACQUIRING FUND AND EACH
     ACQUIRED FUND

     If any of the conditions set forth below have not been met on or before the
Closing Date with respect to each Acquired Fund or its corresponding Acquiring

                                      A-19
<PAGE>

Fund, the other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:

     8.1. This Agreement and the transactions  contemplated herein, with respect
to each Acquired  Fund,  shall have been  approved by the requisite  vote of the
holders of the outstanding shares of that respective Acquired Fund in accordance
with the provisions of the Acquired  Trust's  Declaration of Trust,  as amended,
and By-Laws, applicable Massachusetts law and the 1940 Act, and certified copies
of the  resolutions  evidencing  such approval  shall have been delivered to its
corresponding Acquiring Fund.  Notwithstanding  anything herein to the contrary,
neither an  Acquiring  Fund nor an Acquired  Fund may waive the  conditions  set
forth in this section 8.1.

     8.2. On the Closing  Date,  no action,  suit or other  proceeding  shall be
pending or to its knowledge  threatened before any court or governmental  agency
in which it is sought to restrain or  prohibit,  or obtain  material  damages or
other relief in connection with, this Agreement or the transactions contemplated
herein.

     8.3.  All  consents  of other  parties and all other  consents,  orders and
permits of federal,  state and local regulatory  authorities deemed necessary by
an Acquiring  Fund or an Acquired Fund to permit  consummation,  in all material
respects,  of the  transactions  contemplated  hereby shall have been  obtained,
except  where  failure to obtain  any such  consent,  order or permit  would not
involve a risk of a material  adverse  effect on the assets or  properties of an
Acquiring  Fund or an Acquired  Fund,  provided that either party hereto may for
itself waive any of such conditions.

     8.4. The Registration  Statement shall have become effective under the 1933
Act and no stop orders  suspending  the  effectiveness  thereof  shall have been
issued and, to the best knowledge of the parties  hereto,  no  investigation  or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act.

     8.5. The parties shall have received an opinion of Willkie Farr & Gallagher
addressed  to each of the  Acquiring  Funds and the  Acquired  Funds,  in a form
reasonably  satisfactory to each such party to this Agreement,  substantially to
the effect that, based upon certain facts,  assumptions and  representations  of
the parties, for federal income tax purposes:  (i) the transfer to the Acquiring
Fund of all or substantially  all of the assets of the Acquired Fund in exchange
solely for Acquiring Fund Shares and the assumption by the Acquiring Fund of all
of the  liabilities of the Acquired Fund,  followed by the  distribution of such
shares to the  Acquired  Fund  Shareholders  in exchange for their shares of the
Acquired Fund in complete  liquidation of the Acquired Fund,  will  constitute a
"reorganization"  within the meaning of Section  368(a)(1) of the Code,  and the
Acquiring Fund and

                                      A-20
<PAGE>

the Acquired Fund will each be "a party to a reorganization"  within the meaning
of Section  368(b) of the Code;  (ii) no gain or loss will be  recognized by the
Acquired Fund upon the transfer of all or substantially all of its assets to the
Acquiring  Fund in exchange  solely for Acquiring Fund Shares and the assumption
by the Acquiring Fund of all of the liabilities of the Acquired Fund;  (iii) the
basis of the assets of the Acquired Fund in the hands of the Acquiring Fund will
be the same as the basis of such assets of the Acquired Fund  immediately  prior
to the transfer;  (iv) the holding  period of the assets of the Acquired Fund in
the hands of the Acquiring Fund will include the period during which such assets
were held by the Acquired  Fund;  (v) no gain or loss will be  recognized by the
Acquiring  Fund upon the receipt of the assets of the Acquired  Fund in exchange
for Acquiring Fund Shares and the assumption by the Acquiring Fund of all of the
liabilities  of the Acquired  Fund;  (vi) no gain or loss will be  recognized by
Acquired Fund  Shareholders upon the receipt of the Acquiring Fund Shares solely
in exchange for their shares of the  Acquired  Fund as part of the  transaction;
(vii)  the  basis  of the  Acquiring  Fund  Shares  received  by  Acquired  Fund
Shareholders  will be the same as the basis of the shares of the  Acquired  Fund
exchanged  therefor;  and (viii) the  holding  period of  Acquiring  Fund Shares
received by Acquired Fund  Shareholders  will include the holding  period during
which the shares of the Acquired Fund  exchanged  therefor  were held,  provided
that at the time of the exchange  the shares of the  Acquired  Fund were held as
capital assets in the hands of Acquired Fund Shareholders.  The delivery of such
opinion  is   conditioned   upon   receipt  by  Willkie   Farr  &  Gallagher  of
representations  it shall  request of each of the  Acquiring  Trust and Acquired
Trust.  Notwithstanding  anything herein to the contrary,  neither the Acquiring
Funds nor the Acquired  Funds may waive the  condition set forth in this section
8.5.

9.   INDEMNIFICATION

     9.1.  Each  Acquiring  Fund  agrees  to  indemnify  and hold  harmless  its
corresponding  Acquired Fund and each of such Acquired  Fund's Board members and
officers from and against any and all losses,  claims,  damages,  liabilities or
expenses  (including,  without limitation,  the payment of reasonable legal fees
and  reasonable  costs of  investigation)  to which jointly and  severally,  the
Acquired  Fund or any of its Board  members  or  officers  may  become  subject,
insofar as any such loss, claim,  damage,  liability or expense (or actions with
respect  thereto)  arises out of or is based on any breach by the Acquiring Fund
of any of its representations,  warranties, covenants or agreements set forth in
this Agreement.

     9.2.  Each  Acquired  Fund  agrees  to  indemnify  and  hold  harmless  its
corresponding Acquiring Fund and each of such Acquiring Fund's Board members and
officers from and against any and all losses,  claims,  damages,  liabilities or
expenses (including, without limitation, the payment of reasonable

                                      A-21
<PAGE>

legal  fees  and  reasonable  costs  of  investigation)  to  which  jointly  and
severally, the Acquiring Fund or any of its Board members or officers may become
subject,  insofar as any such loss,  claim,  damage,  liability  or expense  (or
actions  with  respect  thereto)  arises out of or is based on any breach by the
Acquired Fund of any of its representations, warranties, covenants or agreements
set forth in this Agreement.

10.  FEES AND EXPENSES

     10.1. Each of the Acquiring  Trust, on behalf of the Acquiring  Funds,  and
the Acquired Trust, on behalf of the Acquired Funds,  represents and warrants to
the other that it has no  obligations  to pay any  brokers  or  finders  fees in
connection with the transactions provided for herein.

     10.2. ZSI will pay all the expenses in connection with the Reorganizations.
Any such expenses which are so borne by ZSI will be solely and directly  related
to the  Reorganization  within the meaning of Revenue Ruling 73-54,  1973-1 C.B.
187.

11.  ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES

     11.1.  Each  Acquiring  Fund and each Acquired Fund agree that no party has
made any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.

     11.2.  Except as specified  in the next  sentence set forth in this section
11.2, the representations,  warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall not
survive  the  consummation  of  the  transactions  contemplated  hereunder.  The
covenants  to be  performed  after  the  Closing  and  the  obligations  of each
Acquiring  Fund and  Acquired  Fund in  sections  9.1 and 9.2 shall  survive the
Closing.

12.  TERMINATION

     12.1.  This Agreement may be terminated and the  transactions  contemplated
hereby may be abandoned by any party as it relates to the transaction applicable
to such party by (i) mutual agreement of the parties, or (ii) by either party if
the Closing shall not have occurred on or before June 1, 2001,  unless such date
is extended by mutual agreement of the parties,  or (iii) by either party if the
other party shall have materially  breached its obligations under this Agreement
or made a material and  intentional  misrepresentation  herein or in  connection
herewith. In the event of any such termination, this Agreement shall become void
and  there  shall be no  liability  hereunder  on the part of any party or their
respective  Board members or officers,  except for any such  material  breach or
intentional  misrepresentation,  as to each of which all  remedies  at law or in
equity of the party adversely affected shall survive.

                                      A-22
<PAGE>

13.  AMENDMENTS

     This Agreement may be amended,  modified or  supplemented in such manner as
may be mutually agreed upon in writing by any authorized officer of the Acquired
Funds and any authorized officer of the Acquiring Funds; provided, however, that
following each meeting of the Acquired Fund Shareholders  called by the Acquired
Funds pursuant to section 5.3 of this Agreement,  no such amendment may have the
effect of changing the  provisions for  determining  the number of the Acquiring
Fund Shares to be issued to the Acquired Fund Shareholders  under this Agreement
to the detriment of such shareholders without their further approval.

14.  NOTICES

     Any  notice,  report,  statement  or demand  required or  permitted  by any
provisions of this Agreement  shall be in writing and shall be deemed duly given
if delivered by hand (including by Federal  Express or similar express  courier)
or  transmitted  by  facsimile  or three  days  after  being  mailed by  prepaid
registered  or  certified  mail,  return  receipt  requested,  addressed  to the
applicable  Acquired Fund, 222 South Riverside Plaza,  Chicago,  Illinois 60606,
with a copy to Dechert,  Ten Post  Office  Square-South,  Boston,  Massachusetts
02109-4603,  Attention:  Joseph R. Fleming, Esq., or to the applicable Acquiring
Fund, Two International Place, Boston,  Massachusetts 02110-4103, with a copy to
Dechert, Ten Post Office Square-South,  Boston, MA 02109-4603, Attention: Joseph
R.  Fleming,  Esq.,  or to any  other  address  that  the  Acquired  Fund or the
Acquiring Fund shall have last designated by notice to the other party.

15.  HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY

     15.1. The Article and section headings  contained in this Agreement are for
reference  purposes  only  and  shall  not  affect  in any  way the  meaning  or
interpretation of this Agreement.

     15.2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.

     15.3.  This  Agreement  shall bind and inure to the  benefit of the parties
hereto  and their  respective  successors  and  assigns,  but no  assignment  or
transfer  hereof or of any rights or obligations  hereunder shall be made by any
party without the written consent of the other party.  Nothing herein  expressed
or implied is intended or shall be  construed to confer upon or give any person,
firm or corporation,  other than the parties hereto and the shareholders of each
Acquiring  Fund and each  Acquired  Fund and  their  respective  successors  and
assigns, any rights or remedies under or by reason of this Agreement.

                                      A-23
<PAGE>

     15.4.  References  in this  Agreement  to each  Trust mean and refer to the
Board members of each Trust from time to time serving under its  Declaration  of
Trust on file with the Secretary of State of The Commonwealth of  Massachusetts,
as the same may be  amended  from time to time,  pursuant  to which  each  Trust
conducts its business. It is expressly agreed that the obligations of each Trust
hereunder  shall not be  binding  upon any of the Board  members,  shareholders,
nominees,  officers, agents, or employees of the Trusts or the Funds personally,
but bind only the respective  property of the Funds, as provided in each Trust's
Declaration of Trust.  Moreover,  no series of either Trust other than the Funds
shall be  responsible  for the  obligations  of the  Trusts  hereunder,  and all
persons shall look only to the assets of the Funds to satisfy the obligations of
the Trusts hereunder. The execution and the delivery of this Agreement have been
authorized by each Trust's Board members,  on behalf of the applicable Fund, and
this  Agreement  has been signed by  authorized  officers of each Fund acting as
such, and neither such  authorization by such Board members,  nor such execution
and delivery by such officers,  shall be deemed to have been made by any of them
individually  or to impose any  liability on any of them  personally,  but shall
bind only the  respective  property of the Funds,  as  provided in each  Trust's
Declaration of Trust.

     Notwithstanding  anything to the contrary contained in this Agreement,  the
obligations,  agreements,  representations  and warranties  with respect to each
Fund  shall  constitute  the  obligations,   agreements,   representations   and
warranties of that Fund only (the "Obligated  Fund"),  and in no event shall any
other  series of the Trusts or the assets of any such series be held liable with
respect to the breach or other default by the Obligated Fund of its obligations,
agreements, representations and warranties as set forth herein.

     15.5.  This  Agreement  shall be governed by, and construed and enforced in
accordance with, the laws of The State of  Massachusetts,  without regard to its
principles of conflicts of laws.

                                      A-24
<PAGE>

     IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed  by an  authorized  officer  and its seal to be affixed  thereto and
attested by its Secretary or Assistant Secretary.

Attest:                            SCUDDER PATHWAY SERIES
                                   on behalf of Scudder Pathway Series:
_______________________________    Conservative Portfolio, Scudder
Secretary                          Pathway Series: Moderate Portfolio
                                   and Scudder Pathway Series:
                                   Growth Portfolio

                                   ------------------------------------
                                   By:
                                      ---------------------------------
                                   Its:
                                       --------------------------------

Attest:

                                   FARMERS INVESTMENT TRUST
                                   on behalf of Farmers Income Portfolio,
_______________________________    Farmers Income with Growth Portfolio,
Secretary                          Farmers Balanced Portfolio, Farmers
                                   Growth with Income Portfolio and
                                   Farmers Growth Portfolio

                                   ------------------------------------
                                   By:
                                      ---------------------------------
                                   Its:
                                       --------------------------------


AGREED TO AND ACKNOWLEDGED
ONLY WITH RESPECT TO
PARAGRAPH 10.2 HERETO

ZURICH SCUDDER INVESTMENTS, INC.

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

By:
   -----------------------------
Its:
    ----------------------------




                                      A-25
<PAGE>


                                   Schedule A

<TABLE>
<CAPTION>
Farmers Fund (Acquired Fund)               Pathway Fund (Acquiring Fund)
<S>                                        <C>
Farmers Income Portfolio                   Scudder Pathway Series: Conservative Portfolio

Farmers Income with Growth Portfolio       Scudder Pathway Series: Moderate Portfolio

Farmers Balanced Portfolio                 Scudder Pathway Series: Moderate Portfolio

Farmers Growth with Income Portfolio       Scudder Pathway Series: Moderate Portfolio

Farmers Growth Portfolio                   Scudder Pathway Series: Growth Portfolio
</TABLE>



                                      A-26

<PAGE>

                                                                      EXHIBIT B*

MANAGEMENT'S DISCUSSION OF ACQUIRING FUND'S PERFORMANCE
--------------------------------------------------------------------------------
Portfolio Management Discussion                                  August 31, 2000

In the following interview, Donald E. Hall, portfolio manager of Scudder Pathway
Series,  discusses the recent market  environment  and the  portfolios'  current
investment strategy during the twelve-month period ended August 31, 2000.

               Q: During the past year, the stock market has been extremely
               volatile. What has been the cause of this trend?

               A: Many  factors  affect the  performance  of stock  prices,  but
               earnings and interest rates are among the most important. And for
               the past year,  expectations regarding the direction of both have
               been changing at an extremely quick pace, leading to rapid sector
               rotations and high levels of market volatility. Although the past
               five years have brought occasional  inflation scares, the economy
               has  produced  the  greatest  expansion  in its  history  without
               sparking  significant  price pressures.  But in the first half of
               the year, a number of factors -- such as higher energy prices,  a
               soaring stock market, and a tight job market -- prompted the U.S.
               Federal Reserve to raise  short-term  interest rates from 5.25% a
               year ago to 6.50% at the  close of the  reporting  period.  These
               moves,  in themselves,  have not been a significant  negative for
               the markets.  In all cases the moves were widely anticipated and,
               in general,  viewed by investors  as being a  necessity.  But the
               primary catalyst for volatility has been the changes taking place
               in the  longer-term  outlook  for  rates.  During  the times when
               prevailing  wisdom  has said  that very few rate  hikes  would be
               needed to cool the  economy -- such as in the first two months of
               2000,  late  May,  and  August -- stocks  have  generally  gained
               ground.  On the other hand,  the periods when investors have been
               worried that an  indefinite  series of rate  increases was in the
               offing  --  such  as  March-April,  and  again  in  July  -- have
               generally been  accompanied by market  corrections,  some of them
               severe.

               An additional question that has been hanging over the markets has
               been the  issue of how  corporate  earnings  would  respond  to a
               slowing   economy.   One  school  of  thought  says  that  rising
               productivity  and the  proliferation  of  technology  will  allow
               corporate America to maintain


* Farmers Fund shareholders should be aware that the performance  discussion and
  data in Exhibit B has not been  adjusted  to  reflect  the impact of the sales
  charges  and  distribution  fees  borne by Class A and  Class B shares  of the
  Pathway Funds, which would reduce performance.

                                       B-1
<PAGE>

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

               the  strong  earnings  growth of the past  several  years,  while
               another feels that a slowdown in the economy -- as well as rising
               energy  prices -- will  eventually  take a bite out of the bottom
               lines of most  companies.  While the  resolution of this question
               remains  to be seen,  the  shifting  expectations  regarding  its
               outcome have been an important factor in the market's high levels
               of volatility during the past year.

               Q: How has this affected growth stocks, compared to value stocks?

               A:  Growth  stocks,  particularly  those  in the  technology  and
               biotech  sectors,  suffered  the  brunt of the  April-May  market
               correction.  Stocks in these groups had risen  extremely  quickly
               throughout the winter months,  and had reached  valuation  levels
               that left them very vulnerable to negative developments,  such as
               rising interest rates. Nevertheless, growth outperformed value by
               a wide margin over the full  period,  due largely to the strength
               of its winter run-up and subsequent  summer rebound.  In general,
               investors  have found a measure of safety in stocks with stronger
               earnings growth, on the basis that such companies would be better
               equipped to survive in a difficult economic environment.

               On the other hand,  the  earnings  of many stocks in  traditional
               value areas tend to be much more  dependent  on the  direction of
               the economy and interest rates.  Although sectors such as energy,
               financials,  and basic materials  showed signs of life during the
               summer,  value -- as an asset  class --  underperformed  over the
               full  period.  However,  it is important to note that past is not
               necessarily  prologue.  We believe that value -- i.e.,  the lower
               P/E  spectrum  of the market -- is poised for  improved  relative
               returns from here.

               Q: What factors have impacted the performance of stocks overseas?

               A: The swings in the international markets have closely followed
               those of the U.S., and the relationship between the growth and
               value groups has been approximately the

                                       B-2
<PAGE>

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

               same.  While the 12-month returns from most overseas markets were
               impressive,  a variety of local factors have contributed to shaky
               overall  returns  from  international  equities  during  the past
               half-year.  In  Europe,  the  decline  of the  euro  (the  common
               currency  used by  European  Union  members)  has been a distinct
               negative for dollar-based  investors.  Meanwhile,  Japan's market
               has been  pressured  by the lack of a strong  economic  recovery,
               concerns  surrounding  the Bank of Japan's  interest rate policy,
               and fears about the health of the country's corporations.  In the
               emerging  markets stocks have been  pressured by rising  interest
               rates worldwide.  Although  international  equities have produced
               spotty  performance  of late,  we  believe  that  they  remain an
               essential part of a diversified portfolio.

               Q: How have rising short-term interest rates affected the bond
               market?

               A:  Despite  the Fed's  long  series of rate  hikes,  bonds  have
               actually   performed   well  over  both  the  trailing  six-  and
               twelve-month  periods.  Government  bonds,  in  particular,  have
               produced  exceptional  performance  in the wake of the Treasury's
               buyback  program,  which has  reduced  the supply of  outstanding
               issues.  Meanwhile,  corporate bonds have been supported by sound
               economic  growth,  robust  corporate  profits,   positive  sector
               fundamentals,  and attractive valuations. Bond market performance
               was  particularly  impressive  during  the  summer  months,  when
               investors'  fears of an indefinite  series of interest rate hikes
               began to dissipate.  In a period of high  volatility in the stock
               market,  bonds  proved to be a valuable  addition  to  investors'
               portfolios by providing  favorable  returns and helping to reduce
               overall volatility.

               Q: What changes did you make in the portfolios during this
               period?

               A: As we  have  said  in the  past,  our  goal  in  managing  the
               portfolios is to establish positions in response to the long-term
               trends,   rather  than   attempting   to  adjust  to   short-term
               developments by making rapid-fire changes.

                                       B-3
<PAGE>

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

               The  value of such an  approach  has been  borne out by the rapid
               sentiment  shifts and numerous sector rotations of the past year,
               which  would have been  nearly  impossible  to  navigate  using a
               strategy  that  emphasized  short-term  trading.  We did make two
               important  adjustments in each of the three portfolios,  however.
               First,  we trimmed  our  position  in  international  equities to
               compensate  for  the  deteriorating   outlook  for  these  areas,
               especially  Japan.  While  we  will  always  seek to  maintain  a
               position  in  overseas  stocks -- since the sector is so critical
               for  effective  diversification  -- we took  profits  and cut the
               portfolios' international exposure by a substantial amount.

               The second  important  adjustment  was our  decision to boost our
               weighting  in funds  that  invest  in value  stocks  and trim our
               position in those that invest in growth. The portfolios have been
               tilted  toward  growth  during  the past year -- which has helped
               performance  substantially  -- but we believe that going forward,
               the  investment  environment  will be much  less  conducive  to a
               similar performance gap. As a consequence, the portfolios are now
               more evenly weighted between growth and value.

               Q: What is your outlook for the financial markets from here?

               A: We believe that it is important  for investors to realize that
               the last five years have been an extraordinary time for the stock
               market.  Led by growth stocks, the S&P 500 Index produced returns
               of over 20% annually from  1995-1999.  Many investors have become
               used to returns of this  magnitude,  but it is  important to note
               that this type of performance is far above the market's long-term
               average.  Similarly, it is unusual for growth to outperform other
               sectors by as wide a margin as it has in recent  years.  Although
               many of the pillars that have supported the bull market remain in
               place -- such as improving productivity, the growing influence of
               technology,  and a growing  economy  -- it is likely  that  stock
               market  returns  will be more  subdued  in the coming  years.  In
               addition,  it is likely that the  performance of growth stocks in
               relation to other

                                       B-4
<PAGE>

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

               asset classes will ultimately return to a level closer to the
               historical norm.

               For this reason,  we believe that now, more than ever,  investors
               should  take a long-term  view when  assessing  their  investment
               strategies.  Volatility  can be  nerve-wracking,  and it can lead
               undisciplined  investors  to make  ill-advised  decisions  during
               times when the market is falling.  However, we believe that those
               who establish  long-term goals, ensure that their investments are
               appropriately diversified, and ignore the short-term movements of
               the markets are creating  the  foundation  for a sound  financial
               future.  In  managing  the  Pathway  Series,  we seek to help you
               achieve these goals  through our long-term  approach and focus on
               measured  diversification  among multiple asset classes.  Even if
               growth  stocks slow from their torrid pace of the last 2-3 years,
               we feel that the  portfolios  will be  positioned  to  prosper by
               virtue  of  their   exposure   to  bonds,   value   stocks,   and
               international equities.

                                       B-5

<PAGE>


--------------------------------------------------------------------------------
Portfolio Highlights                                             August 31, 2000

Pathway Conservative Portfolio

Pathway Conservative Portfolio seeks current income and, secondarily,  long-term
growth of capital by investing substantially in bond mutual funds, with moderate
exposure to equity funds.

               Performance

               In  the   twelve-month   period  ended   August  31,  2000,   the
               Conservative Portfolio produced a total return of 7.39%, versus a
               return of 9.98% for the portfolio's  custom  benchmark.  Detailed
               performance information is listed on page B-8.

               During the past year, the portfolio gained favorable returns from
               both its equity  and fixed  income  components,  but its focus on
               value  stocks  --  which  is  consistent  with  its  conservative
               objective -- dampened  performance in relation to the index.  The
               strongest  performer  among the  portfolio's  eight  mutual  fund
               holdings  was Classic  Growth  Fund,  which is a  growth-oriented
               offering that was well  positioned  to prosper in an  environment
               that generally  favored stocks with the best earnings  prospects.
               International Fund, which benefited from the rally in technology,
               telecommunications,  and media stocks during the first quarter of
               2000, was also a strong  contributor over the full period. On the
               down  side,  our three  holdings  in the value area -- Growth and
               Income Fund,  Large Company  Value Fund,  and Small Company Value
               Fund -- all  underperformed  the S&P  500,  which  is the  equity
               component  of the  portfolio's  benchmark.  Nevertheless,  we are
               pleased to report that a large value  component  helped  mitigate
               the volatility in growth stocks and overseas equities.

               The bond  component of the portfolio  also  contributed  positive
               returns  and  overall  stability  amid  volatility  in the  stock
               market.  Through the three bond funds in the  portfolio,  we have
               exposure  to a  wide  range  of  sectors,  including  Treasuries,
               corporate  bonds,  mortgage-backed  securities,  and  high  yield
               issues.  We believe that the structure of the portfolio's  income
               holdings provides the

                                       B-6
<PAGE>

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

               ideal   combination  of  strong  yield  potential  and  extensive
               diversification.  Although bonds have not received much attention
               in recent  years due to the  run-up  in the stock  market,  their
               performance  during the past year illustrates their ongoing value
               to investors who place an emphasis on diversification.

               Portfolio Strategy

               As  always,  the  changes we made to the  portfolio's  weightings
               during  the  twelve-month  period  were  relatively  modest.  The
               overall  weighting  in bond funds has fallen from 65% to 59% over
               the past year,  but this is primarily a reflection  of the growth
               of  the  portfolio's  holdings  in  equity  funds  rather  than a
               specific  decision to trim our  holdings in this area.  The fixed
               income position is diversified among Scudder GNMA Fund (5% of net
               assets),  Scudder  Corporate  Bond Fund (7%),  and Scudder Income
               Fund (47%), providing exposure to a variety of sectors within the
               bond market.  In the stock portion of the  portfolio,  we cut the
               weighting in  international  funds,  for two reasons:  first,  to
               bring the  composition of the portfolio more closely in line with
               that of the benchmark;  and second, to account for what we see as
               a  deterioration  in the  investment  picture  overseas.  We also
               increased the  portfolio's  weighting in value funds, to position
               the fund  for an  environment  which -- in our view -- will  lend
               itself to better relative  performance from the value sector than
               that  which has  existed  over the past two  years.  Overall,  we
               believe that the portfolio's extensive  diversification will help
               position it for an environment of persistent market volatility.

                                       B-7
<PAGE>

--------------------------------------------------------------------------------
Performance Update                                               August 31, 2000

--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE


LINE CHART DATA:

                                                           LBAB Index (60%),
                                                           S&P 500 Index (25%),
               Scudder Pathway                             MSCI All Country
               Series: Conservative                        (ex U.S.) Index (5%),
               Portfolio                   LBAB Index*     3-month T-Bill (10%)*

      11/96**       10000                    10000                10000
       2/97         10236                     9963                10110
       8/97         11006                    10402                10813
       2/98         11768                    10996                11716
       8/98         11232                    11499                11778
       2/99         11871                    11684                12845
       8/99         12088                    11588                13131
       2/00         12188                    11811                13569
       8/00         12981                    12463                14442


--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                    Total Return
                               Growth of                                    Average
Period ended 8/31/2000          $10,000               Cumulative             Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Conservative Portfolio
------------------------------------------------------------------------------------
<S>                            <C>                     <C>                  <C>
1 year                         $  10,739                7.39%                7.39%
------------------------------------------------------------------------------------
Life of Portfolio**            $  13,143               31.43%                7.47%
------------------------------------------------------------------------------------
</TABLE>
LBAB Index (60%), S&P 500 Index (25%), MSCI All Country (ex U.S.) Index (5%),
3-month T-Bill (10%)*
<TABLE>
------------------------------------------------------------------------------------
<S>                            <C>                     <C>                  <C>
1 year                         $  10,998                9.98%                9.98%
------------------------------------------------------------------------------------
Life of Portfolio**            $  14,442               44.42%               10.29%
------------------------------------------------------------------------------------
</TABLE>

*        The Lehman Brothers Aggregate Bond (LBAB) Index is a market
         value-weighted measure of treasury issues, agency issues, corporate
         bond issues and mortgage-backed securities. The Standard & Poor's 500
         Index is a capitalization-weighted index of 500 stocks. The index is
         designed to measure performance of the broad domestic economy through
         changes in the aggregate market value of 500 stocks representing all
         major industries. The MSCI All Country (ex U.S.) Index is a market
         value-weighted measure of stocks of 46 countries. Index returns assume
         reinvestment of dividends and, unlike Portfolio returns, do not reflect
         any fees or expenses.

**       The  Portfolio  commenced   operations  on  November  15,  1996.  Index
         comparisons begin November 30, 1996.

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

                                       B-8
<PAGE>

--------------------------------------------------------------------------------
Portfolio Highlights                                             August 31, 2000

Pathway Balanced Portfolio*

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

               Performance

               In the  twelve-month  period ended August 31, 2000,  the Balanced
               Portfolio  produced a total return of 15.65%,  versus a return of
               12.55%  for  the  portfolio's  custom  benchmark.  The  portfolio
               finished in the top 28% of 467 balanced  funds during the period,
               according to Lipper  Analytical  Services.  Detailed  performance
               information is listed on page B-11.

               The  key to  the  strong  relative  performance  of the  Balanced
               Portfolio  lies in the favorable  returns  produced by the growth
               component  of its equity fund  holdings.  The top  performer  was
               Development Fund, which is an aggressive growth fund that focuses
               on companies with three important characteristics: strong revenue
               growth,   products  with  the  potential  to  be  a  hit  in  the
               marketplace,  and top-notch  management teams. This focus led the
               managers of the  Development  Fund to build a heavy  weighting in
               technology issues (over half its portfolio),  the  top-performing
               sector over the past year.  The portfolio also benefited from its
               holdings  in  Classic  Growth  Fund,  which is a  growth-oriented
               offering that was well  positioned  to prosper in an  environment
               that generally  favored stocks with the best earnings  prospects.
               International Fund, which also was boosted by its holdings in the
               technology,  media, and telecommunications  areas, was a positive
               contributor.  Our  holdings in funds that invest in value  stocks
               (Growth and Income Fund,  Small Company Value Fund) and stocks in
               the developing  countries (Emerging Markets Growth Fund) produced
               single digit returns, but made important  contributions by adding
               diversification  and helping reduce the overall volatility of the
               portfolio.

*  The name of Pathway  Balanced  Portfolio  was  changed  to  Pathway  Moderate
   Portfolio on December 29, 2000.

                                       B-9
<PAGE>

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

               Our holdings in the fixed income area -- Scudder  Income Fund and
               Scudder  Corporate  Bond Fund -- also  contributed to our goal of
               achieving favorable risk-adjusted returns. Between the two funds,
               we achieved  diversified  exposure to a wide range of  subsectors
               within the bond market,  including  Treasuries,  corporate bonds,
               high-yield issues, and mortgage-backed  securities.  Our holdings
               in these areas provided income for the fund, and helped stabilize
               its share price during periods when the stock market was falling.

               Portfolio Strategy

               Consistent with our long-term approach to investing, we made only
               minor changes to the portfolio during the past twelve months.  We
               entered the period with 29% of net assets in Scudder  Income Fund
               and 8% in Scudder Corporate Bond Fund, and closed with weightings
               of 28% and 8%,  respectively.  We  believe  that given the recent
               volatility  in  the  stock  markets,  bonds  have  proven  to  be
               important as ever to maintaining  effective  diversification.  On
               the equity side of the portfolio, we made two significant shifts.
               First,  we trimmed our position in  international  stock funds in
               order to 1) rebalance the outsized  position,  which had grown to
               15% of the portfolio  versus 12.15% in the  benchmark;  and 2) to
               account for the deterioration in the investment picture overseas.
               While we maintained a position in  international  stock funds, we
               closed the period with 9% of net assets in this area,  versus 15%
               a year ago. A second,  more  recent,  shift was our  decision  to
               increase our weighting in domestic value funds, at the expense of
               growth.  The portfolio has been tilted  heavily toward growth for
               most of the year,  which has  helped  performance  significantly.
               Going forward,  however,  we anticipate  that the performance gap
               between growth and value will narrow  significantly,  and we have
               positioned the portfolio accordingly.

                                      B-10
<PAGE>

--------------------------------------------------------------------------------
Performance Update                                               August 31, 2000

--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE

LINE CHART DATA:

                                                         S&P 500 Index (50%),
                                                         LBAB Index (35%),
        Scudder Pathway                                  MSCI All Country
        Series: Balanced                                 (ex U.S.) Index (10%),
        Portfolio         S&P 500 Index*  LBAB Index*    3-month T-Bill (5%)*

11/96**    10000              10000         10000               10000
 2/97      10235              10496          9963               10232
 8/97      11074              12048         10402               11229
 2/98      11888              14172         10996               12516
 8/98      10759              13026         11499               12098
 2/99      12107              16969         11684               14129
 8/99      12725              18212         11588               14810
 2/00      14153              18962         11811               15484
 8/00      14716              21187         12463               16670


--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                           Total Return
                               Growth of                                   Average
Period ended 8/31/2000          $10,000             Cumulative             Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Balanced Portfolio
------------------------------------------------------------------------------------
<S>                            <C>                     <C>                  <C>
1 year                         $  11,565               15.65%               15.65%
------------------------------------------------------------------------------------
Life of Portfolio**            $  14,875               48.75%               11.03%
------------------------------------------------------------------------------------
</TABLE>
S&P 500 Index (50%), LBAB Index (35%), MSCI All Country (ex U.S.) Index (10%),
3-month T-Bill (5%)*
<TABLE>
------------------------------------------------------------------------------------
<S>                            <C>                     <C>                  <C>
1 year                         $  11,255               12.55%               12.55%
------------------------------------------------------------------------------------
Life of Portfolio**            $  16,670               66.70%               14.58%
------------------------------------------------------------------------------------
</TABLE>

*   The Standard & Poor's 500 Index is a capitalization-weighted index of
    500 stocks. The index is designed to measure performance of the broad
    domestic economy through changes in the aggregate market value of 500
    stocks representing all major industries. The Lehman Brothers Aggregate
    Bond (LBAB) Index is a market value-weighted measure of treasury
    issues, agency issues, corporate bond issues and mortgage-backed
    securities. The MSCI All Country (ex U.S.) Index is a market
    value-weighted measure of stocks of 46 countries. Index returns assume
    reinvestment of dividends and, unlike Portfolio returns, do not reflect
    any fees or expenses.

**  The Portfolio  commenced  operations on November 15, 1996. Index comparisons
    begin November 30, 1996.

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

                                      B-11
<PAGE>

--------------------------------------------------------------------------------
Portfolio Management Discussion                                  August 31, 2000

Pathway Growth Portfolio

Pathway  Growth  Portfolio  seeks  long-term  growth  of  capital  by  investing
primarily in equity mutual funds. The Portfolio also invests a portion of assets
in bond funds,  which offer the  potential for capital  appreciation  as well as
income.

               Performance

               In the  twelve-month  period ended  August 31,  2000,  the Growth
               Portfolio  produced a total return of 24.24%,  versus a return of
               13.85% for the portfolio's  custom  benchmark.  We are pleased to
               report that the portfolio  finished in the top 8% of funds in its
               peer group  during the  period,  according  to Lipper  Analytical
               Services. Detailed performance information is listed on page 27.

               In a period  in  which  growth  stocks  outperformed  most  other
               sectors by a  substantial  margin,  our  emphasis on growth funds
               (within the context of the  diversified  portfolio)  was the most
               important factor in our strong  performance  relative to our peer
               group.  The  top-performing  fund was 21st  Century  Growth Fund,
               which emphasized  small-cap growth stocks,  particularly those in
               aggressive  areas such as  technology.  This  positioning  proved
               ideal during a period in which technology was the best-performing
               sector in the  market.  The  portfolio  also  benefited  from the
               powerful  returns of Large Company Growth Fund,  which invests in
               stocks that its management team believes to be best positioned to
               sustain strong  long-term  earnings growth.  International  Fund,
               which benefited from the rally in technology, telecommunications,
               and media stocks  during the first  quarter of 2000,  also was an
               important  contributor over the full period.  In comparison,  the
               fund holds a relatively  small  weighting in funds that invest in
               value stocks,  which helped performance in a period characterized
               by the weak performance of this area.

               The  fund  holds  15% of net  assets  in  bond  funds,  the  same
               percentage it held in this area when the reporting  period began.
               The strongest performer in this area was Emerging

                                      B-12
<PAGE>

               Markets Income Fund, which was boosted by the improving  economic
               outlook in the developing countries. Our other holdings -- Income
               Fund and Corporate Bond Fund -- provided  diversified exposure to
               a variety of sectors  within the domestic  bond market.  Although
               the  returns  of  these  two  funds  paled in  comparison  to the
               performance  of our holdings in growth stocks,  they  contributed
               positively to the portfolio's  risk profile by providing  ballast
               during times when the stock market was falling.

               Portfolio Strategy

               Although the overall composition of the portfolio has not changed
               substantially  during the past year -- a fact that is  consistent
               with  our  focus  on  long-term  investing  -- we  did  make  two
               important shifts. First, we trimmed our position in International
               Fund from 23% of net assets at the  beginning  of the period,  to
               15%  by  August  31,  2000.  This  decision,   which  brings  the
               portfolio's  weighting  in  this  sector  closer  to  that of the
               benchmark,  reflects our view that although  international stocks
               remain critical to diversification,  the outlook for the overseas
               markets has dimmed in recent months.  The second important change
               was our  decision  to trim the  portfolio's  position  in  growth
               stocks,  and increase its  weighting in value stocks  through our
               holdings in Large  Company  Value Fund.  The  portfolio  has been
               tilted  heavily toward growth for most of the year, a positioning
               that  boosted  performance  significantly.   Believing  that  the
               performance  gap  between  growth  and value  will  narrow in the
               months ahead,  we have positioned the portfolio  accordingly.  On
               the fixed income side, we closed the period with exactly the same
               weightings as we held when the period began.

                                      B-13
<PAGE>

--------------------------------------------------------------------------------
Performance Update                                               August 31, 2000

--------------------------------------------------------------------------------
Growth of a $10,000 Investment
--------------------------------------------------------------------------------

THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE

LINE CHART DATA:

                                                        S&P 500 Index (60%),
                                                        MSCI All Country
               Scudder Pathway                          (ex U.S.) Index (20%),
               Series: Growth                           LBAB Index (15%),
               Portfolio             S&P 500 Index*     3-month T-Bill (5%)*

   11/96**         10000                 10000                10000
    2/97           10336                 10496                10278
    8/97           11340                 12048                11407
    2/98           12294                 14172                12841
    8/98           10633                 13026                12029
    2/99           12660                 16969                14580
    8/99           14003                 18212                15609
    2/00           17144                 18962                16559
    8/00           17398                 21187                17771


--------------------------------------------------------------------------------
Fund Index Comparison
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                    Total Return
                               Growth of                                   Average
Period ended 8/31/2000          $10,000              Cumulative             Annual
------------------------------------------------------------------------------------
Scudder Pathway Series: Growth Portfolio
------------------------------------------------------------------------------------
<S>                            <C>                     <C>                  <C>
1 year                         $  12,424               24.24%               24.24%
------------------------------------------------------------------------------------
Life of Portfolio**            $  17,600               76.00%               16.07%
------------------------------------------------------------------------------------
</TABLE>
S&P 500 Index (60%), MSCI All Country (ex U.S.) Index (20%), LBAB Index (15%),
3-month T-Bill (5%)*
<TABLE>
------------------------------------------------------------------------------------
<S>                            <C>                     <C>                  <C>
1 year                         $  11,385               13.85%               13.85%
------------------------------------------------------------------------------------
Life of Portfolio**            $  17,771               77.71%               16.56%
------------------------------------------------------------------------------------
</TABLE>

*     The Standard & Poor's 500 Index is a capitalization-weighted index of
      500 stocks. The index is designed to measure performance of the broad
      domestic economy through changes in the aggregate market value of 500
      stocks representing all major industries. The MSCI All Country (ex
      U.S.) Index is a market value-weighted measure of stocks of 46
      countries. The Lehman Brothers Aggregate Bond (LBAB) Index is a market
      value-weighted measure of treasury issues, agency issues, corporate
      bond issues and mortgage-backed securities. Index returns assume
      reinvestment of dividends and, unlike Portfolio returns, do not reflect
      any fees or expenses.

**    The Portfolio commenced operations on November 15, 1996. Index comparisons
      begin November 30, 1996.

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

                                      B-14
<PAGE>

                                    APPENDIX

      Beneficial Owners of More than 5% of the Funds' Classes of Shares(1)

                            Farmers Income Portfolio

     As of November 30, 2000,  4,163 shares in the  aggregate,  or 13.89% of the
outstanding shares of Farmers Income Portfolio - Class A - were held in the name
of Betty  Torrey,  who may be deemed to be the  beneficial  owner of  certain of
these shares.

     As of November 30, 2000,  4,661 shares in the  aggregate,  or 15.55% of the
outstanding shares of Farmers Income Portfolio - Class A - were held in the name
of  Pauline  Lane,  who may be deemed to be the  beneficial  owner of certain of
these shares.

     As of November 30, 2000,  19,575 shares in the aggregate,  or 65.32% of the
outstanding shares of Farmers Income Portfolio - Class A - were held in the name
of Clarence Rodriguez,  Trustee for the benefit of East Valley Pulmonary Pension
Plan,  5801  E.  Main  Street,  Mesa,  AZ  85205,  who may be  deemed  to be the
beneficial owner of certain of these shares.

     As of November 30, 2000,  1,342 shares in the  aggregate,  or 40.83% of the
outstanding shares of Farmers Income Portfolio - Class B - were held in the name
of Lillian  Beattie,  who may be deemed to be the beneficial owner of certain of
these shares.

     As of November 30, 2000,  1,342 shares in the  aggregate,  or 40.83% of the
outstanding shares of Farmers Income Portfolio - Class B - were held in the name
of Jolene  Poole,  who may be deemed to be the  beneficial  owner of  certain of
these shares.

     As of  November  30,  2000,  701 shares in the  aggregate,  or 6.67% of the
outstanding shares of Farmers Income Portfolio - Class B - were held in the name
of Yazmin  Castiel,  who may be deemed to be the beneficial  owner of certain of
these shares.

     As of  November  30,  2000,  701 shares in the  aggregate,  or 6.67% of the
outstanding shares of Farmers Income Portfolio - Class B - were held in the name
of Katilena Yusupova, who may be deemed to be the beneficial owner of certain of
these shares.

--------

(1)  Unless  otherwise  indicated,  the  information  in this appendix  reflects
     percentage  ownership  both of the Funds'  classes of shares as of November
     30, 2000 and of the  corresponding  classes of shares of the combined Funds
     assuming the proposed  reorganizations  had been  consummated on that date.
     The  percentages  that appear in  parentheses  for the 5% owners of Farmers
     Income with Growth Portfolio, Farmers Balanced Portfolio and Farmers Growth
     with Income Portfolio  reflect  percentage  ownership of the  corresponding
     classes  of  Scudder  Pathway   Series:   Moderate   Portfolio   ("Moderate
     Portfolio")  assuming the proposed  reorganizations  of those Farmers Funds
     into Moderate Portfolio had been consummated on November 30, 2000.

<PAGE>

                      Farmers Income with Growth Portfolio

     As of November 30, 2000, 4,163 shares in the aggregate, or 7.12% (1.72%) of
the outstanding  shares of Farmers Income with Growth Portfolio - Class A - were
held in the name of Scudder Trust Company,  Custodian for IRA,  Salem, NH 03079,
who may be deemed to be the beneficial owner of certain of these shares.

     As of November 30, 2000, 12,266 shares in the aggregate,  or 20.98% (5.06%)
of the  outstanding  shares of Farmers Income with Growth  Portfolio - Class A -
were held in the name of Barbara Peebles, who may be deemed to be the beneficial
owner of certain of these shares.

     As of November 30, 2000, 13,433 shares in the aggregate,  or 22.98% (5.54%)
of the  outstanding  shares of Farmers Income with Growth  Portfolio - Class A -
were held in the name of Scudder Trust  Company,  Custodian for IRA,  Salem,  NH
03079, who may be deemed to be the beneficial owner of certain of these shares.

     As of November 30, 2000, 4,187 shares in the aggregate, or 7.16% (1.73%) of
the outstanding  shares of Farmers Income with Growth Portfolio - Class A - were
held in the name of Scudder Trust Company,  Custodian for IRA,  Salem, NH 03079,
who may be deemed to be the beneficial owner of certain of these shares.

     As of November 30, 2000,  6,720 shares in the aggregate,  or 18.61% (2.50%)
of the  outstanding  shares of Farmers Income with Growth  Portfolio - Class B -
were held in the name of Scudder Trust  Company,  Custodian for IRA,  Salem,  NH
03079, who may be deemed to be the beneficial owner of certain of these shares.

     As of November 30, 2000, 1,951 shares in the aggregate, or 5.40% (0.72%) of
the outstanding  shares of Farmers Income with Growth Portfolio - Class B - were
held in the name of William  Wyrick,  Trustee for the benefit of William  Wyrick
Revocable  Trust,  who may be deemed to be the  beneficial  owner of  certain of
these shares.

     As of November 30, 2000, 2,009 shares in the aggregate, or 5.56% (0.75%) of
the outstanding  shares of Farmers Income with Growth Portfolio - Class B - were
held in the names of Marcella and Floyd  Edgington,  who may be deemed to be the
beneficial owner of certain of these shares.

     As of November 30, 2000, 1,956 shares in the aggregate, or 5.41% (0.73%) of
the outstanding  shares of Farmers Income with Growth Portfolio - Class B - were
held in the name of Joanne  Harrington,  who may be deemed to be the  beneficial
owner of certain of these shares.

                                        2
<PAGE>

     As of November 30, 2000,  4,327 shares in the aggregate,  or 11.98% (1.61%)
of the  outstanding  shares of Farmers Income with Growth  Portfolio - Class B -
were held in the name of Kareen  Balch,  who may be deemed to be the  beneficial
owner of certain of these shares.

     As of November 30, 2000, 10,618 shares in the aggregate,  or 29.40% (3.94%)
of the  outstanding  shares of Farmers Income with Growth  Portfolio - Class B -
were held in the name of Scudder  Trust  Company,  Custodian for IRA, who may be
deemed to be the beneficial owner of certain of these shares.

                           Farmers Balanced Portfolio

     As of November 30, 2000, 4,353 shares in the aggregate, or 5.76% (1.79%) of
the outstanding  shares of Farmers  Balanced  Portfolio - Class A - were held in
the name of SSC Investment  Corp., 345 Park Avenue,  New York, NY 10154, who may
be deemed to be the beneficial owner of certain of these shares.

     As of November 30, 2000, 6,149 shares in the aggregate, or 8.13% (2.53%) of
the outstanding  shares of Farmers  Balanced  Portfolio - Class A - were held in
the name of Carol  Boles,  Trustee  for the  benefit of Jimmie  and Carol  Boles
Living Trust,  who may be deemed to be the beneficial  owner of certain of these
shares.

     As of November 30, 2000, 4,363 shares in the aggregate, or 5.77% (1.80%) of
the outstanding  shares of Farmers  Balanced  Portfolio - Class A - were held in
the name of Dennis Wayne Smith,  who may be deemed to be the beneficial owner of
certain of these shares.

     As of November 30, 2000, 4,476 shares in the aggregate, or 5.92% (1.85%) of
the outstanding  shares of Farmers  Balanced  Portfolio - Class A - were held in
the name of Scudder  Trust  Company,  Custodian for IRA, who may be deemed to be
the beneficial owner of certain of these shares.

     As of November 30, 2000, 7,351 shares in the aggregate, or 9.72% (3.03%) of
the outstanding  shares of Farmers  Balanced  Portfolio - Class A - were held in
the name of Scudder  Trust  Company,  Custodian for IRA, who may be deemed to be
the beneficial owner of certain of these shares.

     As of November 30, 2000,  7,952 shares in the aggregate,  or 10.51% (3.28%)
of the outstanding shares of Farmers Balanced Portfolio - Class A - were held in
the name of Keith  Heppner  and Roy & Ben  Letourneau,  for the  benefit  of Rio
Grande Bible Institute, 4300 South Business Highway 281, Edinburg, TX 78539, who
may be deemed to be the beneficial owner of certain of these shares.

                                        3
<PAGE>

     As of November 30, 2000, 6,282 shares in the aggregate, or 6.05% (2.33%) of
the outstanding  shares of Farmers  Balanced  Portfolio - Class B - were held in
the name of Scudder  Trust  Company,  Custodian for IRA, who may be deemed to be
the beneficial owner of certain of these shares.

     As of November 30, 2000, 11,739 shares in the aggregate,  or 11.31% (4.36%)
of the outstanding shares of Farmers Balanced Portfolio - Class B - were held in
the name of Scudder  Trust  Company,  Custodian for IRA, who may be deemed to be
the beneficial owner of certain of these shares.

     As of November 30, 2000, 7,648 shares in the aggregate, or 7.36% (2.84%) of
the outstanding  shares of Farmers  Balanced  Portfolio - Class B - were held in
the  name  of  Alexander  Construction  Company,  who  may be  deemed  to be the
beneficial owner of certain of these shares.

                      Farmers Growth with Income Portfolio

     As of November 30, 2000, 6,601 shares in the aggregate, or 6.08% (2.72%) of
the outstanding  shares of Farmers Growth with Income Portfolio - Class A - were
held in the name of Scudder Trust Company,  Custodian for IRA, who may be deemed
to be the beneficial owner of certain of these shares.

     As of November 30, 2000, 6,997 shares in the aggregate, or 6.44% (2.88%) of
the outstanding  shares of Farmers Growth with Income Portfolio - Class A - were
held in the name of Scudder Trust Company,  Custodian for IRA, who may be deemed
to be the beneficial owner of certain of these shares.

     As of November 30, 2000, 6,304 shares in the aggregate, or 5.80% (2.60%) of
the outstanding  shares of Farmers Growth with Income Portfolio - Class A - were
held in the name of Scudder Trust Company,  Custodian for IRA, who may be deemed
to be the beneficial owner of certain of these shares.

     As of November 30, 2000, 9,671 shares in the aggregate, or 7.47% (3.59%) of
the outstanding  shares of Farmers Growth with Income Portfolio - Class B - were
held in the name of Scudder Trust Company,  Custodian for IRA, who may be deemed
to be the beneficial owner of certain of these shares.

                            Farmers Growth Portfolio

     As of November 30, 2000,  15,760 shares in the  aggregate,  or 6.29% of the
outstanding  shares of  Farmers  Growth  Portfolio  - Class A - were held in the
names of Daniel and Laurie Steflik, who may be deemed to be the beneficial owner
of certain of these shares.

                                        4
<PAGE>

     As of November 30, 2000,  14,858 shares in the  aggregate,  or 5.93% of the
outstanding shares of Farmers Growth Portfolio - Class A - were held in the name
of  Scudder  Trust  Company,  Custodian  for IRA,  who may be  deemed  to be the
beneficial owner of certain of these shares.

                 Scudder Pathway Series: Conservative Portfolio

     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,  Scudder  Kemper
Investments,  Trustee, 322 James Avenue,  Jamestown, NY 14701, who may deemed to
be the beneficial owner of such shares.

                   Scudder Pathway Series: Moderate Portfolio

     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 names of Merle  and  Betty  Wingo,  who may be deemed to be the
beneficial owner of such shares.

                                        5

<PAGE>





For more information,  please contact  Shareholder  Cummunications  Corporation,
your Fund's information agent at 1-888-676-7706.











                                                                         FARMERS


<PAGE>

     This  Proxy  Statement/Prospectus  is  accompanied  by the  Pathway  Funds'
prospectus  relating to Class A, Class B and Class C shares  dated  December 29,
2000,  which was previously  filed with the  Securities and Exchange  Commission
(the "Commission") via EDGAR on January 4, 2001 (File No.  811-08606),  which is
incorporated by reference herein.

     Pathway  Funds'  statement of additional  information  relating to Class A,
Class B and Class C shares dated December 29, 2000,  which was previously  filed
with the  Commission  via EDGAR on  January  4, 2001  (File No.  811-08606),  is
incorporated by reference herein.

     Farmers Funds'  prospectus  dated  September 1, 2000,  which was previously
filed with the Commission via EDGAR on August 31, 2000 (File No. 333-66385),  is
incorporated by reference herein.


<PAGE>


                                     PART B

                             SCUDDER PATHWAY SERIES
 -------------------------------------------------------------------------------

                       Statement of Additional Information
                                January 12, 2001
 -------------------------------------------------------------------------------

Acquisition of the Assets         By and in Exchange for shares of beneficial
of each portfolio series of       interest of the series of
Farmers Investment Trust          Scudder Pathway Series (the "Acquiring Trust")
222 South Riverside Plaza         Two International Place
Chicago, IL 60606                 Boston, MA 02110-4103

     This Statement of Additional  Information is available to the  shareholders
of each series of Farmers  Investment Trust (Farmers Income  Portfolio,  Farmers
Income with Growth Portfolio,  Farmers Balanced  Portfolio,  Farmers Growth with
Income  Portfolio and Farmers  Growth  Portfolio)  (each,  a "Farmers  Fund" and
collectively,  the "Farmers  Funds") in connection  with a proposed  transaction
whereby  three  series  of  the  Acquiring   Trust  (Scudder   Pathway   Series:
Conservative Portfolio;  Scudder Pathway Series: Balanced Portfolio; and Scudder
Pathway Series:  Growth Portfolio) (each a "Pathway Fund" and collectively,  the
"Pathway Funds") will acquire all or substantially  all of the assets and all of
the  liabilities of its  corresponding  Farmers Fund in exchange for the Class A
and Class B shares of beneficial  interest of the applicable Pathway Fund (each,
a "Reorganization" and collectively, the "Reorganizations").

     This Statement of Additional  Information  of the Acquiring  Trust contains
material  which may be of interest to investors but which is not included in the
Proxy   Statement/Prospectus   of   the   Acquiring   Trust   relating   to  the
Reorganizations. This Statement of Additional Information consists of this cover
page and the following documents:

1.   Pathway Funds' statement of  additional  information relating  to  Class A,
Class B  and  Class C  shares  dated  December 29, 2000,  which  was  previously
filed with the Securities and Exchange  Commission (the  "Commission") via EDGAR
on January 4, 2001 (File No. 811-08606) and is incorporated by reference herein.

2.   Pathway Funds' annual  report to  shareholders  for the fiscal  year  ended
August 31, 2000,  which  was  previously  filed with the Commission via EDGAR on
October 18, 2000 (File No. 811-08606) and is incorporated by reference herein.

3.   Farmers Funds'  prospectus  dated September 1, 2000,  which  was previously
filed with the  Commission  via EDGAR on August 31, 2000 (File No.  333-66385)
and is incorporated by reference herein.

4.   Farmers Funds' statement of additional information dated September 1, 2000,
which was  previously  filed with the  Commission  via EDGAR on August 31,  2000
(File No. 333-66385) and is incorporated by reference herein.

<PAGE>

5.   Farmers  Funds'  annual report to shareholders  for the  fiscal  year ended
April 30, 2000,  which  was  previously filed with  the Commission  via EDGAR on
September 5, 2000 (File No. 811-09085) and is incorporated by reference herein.

     Because the net asset value of each  Farmers Fund did not exceed 10 percent
of the net asset value of its  corresponding  Pathway  Fund,  all measured as of
October 31, 2000, pro forma financial  statements have not been included in this
Statement of Additional Information.

     This  Statement of  Additional  Information  is not a  prospectus.  A Proxy
Statement/Prospectus  dated January 12, 2001 relating to the Reorganizations may
be obtained by writing Farmers Funds at 222 South Riverside Drive,  Chicago,  IL
60606 or by calling Kemper Distributors, Inc. at 1-800-621-1048.  This Statement
of  Additional  Information  should  be  read  in  conjunction  with  the  Proxy
Statement/Prospectus.

<PAGE>

<TABLE>
<S>                                             <C>
[LOGO]                                          For more information or to vote by phone
                                                call toll-free 1-888-676-7706.
                                                Or fax both sides of your signed card to
                                                1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669       NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED                       Friday between the hours of
                                                8:30 A.M. and 5:00 P.M. EST. Faxes will not
                                                be accepted on holidays.
</TABLE>

           Please fold and detach card at perforation before mailing

FUND NAME PRINTS HERE                           Special  Meeting of Shareholders
                                                                  March 14, 2001

I hereby appoint John Millette,  Kathryn L. Quirk and Caroline Pearson each with
the full power of  substitution,  as  proxies  for the  undersigned  to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"),  as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the  Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m.,  Eastern Time, at the offices of Zurich
Scudder  Investments,   Inc.,  13th  Floor,  Two  International  Place,  Boston,
Massachusetts 02110, and at any adjournments thereof.

I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.

This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent  proxy card, by written  notice to the Secretary of
the Trust or by voting in person at the Meeting.

                                    PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
                                         PROMPTLY IN THE ENCLOSED ENVELOPE.


                                Date ___________________ 2001

                                Signature should be exactly as the name or names
                                appear  on  this proxy card.  If  the individual
                                signing  the  proxy  card  is a fiduciary (e.g.,
                                attorney,  executor,  trustee,  guardian, etc.),
                                the individual's signature must be  followed  by
                                his full title.



                                ------------------------------------------------
                                           Signature(s) of Shareholder(s)

                                                                          FARMER
<PAGE>

                  Your vote is important - Please vote today!

           Please fold and detach card at perforation before mailing

This proxy, if properly  executed,  will be voted in the manner directed.  IF NO
DIRECTION IS MADE ON A PROPERLY  EXECUTED  PROXY,  THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.

THIS PROXY IS  SOLICITED  ON BEHALF OF THE BOARD OF TRUSTEES  OF THE TRUST.  THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.

<TABLE>
<S>                                                                                     <C>
                                                                                        FOR     AGAINST   ABSTAIN
1. To approve an Agreement and Plan of  Reorganization as it relates to (i) the         / /       / /       / /
   transfer of all or substantially all of the assets and all of the liabilities
   of Farmers Income  Portfolio to Scudder Pathway Series: Conservative
   Portfolio ("Pathway Conservative Portfolio"),  (ii) the  distribution  to
   each shareholder of Farmers Income Portfolio shares of Pathway Conservative
   Portfolio of a corresponding class to those held by the shareholder in
   Farmers Income Portfolio in an amount equal to the value of the shareholder's
   holdings in Farmers Income Portfolio and (iii) the termination of Farmers
   Income Portfolio.
</TABLE>

The proxies are  authorized to vote in their  discretion  on any other  business
that may properly come before the Meeting and any adjournments thereof.

                  Please be sure to sign and date this Proxy.



                                                                      FARMERS 01
<PAGE>

<TABLE>
<S>                                             <C>
[LOGO]                                          For more information or to vote by phone
                                                call toll-free 1-888-676-7706.
                                                Or fax both sides of your signed card to
                                                1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669       NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED                       Friday between the hours of
                                                8:30 A.M. and 5:00 P.M. EST. Faxes will not
                                                be accepted on holidays.
</TABLE>

           Please fold and detach card at perforation before mailing

FUND NAME PRINTS HERE                           Special  Meeting of Shareholders
                                                                  March 14, 2001

I hereby appoint John Millette,  Kathryn L. Quirk and Caroline Pearson each with
the full power of  substitution,  as  proxies  for the  undersigned  to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"),  as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the  Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m.,  Eastern Time, at the offices of Zurich
Scudder  Investments,   Inc.,  13th  Floor,  Two  International  Place,  Boston,
Massachusetts 02110, and at any adjournments thereof.

I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.

This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent  proxy card, by written  notice to the Secretary of
the Trust or by voting in person at the Meeting.

                                    PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
                                         PROMPTLY IN THE ENCLOSED ENVELOPE.


                                Date ___________________ 2001

                                Signature should be exactly as the name or names
                                appear  on  this proxy card.  If  the individual
                                signing  the  proxy  card  is a fiduciary (e.g.,
                                attorney,  executor,  trustee,  guardian, etc.),
                                the individual's signature must be  followed  by
                                his full title.



                                ------------------------------------------------
                                           Signature(s) of Shareholder(s)

                                                                          FARMER
<PAGE>

                  Your vote is important - Please vote today!

           Please fold and detach card at perforation before mailing

This proxy, if properly  executed,  will be voted in the manner directed.  IF NO
DIRECTION IS MADE ON A PROPERLY  EXECUTED  PROXY,  THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.

THIS PROXY IS  SOLICITED  ON BEHALF OF THE BOARD OF TRUSTEES  OF THE TRUST.  THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.

<TABLE>
<S>                                                                                     <C>
                                                                                        FOR     AGAINST   ABSTAIN
2. To approve an Agreement and Plan of Reorganization as it relates to (i) the          / /       / /       / /
   transfer of all or substantially all of the assets and all of the liabilities
   of Farmers Income with Growth Portfolio to Scudder Pathway Series:  Moderate
   Portfolio ("Pathway Moderate Portfolio"), (ii) the distribution  to each
   shareholder of  Farmers Income with Growth Portfolio shares of Pathway
   Moderate Portfolio of a corresponding class to those held by the shareholder
   in Farmers Income with Growth Portfolio in an amount equal to the value of
   the shareholder's holdings in Farmers Income with Growth Portfolio and (iii)
   the termination of Farmers Income with Growth Portfolio.
</TABLE>

The proxies are  authorized to vote in their  discretion  on any other  business
that may properly come before the Meeting and any adjournments thereof.

                  Please be sure to sign and date this Proxy.

                                                                       FARMER 02
<PAGE>

<TABLE>
<S>                                             <C>
[LOGO]                                          For more information or to vote by phone
                                                call toll-free 1-888-676-7706.
                                                Or fax both sides of your signed card to
                                                1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669       NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED                       Friday between the hours of
                                                8:30 A.M. and 5:00 P.M. EST. Faxes will not
                                                be accepted on holidays.
</TABLE>

           Please fold and detach card at perforation before mailing

FUND NAME PRINTS HERE                           Special  Meeting of Shareholders
                                                                  March 14, 2001

I hereby appoint John Millette,  Kathryn L. Quirk and Caroline Pearson each with
the full power of  substitution,  as  proxies  for the  undersigned  to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"),  as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the  Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m.,  Eastern Time, at the offices of Zurich
Scudder  Investments,   Inc.,  13th  Floor,  Two  International  Place,  Boston,
Massachusetts 02110, and at any adjournments thereof.

I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.

This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent  proxy card, by written  notice to the Secretary of
the Trust or by voting in person at the Meeting.

                                    PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
                                         PROMPTLY IN THE ENCLOSED ENVELOPE.


                                Date ___________________ 2001

                                Signature should be exactly as the name or names
                                appear  on  this proxy card.  If  the individual
                                signing  the  proxy  card  is a fiduciary (e.g.,
                                attorney,  executor,  trustee,  guardian, etc.),
                                the individual's signature must be  followed  by
                                his full title.



                                ------------------------------------------------
                                           Signature(s) of Shareholder(s)

                                                                          FARMER
<PAGE>

                  Your vote is important - Please vote today!

           Please fold and detach card at perforation before mailing

This proxy, if properly  executed,  will be voted in the manner directed.  IF NO
DIRECTION IS MADE ON A PROPERLY  EXECUTED  PROXY,  THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.

THIS PROXY IS  SOLICITED  ON BEHALF OF THE BOARD OF TRUSTEES  OF THE TRUST.  THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.

<TABLE>
<S>                                                                                     <C>
                                                                                        FOR     AGAINST   ABSTAIN
3. To approve an Agreement and Plan of Reorganization as it relates to (i) the          / /       / /       / /
   transfer of all or substantially all of the assets and all of the liabilities
   of Farmers Balanced Portfolio to Scudder Pathway Series: Moderate Portfolio
   ("Pathway Moderate Portfolio"), (ii) the distribution to each shareholder of
   Farmers Balanced Portfolio shares of Pathway Moderate Portfolio of a
   corresponding class to those held by the shareholder in Farmers Balanced
   Portfolio in an amount equal to the value of the shareholder's holdings in
   Farmers Balanced Portfolio and (iii) the termination of Farmers Balanced
   Portfolio.
</TABLE>

The proxies are  authorized to vote in their  discretion  on any other  business
that may properly come before the Meeting and any adjournments thereof.

                  Please be sure to sign and date this Proxy.

                                                                       FARMER 03
<PAGE>

<TABLE>
<S>                                             <C>
[LOGO]                                          For more information or to vote by phone
                                                call toll-free 1-888-676-7706.
                                                Or fax both sides of your signed card to
                                                1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669       NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED                       Friday between the hours of
                                                8:30 A.M. and 5:00 P.M. EST. Faxes will not
                                                be accepted on holidays.
</TABLE>

           Please fold and detach card at perforation before mailing

FUND NAME PRINTS HERE                           Special  Meeting of Shareholders
                                                                  March 14, 2001

I hereby appoint John Millette,  Kathryn L. Quirk and Caroline Pearson each with
the full power of  substitution,  as  proxies  for the  undersigned  to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"),  as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the  Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m.,  Eastern Time, at the offices of Zurich
Scudder  Investments,   Inc.,  13th  Floor,  Two  International  Place,  Boston,
Massachusetts 02110, and at any adjournments thereof.

I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.

This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent  proxy card, by written  notice to the Secretary of
the Trust or by voting in person at the Meeting.

                                    PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
                                         PROMPTLY IN THE ENCLOSED ENVELOPE.


                                Date ___________________ 2001

                                Signature should be exactly as the name or names
                                appear  on  this proxy card.  If  the individual
                                signing  the  proxy  card  is a fiduciary (e.g.,
                                attorney,  executor,  trustee,  guardian, etc.),
                                the individual's signature must be  followed  by
                                his full title.



                                ------------------------------------------------
                                           Signature(s) of Shareholder(s)

                                                                          FARMER
<PAGE>

                  Your vote is important - Please vote today!

           Please fold and detach card at perforation before mailing

This proxy, if properly  executed,  will be voted in the manner directed.  IF NO
DIRECTION IS MADE ON A PROPERLY  EXECUTED  PROXY,  THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.

THIS PROXY IS  SOLICITED  ON BEHALF OF THE BOARD OF TRUSTEES  OF THE TRUST.  THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.

<TABLE>
<S>                                                                                     <C>
                                                                                        FOR     AGAINST   ABSTAIN
4. To approve an Agreement and Plan of Reorganization as it relates to (i) the          / /       / /       / /
   transfer of all or substantially all of the assets and all of the liabilities
   of Farmers Growth with Income Portfolio to Scudder Pathway Series: Moderate
   Portfolio ("Pathway Moderate Portfolio"), (ii) the distribution to each
   shareholder of Farmers Growth with Income Portfolio shares of Pathway
   Moderate Portfolio of a corresponding class to those held by the shareholder
   in Farmers Growth with Income Portfolio in an amount equal to the value of
   the shareholder's holdings in Farmers Growth with Income Portfolio and (iii)
   the termination of Farmers Growth with Income Portfolio.
</TABLE>

The proxies are  authorized to vote in their  discretion  on any other  business
that may properly come before the Meeting and any adjournments thereof.

                  Please be sure to sign and date this Proxy.

                                                                       FARMER 04
<PAGE>

<TABLE>
<S>                                             <C>
[LOGO]                                          For more information or to vote by phone
                                                call toll-free 1-888-676-7706.
                                                Or fax both sides of your signed card to
                                                1-888-451-VOTE(8683)
PO Box 219453, Kansas City, MO 64121-9669       NOTE: Faxes will only be accepted Monday through
ADDRESS SERVICE REQUESTED                       Friday between the hours of
                                                8:30 A.M. and 5:00 P.M. EST. Faxes will not
                                                be accepted on holidays.
</TABLE>

           Please fold and detach card at perforation before mailing

FUND NAME PRINTS HERE                           Special  Meeting of Shareholders
                                                                  March 14, 2001

I hereby appoint John Millette,  Kathryn L. Quirk and Caroline Pearson each with
the full power of  substitution,  as  proxies  for the  undersigned  to vote the
shares of the above referenced fund (the "Fund"), a series of Farmers Investment
Trust (the "Trust"),  as to which I am entitled to vote, as shown on the reverse
side, at the Special Meeting of the  Shareholders of the Fund (the "Meeting") to
be held on March 14, 2001, at 4:30 p.m.,  Eastern Time, at the offices of Zurich
Scudder  Investments,   Inc.,  13th  Floor,  Two  International  Place,  Boston,
Massachusetts 02110, and at any adjournments thereof.

I hereby revoke any and all proxies with respect to such shares previously given
by me. I acknowledge receipt of the Proxy Statement dated January 12, 2001.

This instruction may be revoked at any time prior to its exercise at the Meeting
by execution of a subsequent  proxy card, by written  notice to the Secretary of
the Trust or by voting in person at the Meeting.

                                    PLEASE SIGN, DATE AND RETURN THIS PROXY CARD
                                         PROMPTLY IN THE ENCLOSED ENVELOPE.


                                Date ___________________ 2001

                                Signature should be exactly as the name or names
                                appear  on  this proxy card.  If  the individual
                                signing  the  proxy  card  is a fiduciary (e.g.,
                                attorney,  executor,  trustee,  guardian, etc.),
                                the individual's signature must be  followed  by
                                his full title.



                                ------------------------------------------------
                                           Signature(s) of Shareholder(s)

                                                                          FARMER
<PAGE>


                  Your vote is important - Please vote today!

           Please fold and detach card at perforation before mailing

This proxy, if properly  executed,  will be voted in the manner directed.  IF NO
DIRECTION IS MADE ON A PROPERLY  EXECUTED  PROXY,  THE PROXY WILL BE VOTED "FOR"
APPROVAL OF THE PROPOSAL.

THIS PROXY IS  SOLICITED  ON BEHALF OF THE BOARD OF TRUSTEES  OF THE TRUST.  THE
BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL. Please vote by
filling in a box below.

<TABLE>
<S>                                                                                     <C>
                                                                                        FOR     AGAINST   ABSTAIN
5. To approve an Agreement and Plan of Reorganization as it relates to (i) the          / /       / /       / /
   transfer of all or substantially all of the assets and all of the liabilities
   of Farmers Growth Portfolio to Scudder Pathway Series: Growth Portfolio
   ("Pathway Growth Portfolio"), (ii) the distribution to each shareholder of
   Farmers Growth Portfolio shares of Pathway Growth Portfolio of a
   corresponding class to those held by the shareholder in Farmers Growth
   Portfolio in an amount equal to the value of the shareholder's holdings in
   Farmers Growth  Portfolio and (iii) the termination of Farmers Growth
   Portfolio.
</TABLE>

The proxies are  authorized to vote in their  discretion  on any other  business
that may properly come before the Meeting and any adjournments thereof.

                  Please be sure to sign and date this Proxy.

                                                                       FARMER 05




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