Supplement to the currently effective Statement of Additional            Information of each of the listed funds/portfolios:

**_____________________________________________________________________________________________**

 

**Cash Management Fund Institutional**

**Cash Reserve Fund, Inc.**

Prime Series

**Cash Reserve Fund Institutional**

**NY Tax Free Money Fund**

**Tax Free Money Fund Investment**

**DWS Capital Growth Fund**

**DWS Climate Change Fund**

**DWS Commodity Securities Fund**

**DWS Communications Fund**

**DWS Core Fixed Income Fund**

**DWS Core Plus Income Fund**

**DWS EAFE® Equity Index Fund**

**DWS Emerging Markets Equity Fund**

**DWS Emerging Markets Fixed Income Fund**

**DWS Enhanced S&P 500 Index Fund**

**DWS Equity 500 Index Fund**

**DWS Equity Income Fund**

**DWS Equity Partners Fund**

**DWS Europe Equity Fund**

**DWS Floating Rate Plus Fund**

**DWS Global Bond Fund**

**DWS Global Opportunities Fund**

**DWS Global Thematic Fund**

**DWS GNMA Fund**

**DWS Gold & Precious Metals Fund**

**DWS Growth & Income Fund**

**DWS Health Care Fund**

**DWS High Income Plus Fund**

**DWS High Yield Tax Free Fund**

**DWS Inflation Protected Plus Fund**

**DWS Intermediate Tax/AMT Free Fund**

**DWS International Fund**

**DWS International Select Equity Fund**

**DWS International Value Opportunities Fund**

**DWS Investments VIT Funds**

DWS Equity 500 Index VIP

DWS RREEF Real Estate Securities VIP

DWS Small Cap Index VIP

**DWS Japan Equity Fund**

**DWS Large Company Growth Fund**

**DWS Latin America Equity Fund**

**DWS LifeCompass 2015 Fund**

**DWS LifeCompass 2020 Fund**

**DWS LifeCompass 2030 Fund**

**DWS LifeCompass 2040 Fund**

**DWS LifeCompass Retirement Fund**

**DWS Lifecycle Long Range Fund**

**DWS Managed Municipal Bond Fund**

**DWS Massachusetts Tax-Free Fund**

**DWS Micro Cap Fund**

**DWS Mid Cap Growth Fund**

**DWS Money Market Series**

**DWS RREEF Global Real Estate Securities Fund**

**DWS RREEF Real Estate Securities Fund**

**DWS S&P 500 Index Fund**

**DWS Short Duration Fund**

**DWS Short Duration Plus Fund**

 

----

**DWS Short-Term Municipal Bond Fund**

**DWS Small Cap Core Fund**

**DWS Small Cap Growth Fund**

**DWS Small Cap Value Fund**

**DWS U.S. Bond Index Fund**

**DWS Value Builder Fund**

**DWS Variable Series I**

DWS Bond VIP

DWS Capital Growth VIP

DWS Global Opportunities VIP

DWS Growth & Income VIP

DWS Health Care VIP

DWS International VIP

 

At            present, substantially all DWS mutual funds are overseen by one of two boards of            trustees/directors (the “Boards”). Each Board, including the Board that            oversees your Fund (the “New York Board”), has determined that the            formation of a single consolidated Board overseeing substantially all DWS mutual funds            is in the best interests of the Funds and their shareholders. In this connection, each            Board has approved a plan outlining the process for implementing the consolidation of            the New York Board with the other primary DWS mutual fund board (the “Chicago            Board”). (The geographic references in the preceding sentences merely indicate            where each Board historically held most of its meetings.)

The            consolidation of the two Boards is expected to take effect on or about April 1, 2008            (the “Consolidation Date”). To accomplish the consolidation, the New York            Board will nominate and elect four individuals (John W. Ballantine, Paul K. Freeman,            William McClayton and Robert H. Wadsworth) who currently serve on the Chicago Board to            the Board of your Fund and each other fund overseen by the New York Board. Information            regarding these four individuals is set forth below. In addition, the Chicago Board has            determined to nominate and recommend that shareholders of each fund overseen by that            Board elect eight members of your Fund’s Board (Henry P. Becton, Jr., Dawn-Marie            Driscoll, Keith R. Fox, Kenneth C. Froewiss, Richard J. Herring, Rebecca W. Rimel,            William N. Searcy, Jr. and Jean Gleason Stromberg). As a result, as of the            Consolidation Date, it is expected that the four Chicago Board members and eight New            York Board members named above (each of whom will be an Independent Board Member),            together with Axel Schwarzer, CEO of DWS Scudder, will constitute the Board of each DWS            Scudder mutual fund (134 funds), including your Fund.

To            facilitate the Board consolidation, three members of the New York Board (Martin J.            Gruber, Graham E. Jones and Carl W. Vogt) have agreed to resign as of the            Consolidation Date, which is prior to their normal retirement dates. Independent Board            Members of the New York Board do not receive benefits under any pension or retirement            plan. However, the New York Board has determined that it would be appropriate to            provide those three Independent Board Members who agreed to resign prior to the            Board’s normal retirement date with a retirement agreement, the terms of which            include a one-time benefit. As DIMA, the Funds’ investment adviser, will also            benefit from the administrative efficiencies of a consolidated Board, DIMA has agreed            to reimburse the Funds for the full cost of this one-time benefit (which for each            retiring Independent Board Member will equal his annual compensation immediately            preceding the Consolidation Date multiplied by the lesser of (i) two; or (ii) the            number of years (or portion thereof) from the Consolidation Date to his normal            retirement date). As consideration for this benefit, each retiring Independent Board            Member has agreed not to serve on the board of another mutual fund without prior            consent for a specified period. In addition, pursuant to an agreement between each            retiring Independent Board Member, the New York Funds and DIMA, each retiring            Independent

 

----

Board Member has received certain assurances regarding continuation of            insurance and indemnification rights.

Following the Consolidation Date, it is expected that the consolidated            Board will implement certain changes to the Fund’s current committee structure            and other governance practices, including the appointment of new committee chairs and            members. Additional information regarding these changes will be set forth in the            Fund’s statement of additional information upon implementation.

 

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| **Name and Year of Birth**                                                           | **Business Experience and                            Directorships****During the Past 5 Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **Position with the DWS Funds and Length of Time                            Served** |
|--------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|
| **Chicago Board Members                            to be Elected to New York Board** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                 |
| John W. Ballantine                            (1946)                                 | Retired; formerly,                            Executive Vice President and Chief Risk Management Officer, First                            Chicago NBD Corporation/The First National Bank of Chicago (1996-1998);                            Executive Vice President and Head of International Banking (1995-1996).                            Directorships: Healthways Inc. (provider of disease and care management                            services); Portland General Electric (utility company); Stockwell                            Capital Investments PLC (private equity). Former Directorships: First                            Oak Brook Bancshares, Inc. and Oak Brook Bank | Chicago Board Member                            since 1999.                          |
| Paul K. Freeman                            (1950)                                    | Consultant, World                            Bank/Inter-American Development Bank; formerly, Project Leader,                            International Institute for Applied Systems Analysis (1998-2001); Chief                            Executive Officer, The Eric Group, Inc. (environmental insurance)                            (1986-1998). Formerly, Trustee of funds managed by DIMA or its                            affiliates (1993-2002).                                                                                                                                                                                                                                       | Chicago Board Member                            since 2002, Chairperson since 2007.  |
| William McClayton                            (1944)                                  | Chief Administrative                            Officer, Diamond Management & Technology Consultants, Inc. (global                            management consulting firm) (2001-present); formerly, Senior Partner,                            Arthur Andersen LLP (accounting) (1966-2001). Directorships: Board of                            Managers, YMCA of Metropolitan Chicago; formerly, Trustee, Ravinia                            Festival.                                                                                                                                                                                                                                     | Chicago Board Member                            since 2004.                          |
| Robert H. Wadsworth                            (1940)                                | President, Robert H.                            Wadsworth & Associates, Inc. (consulting firm) (1983 to present).                            Formerly, Trustee of funds managed by DIMA or its affiliates                            (1999-2004).                                                                                                                                                                                                                                                                                                                                                                                                                                           | Chicago Board Member                            since 2004.                          |

 

 

 

 

*Please Retain This Supplement for Future Reference*

 

November 26, 2007

DMF-3913

 

 

Supplement to the currently effective Statements of Additional            Information of each of the listed funds/portfolios:

 

| **Cash Management Fund Institutional**

**Cash Reserves Fund Institutional**

**Daily Assets Fund Institutional**

**DWS Alternative Asset Allocation Plus                            Fund**

**DWS Balanced Fund**

**DWS Blue Chip Fund**

**DWS California Tax-Free Income Fund**

**DWS Capital Growth Fund**

**DWS Commodity Securities Fund**

**DWS Communications Fund**

**DWS Conservative Allocation Fund**

**DWS Core Fixed Income Fund**

**DWS Core Plus Allocation Fund**

**DWS Core Plus Income Fund**

**DWS Disciplined Long/Short Growth Fund**

**DWS Disciplined Long/Short Value Fund**

**DWS Disciplined Market Neutral Fund**

**DWS Dreman Concentrated Value Fund**

**DWS Dreman High Return Equity Fund**

**DWS Dreman Mid Cap Value Fund**

**DWS Dreman Small Cap Value Fund**

**DWS EAFE® Equity Index                            Fund**

**DWS Emerging Markets Equity Fund**

**DWS Emerging Markets Fixed Income Fund**

**DWS Enhanced S&P 500 Index Fund**

**DWS Equity 500 Index Fund** | **DWS Equity Income Fund**

**DWS Equity Partners Fund**

**DWS Europe Equity Fund**

**DWS Floating Rate Plus Fund**

**DWS Global Bond Fund**

**DWS Global Opportunities Fund**

**DWS Global Thematic Fund**

**DWS GNMA Fund**

**DWS Gold & Precious Metals Fund**

**DWS Growth & Income Fund**

**DWS Growth Allocation Fund**

**DWS Growth Plus Allocation Fund**

**DWS Health Care Fund**

**DWS High Income Fund**

**DWS High Income Plus Fund**

**DWS High Yield Tax Free Fund**

**DWS Inflation Protected Plus Fund**

**DWS Intermediate Tax/AMT Free Fund**

**DWS International Fund**

**DWS International Select Equity Fund**

**DWS International Value Opportunities                            Fund**

**DWS Japan Equity Fund**

**DWS Large Cap Value Fund**

**DWS Large Company Growth Fund**

**DWS Latin America Equity Fund**

**DWS Lifecycle Long Range Fund**

**DWS Managed Municipal Bond Fund**

**DWS Massachusetts Tax-Free Fund**

  | **DWS Micro Cap Fund**

**DWS Mid Cap Growth Fund**

**DWS Moderate Allocation Fund**

**DWS Money Market Prime Series**

**DWS Money Market Series**

**DWS New York Tax-Free Income Fund**

**DWS RREEF Global Real Estate Securities                            Fund**

**DWS RREEF Real Estate Securities Fund**

**DWS S&P 500 Index Fund**

**DWS Short Duration Fund**

**DWS Short Duration Plus Fund**

**DWS Short-Term Municipal Bond Fund**

**DWS Small Cap Core Fund**

**DWS Small Cap Growth Fund**

**DWS Small Cap Value Fund**

**DWS Strategic Income Fund**

**DWS Technology Fund**

**DWS U.S. Bond Index Fund**

**DWS U.S. Government Securities Fund**

**DWS Value Builder Fund**

**NY Tax Free Money Fund**

**Tax Free Money Fund Investment**

**Tax-Exempt California Money Market                            Fund**

**Treasury Money Fund**

**Treasury Money Fund Investment** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*The            following information replaces similar disclosure under “Revenue Sharing”            in the “Purchase and Redemption of Shares” section of each            Fund’s/Portfolio’s Statements of Additional Information:*

 

**Revenue Sharing**

In            light of recent regulatory developments, the Advisor, the Distributor and their            affiliates have undertaken to furnish certain additional information below regarding            the level of payments made by them to selected affiliated and unaffiliated brokers,            dealers, participating insurance companies or other financial intermediaries            (“financial advisors”) in connection with the sale and/or distribution of            Fund shares or the retention and/or servicing of investors and Fund shares            (“revenue sharing”).

The            Advisor, the Distributor and/or their affiliates may pay additional compensation, out            of their own assets and not as an additional charge to the Fund, to financial advisors            in connection with the sale and/or distribution of Fund shares or the retention and/or            servicing of Fund investors and Fund shares. Such revenue sharing payments are in            addition to any distribution or service fees payable under any Rule 12b-1 or service            plan of any fund, any record keeping/sub-transfer agency/networking fees payable by the            Fund (generally through the Distributor or an affiliate) and/or the Distributor to            certain financial advisors for performing such services and any sales charges,            commissions, non-cash compensation arrangements expressly permitted under applicable            rules of the NASD or other concessions described in the fee table or elsewhere in the            Prospectuses or the SAI as payable to all financial advisors. For example, the Advisor,            the Distributor and/or their affiliates may compensate financial advisors for providing            the Fund with “shelf space” or access to a third party platform or fund            offering list, or other marketing programs including, without limitation, inclusion of            the Fund on preferred or recommended sales lists, mutual fund “supermarket”            platforms and other formal sales programs; granting the Distributor access to the            financial advisor’s

 

----

sales force; granting the Distributor access to the financial            advisor’s conferences and meetings; assistance in training and educating the            financial advisor’s personnel; and, obtaining other forms of marketing support.            The level of revenue sharing payments made to financial advisors may be a fixed fee or            based upon one or more of the following factors: gross sales, current assets and/or            number of accounts of the Fund attributable to the financial advisor, the particular            fund or fund type or other measures as agreed to by the Advisor, the Distributor and/or            their affiliates and the financial advisors or any combination thereof. The amount of            these payments is determined at the discretion of the Advisor, the Distributor and/or            their affiliates from time to time, may be substantial, and may be different for            different financial advisors based on, for example, the nature of the services provided            by the financial advisor.

The            Advisor, the Distributor and/or their affiliates currently make revenue sharing            payments from their own assets in connection with the sale and/or distribution of DWS            Fund shares, or the retention and/or servicing of investors, to financial advisors in            amounts that generally range from .01% up to .50% of assets of the Fund serviced and            maintained by the financial advisor, .10% to .25% of sales of the Fund attributable to            the financial advisor, a flat fee of $12,500 up to $500,000, or any combination            thereof. These amounts are subject to change at the discretion of the Advisor, the            Distributor and/or their affiliates. Receipt of, or the prospect of receiving, this            additional compensation, may influence your financial advisor’s recommendation of            this Fund or of any particular share class of the Fund. You should review your            financial advisor’s compensation disclosure and/or talk to your financial advisor            to obtain more information on how this compensation may have influenced your financial            advisor’s recommendation of this Fund.

The            Advisor, the Distributor and/or their affiliates may also make such revenue sharing            payments to financial advisors under the terms discussed above in connection with the            distribution of both DWS funds and non-DWS funds by financial advisors to retirement            plans that obtain record keeping services from ADP, Inc. on the DWS Scudder branded            retirement plan platform (the “Platform") with the level of revenue sharing            payments being based upon sales of both the DWS funds and the non-DWS funds by the            financial advisor on the Platform or current assets of both the DWS funds and the            non-DWS funds serviced and maintained by the financial advisor on the            Platform.

As            of the date hereof, the Fund has been advised that the Advisor, the Distributor and            their affiliates expect that the following firms will receive revenue sharing payments            at different points during the coming year as described above:

**Channel: Broker-Dealers and Financial Advisors**

A G            Edwards & Sons Inc.

AIG            Advisors Group

Ameriprise

Cadaret, Grant & Co. Inc.

Capital            Analyst, Incorporated

Citigroup Global Markets, Inc. (dba Smith Barney)

Commonwealth Equity Services, LLP (dba Commonwealth Financial            Network)

First            Clearing/Wachovia Securities

HD Vest            Investment Securities, Inc.

ING            Group

LaSalle            Financial Services, Inc. (dba ABN Amro)

Linsco/Private Ledger Corp.

Marsh            Insurance and Investment Company

Merrill            Lynch, Pierce, Fenner & Smith Inc.

Morgan            Stanley

Oppenheimer & Co., Inc.

Pacific            Select Distributors Group

Raymond            James & Associates

Raymond            James Financial Services

RBC            Dain Rauscher, Inc

Securities America, Inc.

UBS            Financial Services

Wells            Fargo Investments, LLC

 

----

 

**Channel: Cash Product Platform**

ADP            Clearing & Outsourcing

Allegheny Investments LTD

Bank of            New York (Hare & Co.)

Bear,            Stearns Securities Corp.

Brown            Brothers Harriman

Brown            Investment Advisory & Trust Company

Cadaret            Grant & Co.

Chicago            Mercantile Exchange

Citibank NA

D.A.            Davidson & Company

Deutsche Bank Securities Inc.

Deutsche Bank Trust Company Americas

Emmett            A. Larkin Company

Fiduciary Trust Co. – International

H.C.            Denison Co.

Huntleigh Securities

Investors Bank & Trust

JPMorgan Chase

Lincoln            Investment Planning

Linsco            Private Ledger Financial Services

Mellon            Financial Markets LLC

Penson            Financial Services

Pershing Choice Platform

ProFunds Distributors, Inc.

Romano            Brothers and Company

SAMCO            Capital Markets (Fund Services, Inc.)

Smith            Moore & Company

State            Street Bank & Trust Co.

Sungard            Institutional Brokerage Inc.

US            Bancorp

UBS            Financial Services Inc.

William            Blair & Company

**Channel: Third Party Insurance Platforms**

Acacia            National Life Insurance

Allmerica Financial Life Insurance Company

Allstate Life Insurance Company of New York

Ameritas Life Insurance Group

American General Life Insurance Company

Annuity            Investors Life Insurance Company

Columbus Life Insurance Company

Commonwealth Annuity and Life Insurance Company

Companion Life Insurance Company

Connecticut General Life Insurance Company

Farmers            New World Life Insurance Company

Fidelity Security Life Insurance Company

First            Allmerica Financial Life Insurance Company

Genworth Life Insurance Company of New York

Genworth Life and Annuity Insurance Company

Great            West Life and Annuity Insurance Company

Hartford Life Insurance Company

ICMG            Registered Variable Life

Integrity Life Insurance Company

John            Hancock Life Insurance companies

 

----

Kemper            Investors Life Insurance Company

Lincoln            Benefit Life Insurance Company

Lincoln            Life & Annuity Company of New York

Lincoln            National Life Insurance Company

Massachusetts Mutual Life Insurance Group

MetLife            Group

Minnesota Life Insurance Company

Mutual            of America Life Insurance Company

National Life Insurance Company

National Integrity Life Insurance Company

Nationwide Group

New            York Life Insurance and Annuity Corporation

Phoenix            Life Insurance Company

Protective Life Insurance

Provident Mutual Life Insurance

Prudential Insurance Company of America

Sun            Life GroupSymetra Life Insurance Company

Transamerica Life Insurance Company

Union            Central Life Insurance Company

United            of Omaha Life Insurance Company

United            Investors Life Insurance Company

Western            Southern Life Assurance Company

Any            additions, modifications or deletions to the financial advisors identified above that            have occurred since the date hereof are not reflected.

The            Advisor, the Distributor or their affiliates may enter into additional revenue sharing            arrangements or change or discontinue existing arrangements with financial advisors at            any time without notice.

The            prospect of receiving, or the receipt of additional compensation or promotional            incentives described above by financial advisors may provide such financial advisors            and/or their salespersons with an incentive to favor sales of shares of the DWS Funds            or a particular DWS Fund over sales of shares of mutual funds (or non-mutual fund            investments) with respect to which the financial advisor does not receive additional            compensation or promotional incentives, or receives lower levels of additional            compensation or promotional incentives. Similarly, financial advisors may receive            different compensation or incentives that may influence their recommendation of any            particular share class of the Fund or of other funds. These payment arrangements,            however, will not change the price that an investor pays for Fund shares or the amount            that the Fund receives to invest on behalf of an investor and will not increase Fund            expenses. You may wish to take such payment arrangements into account when considering            and evaluating any recommendations relating to Fund shares and you should discuss this            matter with your financial advisor and review your financial advisor’s            disclosures.

 

 

*Please Retain This Supplement for Future Reference*

 

August            8, 2007

DMF-3911

 

 

 

**STATEMENT OF ADDITIONAL INFORMATION**

**August 1, 2007, as revised December 31, 2007**

 

**DWS ADVISOR FUNDS**

 

**DWS Lifecycle Long Range Fund**

**Institutional Class**

 

DWS            Advisor Funds (the “Trust”) is an open-end management investment company            that offers investors a selection of investment portfolios, each having separate and            distinct investment objectives and policies. This Statement of Additional Information            (“SAI”) provides supplementary information pertaining to the DWS Lifecycle            Long Range Fund (the “Fund”) Institutional Class.

The            Fund commenced operations as a series of the Trust on July 10, 2006 (the “Fund            Reorganization Date”). Prior to the Fund Reorganization Date, the Fund was a            series of DWS Advisor Funds III — an open-end, management investment company            known as DWS Lifecycle Long Range Fund (the “Predecessor Fund”). Deutsche            Investment Management Americas Inc. (“DIMA” or the “Advisor”)            serves as investment advisor to the Fund.

The            Fund’s Prospectuses, which are dated August 1, 2007, provide the basic            information investors should know before investing. This Statement of Additional            Information (“SAI”), which is not a prospectus, is intended to provide            additional information regarding the activities and operations of the Fund and should            be read in conjunction with the Prospectuses. You may request a copy of a Prospectus or            this SAI, free of charge, by calling the Trust at the telephone number listed below or            by contacting the Fund’s Service Center at (800) 621-1048 or any service agent            (“financial advisor”) (which is any broker, financial advisor, bank, dealer            or other institution or financial intermediary that has a sub-shareholder servicing            agreement with the Fund). This SAI is not an offer of the Fund for which an investor            has not received a Prospectus. Capitalized terms not otherwise defined in this SAI have            the meanings accorded to them in the Fund’s Prospectuses. The audited financial            statements for the Institutional Class of the Fund, together with accompanying Notes,            for the fiscal year ended March 31, 2007, are incorporated herein by reference to the            Annual Report to shareholders for the Fund dated March 31, 2007. A copy of the            Fund’s Annual Report may be obtained without charge by calling the Transfer Agent            at (800) 730-1313 for the Institutional Class.

 

----

 

**TABLE OF CONTENTS**

**Page**

| INVESTMENT                            RESTRICTIONS | 1 |
|----------------------------------------------------|---|

| INVESTMENT                            POLICIES AND TECHNIQUES | 2 |
|---------------------------------------------------------------|---|

|   | Portfolio                            Holdings | 44 |
|--------|-----------------------------------------------|----|

| MANAGEMENT OF                            THE FUND | 45 |
|---------------------------------------------------|----|

|   | Investment                            Advisor | 45 |
|--------|-----------------------------------------------|----|

|   | Subadvisors | 47 |
|--------|-------------|----|

|   | Fund Ownership                            of Portfolio Managers — Advisor | 48 |
|--------|---------------------------------------------------------------------------------|----|

| FUND SERVICE                            PROVIDERS | 54 |
|---------------------------------------------------|----|

|   | Administrator | 54 |
|--------|---------------|----|

|   | Custodian | 55 |
|--------|-----------|----|

|   | Transfer                            Agent | 55 |
|--------|-------------------------------------------|----|

|   | Distributor | 56 |
|--------|-------------|----|

|   | Counsel | 56 |
|--------|---------|----|

|   | Independent                            Registered Public Accounting Firm | 56 |
|--------|--------------------------------------------------------------------------|----|

| PORTFOLIO                            TRANSACTIONS | 56 |
|---------------------------------------------------|----|

| PURCHASE AND                            REDEMPTION OF SHARES | 59 |
|--------------------------------------------------------------|----|

| DIVIDENDS | 68 |
|-----------|----|

| TRUSTEES AND                            OFFICERS | 69 |
|--------------------------------------------------|----|

| PROXY VOTING                            GUIDELINES | 78 |
|----------------------------------------------------|----|

| ORGANIZATION                            OF THE TRUST | 79 |
|------------------------------------------------------|----|

| TAXES | 80 |
|-------|----|

| NET ASSET                            VALUE | 86 |
|--------------------------------------------|----|

| FINANCIAL                            STATEMENTS | 88 |
|-------------------------------------------------|----|

| ADDITIONAL                            INFORMATION | 88 |
|---------------------------------------------------|----|

| APPENDIX | 90 |
|----------|----|

 

----

 

----

 

**INVESTMENT            RESTRICTIONS**

The            following investment restrictions are “fundamental policies” of the Fund            and may not be changed without the approval of a “majority of the outstanding            voting securities” of the Fund. “Majority of the outstanding voting            securities” under the 1940 Act, and as used in this SAI and the Prospectus,            means, the lesser of (i) 67% or more of the outstanding voting securities of the Fund            present at a meeting, if the holders of more than 50% of the outstanding voting            securities of the Fund are present or represented by proxy or (ii) more than 50% of the            outstanding voting securities of the Fund. Whenever the Trust is requested to vote on a            fundamental policy of the Fund, the Trust will hold a meeting of the Fund’s            shareholders and will cast its vote as instructed by the Fund’s            shareholders.

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

| 1. | borrow money or mortgage or hypothecate assets of the                            Fund, except that in an amount not to exceed 1/3 of the current value                            of the Fund’s net assets, it may borrow money as a temporary                            measure for extraordinary or emergency purposes and enter into reverse                            repurchase agreements or dollar roll transactions, and except that it                            may pledge, mortgage or hypothecate not more than 1/3 of such assets to                            secure such borrowings (it is intended that money would be borrowed                            only from banks and only either to accommodate requests for the                            withdrawal of beneficial interests (redemption of shares) while                            effecting an orderly liquidation of portfolio securities or to maintain                            liquidity in the event of an unanticipated failure to complete a                            portfolio security transaction or other similar situations) or reverse                            repurchase agreements, provided that collateral arrangements with                            respect to options and futures, including deposits of initial deposit                            and variation margin, are not considered a pledge of assets for                            purposes of this restriction and except that assets may be pledged to                            secure letters of credit solely for the purpose of participating in a                            captive insurance company sponsored by the Investment Company                            Institute; for additional related restrictions, see clause (1) under                            the caption “Additional Restrictions”; |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | underwrite securities issued by other persons except                            insofar as the Trust or the Fund may technically be deemed an                            underwriter under the 1933 Act in selling a portfolio                            security; |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | make loans to other persons except: (a) through the                            lending of the Fund’s portfolio securities and provided that any                            such loans not exceed 30% of the Fund’s total assets (taken at                            market value); (b) through the use of repurchase agreements or the                            purchase of short-term obligations; or (c) by purchasing a portion of                            an issue of debt securities of types distributed publicly or                            privately; |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | purchase or sell real estate (including limited                            partnership interests but excluding securities secured by real estate                            or interests therein), interests in oil, gas or mineral leases,                            commodities or commodity contracts (except futures and option                            contracts) in the ordinary course of business (except that the Trust)                            may hold and sell, for the Fund’s portfolio, real estate acquired                            as a result of the Fund’s ownership of securities); |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5. | concentrate its investments in any particular industry                            (excluding US government securities), but if it is deemed appropriate                            for the achievement of the Fund’s investment objective(s), up to                            25% of its total assets may be invested in any one industry; |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6. | issue any senior security (as that term is defined in                            the 1940 Act) if such issuance is specifically prohibited by the                            1940 Act or the rules and regulations promulgated thereunder,                            provided that collateral arrangements with respect to options and                            futures, including deposits of initial deposit and variation margin,                            are not considered to be the issuance of a senior security for purposes                            of this restriction; and |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 7. | with respect to 75% of the Fund’s total assets,                            invest more than 5% of its total assets in the securities of any one                            issuer (excluding cash and cash-equivalents, US government securities                            and the securities of other investment companies) or own more than 10%                            of the voting securities of any issuer. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Additional            Restrictions*****.***In order to            comply with certain statutes and policies the Fund (or the Trust, on behalf of the            Fund) will not as a matter of operating policy:

 

----

 

| 1. | borrow money (including through reverse repurchase                            agreements) for any purpose in excess of 5% of the Fund’s net                            assets (taken at market), except that the Fund may borrow for temporary                            or emergency purposes up to 1/3 of its net assets; |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | pledge, mortgage or hypothecate for any purpose in                            excess of 10% of the Fund’s total assets (taken at market value),                            provided that collateral arrangements with respect to options and                            futures, including deposits of initial deposit and variation margin,                            and reverse repurchase agreements are not considered a pledge of assets                            for purposes of this restriction; |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | purchase any security or evidence of interest therein on                            margin, except that such short-term credit as may be necessary for the                            clearance of purchases and sales of securities may be obtained and                            except that deposits of initial margin and variation margin may be made                            in connection with the purchase, ownership, holding or sale of                            futures; |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | invest for the purpose of exercising control or                            management; |
|----|----------------------------------------------------------------------------------------|

| 5. | purchase securities issued by any investment company                            except by purchase in the open market where no commission or profit to                            a sponsor or dealer results from such purchase other than the customary                            broker’s commission, or except when such purchase, though not                            made in the open market, is part of a plan of merger or consolidation;                            provided, however, that securities of any investment company will not                            be purchased for the Fund if such purchase at the time thereof would                            cause: (a) more than 10% of the Fund’s total assets (taken                            at the greater of cost or market value) to be invested in the                            securities of such issuers; (b) more than 5% of the Fund’s                            total assets (taken at the greater of cost or market value) to be                            invested in any one investment company; or (c) more than 3% of the                            outstanding voting securities of any such issuer to be held by the Fund                            unless permitted to exceed these limitations by an exemptive order of                            the SEC; provided further that, except in the case of a merger or                            consolidation, the Fund shall not purchase any securities of any                            open-end investment company unless the Fund (1) waives the investment                            advisory fee with respect to assets invested in other open-end                            investment companies and (2) incurs no sales charge in connection with                            the investment; |
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| 6. | invest more than 15% of the Fund’s net assets                            (taken at the greater of cost or market value) in securities that are                            illiquid or not readily marketable excluding (a) Rule 144A securities                            that have been determined to be liquid by the Board of Trustees; and                            (b) commercial paper that is sold under section 4(2) of the 1933 Act                            which: (i) is not traded flat or in default as to interest or                            principal; and (ii) is rated in one of the two highest categories by at                            least two NRSROs and the Fund’s Board of Trustees have determined                            the commercial paper to be liquid; or (iii) is rated in one of the two                            highest categories by one NRSRO and the Fund’s Board of Trustees                            has determined that the commercial paper is of equivalent quality and                            is liquid. |
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There will be no violation of any investment restriction if that            restriction is complied with at the time the relevant action is taken notwithstanding a            later change in market value of an investment, in net or total assets, in the            securities rating of the investment, or any other later change.

The            Fund’s investment objective is not a fundamental policy and may be changed upon            notice to, but without the approval of, the Fund’s shareholders. If there is a            change in the Fund’s investment objective, the Fund’s shareholders should            consider whether the Fund remains an appropriate investment in light of their            then-current needs. The investment objective of the Fund is also not a fundamental            policy. Shareholders of the Fund will receive 30 days prior written notice with respect            to any change in the investment objective of the Fund.

**INVESTMENT POLICIES AND TECHNIQUES**

 

**Investment Techniques**

Descriptions in this SAI of a particular investment practice or            technique in which the Fund may engage are meant to describe the spectrum of            investments that the Advisor, in its discretion, might, but is not required to, use            in

 

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managing the Fund’s portfolio assets. The Advisor may, in its            discretion, at any time, employ such practice, technique or instrument for one or more            funds but not for all funds advised by it. Furthermore, it is possible that certain            types of financial instruments or investment techniques described herein may not be            available, permissible, economically feasible or effective for their intended purposes            in all markets. Certain practices, techniques or instruments may not be principal            activities of the Fund, but, to the extent employed, could, from time to time, have a            material impact on the Fund’s performance.

 

Unless otherwise indicated, the Fund is permitted, but not obligated to,            engage in the following investment strategies, subject to any percentage limitations            set forth below. Any percentage limitation on the Fund’s ability to invest in            debt securities will not be applicable during periods when the Fund pursues a temporary            defensive strategy as discussed below.

The            Fund is not obligated to pursue any of the following strategies and does not represent            that these techniques are available now or will be available at any time in the            future.

***Equity Securities***

**General.**The Fund may invest in equity            securities listed on any domestic or non-US securities exchange or traded in the            over-the-counter (“OTC”) market as well as certain restricted or unlisted            securities. As used herein, “equity securities” include common stock,            preferred stock, trust or limited partnership interests, rights and warrants (to            subscribe to or purchase such securities) and convertible securities (consisting of            debt securities or preferred stock that may be converted into common stock or that            carry the right to purchase common stock).

**Common Stocks.**Common stocks, the most            familiar type of equity securities, represent an equity            (i.e., ownership) interest in a            corporation. They may or may not pay dividends or carry voting rights. Common stock            occupies the most junior position in a company’s capital structure. Although            equity securities have a history of long-term growth in value, their prices fluctuate            based on changes in a company’s financial condition, as well as, changes in            overall market and economic conditions. This affects the value of the shares of the            Fund, and thus the value of your investment. Smaller companies are especially sensitive            to these factors.

**Warrants.**The Fund may invest in warrants.            Warrants are securities that give the holder the right but not the obligation to buy a            specified number of shares of common stock at a specified price, which is often higher            than the market price at the time of issuance, for a specified period (or in            perpetuity). Warrants may be issued in units with other securities or separately, and            may be freely transferable and traded on exchanges. Investing in warrants can provide a            greater potential for profit or loss than an equivalent investment in the underlying            security, and, thus is a speculative investment. At the time of issue, the cost of a            warrant is substantially less than the cost of the underlying security itself, and            price movements in the underlying security are generally magnified in the price            movements of the warrant. This leveraging effect enables the investor to gain exposure            to the underlying security with a relatively low capital investment. This leveraging            increases an investor’s risk, however, in the event of a decline in the value of            the underlying security and can result in a complete loss of the amount invested in the            warrant.

While the market value of a warrant tends to be more volatile than that            of the securities underlying the warrant, changes in the market value of a warrant may            not necessarily correlate with that of the underlying security. A warrant ceases to            have value if it is not exercised prior to the expiration date, if any, to which the            warrant is subject. The purchase of warrants involves a risk that the Fund could lose            the purchase value of a warrant if the right to subscribe to additional shares is not            exercised prior to the warrant’s expiration. Also, the purchase of warrants            involves the risk that the effective price paid for the warrant added to the            subscription price of the related security may exceed the value of the subscribed            security’s market price such as when there is no movement in the level of the            underlying security. The value of a warrant may decline because of a decline in the            value of the underlying security, the passage of time, changes in interest rates or in            the dividend or other policies of the company whose equity underlies the warrant or a            change in the perception as to the future price of the underlying security, or any            combination thereof. Also, warrants do not entitle the holder to dividends or voting            rights with respect to the underlying securities and do not represent any rights in the            assets of the issuing company.

**Preferred Stock.**The Fund may invest in            preferred stock. Preferred stock has a preference            (i.e., ranks higher) in liquidation            (and generally dividends) over common stock but is subordinated            (i.e., ranks lower) in liquidation            to

 

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fixed income securities. Dividends on preferred stock may be cumulative,            and in such cases, all cumulative dividends usually must be paid prior to dividend            payments to common stockholders. Because of this preference, preferred stocks generally            entail less risk than common stocks. As a general rule the market value of preferred            stocks with fixed dividend rates and no conversion rights moves inversely with interest            rates and perceived credit risk, with the price determined by the dividend rate. Some            preferred stocks are convertible into other securities            (e.g., common stock) at a fixed            price and ratio or upon the occurrence of certain events. The market price of            convertible preferred stocks generally reflects an element of conversion value. Because            many preferred stocks lack a fixed maturity date, these securities generally fluctuate            substantially in value when interest rates change; such fluctuations often exceed those            of long-term bonds of the same issuer. Some preferred stocks pay an adjustable dividend            that may be based on an index, formula, auction procedure or other dividend rate reset            mechanism. In the absence of credit deterioration, adjustable rate preferred stocks            tend to have more stable market values than fixed rate preferred stocks.

All            preferred stocks are also subject to the same types of credit risks as corporate bonds.            In addition, because preferred stock is subordinate to debt securities and other            obligations of an issuer, deterioration in the credit rating of the issuer will cause            greater changes in the value of a preferred stock than in a more senior debt security            with similar yield characteristics. Preferred stocks may be rated by Standard &            Poor’s Division of the McGraw-Hill Companies, Inc. (“S&P”) and            Moody’s Investors Service, Inc. (“Moody’s”) although there is            no minimum rating which a preferred stock must have to be an eligible investment for            the Fund.

**Convertible Securities.**The Fund may invest            in convertible securities. A convertible security is a bond or preferred stock which            may be converted at a stated price within a specific period of time into a specified            number of shares of common stock of the same or different issuer. Convertible            securities are senior to common stock in a corporation’s capital structure, but            are generally subordinate to non-convertible debt securities. While providing a fixed            income stream, generally higher in yield than in the income derived from a common stock            but lower than that afforded by a non-convertible debt security, a convertible security            also affords an investor the opportunity, through its conversion feature, to            participate in the capital appreciation of common stock into which it is            convertible.

The            terms of any convertible security determine its ranking in a company’s capital            structure. In the case of subordinated convertible debentures, the holders’            claims on assets and earnings are subordinated to the claims of other creditors, and            are senior to the claims of preferred and common shareholders. In the case of            convertible preferred stock, the holders’ claims on assets and earnings are            subordinated to the claims of all creditors and are senior to the claims of common            shareholders.

In            general, the market value of a convertible security is the greater of its investment            value (its value as a fixed income security) or its conversion value (the value of the            underlying shares of common stock if the security is converted). Because a convertible            security is a fixed income security, its market value generally increases when interest            rates decline and generally decreases when interest rates rise; however, the price of a            convertible security also generally increases as the market value of the underlying            stock increases, and generally decreases as the market value of the underlying stock            declines. Investments in convertible securities generally entail less risk than            investments in the common stock of the same issuer.

**Medium-Capitalization, Small-Capitalization and Micro-Capitalization            Stocks.**The Fund may invest in lesser known companies with            medium-, small- and micro-market capitalizations. Such companies frequently offer            greater growth potential than larger, more mature, better-known companies. Investments            in such companies involve considerations that are not applicable to investing in            securities of established, larger capitalization issuers including reduced and less            reliable information about the issuer, less stringent financial disclosure requirements            and higher brokerage commissions and fees and greater market risk in            general.

In            addition, investing in the securities of these companies, also involves the possibility            of greater portfolio price volatility. Among the reasons for the greater price            volatility of such companies are the less certain growth prospects of medium and            smaller firms, the greater illiquidity in the markets for the stocks of such companies            and the greater sensitivity of such companies to changing economic conditions in their            respective geographic region.

For            example, securities of these companies involve higher investment risk than that            normally associated with larger firms due to the greater business risks of small size            and limited product lines, markets, distribution channels and

 

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financial and managerial resources. Therefore such securities may be            subject to more abrupt or erratic market movements than securities of larger, more            established companies or the market averages in general.

In            addition, many medium-, small- and micro-market capitalization companies in which the            Fund may invest are not well-known to the investing public, do not have significant            institutional ownership and are followed by relatively few securities analysts. As a            result, it may be difficult to obtain reliable information and financial data on such            companies and the securities of smaller capitalization companies may not be readily            marketable, making it difficult to dispose of shares when desirable. Also, the            securities of smaller capitalization companies traded on the over-the-counter market            may have fewer market makers, wider spreads between their quoted bid and asked prices            and lower trading volumes, resulting in comparatively greater price volatility and less            liquidity than exists for securities of larger capitalization companies.

An            additional risk of investing in smaller emerging companies is that smaller issuers may            face increased difficulty in obtaining the capital necessary to continue operations and            thus may go into bankruptcy, which could result in a complete loss of an investment.            Furthermore, when the economy enters into recession there tends to be a “flight            to quality” which exacerbates the increased risk and greater price volatility            normally associated with smaller capitalization companies.

***Fixed Income Securities and Money Market            Instruments***

**General.**The Fund may invest in a broad            range of domestic and foreign fixed income (debt) securities. Fixed income securities,            including (but not limited to) bonds, are used by issuers to borrow money from            investors. The issuer pays the investor a fixed or variable rate of interest, and must            repay the amount borrowed at maturity. Some debt securities, such as zero coupon bonds,            do not pay current interest, but are purchased at a discount from their face            values.

The            value of fixed income securities held by the Fund’s portfolio generally varies            inversely with changes in interest rates. Prices of fixed income securities with longer            effective maturities are more sensitive to interest rate changes than those with            shorter effective maturities.

In            periods of declining interest rates, the yield (the income generated over a stated            period of time) of the Fund that invests in fixed income securities may tend to be            higher than prevailing market rates, and in periods of rising interest rates, the yield            of the Fund may tend to be lower. Also, when interest rates are falling, the inflow of            net new money to the Fund from the continuous sale of its shares will likely be            invested in portfolio instruments producing lower yields than the balance of the            Fund’s portfolio, thereby reducing the yield of the Fund. In periods of rising            interest rates, the opposite can be true. The net asset value of the Fund investing in            fixed income securities can generally be expected to change as general levels of            interest rates fluctuate.

**Fixed Income Security Risk.**Fixed income            securities generally expose the Fund to four types of risk: (1) interest rate risk (the            potential for fluctuations in bond prices due to changing interest rates); (2) income            risk (the potential for a decline in the Fund’s income due to falling market            interest rates); (3) credit risk (the possibility that a bond issuer will fail to make            timely payments of either interest or principal to the Fund); (4) prepayment risk or            call risk (the likelihood that, during period of falling interest rates, securities            with high stated interest rates will be prepaid, or “called” prior to            maturity, requiring the Fund to invest the proceeds at generally lower interest rates);            and (5) extension risk (the likelihood that as interest rates increase, slower than            expected principal payments may extend the average life of fixed income securities,            which will have the effect of locking in a below-market interest rate, increasing the            security’s duration and reducing the value of the security).

**Short-Term Instruments.**At the time of the            Fund’s investment in short-term instruments, the issuer (or the issuer’s            parent) must have outstanding debt rated within the top two rating categories by a            nationally recognized statistical rating organization (“NRSRO”) or, if not            so rated, must be believed by the Advisor to be of comparable quality.

When the Fund experiences large cash inflows, for example, through the            sale of securities or of its shares and attractive investments are unavailable in            sufficient quantities, the Fund may hold short-term investments (or shares

 

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of            money market mutual funds) for a limited time pending availability of such investments.            In addition, when in the Advisor’s opinion, it is advisable to adopt a temporary            defensive position because of unusual and adverse market or other conditions, up to            100% of the Fund’s assets may be invested in such short-term            instruments.

Short-term instruments consist of foreign and domestic: (1) short-term            obligations of sovereign governments, their agencies, instrumentalities, authorities or            political subdivisions; (2) other investment grade short-term debt securities; (3)            investment grade commercial paper; (4) bank obligations, including negotiable            certificates of deposit, time deposits and banker’s acceptances; and (5)            repurchase agreements. At the time the Fund invests in commercial paper, bank            obligations or repurchase agreements, the issuer or the issuer’s parent must have            outstanding debt, commercial paper or bank obligations rated investment grade; or, if            no such ratings are available, the instrument must be deemed to be of comparable            quality in the opinion of the Advisor. These instruments may be denominated in US            dollars or in foreign currencies.

**Obligations of Banks and Other Financial Institutions.**The Fund may invest in US dollar-denominated fixed rate or variable rate            obligations of US or foreign financial institutions, including banks. Obligations of            domestic and foreign financial institutions in which the Fund may invest include (but            are not limited to) certificates of deposit, bankers’ acceptances, bank time            deposits, commercial paper, and other instruments issued or supported by the credit of            US or foreign financial institutions, including banks.

For            purposes of the Fund’s investment policies with respect to bank obligations, the            assets of a bank will be deemed to include the assets of its domestic and foreign            branches. Obligations of foreign branches of US banks and foreign banks may be general            obligations of the parent bank in addition to the issuing bank or may be limited by the            terms of a specific obligation and by government regulation. If the Advisor deems the            instruments to present minimal credit risk, the Fund may invest in obligations of            foreign banks or foreign branches of US banks, which include banks located in the            United Kingdom, Grand Cayman Island, Nassau, Japan and Canada.

Investments in these obligations may entail risks that are different            from those of investments in obligations of US domestic banks because of differences in            political, regulatory and economic systems and conditions. These risks include future            political and economic developments, currency blockage, the possible imposition of            withholding taxes on interest payments, possible seizure or nationalization of foreign            deposits, difficulty or inability of pursuing legal remedies and obtaining judgments in            foreign courts, possible establishment of exchange controls or the adoption of other            foreign governmental restrictions that might affect adversely the payment of principal            and interest on bank obligations. Foreign branches of US banks and foreign banks may            also be subject to less stringent reserve requirements and to different accounting,            auditing, reporting and record keeping standards than those applicable to domestic            branches of US banks.

**Certificates of Deposit and Bankers’ Acceptances.**The Fund may invest in certificates of deposit and bankers’            acceptances. Certificates of deposit are receipts issued by a depository institution in            exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus            interest to the bearer of the receipt on the date specified on the certificate. The            certificate usually can be traded in the secondary market prior to maturity.

Bankers’ acceptances typically arise from short-term credit            arrangements designed to enable businesses to obtain funds to finance commercial            transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter            or an importer to obtain a stated amount of funds to pay for specific merchandise. The            draft is then “accepted” by a bank that, in effect, unconditionally            guarantees to pay the face value of the instrument on its maturity date. The acceptance            may then be held by the accepting bank as an earning asset or it may be sold in the            secondary market at the going rate of discount for a specific maturity. Although            maturities for acceptances can be as long as 270 days, most acceptances have maturities            of six months or less.

**Commercial Paper.**The Fund may invest in            commercial paper. The Fund may invest in fixed rate or variable rate commercial paper,            issued by US or foreign entities. Commercial paper consists of short-term (usually up            to one year) unsecured promissory notes issued by US or foreign corporations in order            to finance their current operations. Any commercial paper issued by a foreign entity            corporation and purchased by the Fund must be US dollar-denominated and must not be            subject to foreign withholding tax at the time of purchase. At the time of the            Fund’s investment in commercial paper, the issuer (or the issuer’s parent)            must have outstanding debt rated within the top two rating categories by a NRSRO or, if            not so rated, must be believed by the Advisor to be of comparable quality.

 

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Commercial paper when purchased by the Fund must be rated in the highest            short-term rating category by any two NRSROs (or one NRSRO if that NRSRO is the only            such NRSRO which rates such security) or, if not so rated, must be believed by the            Advisor to be of comparable quality. Investing in foreign commercial paper generally            involves risks similar to those described above relating to obligations of foreign            banks or foreign branches and subsidiaries of US and foreign banks.

For            a description of commercial paper ratings, see the Appendix to this SAI.

**Variable Rate Master Demand Notes.**The Fund            may also invest in variable rate master demand notes. A variable rate master demand            note (which is a type of commercial paper) represents a direct borrowing arrangement            involving periodically fluctuating rates of interest under a letter agreement between a            commercial paper issuer and an institutional lender pursuant to which the lender may            determine to invest varying amounts. Because variable rate master demand notes are            direct lending arrangements between the Fund and the issuer, they are not ordinarily            traded. Although no active secondary market may exist for these notes, the Fund will            purchase only those notes under which it may demand and receive payment of principal            and accrued interest daily or may resell the note to a third party. While the notes are            not typically rated by credit rating agencies, issuers of variable rate master demand            notes must satisfy the Advisor, acting under the supervision of the Board of Trustees,            that the same criteria as set forth above for issuers of commercial paper are met. In            the event an issuer of a variable rate master demand note defaulted on its payment            obligation, the Fund might be unable to dispose of the note because of the absence of a            secondary market and could, for this or other reasons, suffer a loss to the extent of            the default. The face maturities of variable rate master demand notes subject to a            demand feature may exceed 397 days in certain circumstances.

**US Government Securities.**The Fund may            invest in obligations issued or guaranteed by the US government and include:            (1) direct obligations of the US Treasury and (2) obligations issued by US            government agencies and instrumentalities. Included among direct obligations of the US            are Treasury Bills, Treasury Notes and Treasury Bonds, which differ in terms of their            interest rates, maturities and dates of issuance. Treasury Bills have maturities of            less than one year, Treasury Notes have maturities of one to 10 years and Treasury            Bonds generally have maturities of greater than 10 years at the date of issuance.            Included among the obligations issued by agencies and instrumentalities of the US are:            instruments that are supported by the full faith and credit of the US (such as            certificates issued by the Government National Mortgage Association (“GNMA”            or “Ginnie Mae”)); instruments that are supported by the right of the            issuer to borrow from the US Treasury (such as securities of Federal Home Loan Banks);            and instruments that are supported by the credit of the instrumentality (such as            Federal National Mortgage Association (“FNMA” or “Fannie Mae”)            and Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie            Mac”)).

Other US government securities the Fund may invest in include (but are            not limited to) securities issued or guaranteed by the Federal Housing Administration,            Farmers Home Loan Administration, Export-Import Bank of the US, Small Business            Administration, General Services Administration, Central Bank for Cooperatives, Federal            Farm Credit Banks, Federal Intermediate Credit Banks, Federal Land Banks, Maritime            Administration, Tennessee Valley Authority, District of Columbia Armory Board and            Student Loan Marketing Association. Because the US government is not obligated by law            to provide support to an instrumentality it sponsors, the Fund will invest in            obligations issued by such an instrumentality only if the Advisor determines that the            credit risk with respect to the instrumentality does not make its securities unsuitable            for investment by the Fund.

The            Fund may also invest in separately traded principal and interest component of            securities guaranteed or issued by the US government or its agencies, instrumentalities            or sponsored enterprises if such components trade independently under the Separate            Trading of Registered Interest and Principal of Securities program            (“STRIPS”) or any similar program sponsored by the US government. STRIPS            are sold as zero coupon securities. See “Zero Coupon            Securities.”

**Custodial Receipts.**The Fund may invest in            custodial receipts which are interests in separately traded interest and principal            component parts of US government securities that are issued by banks or brokerage firms            and are created by depositing US government securities into a special account at a            custodian bank. The custodian holds the interest and principal payments for the benefit            of the registered owners of the certificates or receipts. The custodian arranges for            the issuance of the certificates or receipts evidencing ownership and maintains the            register. Custodial receipts include Treasury Receipts (“TRs”), Treasury            Investment Growth Receipts (“TIGRs”), and Certificates of Accrual            on

 

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Treasury Securities (“CATS”). TIGRs and CATS are interests            in private proprietary accounts while TRs and STRIPS are interests in accounts            sponsored by the US Treasury. Receipts are sold as zero coupon securities. See            “Zero Coupon Securities and Deferred Interest Bonds and Deferred Interest            Bonds.”

The            Fund may acquire US government securities and their unmatured interest coupons that            have been separated (“stripped”) by their holder, typically a custodian            bank or investment brokerage firm. Having separated the interest coupons from the            underlying principal of the US government securities, the holder will resell the            stripped securities in custodial receipt programs with a number of different names,            including TIGRs, and CATS. The stripped coupons are sold separately from the underlying            principal, which is usually sold at a deep discount because the buyer receives only the            right to receive a future fixed payment on the security and does not receive any rights            to periodic interest (cash) payments. The underlying US Treasury bonds and notes            themselves are generally held in book-entry form at a Federal Reserve Bank. Counsel to            the underwriters of these certificates or other evidences of ownership of US Treasury            securities have stated that, in their opinion, purchasers of the stripped securities            most likely will be deemed the beneficial holders of the underlying US government            securities for federal tax and securities purposes. In the case of CATS and TIGRS, the            Internal Revenue Service (the “IRS”) has reached this conclusion for the            purpose of applying the tax diversification requirements applicable to regulated            investment companies such as the Fund. CATS and TIGRS are not considered US government            securities by the staff of the Securities and Exchange Commission (“SEC”).            Further, the IRS conclusion noted above is contained only in a general counsel            memorandum, which is an internal document of no precedential value or binding effect,            and a private letter ruling, which also may not be relied upon by the Fund. The Trust            is not aware of any binding legislative, judicial or administrative authority on this            issue.

**Zero Coupon Securities and Deferred Interest Bonds.**The Fund may invest in zero coupon securities and deferred interest            bonds. Zero coupon and deferred interest bonds are debt obligations which are issued at            a significant discount from face value. The original discount approximates the total            amount of interest the bonds will accrue and compound over the period until maturity or            the first interest accrual date at a rate of interest reflecting the market rate of the            security at the time of issuance. Zero coupon securities are redeemed at face value at            their maturity date without interim cash payments of interest or principal. The amount            of this discount is accrued over the life of the security, and the accrual constitutes            the income earned on the security for both accounting and tax purposes. Because of            these features, the market prices of zero coupon securities are generally more volatile            than the market prices of securities that have similar maturity but that pay interest            periodically.

While zero coupon bonds do not require the periodic payment of interest,            deferred interest bonds generally provide for a period of delay before the regular            payment of interest begins. Although this period of delay is different for each            deferred interest bond, a typical period is approximately one-third of the bond’s            term to maturity. Such investments benefit the issuer by mitigating its initial need            for cash to meet debt service, but some also provide a higher rate of return to attract            investors who are willing to defer receipt of such cash.

The            Fund will accrue income on such investments for tax and accounting purposes, as            required, which is distributable to shareholders and which, because no cash is            generally received at the time of accrual, may require the liquidation of other            portfolio securities to satisfy the Fund’s distribution obligations. See            “Taxes.”

**Variable Rate Securities.**The Fund may            invest in long-term maturity securities which are subject to frequently available put            option or tender option features under which the holder may put the security back to            the issuer or its agent at a predetermined price (generally par) after giving specified            notice. The interest rate on a variable rate security changes at intervals according to            an index or a formula or other standard measurement as stated in the bond contract. One            common method is to calculate the interest rate as a percentage of the rate paid on            selected issues of Treasury securities on specified dates. The put option or tender            option right is typically available to the investor on a weekly or monthly basis            although on some demand securities the investor has a daily right to exercise the put            option. Variable rate securities with the put option exercisable on dates on which the            variable rate changes are often called “variable rate demand notes.” The            absence of an active secondary market for certain variable and floating rate notes            could make it difficult to dispose of the instruments, and the Fund could suffer a loss            if the issuer defaults or during periods in which the Fund is not entitled to exercise            its demand rights. See “Illiquid Securities.”

**Inverse Floating Rate Securities.**The Fund            may invest in inverse floating rate securities (“inverse floaters”). The            interest rate on an inverse floater resets in the opposite direction from the market            rate of interest to which the inverse

 

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floater is indexed. An inverse floater may be considered to be leveraged            to the extent that its interest rate varies by a magnitude that exceeds the magnitude            of the change in the index rate of interest. The higher degree of leverage inherent in            inverse floaters is associated with greater volatility in their market values. See            “Illiquid Securities.”

**Yields and Ratings.**The yields on certain            obligations in which the Fund may invest (such as commercial paper and bank            obligations) are dependent on a variety of factors, including the ratings of the issue.            The ratings of S&P, Moody’s and other recognized rating organizations            represent their respective opinions as to the quality of the obligations they undertake            to rate. Ratings, however, are general and are not absolute standards of quality or            value. Consequently, obligations with the same rating, maturity and interest rate may            have different market prices.

**Lower-Rated Debt Securities (“Junk Bonds” or “High            Yield Debt Securities”).**No more than 5% of the            Fund’s net assets (at the time of investment) may be invested in lower rated            (BB/Ba or lower), high yield bonds. The Fund may retain any bond whose rating drops            below investment grade if it is in the best interest of the respective Fund’s            shareholders.

These securities, often referred to as Junk Bonds or High Yield Debt            Securities, are considered speculative and, while generally offering greater income            than investments in higher quality securities, involve greater risk of loss of            principal and income, including the possibility of default or bankruptcy of the issuers            of such securities, and have greater price volatility, especially during periods of            economic uncertainty or change. These lower quality bonds tend to be affected by            economic changes and short-term corporate and industry developments, as well as public            perception of those changes and developments, to a greater extent than higher quality            securities, which react primarily to fluctuations in the general level of interest            rates.

In            addition, the market for lower-rated debt securities may be thinner and less active            than that for higher rated debt securities, which can adversely affect the prices at            which the former are sold. If market quotations are not available, lower-rated debt            securities will be valued in accordance with procedures established by the Board of            Trustees, including the use of outside pricing services. Judgment plays a greater role            in valuing high yield corporate debt securities than is the case for securities for            which more external sources for quotations and last sale information are available.            Adverse publicity and changing investor perception may also affect the availability of            outside pricing services to value lower-rated debt securities and the Fund’s            ability to dispose of these securities. In addition, such securities generally present            a higher degree of credit risk. Issuers of lower-rated debt securities are often highly            leveraged and may not have more traditional methods of financing available to them so            that their ability to service their obligations during an economic downturn or during            sustained periods of rising interest rates may be impaired. The risk of loss due to            default by such issuers is significantly greater because below investment grade            securities generally are unsecured and frequently are subordinated to the prior payment            of senior indebtedness.

Since the risk of default is higher for lower-rated debt securities, the            Advisor’s research and credit analysis are an especially important part of            managing securities of this type held by the Fund. In considering investments for the            Fund, the Advisor will attempt to identify those issuers of high yielding debt            securities whose financial conditions are adequate to meet future obligations, have            improved or are expected to improve in the future. The Advisor’s analysis focuses            on relative values based on such factors as interest on dividend coverage, asset            coverage, earnings prospects and the experience and managerial strength of the            issuer.

While the market for high yield corporate debt securities has been in            existence for many years and has weathered previous economic downturns, past experience            may not provide an accurate indication of future performance of the high yield bond            market, especially during periods of economic recession.

The            Fund may choose, at its expense or in conjunction with others, to pursue litigation or            otherwise exercise its rights as a security holder to seek to protect the interest of            security holders if it determines this to be in the interest of the Fund.

**Rating Downgrades.**Subsequent to its            purchase by the Fund, a rated security may cease to be rated or its rating may be            reduced below the minimum rating required for purchase by the Fund. The Advisor will            consider such an event in determining whether the Fund should continue to hold the            security in accordance with the interests of the Fund and applicable regulations of the            SEC.

 

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**Registered Loans.**The Fund may invest in            loan obligations issued or guaranteed by sovereign governments or their agencies and            instrumentalities. The ownership of these loans is registered in the books of an agent            bank and/or the borrower, and transfers of ownership are effected by assignment            agreements. Documentation for these assignments includes a signed notice of assignment,            which is sent to the agent and/or borrower for registration shortly after the execution            of the assignment agreement. Prior to the notice of assignment being registered with            the agent and/or borrower, the borrower or its agent will make any payments of            principal and interest to the last registered owner.

Given the volume of secondary market trading in registered loans, the            agent and/or borrower’s books may be out of date, making it difficult for the            Fund to establish independently whether the seller of a registered loan is the owner of            the loan. For this reason, the Fund will require a contractual warranty from the seller            to this effect. In addition, to assure the Fund’s ability to receive principal            and interest owed to it but paid to a prior holder because of delays in registration,            the Fund will purchase registered loans only from parties that agree to pay the amount            of such principal and interest to the Fund upon demand after the borrower’s            payment of such principal and interest to any prior holder has been            established.

Generally, registered loans trade in the secondary market with interest            (i.e., the right to accrued but            unpaid interest is transferred to purchasers). Occasionally, however, the Fund may sell            a registered loan and retain the right to such interest (“sell a loan without            interest”). To assure the Fund’s ability to receive such interest, the Fund            will make such sales only to parties that agree to pay the amount of such interest to            the Fund upon demand after the borrower’s payment of such interest to any            subsequent holder of the loan has been established. In this rare situation, the            Fund’s ability to receive such interest (and, therefore, the value of            shareholders’ investments in the Fund attributable to such interest) will depend            on the creditworthiness of both the borrower and the party who purchased the loan from            the Fund.

To            further assure the Fund’s ability to receive interest and principal on registered            loans, the Fund will only purchase registered loans from, and sell loans without            interest to, parties determined to be creditworthy by the Advisor. For purposes of the            Fund’s issuer diversification and industry concentration policies, the Fund will            treat the underlying borrower of a registered loan as an issuer of that loan. Where the            Fund sells a loan without interest, it will treat both the borrower and the purchaser            of the loan as issuers for purposes of this policy.

**Put Bonds.**The Fund may invest in            “put” bonds, which are tax-exempt securities (including securities with            variable interest rates) that may be sold back to the issuer of the security at face            value at the option of the holder prior to their stated maturity. The Advisor intends            to purchase only those “put” bonds for which the put option is an integral            part of the security as originally issued. The option to “put” the bond            back to the issuer prior to the stated final maturity can cushion the price decline of            the bond in a rising interest rate environment. However, the premium paid, if any, for            an option to put will have the effect of reducing the yield otherwise payable on the            underlying security. For the purpose of determining the “maturity” of            securities purchased subject to an option to put, and for the purpose of determining            the dollar weighted average maturity of the Fund holding such securities, the Fund will            consider “maturity” to be the first date on which it has the right to            demand payment from the issuer of the put although the final maturity of the security            is later than such date.

**Other Debt Obligations.**The Fund may invest            in deposits, bonds, notes and debentures and other debt obligations that at the time of            purchase have, or are comparable in priority and security to other securities of such            issuer which have, outstanding short-term obligations meeting the above short-term            rating requirements, or if there are no such short-term ratings, are determined by the            Advisor to be of comparable quality and are rated in the top four highest long-term            rating categories by the NRSROs rating such security.

***Municipal Securities***

**General.**The Fund may invest in municipal            securities. Municipal securities consist of bonds, notes and other instruments issued            by or on behalf of states, territories and possessions of the United States (including            the District of Columbia) and their political subdivisions, agencies or            instrumentalities, the interest on which is exempt from regular federal income tax            (i.e., excluded from gross income            for federal income tax purposes but not necessarily exempt from the federal alternative            minimum tax or from state and local taxes). Municipal securities may also be issued on            a taxable basis (i.e., the interest            on such securities is not exempt from regular federal income tax).

 

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Municipal securities are often issued to obtain funds for various public            purposes, including the construction of a wide range of public facilities such as            bridges, highways, housing, hospitals, mass transportation, schools, streets and water            and sewer works. Other public purposes for which municipal securities may be issued            include refunding outstanding obligations, obtaining funds for general operating            expenses, and obtaining funds to lend to other public institutions and facilities.            Municipal securities also include “private activity” or industrial            development bonds, which are issued by or on behalf of public authorities to provide            financing aid to acquire sites or construct or equip facilities within a municipality            for privately or publicly owned corporations.

The            two principal classifications of municipal securities are “general            obligations” and “revenue obligations.” General obligations are            secured by the issuer’s pledge of its full faith and credit for the payment of            principal and interest although the characteristics and enforcement of general            obligations may vary according to the law applicable to the particular issuer. Revenue            obligations, which include, but are not limited to, private activity bonds, resource            recovery bonds, certificates of participation and certain municipal notes, are not            backed by the credit and taxing authority of the issuer and are payable solely from the            revenues derived from a particular facility or class of facilities or, in some cases,            from the proceeds of a special excise or other specific revenue source. Nevertheless,            the obligations of the issuer may also be backed by a letter of credit, guarantee or            insurance. General obligations and revenue obligations may be issued in a variety of            forms, including commercial paper, fixed, variable and floating rate securities, tender            option bonds, auction rate bonds and capital appreciation bonds.

In            addition to general obligations and revenue obligations, there is a variety of hybrid            and special types of municipal securities. There are also numerous differences in the            credit backing of municipal securities both within and between these two principal            classifications.

For            the purpose of applying the Fund’s investment restrictions, the identification of            the issuer of a municipal security which is not a general obligation is made by the            Advisor based on the characteristics of the municipal security, the most important of            which is the source of funds for the payment of principal and interest on such            securities.

An            entire issue of municipal securities may be purchased by one or a small number of            institutional investors such as the Fund. Thus, the issue may not be said to be            publicly offered. Unlike some securities that are not publicly offered, a secondary            market exists for many municipal securities that were not publicly offered initially            and such securities are often readily marketable.

The            obligations of an issuer to pay the principal and interest on a municipal security are            subject to the provisions of bankruptcy, insolvency and other laws affecting the rights            and remedies of creditors, such as the Federal Bankruptcy Act, and laws, if any, that            may be enacted by Congress or state legislatures extending the time for payment of            principal or interest or imposing other constraints upon the enforcement of such            obligations. There is also the possibility that, as a result of litigation or other            conditions, the power or ability of the issuer to pay principal or interest when due on            a municipal security may be materially affected.

**Municipal Notes.**Municipal securities in            the form of notes generally are used to provide for short-term capital needs, in            anticipation of an issuer’s receipt of other revenues or financing, and typically            have maturities of up to three years. Such instruments may include tax anticipation            notes, revenue anticipation notes, bond anticipation notes, tax and revenue            anticipation notes and construction loan notes. The obligations of an issuer of            municipal notes are generally secured by the anticipated revenues from taxes, grants or            bond financing. An investment in such instruments, however, presents a risk that the            anticipated revenues will not be received or that such revenues will be insufficient to            satisfy the issuer’s payment obligations under the notes or that refinancing will            be otherwise unavailable.

**Tax Anticipation Notes.**Tax anticipation            notes are issued to finance working capital needs of municipalities. Generally, they            are issued in anticipation of various seasonal tax revenue, such as income, sales, use            and business taxes, and are payable from these specific future taxes.

**Revenue Anticipation Notes.**Revenue            anticipation notes are issued in expectation of receipt of other types of revenue, such            as federal revenues available under federal revenue sharing programs.

 

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**Bond Anticipation Notes.**Bond anticipation            notes are issued to provide interim financing until long-term financing can be            arranged. In most cases, the long-term bonds provide funds for the repayment of these            notes.

**Tax and Revenue Anticipation Notes.**Tax and            revenue anticipation notes combine the funding sources of both tax anticipation notes            and revenue anticipation notes.

**Construction Loan Notes.**Construction loan            notes are secured by mortgage notes insured by the Federal Housing Authority            (“FHA”); however, the proceeds from the insurance may be less than the            economic equivalent of the payment of principal and interest on the mortgage note if            there has been a default. Construction loan notes are sold to provide construction            financing. Permanent financing, the proceeds of which are applied to the payment of            construction loan notes, is sometimes provided by a commitment of GNMA to purchase the            loan, accompanied by a commitment by the FHA to insure mortgage advances thereunder. In            other instances, permanent financing is provided by commitments of banks to purchase            the loan. The Fund will only purchase construction loan notes that are subject to            permanent GNMA or bank purchase commitments.

**Miscellaneous, Temporary and Anticipatory Instruments.**These instruments may include notes issued to obtain interim financing            pending entering into alternate financial arrangements, such as receipt of anticipated            federal, state or other grants or aid, passage of increased legislative authority to            issue longer-term instruments or obtaining other refinancing.

**Tax-Exempt Commercial Paper.**Tax-exempt            commercial paper is a short-term obligation with a stated maturity of 365 days or less.            It is issued by agencies of state and local governments to finance seasonal working            capital needs or to provide interim construction financing and are paid from general            revenues of the municipalities or are refinanced with long-term debt. In most cases,            tax-exempt commercial paper is backed by letters of credit, lending agreements, note            repurchase agreements or other credit facility agreements offered by banks or other            institutions.

**Municipal Bonds.**Municipal bonds generally            fund longer-term capital needs than municipal notes and have maturities exceeding one            year when issued. The Fund may invest in municipal bonds. Municipal bonds include            general obligation bonds, revenue bonds, private activity bonds and tender option            bonds.

**General Obligation Bonds.**Issuers of            general obligation bonds include states, counties, cities, towns and regional            districts. The proceeds of these obligations are used to fund a wide range of public            projects, including construction or improvement of schools, highways and roads, and            water and sewer systems. The basic security behind general obligation bonds is the            issuer’s pledge of its full faith and credit and taxing power for the payment of            principal and interest. The taxes that can be levied for the payment of debt service            may be limited or unlimited as to the rate or amount of special assessments.

**Revenue Bonds.**The principal security for a            revenue bond is generally the net revenues derived from a particular facility, group of            facilities or, in some cases, the proceeds of a special excise tax or other specific            revenue source. Revenue bonds are issued to finance a wide variety of capital projects,            including electric, gas, water and sewer systems; highways, bridges, and tunnels; port            and airport facilities; colleges and universities; and hospitals. Although the            principal security behind these bonds may vary, many provide additional security in the            form of a debt service reserve fund that may be used to make principal and interest            payments on the issuer’s obligations. Housing finance authorities have a wide            range of security, including partially or fully insured mortgages, rent subsidized            and/or collateralized mortgages, certificates of deposit and/or the net revenues from            housing or other public projects. Some authorities provide further security in the form            of a state’s ability (without obligation) to make up deficiencies in the debt            service reserve fund.

**Private Activity Bonds.**Private activity            bonds, which are considered municipal obligations if the interest paid thereon is            excluded from gross income for federal income tax purposes and is not a specific tax            preference item for federal individual and corporate alternative minimum tax purposes,            are issued by or on behalf of public authorities to raise money to finance various            privately operated facilities such as manufacturing facilities, certain hospital and            university facilities and housing projects. These bonds are also used to finance public            facilities such as airports, mass transit systems and ports. The payment of the            principal and interest on these bonds is dependent solely on the ability of the            facility’s user to meet its financial obligations and generally the pledge, if            any, of real and personal property so financed as security for payment.

 

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**Tender Option Bonds.**A tender option bond            is a municipal security (generally held pursuant to a custodial arrangement) having a            relatively long maturity and bearing interest at a fixed rate substantially higher than            prevailing short-term tax-exempt rates. The bond is typically issued in conjunction            with the agreement of a third party, such as a bank, broker-dealer or other financial            institution, pursuant to which such institution grants the security holders the option,            at periodic intervals, to tender their securities to the institution and receive the            face value thereof.

As            consideration for providing the option, the financial institution receives periodic            fees equal to the difference between the bond’s fixed coupon rate and the rate,            as determined by a remarketing or similar agent at or near the commencement of such            period, that would cause the securities, coupled with the tender option, to trade at            par on the date of such determination. Thus, after payment of this fee, the security            holder effectively holds a demand obligation that bears interest at the prevailing            short-term tax-exempt rate.

However, an institution will not be obligated to accept tendered bonds            in the event of certain defaults or a significant downgrade in the credit rating            assigned to the issuer of the bond. The liquidity of a tender option bond is a function            of the credit quality of both the bond issuer and the financial institution providing            liquidity.

The            Fund intends to invest only in tender option bonds the interest on which will, in the            opinion of bond counsel, counsel for the issuer of interests therein or counsel            selected by the Advisor, be exempt from regular federal income tax. However, because            there can be no assurance that the IRS will agree with such counsel’s opinion in            any particular case, there is a risk that the Fund will not be considered the owner of            such tender option bonds and thus will not be entitled to treat such interest as exempt            from such tax. Additionally, the federal income tax treatment of certain other aspects            of these investments, including the proper tax treatment of tender option bonds and the            associated fees, in relation to various regulated investment company tax provisions is            unclear. The Fund intends to manage its portfolio in a manner designed to eliminate or            minimize any adverse impact from the tax rules applicable to these            investments.

**Municipal Leases, Certificates of Participation and Other            Participation Interests.**The Fund may invest in municipal            leases. A municipal lease is an obligation in the form of a lease or installment            purchase contract which is issued by a state or local government to acquire equipment            and facilities. Income from such obligations is generally exempt from state and local            taxes in the state of issuance (as well as regular federal income tax). Municipal            leases frequently involve special risks not normally associated with general obligation            or revenue bonds. Leases and installment purchase or conditional sale contracts (which            normally provide for title to the leased asset to pass eventually to the governmental            issuer) have evolved as a means for governmental issuers to acquire property and            equipment without meeting the constitutional and statutory requirements for the            issuance of debt. The debt issuance limitations are deemed to be inapplicable because            of the inclusion in many leases or contracts of “non-appropriation” clauses            that relieve the governmental issuer of any obligation to make future payments under            the lease or contract unless money is appropriated for such purpose by the appropriate            legislative body on a yearly or other periodic basis. Thus, the Fund’s investment            in municipal leases will be subject to the special risk that the governmental issuer            may not appropriate funds for lease payments.

In            addition, such leases or contracts may be subject to the temporary abatement of            payments in the event the issuer is prevented from maintaining occupancy of the leased            premises or utilizing the leased equipment. Although the obligations may be secured by            the leased equipment or facilities, the disposition of the property in the event of            nonappropriation or foreclosure might prove difficult, time consuming and costly, and            result in an unsatisfactory or delayed recoupment of the Fund’s original            investment.

Certificates of participation represent undivided interests in municipal            leases, installment purchase contracts or other instruments. The certificates are            typically issued by a trust or other entity which has received an assignment of the            payments to be made by the state or political subdivision under such leases or            installment purchase contracts.

In            determining the liquidity of municipal lease obligations and certificates of            participation, the Advisor will consider a variety of factors including: (1) the            willingness of dealers to bid for the security; (2) the number of dealers willing            to purchase or sell the obligation and the number of other potential buyers;            (3) the frequency of trades or quotes for the obligation; and (4) the nature            of the marketplace trades. In addition, the Advisor will consider factors unique to            particular lease obligations and certificates of participation affecting the            marketability thereof. These include the

 

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general creditworthiness of the issuer, the importance to the issuer of            the property covered by the lease and the likelihood that the marketability of the            obligation will be maintained throughout the time the obligation is held by the Fund.            See “Illiquid Securities.”

The            Fund may also purchase participations in municipal securities held by a commercial bank            or other financial institution. Such participations provide the Fund with the right to            a pro rata undivided interest in the underlying municipal securities. In addition, such            participations generally provide the Fund with the right to demand payment, on not more            than seven days notice, of all or any part of the Fund’s participation interest            in the underlying municipal security, plus accrued interest.

**Pre-Refunded Municipal Securities.**The            principal and interest on municipal securities that have been pre-refunded are no            longer paid from the original revenue source for the securities. Instead, after            pre-refunding, such payments of the principal and interest on these securities are            typically paid from an escrow fund consisting of obligations issued or guaranteed by            the US government. The assets in the escrow fund are derived from the proceeds of            refunding bonds issued by the same issuer as the pre-refunded municipal securities.            Issuers of municipal securities use this advance refunding technique to obtain more            favorable terms with respect to securities that are not yet subject to call or            redemption by the issuer. For example, advance refunding enables an issuer to refinance            debt at lower market interest rates, restructure debt to improve cash flow or eliminate            restrictive covenants in the indenture or other governing instrument for the            pre-refunded municipal securities. However, except for a change in the revenue source            from which principal and interest payments are made, the pre-refunded municipal            securities remain outstanding on their original terms until they mature or are redeemed            by the issuer. Pre-refunded municipal securities are usually purchased at a price which            represents a premium over their face value.

**Auction Rate Securities.**Auction rate            securities consist of auction rate municipal securities and auction rate preferred            securities issued by closed-end investment companies that invest primarily in municipal            securities. Provided that the auction mechanism is successful, auction rate securities            usually permit the holder to sell the securities in an auction at par value at            specified intervals. The dividend is reset by “Dutch” auction in which bids            are made by broker-dealers and other institutions for a certain amount of securities at            a specified minimum yield. The dividend rate set by the auction is the lowest interest            or dividend rate that covers all securities offered for sale. While this process is            designed to permit auction rate securities to be traded at par value, there is the risk            that an auction will fail due to insufficient demand for the securities. The Fund will            take the time remaining until the next scheduled auction date into account for purpose            of determining the securities’ duration.

Dividends on auction rate preferred securities issued by a closed-end            fund may be designated as exempt from federal income tax to the extent they are            attributable to tax-exempt interest income earned by the Fund on the securities in its            portfolio and distributed to holders of the preferred securities, provided that the            preferred securities are treated as equity securities for federal income tax purposes            and the closed-end fund complies with certain requirements under the Internal Revenue            Code of 1986, as amended (the “Code”).

The            Fund’s investments in auction rate preferred securities of closed-end funds are            subject to limitations on investments in other US registered investment companies,            which limitations are prescribed by the Investment Company Act of 1940, as amended (the            “1940 Act”). See “Other Investment Companies.”

***Derivative Securities***

**General.**The Fund may invest in various            instruments that are commonly known as “derivatives.” Generally, a            derivative is a financial arrangement, the value of which is based on, or            “derived” from, a traditional security, asset or market index. Some            “derivatives” such as mortgage-related and other asset-backed securities            are in many respects like any other investment, although they may be more volatile            and/or less liquid than more traditional debt securities. There are, in fact, many            different types of derivatives and many different ways to use them. For example, the            Fund may use futures and options as a low-cost method of gaining exposure to a            particular securities market without investing directly in those securities, for            speculative purposes, and for traditional hedging purposes to attempt to protect the            Fund from exposure to changing interest rates, securities prices or currency exchange            rates and for cash management or other investment purposes.

 

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There is a range of risks associated with those uses. The use of            derivatives may result in leverage, which tends to magnify the effects of an            instrument’s price changes as market conditions change. Leverage involves the use            of a small amount of money to control a large amount of financial assets, and can in            some circumstances, lead to significant losses. The Fund will limit the leverage            created by its use of derivatives for investment purposes by “covering”            such positions as required by the SEC. The Advisor may use derivatives in circumstances            where the Advisor believes they offer an economical means of gaining exposure to a            particular asset class. Derivatives will not be used to increase portfolio risk above            the level that could be achieved using only traditional investment securities or to            acquire exposure to changes in the value of assets or indexes that by themselves could            not be purchased for the Fund. The use of derivatives for non-hedging purposes may be            considered speculative.

The            Fund’s investment in options, futures or forward contracts, swaps and similar            strategies (collectively, “derivatives”) depends on the Advisor’s            judgment as to the potential risks and rewards of different types of strategies.            Derivatives can be volatile investments and may not perform as expected. If the Advisor            applies a hedge at an inappropriate time or judges price trends incorrectly, derivative            strategies may lower the Fund’s return. The Fund could also experience losses if            the prices of its derivative positions were poorly correlated with its other            investments, or if it could not close out its positions because of an illiquid            secondary market. Options and futures traded on foreign exchanges generally are not            regulated by US authorities, and may offer less liquidity and less protection to the            Fund in the event of default by the other party to the contract.

***Derivative Securities: Options***

**Options on Securities.**The Fund may            purchase and write (sell) put and call options on securities. A call option gives the            purchaser of the option the right to buy, and obligates the writer to sell, the            underlying security at the exercise price at any time during the option period.            Similarly, a put option gives the purchaser of the option the right to sell, and            obligates the writer to buy, the underlying security at the exercise price at any time            during the option period.

The            Fund may write (sell) covered call and put options to a limited extent on its portfolio            securities (“covered options”) in an attempt to increase income through the            premiums it receives for writing the option(s). However, in return for the premium, the            Fund may forgo the benefits of appreciation on securities sold or may pay more than the            market price on securities acquired pursuant to call and put options written by the            Fund.

A            call option written by the Fund is “covered” if the Fund owns the            underlying security covered by the call or has an absolute and immediate right to            acquire that security without additional cash consideration (or for additional cash            consideration held in a segregated account) upon conversion or exchange of other            securities held in its portfolio. A call option is also covered if the Fund holds a            call option on the same security and in the same principal amount as the written call            option where the exercise price of the call option so held (a) is equal to or less than            the exercise price of the written call option or (b) is greater than the exercise price            of the written call option if the difference is segregated by the Fund in cash or            liquid securities.

When the Fund writes a covered call option, it gives the purchaser of            the option the right to buy the underlying security at the price specified in the            option (the “exercise price”) by exercising the option at any time during            the option period. If the option expires unexercised, the Fund will realize income in            an amount equal to the premium received for writing the option. If the option is            exercised, a decision over which the Fund has no control, the Fund must sell the            underlying security to the option holder at the exercise price. By writing a covered            call option, the Fund forgoes, in exchange for the premium less the commission            (“net premium”), the opportunity to profit during the option period from an            increase in the market value of the underlying security above the exercise price. In            addition, the Fund may continue to hold a security which might otherwise have been sold            to protect against depreciation in the market price of the security.

A            put option written by the Fund is “covered” when, among other things, cash            or liquid securities are placed in a segregated account to fulfill the obligations            undertaken. When the Fund writes a covered put option, it gives the purchaser of the            option the right to sell the underlying security to the Fund at the specified exercise            price at any time during the option period. If the option expires unexercised, the Fund            will realize income in the amount of the net premium received for writing the option.            If the put option is exercised, a decision over which the Fund has no control, the Fund            must purchase the underlying security from the option holder at the exercise price. By            writing a

 

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covered put option, the Fund, in exchange for the net premium received,            accepts the risk of a decline in the market value of the underlying security below the            exercise price.

The            Fund may terminate its obligation as the writer of a call or put option by purchasing            an option with the same exercise price and expiration date as the option previously            written. This transaction is called a “closing purchase transaction.” The            Fund will realize a profit or loss on a closing purchase transaction if the amount paid            to purchase an option is less or more, as the case may be, than the amount received            from the sale thereof. To close out a position as a purchaser of an option, the Fund,            may enter into a “closing sale transaction” which involves liquidating the            Fund’s position by selling the option previously purchased. Where the Fund cannot            effect a closing purchase transaction, it may be forced to incur brokerage commissions            or dealer spreads in selling securities it receives or it may be forced to hold            underlying securities until an option is exercised or expires.

The            current market value of a traded option is the last sale price or, in the absence of a            sale, the mean between the closing bid and asked price. If an option expires on its            stipulated expiration date or if the Fund enters into a closing purchase transaction,            the Fund will realize a gain (or loss if the cost of a closing purchase transaction            exceeds the premium received when the option was sold), and the deferred credit related            to such option will be eliminated. If a call option is exercised, the Fund will realize            a gain or loss from the sale of the underlying security and the proceeds of the sale            will be increased by the premium originally received.

The            Fund may also purchase call and put options on any securities in which it may invest.            The Fund would normally purchase a call option in anticipation of an increase in the            market value of such securities. The purchase of a call option would entitle the Fund,            in exchange for the premium paid, to purchase a security at a specified price during            the option period. The Fund would ordinarily have a gain if the value of the securities            increased above the exercise price sufficiently to cover the premium and would have a            loss if the value of the securities remained at or below the exercise price during the            option period.

The            Fund would normally purchase put options in anticipation of a decline in the market            value of securities in its portfolio (“protective puts”) or securities of            the type in which it is permitted to invest. The purchase of a put option would entitle            the Fund, in exchange for the premium paid, to sell a security, which may or may not be            held by the Fund at a specified price during the option period. The purchase of            protective puts is designed merely to offset or hedge against a decline in the market            value of the Fund. Put options also may be purchased by the Fund for the purpose of            affirmatively benefiting from a decline in the price of securities that the Fund does            not own. The Fund would ordinarily recognize a gain if the value of the securities            decreased below the exercise price sufficiently to cover the premium and would            recognize a loss if the value of the securities remained at or above the exercise            price. Gains and losses on the purchase of protective put options would tend to be            offset by countervailing changes in the value of underlying portfolio            securities.

The            hours of trading for options on securities may not conform to the hours during which            the underlying securities are traded. To the extent that the option markets close            before the markets for the underlying securities, significant price and rate movements            can take place in the underlying securities markets that cannot be reflected in the            option markets. It is impossible to predict the volume of trading that may exist in            such options, and there can be no assurance that viable exchange markets will develop            or continue.

The            Fund may enter into closing transactions in order to offset an open option position            prior to exercise or expiration by selling an option it has purchased or by entering            into an offsetting option. If the Fund cannot effect closing transactions, it may have            to retain a security in its portfolio it would otherwise sell or deliver a security it            would otherwise retain. The Fund may purchase and sell options traded on recognized            foreign exchanges. The Fund may also purchase and sell options traded on US exchanges            and, to the extent permitted by law, options traded in the OTC market.

The            Fund may also engage in options transactions in the OTC market with broker-dealers who            make markets in these options. The Fund will engage in OTC options only with            broker-dealers deemed by the Advisor to be creditworthy. The ability to terminate OTC            option positions is more limited than with exchange-traded option positions because the            predominant market is the issuing broker rather than an exchange, and may involve the            risk that broker-dealers participating in such transactions will not fulfill their            obligations. To reduce this risk, the Fund

 

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will purchase such options only from a counter party approved for these            purposes by the Advisor. The Advisor will monitor the creditworthiness of dealers with            whom the Fund enters into such options transactions.

**Options on Securities Indices.**The Fund may            also purchase and write exchange-listed and OTC put and call options on securities            indices. A securities index measures the movement of a certain group of securities by            assigning relative values to the securities included in the index, fluctuating with            changes in the market values of the securities included in the index. Some securities            index options are based on a broad market index, such as the NYSE Composite Index, or a            narrower market index such as the Standard & Poor’s 100. Indices may also be            based on a particular industry or market segment.

Options on securities indices are similar to options on securities            except that (1) the expiration cycles of securities index options are monthly, while            those of securities options are currently quarterly, and (2) the delivery requirements            are different. Instead of giving the right to take or make delivery of securities at a            specified price, an option on a securities index gives the holder the right to receive            a cash “exercise settlement amount” equal to (a) the amount, if any, by            which the fixed exercise price of the option exceeds (in the case of a put) or is less            than (in the case of a call) the closing value of the underlying index on the date of            exercise, multiplied by (b) a fixed “index multiplier.” Receipt of this            cash amount will depend upon the closing level of the securities index upon which the            option is based being greater than, in the case of a call, or less than, in the case of            a put, the exercise price of the index and the exercise price of the option times a            specified multiple. The writer of the option is obligated, in return for the premium            received, to make delivery of this amount. Securities index options may be offset by            entering into closing transactions as described above for securities            options.

As            discussed in “Options on Securities,” the Fund would normally purchase a            call option in anticipation of an increase in the market value of the relevant index.            The purchase of a call option would entitle the Fund, in exchange for the premium paid,            to receive upon exercise a cash payment based on the level of the index on the exercise            date. The Fund would ordinarily have a gain if the value of the index increased above            the exercise price sufficiently to cover the premium and would have a loss if the value            of the index remained at or below the exercise price during the option            period.

As            discussed in “Options on Securities,” the Fund would normally purchase            “protective puts” in anticipation of a decline in the market value of the            relevant index. The purchase of a put option would entitle the Fund, in exchange for            the premium paid, to receive upon exercise a cash payment based on the level of the            index on the exercise date. The purchase of protective puts is generally designed to            offset or hedge against a decline in the market value of the index. The Fund would            ordinarily recognize a gain if the value of the index decreased below the exercise            price sufficiently to cover the premium and would recognize a loss if the value of the            index remained at or above the exercise price. Gains and losses on the purchase of            protective put options would tend to be offset by countervailing changes in the value            of the index.

Because the value of an index option depends upon movements in the level            of the index rather than the price of a particular security, whether the Fund will            realize a gain or loss from the purchase or writing of options on an index depends upon            movements in the level of securities prices in the securities market generally or, in            the case of certain indices, in an industry or market segment, rather than movements in            the price of a particular security. Accordingly, successful use by the Fund of options            on securities indices will be subject to the Advisor’s ability to predict            correctly movements in the direction of the securities market generally or of a            particular industry. This requires different skills and techniques than predicting            changes in the price of individual securities.

Options on securities indices entail risks in addition to the risks of            options on securities. The absence of a liquid secondary market to close out options            positions on securities indices may be more likely to occur, although the Fund            generally will only purchase or write such an option if the Advisor believes the option            can be closed out. Use of options on securities indices also entails the risk that            trading in such options may be interrupted if trading in certain securities included in            the index is interrupted. The Fund will not purchase such options unless the Advisor            believes the market is sufficiently developed such that the risk of trading in such            options is no greater than the risk of trading in options on securities.

Price movements in the Fund’s portfolio may not correlate            precisely with movements in the level of an index and, therefore, the use of options on            indices cannot serve as a complete hedge. Because options on securities            indices

 

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require settlement in cash, the Advisor may be forced to liquidate            portfolio securities to meet settlement obligations. The Fund’s activities in            index options may also be restricted by the requirements of the Code for qualification            as a regulated investment company.

In            addition, the hours of trading for options on the securities indices may not conform to            the hours during which the underlying securities are traded. To the extent that the            option markets close before the markets for the underlying securities, significant            price and rate movements can take place in the underlying securities markets that            cannot be reflected in the option markets. It is impossible to predict the volume of            trading that may exist in such options, and there can be no assurance that viable            exchange markets will develop or continue.

**Options on Non-US Securities Indices.**The            Fund may purchase and write put and call options on foreign securities indices listed            on domestic and foreign securities exchanges. The Fund may also purchase and write OTC            options on foreign securities indices.

The            Fund may, to the extent allowed by federal and state securities laws, invest in options            on non-US securities indices instead of investing directly in individual non-US            securities. The Fund may also use foreign securities index options for bona fide            hedging and non-hedging purposes.

**Yield Curve Options.**The Fund may enter            into options on the yield spread or yield differential between two securities. These            options are referred to as yield curve options. In contrast to other types of options,            a yield curve option is based on the difference between the yields of designated            securities, rather than the prices of the individual securities, and is settled through            cash payments. Accordingly, a yield curve option is profitable to the holder if this            differential widens (in the case of a call) or narrows (in the case of a put),            regardless of whether the yields of the underlying securities increase or            decrease.

**Spreadlocks.**The Fund may enter into            spreadlocks. A spreadlock is a form of swap contract which is an exchange of a one time            cash payment between the Fund and another party which is based on a specific financial            index. A spreadlock allows an interest rate swap user to lock in the forward            differential between the interest rate swap rate and the yield of the government bond            underlying the swap. Essentially, a spreadlock allows the investor to buy or sell the            spread forward by entering into a forward contract on the swap spread (i.e., the spread            between the government yield and the swap rate (or yield)) for a given maturity. The            price of a spreadlock is determined by the yield spread between a forward starting            fixed/floating swap and a forward transaction in a government bond. The value of the            swap is adjusted daily and the change in value is recorded as unrealized appreciation            or depreciation up until the agreement matures at which time the cash payment, based on            the value of the swap on the maturity date, is exchanged between the two            parties.

***Derivative Securities: Futures Contracts and Options on Futures            Contracts***

**General.**The Fund may enter into futures            contracts on securities, securities indices, foreign currencies and interest rates, and            purchase and write (sell) options thereon which are traded on exchanges designated by            the Commodity Futures Trading Commission (the “CFTC”) or, if consistent            with CFTC regulations, on foreign exchanges. These futures contracts are standardized            contracts for the future delivery of, among other things, a commodity, a non-US            currency, an interest rate sensitive security or, in the case of index futures            contracts or certain other futures contracts, a cash settlement with reference to a            specified multiplier times the change in the index. An option on a futures contract            gives the purchaser the right, in return for the premium paid, to assume a position in            a futures contract.

The            Fund will engage in futures and related options transactions only for bona fide hedging            or other non-hedging purposes as permitted by CFTC regulations which permit principals            of an investment company registered under the 1940 Act to engage in such transactions            without registering as commodity pool operators. The Fund may, for example, enter into            futures contracts and options on futures contracts on securities, securities indices            and currencies to manage its exposure to changing interest rates, security prices and            currency exchange rates or as an efficient means of managing allocations between asset            classes. All futures contracts entered into by the Fund are traded on US exchanges or            boards of trade that are licensed and regulated by the CFTC or on foreign exchanges            approved by the CFTC. The Fund will determine that the price fluctuations in the            futures contracts and options on futures used for hedging purposes are substantially            related to price fluctuations in securities or instruments held by the Fund or            securities or instruments which they expect to purchase. Aggregate initial margin and            premiums required to

 

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establish positions other than those considered by the CFTC to be            “bona fide hedging” will not exceed 5% of the Fund’s net asset value,            after taking into account unrealized profits and unrealized losses on any such            contracts.

The            successful use of futures contracts and options thereon draws upon the Advisor’s            skill and experience with respect to such instruments and are subject to special risk            considerations. A liquid secondary market for any futures or options contract may not            be available when a futures or options position is sought to be closed. In addition,            there may be an imperfect correlation between movements in the securities or currency            in the Fund. Successful use of futures or options contracts is further dependent on the            Advisor’s ability to predict correctly movements in the securities or foreign            currency markets and no assurance can be given that its judgment will be            correct.

**Futures Contracts.**Futures contracts are            contracts to purchase or sell a fixed amount of an underlying instrument, commodity or            index at a fixed time and place in the future. US futures contracts have been designed            by exchanges which have been designated “contract markets” by the CFTC, and            must be executed through a futures commission merchant, or brokerage firm, which is a            member of the relevant contract market. Futures contracts trade on a number of exchange            markets, and, through their clearing corporations, the exchanges guarantee performance            of the contracts as between the clearing members of the exchange. The Fund may enter            into contracts for the purchase or sale for future delivery of fixed-income or equity            securities, foreign currencies, or financial indices including any index of US or            foreign securities, US government securities, foreign government securities, corporate            debt securities, or municipal securities. Futures contracts on foreign currencies may            be used for speculative purposes or to hedge the value of securities that are            denominated in foreign currencies.

Although futures contracts (other than those that settle in cash, such            as index futures) by their terms call for the actual delivery or acquisition of the            instrument underlying the contract, in most cases the contractual obligation is            fulfilled by offset before the date of the contract without having to make or take            delivery of the instrument underlying the contract. The offsetting of a contractual            obligation is accomplished by entering into an opposite position in an identical            futures contract on the commodities exchange on which the futures contract was entered            into (or a linked exchange) calling for delivery in the same month. Such a transaction,            which is effected through a member of an exchange, cancels the obligation to make or            take delivery of the instrument underlying the contract. Since all transactions in the            futures market are made, offset or fulfilled through a clearinghouse associated with            the exchange on which the contracts are traded, the Fund will incur brokerage fees when            it enters into futures contracts.

One            purpose of the acquisition or sale of a futures contract, in cases where the Fund holds            or intends to acquire fixed-income or equity securities, is to attempt to protect the            Fund from fluctuations in interest or foreign exchange rates or in securities prices            without actually buying or selling fixed-income or equity securities or foreign            currencies. For example, if interest rates were expected to increase (which thus would            cause the prices of debt securities to decline), the Fund might enter into futures            contracts for the sale of debt securities. Such a sale would have much the same effect            as selling an equivalent value of the debt securities owned by the Fund. If interest            rates did increase, the value of the debt security in the Fund would decline, but the            value of the futures contracts to the Fund would increase at approximately the same            rate, thereby keeping the net asset value of the Fund from declining as much as it            otherwise would have. The Fund could accomplish similar results by selling debt            securities and investing in bonds with short maturities when interest rates are            expected to increase. However, since the futures market is more liquid than the cash            market, the use of futures contracts as an investment technique allows the Fund to            maintain a defensive position without having to sell its portfolio            securities.

Similarly, when it is expected that interest rates may decline (thus            increasing the value of debt securities), futures contracts may be purchased to attempt            to hedge against anticipated purchases of debt securities at higher prices. Since the            fluctuations in the value of futures contracts should be similar to those of debt            securities, the Fund could take advantage of the anticipated rise in the value of debt            securities without actually buying them until the market had stabilized. At that time,            the futures contracts could be liquidated and the Fund could then buy debt securities            on the cash market. The segregated assets maintained to cover the Fund’s            obligations with respect to such futures contracts will consist of cash or liquid            securities in an amount equal to the difference between the fluctuating market value of            such futures contracts and the aggregate value of the initial and variation margin            payments made by the Fund with respect to such futures contracts.

The            ordinary spreads between prices in the cash and futures market, due to differences in            the nature of those markets, are subject to distortions. First, all participants in the            futures market are subject to initial and variation

 

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margin requirements. Rather than meeting additional variation margin            requirements, investors may close futures contracts through offsetting transactions            which could distort the normal relationship between the cash and futures markets.            Second, the liquidity of the futures market depends on most participants entering into            offsetting transactions rather than making or taking delivery. To the extent that many            participants decide to make or take delivery, liquidity in the futures market could be            reduced, thus producing distortion. Third, from the point of view of speculators, the            margin requirements in the futures market are less onerous than margin requirements in            the securities market. Therefore, increased participation by speculators in the futures            market may cause temporary price distortions. Due to the possibility of distortion, a            correct forecast of securities price, general interest rate or currency exchange rate            trends by the Advisor may still not result in a successful transaction.

In            addition, futures contracts entail significant risks. Although the Advisor believes            that use of such contracts will benefit the Fund, if the Advisor’s investment            judgment about the general direction of securities prices, currency rates, interest            rates or an index is incorrect, the Fund’s overall performance would be poorer            than if it had not entered into any such contract. For example, if the Fund has hedged            against the possibility of an increase in interest rates or a decrease in an index            which would adversely affect the value of securities held in its portfolio and interest            rates decrease or securities prices increase instead, the Fund will lose part or all of            the benefit of the increased value of its securities which it has hedged because it            will have offsetting losses in its futures positions. In addition, in such situations,            if the Fund has insufficient cash, it may have to sell securities from its portfolio to            meet daily variation margin requirements. Such sales of securities may be, but will not            necessarily be, at increased prices which reflect the rising market. The Fund may have            to sell securities at a time when it may be disadvantageous to do so.

**Futures Contracts on Securities Indices.**The Fund may also enter into futures contracts providing for the making            and acceptance of a cash settlement based upon changes in the value of an index of US            or non-US securities. Index futures may be used for speculative purposes, as a low-cost            method of gaining exposure to a particular securities market without investing directly            in those securities or to hedge against anticipated future changes in general market            prices which otherwise might either adversely affect the value of securities held by            the Fund or adversely affect the prices of securities which are intended to be            purchased at a later date for the Fund or as an efficient means of managing allocation            between asset classes. An index futures contract may also be entered into to close out            or offset an existing futures position.

When used for hedging purposes, each transaction in futures contracts on            a securities index involves the establishment of a position which, the Advisor            believes, will move in a direction opposite to that of the investment being hedged. If            these hedging transactions are successful, the futures positions taken for the Fund            will rise in value by an amount which approximately offsets the decline in value of the            portion of the Fund’s investments that are being hedged. Should general market            prices move in an unexpected manner, the full anticipated benefits of futures contracts            may not be achieved or a loss may be realized.

**Options on Futures Contracts (Including Futures Contracts on            Securities Indices).**The Fund may purchase and write (sell)            options on futures contracts for speculative or hedging purposes. For example, as with            the purchase of futures contracts, when the Fund is not fully invested, it may purchase            a call option on an interest rate sensitive futures contract to hedge against a            potential price increase on debt securities due to declining interest rates.

The            purchase of a call option on a futures contract is similar in some respects to the            purchase of a call option on an index or individual security. Depending on the pricing            of the option compared to either the price of the futures contract upon which it is            based or the price of the underlying debt securities, it may or may not be less risky            than ownership of the futures contract or underlying debt securities.

The            writing of a call option on a futures contract may constitute a partial hedge against            declining prices of the underlying portfolio securities which are the same as or            correlate with the security or foreign currency futures contract that is deliverable            upon exercise of the option on that futures contract. If the futures price at            expiration of the option is below the exercise price specified in the option, the Fund            will retain the full amount of the net premium (the premium received for writing the            option less any commission), which provides a partial hedge against any decline that            may have occurred in the Fund’s holdings.

The            writing of a put option on an index futures contract may constitute a partial hedge            against increasing prices of the underlying securities or foreign currency that are            deliverable upon exercise of the futures contract. If the futures

 

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price at expiration of the option is higher than the exercise price, the            Fund will retain the full amount of the option net premium, which provides a partial            hedge against any increase in the price of securities that the Fund intends to            purchase.

If            a put or call option the Fund has written is exercised, the Fund will incur a loss that            will be reduced by the amount of the net premium it receives. Depending on the degree            of correlation between changes in the value of its portfolio securities and changes in            the value of its futures positions, the Fund’s losses from existing options on            futures may to some extent be reduced or increased by changes in the value of portfolio            securities.

The            purchase of a call or put option on a futures contract with respect to an index is            similar in some respects to the purchase of a call or protective put option on an            index. For example, the Fund may purchase a put option on an index futures contract to            hedge against the risk of declining securities values.

The            amount of risk the Fund assumes when it purchases an option on an index futures            contract is the premium paid for the option plus related transaction costs. In addition            to the correlation risks discussed above, the purchase of such an option also entails            the risk that changes in the value of the underlying futures contract will not be fully            reflected in the value of the option purchased.

***Derivative Securities: Swap Agreements***

**General.**The Fund may enter into swaps            relating to indices, currencies, interest rates, equity and debt interests. A swap            transaction is an agreement between the Fund and a counter party to act in accordance            with the terms of the swap contract. Interest rate swaps involve the exchange by the            Fund with another party of their respective commitments to pay or receive interest,            such as an exchange of fixed rate payments for floating rate payments. Mortgage swaps            are similar to interest rate swaps in that they represent commitments to pay and            receive interest. The notional principal amount, however, is tied to a reference pool            or pools of mortgages. Index swaps involve the exchange by the Fund with another party            of the respective amounts payable with respect to a notional principal amount related            to one or more indexes. Currency swaps involve the exchange of cash flows on a notional            amount of two or more currencies based on their relative future values. An equity swap            is an agreement to exchange streams of payments computed by reference to a notional            amount based on the performance of a basket of stocks or a single stock. The purchase            of an interest rate cap entitles the purchaser, to the extent that a specified index            exceeds a predetermined interest rate, to receive payment of interest on a notional            principal amount from the party selling such interest rate cap. The purchase of an            interest rate floor entitles the purchaser, to the extent that a specified index falls            below a predetermined interest rate, to receive payments of interest on a notional            principal amount from the party selling the interest rate floor. An interest rate            collar is the combination of a cap and a floor that preserves a certain return within a            predetermined range of interest rates.

The            Fund may enter into these transactions to preserve a return or spread on a particular            investment or portion of its assets, to protect against currency fluctuations, as a            duration management technique or to protect against any increase in the price of            securities the Fund anticipates purchasing at a later date. The Fund may also use such            transactions for speculative purposes, such as to obtain the price performance of a            security without actually purchasing the security in circumstances, for example, where            the subject security is illiquid, is unavailable for direct investment or available            only on less attractive terms. Swaps have special risks associated including possible            default by the counterpart to the transaction, illiquidity and, where swaps are used as            hedges, the risk that the use of a swap could result in losses greater than if the swap            had not been employed. See “Illiquid Securities.”

The            Fund will usually enter into swaps on a net basis            (i.e.,the two payment streams are            netted out in a cash settlement on the payment date or dates specified in the            agreement, with the Fund receiving or paying, as the case may be, only the net amount            of the two payments). Swaps do not involve the delivery of securities, other underlying            assets or principal. Accordingly, the risk of loss with respect to swaps is limited to            the net amount of payments that the Fund is contractually obligated to make or receive.            If the counter party to a swap defaults, the Fund’s risk of loss consists of the            net amount of payments that the Fund is contractually entitled to receive. Where swaps            are entered into for good faith hedging purposes, the Advisor believes such obligations            do not constitute senior securities under the 1940 Act and, accordingly, will not treat            them as being subject to the Fund’s borrowing restrictions. Where swaps are            entered into for other than hedging purposes, the Fund will segregate an amount            of

 

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cash or other liquid securities having a value equal to the accrued            excess of its obligations over entitlements with respect to each swap on a daily            basis.

Whether the use of swap agreements will be successful in furthering its            investment objective will depend on the Advisor’s ability to correctly predict            whether certain types of investments are likely to produce greater returns than other            investments. Certain swap agreements may be considered to be illiquid because they are            two party contracts and because they may have terms of greater than seven days.            Moreover, the Fund bears the risk of loss of the amount expected to be received under a            swap agreement in the event of the default or bankruptcy of a swap agreement counter            party.

The            Fund will attempt to minimize this risk by entering into agreements that mark to market            no less frequently than quarterly.

In            addition, the Fund will enter into swap agreements only with counter parties that would            be eligible for consideration as repurchase agreement counter parties under the            Fund’s repurchase agreement guidelines. Certain restrictions imposed on the Fund            by the Code may limit the Fund’s ability to use swap agreements. The swaps market            is a relatively new market and is largely unregulated. It is possible that developments            in the swaps market, including potential government regulation, could adversely affect            the Fund’s ability to terminate existing swap agreements or to realize amounts to            be received under such agreements.

Certain swap agreements are exempt from most provisions of the Commodity            Exchange Act (the “CEA”) and, therefore, are not regulated as futures or            commodity option transactions under the CEA, pursuant to regulations approved by the            CFTC. To qualify for this exemption, a swap agreement must be entered into by eligible            participants, which includes the following, provided the participant’s total            assets exceed established levels: a bank or trust company, savings association or            credit union, insurance company, investment company subject to regulation under the            1940 Act, commodity pool, corporation, partnership, proprietorship, organization,            trust or other entity, employee benefit plan, governmental entity, broker-dealer,            futures commission merchant, natural person, or regulated foreign person. To be            eligible, natural persons and most other entities must have total assets exceeding $10            million; commodity pools and employee benefit plans must have asset exceeding $5            million. In addition, an eligible swap transaction must meet three conditions. First,            the swap agreement may not be part of a fungible class of agreements that are            standardized as to their material economic terms. Second, the creditworthiness of            parties with actual or potential obligations under the swap agreement must be a            material consideration in entering into or determining the terms of the swap agreement,            including pricing, cost or credit enhancement terms. Third, swap agreements may not be            entered into and traded on or through a multilateral transaction execution            facility.

This exemption is not exclusive, and participants may continue to rely            on existing exclusions for swaps, such as the Policy Statement issued in July 1989            which recognized a “safe harbor” for swap transactions from regulation as            futures or commodity option transactions under the CEA or its regulations. The Policy            Statement applies to swap transactions settled in cash that: (1) have individually            tailored terms; (2) lack exchange style offset and the use of a clearing organization            or margin system; (3) are undertaken in conjunction with a line of business; and (4)            are not marketed to the public.

The            Fund will not enter into any swap, cap or floor transaction unless the unsecured            commercial paper, senior debt or the claims-paying ability of the other party thereto            is considered to be investment grade by the Advisor. If there is a default by the other            party to such a transaction, the Fund will have contractual remedies pursuant to the            agreements related to the transaction. The swap market has grown substantially in            recent years with a large number of banks and investment banking firms acting both as            principals and as agents utilizing standardized swap documentation. As a result, the            swap market has become relatively liquid in comparison with the markets for other            similar instruments which are traded in the interbank market. See “Illiquid            Securities.” Restrictions adopted by the CFTC may in the future restrict the            Fund’s ability to enter into swap transactions.

***Derivative Securities: Hedging Strategies***

**Hedging Strategies.**The Fund may use            certain strategies designed to adjust the overall risk of its investment portfolio.            These “hedging” strategies involve derivative contracts, including (but not            limited to) US Treasury and Eurodollar futures contracts and exchange-traded put and            call options on such futures contracts. New financial

 

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products and risk management techniques continue to be developed and may            be used if consistent with the Fund’s investment objective and policies. Among            other purposes, these hedging strategies may be used to effectively maintain a desired            portfolio duration or to protect against market risk should the Fund change its            investments among different types of fixed income securities.

The            Fund might not use any hedging strategies, and there can be no assurance that any            strategy used will succeed. If the Advisor is incorrect in its judgment on market            values, interest rates, currency rates or other economic factors in using a hedging            strategy, the Fund may have lower net income and a net loss on the investment. Each of            these strategies involves certain risks, which include:

| **•** | the fact that the skills needed to use hedging                            instruments are different from those needed to select securities for                            the Fund; |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | the possibility of imperfect correlation, or even no                            correlation, between the price movements of hedging instruments and                            price movements of the securities or currencies being                            hedged; |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | possible constraints placed on the Fund’s ability                            to purchase or sell portfolio investments at advantageous times due to                            the need for the Fund to maintain “cover” or to segregate                            securities; and |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | the possibility that the Fund will be unable to close                            out or liquidate its hedged position. |
|------------|------------------------------------------------------------------------------------------------------------------------|

A            hedge is designed to offset a loss in a portfolio position with a gain in the hedged            position; at the same time, however, a properly correlated hedge will result in a gain            in the portfolio position being offset by a loss in the hedged position. As a result,            the use of derivative transactions for hedging purposes could limit any potential gain            from an increase in the value of the position hedged. With respect to futures            contracts, since the value of portfolio securities will generally far exceed the value            of the futures contracts sold by the Fund, an increase in the value of the futures            contracts could only mitigate, but not totally offset, the decline in the value of the            Fund’s assets.

In            hedging transactions based on an index, whether the Fund will realize a gain or loss            depends upon movements in the level of securities prices in the securities market            generally or, in the case of certain indexes, in an industry or market segment, rather            than movements in the price of a particular security. The risk of imperfect correlation            increases as the composition of the Fund’s portfolio varies from the composition            of the index. In an effort to compensate for imperfect correlation of relative            movements in the hedged position and the hedge, the Fund’s hedge positions may be            in a greater or lesser dollar amount than the dollar amount of the hedged position.            Such “over hedging” or “under hedging” may adversely affect the            Fund’s net investment results if market movements are not as anticipated when the            hedge is established.

Securities index futures transactions may be subject to additional            correlation risks. First, all participants in the futures market are subject to margin            deposit and maintenance requirements. Rather than meeting additional margin deposit            requirements, investors may close futures contracts through offsetting transactions            which would distort the normal relationship between the securities index and futures            markets. Secondly, from the point of view of speculators, the deposit requirements in            the futures market are less onerous than margin requirements in the securities market.            Therefore, increased participation by speculators in the futures market also may cause            temporary price distortions. Because of the possibility of price distortions in the            futures market and the imperfect correlation between movements in a securities index            and movements in the price of securities index futures, a correct forecast of general            market trends by the Advisor still may not result in a successful hedging            transaction.

To            the extent that the Fund engages in the strategies described above, the Fund may            experience losses greater than if these strategies had not been utilized. In addition            to the risks described above, these instruments may be illiquid and/or subject to            trading limits, and the Fund may be unable to close out a position without incurring            substantial losses, if at all. The Fund is also subject to the risk of a default by a            counterparty to an off-exchange transaction. See “Illiquid            Securities.”

 

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***Mortgage-Backed and Asset-Backed Securities***

**General Characteristics.**The Fund may            invest in mortgage-backed securities. A mortgage-backed security consists of a pool of            mortgage loans evidenced by promissory notes secured by first mortgages or first deeds            of trust or other similar security instruments creating a first lien on owner occupied            and non-owner occupied one-unit to four-unit residential properties, multifamily            (i.e., five or more) properties,            agriculture properties, commercial properties and mixed use properties.

The            investment characteristics of adjustable and fixed rate mortgage-backed securities            differ from those of traditional fixed-income securities. The major differences include            the payment of interest and principal on mortgage-backed securities on a more frequent            (usually monthly) schedule, and the possibility that principal may be prepaid at any            time due to prepayments on the underlying mortgage loans or other assets. These            differences can result in significantly greater price and yield volatility than is the            case with traditional fixed-income securities. As a result, if the Fund purchases            mortgage-backed securities at a premium, a faster than expected prepayment rate will            decrease both the market value and the yield to maturity from those which were            anticipated. A prepayment rate that is slower than expected will have the opposite            effect of increasing yield to maturity and market value. Conversely, if the Fund            purchases mortgage-backed securities at a discount, faster than expected prepayments            will increase, while slower than expected prepayments will decrease yield to maturity            and market values. To the extent that the Fund invests in mortgage-backed securities,            the Advisor may seek to manage these potential risks by investing in a variety of            mortgage-backed securities and by using certain hedging techniques.

**Government Guaranteed Mortgage-Backed Securities.**The Fund’s investments in mortgage-backed securities may include            securities issued or guaranteed by the US government or one of its agencies,            authorities, instrumentalities or sponsored enterprises, such as Ginnie Mae, Fannie Mae            and Freddie Mac. There are several types of guaranteed mortgage-backed securities            currently available, including guaranteed mortgage pass-through certificates and            multiple class securities, which include guaranteed Real Estate Mortgage Investment            Conduit Certificates (“REMIC Certificates”), collateralized mortgage            obligations (“CMOs”) and stripped mortgage-backed securities. The Fund is            permitted to invest in other types of mortgage-backed securities that may be available            in the future to the extent consistent with its investment policies and            objective.

**Ginnie Mae Certificates.**Ginnie Mae is a            wholly-owned corporate instrumentality of the United States within the Department of            Housing and Urban Development. The National Housing Act of 1934, as amended (the            “Housing Act”), authorizes Ginnie Mae to guarantee the timely payment of            the principal of and interest on certificates that are based on and backed by a pool of            mortgage loans insured by the Federal Housing Administration under the Housing Act, or            Title V of the Housing Act of 1949 (“FHA Loans”), or guaranteed by the            Department of Veterans Affairs under the Servicemen’s Readjustment Act of 1944,            as amended (“VA Loans”), or by pools of other eligible mortgage loans. The            Housing Act provides that the full faith and credit of the US government is pledged to            the payment of all amounts that may be required to be paid under any Ginnie Mae            guaranty. In order to meet its obligations under such guaranty, Ginnie Mae is            authorized to borrow from the US Treasury with no limitations as to amount.

The            Ginnie Mae Certificates in which the Fund may invest will represent a pro rata interest            in one or more pools of the following types of mortgage loans: (1) fixed-rate            level payment mortgage loans; (2) fixed-rate graduated payment mortgage loans;            (3) fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans            secured by manufactured (mobile) homes; (5) mortgage loans on multifamily            residential properties under construction; (6) mortgage loans on completed            multifamily projects; (7) fixed-rate mortgage loans as to which escrowed funds are            used to reduce the borrower’s monthly payments during the early years of the            mortgage loans (“buy down” mortgage loans); (8) mortgage loans that            provide for adjustments in payments based on periodic changes in interest rates or in            other payment terms of the mortgage loans; and (9) mortgage-backed serial            notes.

**Fannie Mae Certificates.**Fannie Mae is a            federally chartered and privately owned corporation organized and existing under the            Federal National Mortgage Association Charter Act of 1938. The obligations of Fannie            Mae are not backed by the full faith and credit of the US government. Each Fannie Mae            Certificate will represent a pro rata interest in one or more pools of FHA Loans, VA            Loans or conventional mortgage loans            (i.e., mortgage loans that are not            insured or guaranteed by any governmental agency) of the following types:            (1) fixed-rate level payment mortgage loans; (2) fixed-rate growing equity            mortgage loans; (3) fixed-rate graduated payment mortgage loans;

 

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(4) variable rate mortgage loans; (5) other adjustable rate            mortgage loans; and (6) fixed-rate and adjustable mortgage loans secured by            multifamily projects.

**Freddie Mac Certificates.**Freddie Mac is a            corporate instrumentality of the United States created pursuant to the Emergency Home            Finance Act of 1970, as amended (the “FHLMC Act”). The obligations of            Freddie Mac are obligations solely of Freddie Mac and are not backed by the full faith            and credit of the US government. Freddie Mac Certificates represent a pro rata interest            in a group of mortgage loans (a “Freddie Mac Certificate group”) purchased            by Freddie Mac. The mortgage loans underlying the Freddie Mac Certificates will consist            of fixed-rate or adjustable rate mortgage loans with original terms to maturity of            between ten and thirty years, substantially all of which are secured by first liens on            one- to four-family residential properties or multifamily projects. Each mortgage loan            must meet the applicable standards set forth in the FHLMC Act. A Freddie Mac            Certificate group may include whole loans, participating interests in whole loans and            undivided interests in whole loans and participations comprising another Freddie Mac            Certificate group.

**Multiple Class Mortgage-Backed Securities (CMOs and REMIC            Certificates).**The Fund may invest in multiple class            mortgage-backed securities including CMOs and REMIC Certificates. These securities may            be issued by US government agencies and instrumentalities such as Fannie Mae or Freddie            Mac or by trusts formed by private originators of, or investors in, mortgage loans,            including savings and loan associations, mortgage bankers, commercial banks, insurance            companies, investment banks and special purpose subsidiaries of the foregoing. In            general, CMOs are debt obligations of a legal entity that are collateralized by a pool            of mortgage loans or mortgage-backed securities the payments on which are used to make            payments on the CMOs or multiple class mortgage-backed securities. REMIC Certificates            represent beneficial ownership interests in a REMIC trust, generally consisting of            mortgage loans or Fannie Mae, Freddie Mac or Ginnie Mae guaranteed mortgage-backed            securities (the “Mortgage Assets”). The obligations of Fannie Mae or            Freddie Mac under their respective guaranty of the REMIC Certificates are obligations            solely of Fannie Mae or Freddie Mac, respectively. Although investors may purchase            beneficial interests in REMICs, which are known as “regular” interests or            “residual” interests, the Fund does not intend to purchase such residual            interests in REMICs.

Fannie Mae REMIC Certificates are issued and guaranteed as to timely            distribution of principal and interest by Fannie Mae. In addition, Fannie Mae will be            obligated to distribute the principal balance of each class of REMIC Certificates in            full, whether or not sufficient funds are otherwise available.

Freddie Mac guarantees the timely payment of interest on Freddie Mac            REMIC Certificates and also guarantees the payment of principal as payments are            required to be made on the underlying mortgage participation certificates            (“PCs”). PCs represent undivided interests in specified level payment,            residential mortgages or participation therein purchased by Freddie Mac and placed in a            PC pool. With respect to principal payments on PCs, Freddie Mac generally guarantees            ultimate collection of all principal of the related mortgage loans without offset or            deduction. Freddie Mac also guarantees timely payment of principal of certain            PCs.

CMOs and REMIC Certificates are issued in multiple classes. Each class            of CMOs or REMIC Certificates, often referred to as a “tranche,” is issued            at a specific adjustable or fixed interest rate and must be fully retired no later than            its final distribution date. Principal prepayments on the underlying mortgage loans or            the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or all of            the classes of CMOs or REMIC Certificates to be retired substantially earlier than            their final distribution dates. Generally, interest is paid or accrues on all classes            of CMOs or REMIC Certificates on a monthly basis.

The            principal of and interest on the Mortgage Assets may be allocated among the several            tranches in various ways. In certain structures (known as “sequential pay”            CMOs or REMIC Certificates), payments of principal, including any principal            prepayments, on the Mortgage Assets generally are applied to the classes of CMOs or            REMIC Certificates in the order of their respective final distribution dates. Thus, no            payment of principal will be made on any class of sequential pay CMOs or REMIC            Certificates until all other classes having an earlier final distribution date have            been paid in full. Additional structures of CMOs and REMIC Certificates include, among            others, “parallel pay” CMOs and REMIC Certificates. Parallel pay CMOs or            REMIC Certificates are those which are structured to apply principal payments and            prepayments of the Mortgage Assets to two or more classes concurrently on a            proportionate or disproportionate basis. These simultaneous payments are taken into            account in calculating the final distribution date of each class.

 

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A            wide variety of REMIC Certificates may be issued in parallel pay or sequential pay            structures. These securities include accrual certificates (also known as            “Z-Bonds”), which only accrue interest at a specified rate until all other            certificates having an earlier final distribution date have been retired and are            converted thereafter to an interest-paying security, and planned amortization class            (“PAC”) certificates, which are parallel pay REMIC Certificates that            generally require that specified amounts or principal be applied on each payment date            to one or more classes or REMIC Certificates (the “PAC Certificates”), even            though all other principal payments and prepayments of the Mortgage Assets are then            required to be applied to one or more other classes of the PAC Certificates. The            scheduled principal payments for the PAC Certificates generally have the highest            priority on each payment date after interest due has been paid to all classes entitled            to receive interest currently. Shortfalls, if any, are added to the amount payable on            the next payment date. The PAC Certificate payment schedule is taken into account in            calculating the final distribution date of each class of PAC. In order to create PAC            tranches, one or more tranches generally must be created that absorbs most of the            volatility in the underlying mortgage assets. These tranches tend to have market prices            and yields that are much more volatile than other PAC classes.

**Privately Issued Mortgage-Backed Securities.**The Fund may also invest in mortgage-backed securities issued by trusts            or other entities formed or sponsored by private originators of and institutional            investors in mortgage loans and other foreign or domestic non-governmental entities (or            representing custodial arrangements administered by such institutions). These private            originators and institutions include domestic and foreign savings and loan            associations, mortgage bankers, commercial banks, insurance companies, investment banks            and special purpose subsidiaries of the foregoing. Privately issued mortgage-backed            securities are generally backed by pools of conventional (i.e., non-government            guaranteed or insured) mortgage loans. Since such mortgage-backed securities are not            guaranteed by an entity having the credit standing of Ginnie Mae, Fannie Mae or Freddie            Mac, in order to receive a high quality rating, they normally are structured with one            or more types of “credit enhancement.” Such credit enhancements fall            generally into two categories; (1) liquidity protection and (2) protection against            losses resulting after default by a borrower and liquidation of the collateral.            Liquidity protection refers to the providing of cash advances to holders of            mortgage-backed securities when a borrower on an underlying mortgage fails to make its            monthly payment on time.

Protection against losses resulting after default and liquidation is            designed to cover losses resulting when, for example, the proceeds of a foreclosure            sale are insufficient to cover the outstanding amount on the mortgage. Such protection            may be provided through guarantees, insurance policies or letters of credit, through            various means of structuring the transaction or through a combination of such            approaches.

**Mortgage Pass-Through Securities.**The Fund            may invest in mortgage pass-through securities, which are fixed or adjustable rate            mortgage-backed securities that provide for monthly payments that are a            “pass-through” of the monthly interest and principal payments (including            any prepayments) made by the individual borrowers on the pooled mortgage loans, net of            any fees or other amounts paid to any guarantor, administrator and/or servicers of the            underlying mortgage loans.

**Stripped Mortgage-Backed Securities.**The            Fund may purchase stripped mortgage-backed securities (“SMBS”), which are            derivative multi-class mortgage securities. The market value of the class consisting            entirely of principal payments generally is unusually volatile in response to changes            in interest rates. The yields on a class of SMBS that receives all or most of the            interest from the Mortgage Assets are generally higher than prevailing market yields on            other mortgage-backed securities because their cash flow patterns are more volatile and            there is a greater risk that the initial investment will not be fully recouped. See            “Illiquid Securities.”

In            accordance with a requirement imposed by the staff of the SEC, the Advisor will            consider privately-issued fixed rate interest only classes of SMBS (“IO”)            and principal only classes of SMBS (“PO”) to be illiquid securities for            purposes of the Fund’s limitation on investments in illiquid securities. Unless            the Advisor determines that a particular government-issued fixed rate IO or PO is            liquid, it will also consider these IOs and POs to be illiquid.

**Adjustable Rate Mortgages-Interest Rate Indices.**Adjustable rate mortgages in which the Fund invests may be adjusted on            the basis of one of several indices. The One Year Treasury Index is the figure derived            from the average weekly quoted yield on US Treasury Securities adjusted to a constant            maturity of one year. The Cost of Funds Index reflects the monthly weighted average            cost of funds of savings and loan associations and savings banks whose home offices are            located in Arizona, California and Nevada (the “FHLB Eleventh District”)            that are member

 

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institutions of the Federal Home Loan Bank of San Francisco (the            “FHLB of San Francisco”), as computed from statistics tabulated and            published by the FHLB of San Francisco. The FHLB of San Francisco normally announces            the Cost of Funds Index on the last working day of the month following the month in            which the cost of funds was incurred.

A            number of factors affect the performance of the Cost of Funds Index and may cause the            Cost of Funds Index to move in a manner different from indices based upon specific            interest rates, such as the One Year Treasury Index. Because of the various origination            dates and maturities of the liabilities of members of the FHLB Eleventh District upon            which the Cost of Funds Index is based, among other things, at any time the Cost of            Funds Index may not reflect the average prevailing market interest rates on new            liabilities of similar maturities. There can be no assurance that the Cost of Funds            Index will necessarily move in the same direction or at the same rate as prevailing            interest rates, since as longer term deposits or borrowings mature and are renewed at            market interest rates, the Cost of Funds Index will rise or fall depending upon the            differential between the prior and the new rates on such deposits and borrowings. In            addition, dislocations in the thrift industry in recent years have caused and may            continue to cause the cost of funds of thrift institutions to change for reasons            unrelated to changes in general interest rate levels. Furthermore, any movement in the            Cost of Funds Index as compared to other indices based upon specific interest rates may            be affected by changes instituted by the FHLB of San Francisco in the method used to            calculate the Cost of Funds Index. To the extent that the Cost of Funds Index may            reflect interest changes on a more delayed basis than other indices, in a period of            rising interest rates, any increase may produce a higher yield later than would be            produced by such other indices, and in a period of declining interest rates, the Cost            of Funds Index may remain higher than other market interest rates which may result in a            higher level of principal prepayments on mortgage loans which adjust in accordance with            the Cost of Funds Index than mortgage loans which adjust in accordance with other            indices.

LIBOR, the London interbank offered rate, is the interest rate that the            most creditworthy international banks dealing in US dollar-denominated deposits and            loans charge each other for large dollar-denominated loans. LIBOR is also usually the            base rate for large dollar-denominated loans in the international market. LIBOR is            generally quoted for loans having rate adjustments at one, three, six or twelve month            intervals.

**Asset-Backed Securities.**The Fund may            invest in securities generally referred to as asset-backed securities. Asset-backed            securities are secured by and payable from, or directly or indirectly represent            undivided fractional interests in, pools of consumer loans (unrelated to mortgage            loans), trade receivables or other types of loans held in a trust. Asset-backed            securities may provide periodic payments that consist of interest and/or principal            payments. Consequently, the life of an asset-backed security varies with the prepayment            and loss experience of the underlying assets. Payments of principal and interest are            typically supported by some form of credit enhancement, such as a letter of credit,            surety bond, limited guarantee or senior/subordination. The degree of credit            enhancement varies, but generally amounts to only a fraction of the asset-backed            security’s par value until exhausted. If the credit enhancement is exhausted,            certificate-holders may experience losses or delays in payment if the required payments            of principal and interest are not made to the trust with respect to the underlying            loans. The value of the securities also may change because of changes in the            market’s perception of creditworthiness of the servicing agent for the loan pool,            the originator of the loans or the financial institution providing the credit            enhancement. Asset-backed securities are ultimately dependent upon payment of loans and            receivables by individuals, businesses and other borrowers, and the certificate-holder            generally has no recourse against the entity that originated the loans.

Asset-backed securities have structural characteristics similar to            mortgage-backed securities. However, the underlying assets are not first lien mortgage            loans or interests therein but include assets such as (but not limited to) motor            vehicle installment sale contracts, other installment sale contracts, home equity            loans, leases of various types of real and personal property, receivables from            revolving credit (credit card) agreements and trade receivables. Such assets are            securitized through the use of trusts or special purpose corporations. Payments or            distributions of principal and interest on asset-backed securities may be guaranteed up            to certain amounts and for a certain time period by a letter of credit or a pool            insurance policy issued by a financial institution unaffiliated with the issuer, or            other credit enhancements may be present.

Asset-backed securities present certain additional risks that are not            presented by mortgage-backed securities. Primarily, these securities do not have the            benefit of the same type of security interest in the related collateral. Credit card            receivables are generally unsecured, and the debtors are entitled to the protection of            a number of state

 

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and            federal consumer credit laws, many of which give such debtors the right to avoid            payment of certain amounts owed on the credit cards, thereby reducing the balance due.            Most issuers of automobile receivables permit the servicer to retain possession of the            underlying obligations. If the servicer were to sell these obligations to another            party, there is a risk that the purchaser would acquire an interest superior to that of            the holders of the related automobile receivables. In addition, because of the large            number of vehicles involved in a typical issuance and technical requirements under            state laws, the trustee for the holders of the automobile receivables may not have a            proper security interest in all of the obligations backing such receivables. Therefore,            there is the possibility that recoveries on repossessed collateral may not, in some            cases, be available to support payments on these securities.

The            market for privately issued asset-backed securities is smaller and less liquid than the            market for US government mortgage-backed securities. The asset-backed securities in            which the Fund may invest are limited to those which are readily marketable and rated            investment grade by S&P, Moody’s or Fitch.

The            yield characteristics of the asset-backed securities in which the Fund may invest            differ from those of traditional debt securities. Among the major differences are that            interest and principal payments are made more frequently on asset-backed securities            (usually monthly) and that principal may be prepaid at any time because the underlying            assets generally may be prepaid at any time. As a result, if the Fund purchases these            securities at a premium, a prepayment rate that is faster than expected will reduce            their yield, while a prepayment rate that is slower than expected will have the            opposite effect of increasing yield. Conversely, if the Fund purchases these securities            at a discount, faster than expected prepayments will increase, while slower than            expected prepayments will reduce, the yield on these securities. Amounts available for            reinvestment by the Fund are likely to be greater during a period of declining interest            rates and, as a result, are likely to be reinvested at lower interest rates than during            a period of rising interest rates.

**Mortgage-Backed Securities and Asset-Backed Securities — Types            of Credit Support.**Mortgage-backed securities and            asset-backed securities are often backed by a pool of assets representing the            obligations of a number of different parties. To lessen the effect of failure by            obligors on underlying assets to make payments, such securities may contain elements of            credit support. Such credit support falls into two categories: (1) liquidity            protection and (2) protection against losses resulting from ultimate default by an            obligor on the underlying assets. Liquidity protection refers to the provision of            advances, generally by the entity administering the pool of assets, to ensure that the            pass-through of payments due on the underlying pool occurs in a timely fashion.            Protection against losses resulting from ultimate default enhances the likelihood of            ultimate payment of the obligations on at least a portion of the assets in the pool.            Such protection may be provided through guarantees, insurance policies or letters of            credit obtained by the issuer or sponsor from third parties; through various means of            structuring the transaction; or through a combination of such approaches. The Fund will            not usually pay any additional fees for such credit support, although the existence of            credit support may increase the price of a security.

The            ratings of mortgage-backed securities and asset-backed securities for which third-party            credit enhancement provides liquidity protection or protection against losses from            default are generally dependent upon the continued creditworthiness of the provider of            the credit enhancement. The ratings of such securities could be subject to reduction in            the event of deterioration in the creditworthiness of the credit enhancement provider            even in cases where the delinquency and loss experience on the underlying pool of            assets is better than expected.

Examples of credit support arising out of the structure of the            transaction include “senior-subordinated securities” (multiple class            securities with one or more classes subordinate to other classes as to the payment of            principal thereof and interest thereon, with the result that defaults on the underlying            assets are borne first by the holders of the subordinated class), creation of            “reserve funds” (where cash or investments, sometimes funded from a portion            of the payments on the underlying assets, are held in reserve against future losses)            and “over-collateralization” (where the scheduled payments on, or the            principal amount of, the underlying assets exceed those required to make payment of the            securities and pay any servicing or other fees). The degree of credit support provided            for each issue is generally based on historical information with respect to the level            of credit risk associated with the underlying assets. Delinquency or loss in excess of            that which is anticipated could adversely affect the return on an investment in such a            security.

 

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***Securities of Non-US Issuers***

**General.**The Fund focuses on US investment            opportunities, but may invest a portion of its assets in foreign securities. The Fund            will not invest more than 25% of its total assets in equity securities of foreign            issuers under normal conditions. The Fund also will not invest more than 25% of its            total assets in each of the bond and short-term classes in foreign currencies. Foreign            securities of all types will normally constitute less than 50% of the Fund’s            assets. As described in the Fund’s prospectuses, the Funds may also seek exposure            to foreign securities through index derivatives.

With respect to certain countries in which capital markets are either            less developed or not easily accessed, investments by the Fund may be made through            investment in other investment companies that in turn are authorized to invest in the            securities of such countries. Investment in other investment companies is generally            limited in amount by the 1940 Act, will involve the indirect payment of a portion of            the expenses (including advisory fees) of such other investment companies and may            result in a duplication of fees and expenses. See “Other Investment            Companies.”

**Investments in American, European, Global and International            Depository Receipts.**The Fund may invest in non-US securities            in the form of American Depositary Receipts (“ADRs”), European Depositary            Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) and            International Depository Receipts (“IDRs”) or other similar securities            representing ownership of securities of non-US issuers held in trust by a bank or            similar financial institution. ADRs are receipts typically issued by a US bank or trust            company which evidence ownership of underlying securities issued by a foreign            corporation. EDRs and IDRs are receipts issued in Europe typically by non-US banking            and trust companies that evidence ownership of either foreign or US securities. GDRs            are receipts issued by either a US or non-US banking institution evidencing ownership            of the underlying non-US securities . Generally, ADRs, in registered form, are designed            for use in US securities markets and EDRs, GDRs and IDRs, in bearer form, are designed            for use in European and international securities markets. An ADR, EDR, GDR or IDR may            be denominated in a currency different from the currency in which the underlying            foreign security is denominated. ADRs, EDRs, GDRs and IDRs are alternatives to the            purchase of the underlying securities in their national markets and currencies, but are            subject to the same risks as the non-US securities to which they relate.

**Foreign Corporate Debt Securities.**The Fund            may invest in the debt securities of foreign companies. Investing in the securities of            foreign companies involves more risks than investing in securities of US companies.            Their value is subject to economic and political developments in the countries where            the companies operate and to changes in foreign currency values. Values may also be            affected by foreign tax laws, changes in foreign economic or monetary policies,            exchange control regulations and regulations involving prohibitions on the repatriation            of foreign currencies.

In            addition, the relative performance of various countries’ fixed income markets            historically has reflected wide variations relating to the unique characteristics of            each country’s economy. Year-to-year fluctuations in certain markets have been            significant, and negative returns have been experienced in various markets from time to            time.

**Foreign Government Debt Securities.**The            Fund may invest in foreign government debt securities, which include debt obligations            issued or guaranteed by national, state or provincial governments or similar political            subdivisions and quasi-governmental and supranational entities (collectively,            “sovereign debt obligations”). Sovereign debt obligations, especially those            of developing countries, may involve a high degree of risk. The issuer of such an            obligation or the governmental authorities that control the repayment of the obligation            may be unable or unwilling to repay principal and interest when due and may require            renegotiation or rescheduling of debt payments. In addition, prospects for repayment of            principal and interest may depend on political as well as economic factors.

Quasi-governmental and supranational entities include international            organizations designated or supported by governmental entities to promote economic            reconstruction or development and international banking institutions and related            government agencies. Examples include (but are not limited to) the International Bank            for Reconstruction and Development (the “World Bank”), the Japanese            Development Bank, the Asian Development Bank and the Inter-American Development Bank.            Foreign government securities also include mortgage-related securities issued or            guaranteed by national, state or provincial governmental instrumentalities, including            quasi-governmental agencies.

 

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**Foreign Fixed Income Securities.**Since most            foreign fixed income securities are not rated, the Fund will invest in foreign fixed            income securities based on the Advisor’s analysis without relying on published            ratings. Since such investments will be based upon the Advisor’s analysis rather            than upon published ratings, achievement of the Fund’s goals may depend more upon            the abilities of the Advisor than would otherwise be the case.

The            value of the foreign fixed income securities held by the Fund, and thus the net asset            value of the Fund’s shares, generally will fluctuate with (a) changes in the            perceived creditworthiness of the issuers of those securities, (b) movements in            interest rates, and (c) changes in the relative values of the currencies in which the            Fund’s investments in fixed income securities are denominated with respect to the            US Dollar. The extent of the fluctuation will depend on various factors, such as the            average maturity of the Fund’s investments in foreign fixed income securities,            and the extent to which the Fund hedges its interest rate, credit and currency exchange            rate risks. A longer average maturity generally is associated with a higher level of            volatility in the market value of such securities in response to changes in market            conditions.

Investments in sovereign debt, including Brady Bonds (Brady Bonds are            debt securities issued under a plan implemented to allow debtor nations to restructure            their outstanding commercial bank indebtedness), involve special risks. Foreign            governmental issuers of debt or the governmental authorities that control the repayment            of the debt may be unable or unwilling to repay principal or pay interest when due. In            the event of default, there may be limited or no legal recourse in that, generally,            remedies for defaults must be pursued in the courts of the defaulting party. Political            conditions, especially a sovereign entity’s willingness to meet the terms of its            fixed income securities, are of considerable significance. Also, there can be no            assurance that the holders of commercial bank loans to the same sovereign entity may            not contest payments to the holders of sovereign debt in the event of default under            commercial bank loan agreements. In addition, there is no bankruptcy proceeding with            respect to sovereign debt on which a sovereign has defaulted, and the Fund may be            unable to collect all or any part of its investment in a particular issue. Foreign            investment in certain sovereign debt is restricted or controlled to varying degrees,            including requiring governmental approval for the repatriation of income, capital or            proceed of sales by foreign investors. These restrictions or controls may at times            limit or preclude foreign investment in certain sovereign debt or increase the costs            and expenses of the Fund.

Sovereign debt of emerging market governmental issuers is to be            considered speculative. Emerging market governmental issuers are among the largest            debtors to commercial banks, foreign governments, international financial organizations            and other financial institutions. Certain emerging market governmental issuers have not            been able to make payments of interest on or principal of debt obligations as those            payments have come due. There is a history of defaults with respect to commercial bank            loans by public and private entities issuing sovereign debt. All or a portion of the            interest payments and/or principal repayment with respect to sovereign debt may be            uncollateralized. Obligations arising from past restructuring agreements may affect the            economic performance and political and social stability of those issuers.

The            ability of emerging market country governmental issuers to make timely payments on            their obligations is likely to be influenced strongly by the issuer’s balance of            payments, including export performance, and its access to international credits and            investments. An emerging market whose exports are concentrated in a few commodities            could be vulnerable to a decline in the international prices of one or more of those            commodities. Increased protectionism on the part of an emerging market’s trading            partners could also adversely affect the country’s exports and diminish its trade            account surplus, if any. To the extent that emerging markets receive payment for its            exports in currencies other than dollars or non-emerging market currencies, its ability            to make debt payments denominated in dollars or non-emerging market currencies could be            affected.

Another factor bearing on the ability of emerging market countries to            repay debt obligations is the level of international reserves of the country.            Fluctuations in the level of these reserves affect the amount of foreign exchange            readily available for external debt payments and thus could have a bearing on the            capacity of emerging market countries to make payments on these debt            obligations.

To            the extent that an emerging market country cannot generate a trade surplus, it must            depend on continuing loans from foreign governments, multilateral organizations or            private commercial banks, aid payments from foreign governments and inflows of foreign            investment. The access of emerging markets to these forms of external funding may not            be certain, and a withdrawal of external funding could adversely affect the capacity of            emerging market

 

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country governmental issuers to make payments on their obligations. In            addition, the cost of servicing emerging market debt obligations can be affected by a            change in international interest rates since the majority of these obligations carry            interest rates that are adjusted periodically based upon international            rates.

**Foreign Investments.**Foreign securities are            normally denominated and traded in foreign currencies. As a result, the value of the            Fund’s foreign investments and the value of its shares may be affected favorably            or unfavorably by changes in currency exchange rates relative to the US dollar. There            may be less information publicly available about a foreign issuer than about a US            issuer, and foreign issuers may not be subject to accounting, auditing and financial            reporting standards and practices comparable to those in the US. The securities of some            foreign issuers are less liquid and at times more volatile than securities of            comparable US issuers. Foreign brokerage commissions and other fees are also generally            higher than in the US. Foreign settlement procedures and trade regulations may involve            certain risks (such as delay in payment or delivery of securities or in the recovery of            the Fund’s assets held abroad) and expenses not present in the settlement of            investments in US markets. Payment for securities without delivery may be required in            certain foreign markets.

In            addition, foreign securities may be subject to the risk of nationalization or            expropriation of assets, imposition of currency exchange controls or restrictions on            the repatriation of foreign currency, confiscatory taxation, political or financial            instability and diplomatic developments which could affect the value of the            Fund’s investments in certain foreign countries. Governments of many countries            have exercised and continue to exercise substantial influence over many aspects of the            private sector through the ownership or control of many companies, including some of            the largest in these countries. As a result, government actions in the future could            have a significant effect on economic conditions which may adversely affect prices of            certain portfolio securities. There is also generally less government supervision and            regulation of stock exchanges, brokers, and listed companies than in the US. Dividends            or interest on, or proceeds from the sale of, foreign securities may be subject to            foreign withholding taxes, and special US tax considerations may apply. Moreover,            foreign economies may differ favorably or unfavorably from the US economy in such            respects as growth of gross national product, rate of inflation, capital reinvestment,            resource self-sufficiency and balance of payments position.

Legal remedies available to investors in certain foreign countries may            be more limited than those available with respect to investments in the US or in other            foreign countries. The laws of some foreign countries may limit the Fund’s            ability to invest in securities of certain issuers organized under the laws of those            foreign countries.

Of            particular importance, many foreign countries are heavily dependent upon exports,            particularly to developed countries, and, accordingly, have been and may continue to be            adversely affected by trade barriers, managed adjustments in relative currency values,            and other protectionist measures imposed or negotiated by the US and other countries            with which they trade. These economies also have been and may continue to be negatively            impacted by economic conditions in the US and other trading partners, which can lower            the demand for goods produced in those countries.

The            risks described above, including the risks of nationalization or expropriation of            assets, typically are increased in connection with investments in “emerging            markets.” For example, political and economic structures in these countries may            be in their infancy and developing rapidly, and such countries may lack the social,            political and economic stability characteristic of more developed countries (including            amplified risk of war and terrorism). Certain of these countries have in the past            failed to recognize private property rights and have at times nationalized and            expropriated the assets of private companies. Investments in emerging markets may be            considered speculative.

The            currencies of certain emerging market countries have experienced devaluations relative            to the US dollar, and future devaluations may adversely affect the value of assets            denominated in such currencies. In addition, currency hedging techniques may be            unavailable in certain emerging market countries. Many emerging market countries have            experienced substantial, and in some periods extremely high, rates of inflation or            deflation for many years, and future inflation may adversely affect the economies and            securities markets of such countries.

In            addition, unanticipated political or social developments may affect the value of            investments in emerging markets and the availability of additional investments in these            markets. Any change in the leadership or politics of emerging market countries, or the            countries that exercise a significant influence over those countries, may halt the            expansion of or reverse the liberalization of foreign investment policies now occurring            and adversely affect existing investment

 

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opportunities. The small size, limited trading volume and relative            inexperience of the securities markets in these countries may make investments in            securities traded in emerging markets illiquid and more volatile than investments in            securities traded in more developed countries. For example, limited market size may            cause prices to be unduly influenced by traders who control large positions. In            addition, the Fund may be required to establish special custodial or other arrangements            before making investments in securities traded in emerging markets. There may be little            financial or accounting information available with respect to issuers of emerging            market securities, and it may be difficult as a result to assess the value of prospects            of an investment in such securities.

The            risk also exists that an emergency situation may arise in one or more emerging markets            as a result of which trading of securities may cease or may be substantially curtailed            and prices for the Fund’s securities in such markets may not be readily            available. The Fund may suspend redemption of its shares for any period during which an            emergency exists, as determined by the SEC. Accordingly if the Fund believes that            appropriate circumstances exist, it will promptly apply to the SEC for a determination            that an emergency is present. During the period commencing from the Fund’s            identification of such condition until the date of the SEC action, the Fund’s            securities in the affected markets will be valued at fair value determined in good            faith by or under the direction of the Fund’s Board.

Certain of the foregoing risks may also apply to some extent to            securities of US issuers that are denominated in foreign currencies or that are traded            in foreign markets, or securities of US issuers having significant foreign            operations.

***Currency Management***

**General.**In connection with the            Fund’s investments denominated in foreign currencies, the Advisor may choose to            utilize a variety of currency management (hedging) strategies. The Advisor seeks to            take advantage of different yield, risk and return characteristics that different            currencies, currency denominations and countries can provide to US investors. In doing            so, the Advisor will consider such factors as the outlook for currency relationships;            current and anticipated interest rates; levels of inflation within various countries;            prospects for relative economic growth; and government policies influencing currency            exchange rates and business conditions. Although the Advisor may attempt to manage            currency exchange rate risks, there is no assurance that the Advisor will do so, or do            so at an appropriate time or that the Advisor will be able to predict exchange rates            accurately.

**Currency Exchange Transactions.**Because the            Fund may buy and sell securities denominated in currencies other than the US dollar and            receives interest, dividends and sale proceeds in currencies other than the US dollar,            the Fund from time to time may enter into currency exchange transactions to convert to            and from different currencies and to convert foreign currencies to and from the US            dollar. The Fund either enters into these transactions on a spot            (i.e., cash) basis at the spot rate            prevailing in the currency exchange market or uses forward currency exchange contracts            (discussed below) to purchase or sell currencies. Neither spot transactions nor forward            currency exchange contracts eliminate fluctuations in the prices of the Fund’s            securities or in foreign exchange rates, or prevent loss if the prices of these            securities should decline.

**Currency Hedging.**The Fund’s currency            hedging strategies may include hedging involving either specific transactions or            portfolio positions. Transaction hedging is the purchase or sale of forward currency            with respect to specific receivables or payables of the Fund generally accruing in            connection with the purchase or sale of its portfolio securities. Position hedging is            the sale of forward currency with respect to portfolio security positions.

A            decline in the US dollar value of a foreign currency in which the Fund’s            securities are denominated will reduce the US dollar value of the securities, even if            their value in the foreign currency remains constant. The use of currency hedges does            not eliminate fluctuations in the underlying prices of the securities, but it does            establish a rate of exchange that can be achieved in the future. For example, in order            to protect against diminutions in the US dollar value of non-dollar denominated            securities it holds, the Fund may purchase foreign currency put options. If the value            of the foreign currency does decline, the Fund will have the right to sell the currency            for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse            effect on the US dollar value of its securities that otherwise would have resulted.            Conversely, if a rise in the US dollar value of a currency in which securities to be            acquired are denominated is projected, thereby potentially increasing the cost of the            securities, the Fund may purchase call options on the particular currency. The purchase            of these options could offset, at least partially, the effects of the adverse movements            in exchange rates. The benefit to the Fund derived from purchases of            currency

 

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options, like the benefit derived from other types of options, will be            reduced by premiums and other transaction costs.

Because transactions in currency exchange are generally conducted on a            principal basis, no fees or commissions are generally involved. Currency hedging            involves some of the same risks and considerations as other transactions with similar            instruments. Although currency hedges limit the risk of loss due to a decline in the            value of a hedged currency, at the same time, they also limit any potential gain that            might result should the value of the currency increase. If a devaluation is generally            anticipated, the Fund may not be able to contract to sell a currency at a price above            the devaluation level it anticipates.

**Cross Hedging.**At the discretion of the            Advisor, the Fund may employ the currency hedging strategy known as            “cross-hedging” by using forward currency contracts, currency options or a            combination of both. When engaging in cross-hedging, the Fund seeks to protect against            a decline in the value of a foreign currency in which certain of its portfolio            securities are denominated by selling that currency forward into a different foreign            currency for the purpose of diversifying the Fund’s total currency exposure or            gaining exposure to a foreign currency that is expected to appreciate.

**Forward Currency Exchange Contracts.**A            forward currency exchange contract is an obligation by the Fund to purchase or sell a            specific currency at a future date, which may be any fixed number of days from the date            of the contract. Forward currency exchange contracts establish an exchange rate at a            future date. These contracts are transferable in the interbank market conducted            directly between currency traders (usually large commercial banks and brokerages) and            their customers. A forward currency exchange contract may not have a deposit            requirement and may be traded at a net price without commission. The Fund maintains a            segregated account of cash or liquid securities in an amount at least equal to its            obligations under each forward currency exchange contract.

The            Fund may enter into forward currency exchange contracts as described in the prospectus.            Additionally, the Fund also may enter into foreign currency hedging transactions in an            attempt to protect against changes in currency exchange rates between the trade and            settlement dates of specific securities transactions or changes in currency exchange            rates that would adversely affect a portfolio position or an anticipated investment            position. Since consideration of the prospect for currency parities will be            incorporated into the Advisor’s long-term investment decisions, the Fund will not            routinely enter into currency hedging transactions with respect to security            transactions; however, the Advisor believes that it is important to have the            flexibility to enter into currency hedging transactions when it determines that the            transactions would be in the Fund’s best interest. Although these transactions            tend to minimize the risk of loss due to a decline in the value of the hedged currency,            at the same time they tend to limit any potential gain that might be realized should            the value of the hedged currency increase. The precise matching of the forward contract            amounts and the value of the securities involved will not generally be possible because            the future value of such securities in foreign currencies will change as a consequence            of market movements in the value of such securities between the date the forward            contract is entered into and the date it matures. The projection of currency market            movements is extremely difficult, and the successful execution of a hedging strategy is            highly uncertain.

While these contracts are not presently regulated by the CFTC, the CFTC            may in the future assert authority to regulate forward contracts. In such event the            Fund’s ability to utilize forward contracts may be restricted. Forward contracts            may reduce the potential gain from a positive change in the relationship between the US            dollar and foreign currencies. Unanticipated changes in currency prices may result in            poorer overall performance for the Fund than if it had not entered into such contracts.            The use of currency forward contracts may not eliminate fluctuations in the underlying            US dollar equivalent value of the prices of or rates of return on the Fund’s            foreign currency denominated portfolio securities and the use of such techniques will            subject the Fund to certain risks.

The            matching of the increase in value of a forward contract and the decline in the US            dollar equivalent value of the foreign currency denominated asset that is the subject            of the hedge generally will not be precise. In addition, the Fund may not always be            able to enter into currency forward contracts at attractive prices, and this will limit            the Fund’s ability to use such contracts to hedge or cross-hedge its assets.            Also, with regard to the Fund’s use of cross-hedges, there can be no assurance            that historical correlations between the movement of certain foreign currencies            relative to the US dollar will continue. Thus, at any time poor correlation may exist            between movements in the

 

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exchange rates of the foreign currencies underlying the Fund’s            cross-hedges and the movements in the exchange rates of the foreign currencies in which            the Fund’s assets that are the subject of such cross-hedges are            denominated.

The            Fund will segregate cash or liquid securities in an amount equal to the value of the            Fund’s total assets committed to the consummation of forward currency contracts            requiring the Fund to purchase foreign currencies or forward contracts entered into for            non-hedging purposes. If the value of the segregated securities declines, additional            cash or liquid securities will be segregated on a daily basis so that the value of the            assets will equal the amount of the Fund’s commitments with respect to such            contracts. The segregated assets will be marked-to-market on a daily basis.

The            Fund may sell US dollars and buy a foreign currency forward in order to gain exposure            to a currency which is expected to appreciate against the US dollar. This speculative            strategy allows the Fund to benefit from currency appreciation potential without            requiring it to purchase a local fixed income instrument, for which prospects may be            relatively unattractive. It is the Advisor’s intention that the Fund’s net            US dollar currency exposure generally will not fall below zero (i.e., that net short            positions in the US dollar generally will not be taken).

The            Fund may also utilize forward foreign currency contracts to establish a synthetic            investment position designed to change the currency characteristics of a particular            security without the need to sell such security. Synthetic investment positions will            typically involve the purchase of US dollar-denominated securities together with a            forward contract to purchase the currency to which the Fund seeks exposure and to sell            US dollars. This may be done because the range of highly liquid short-term instruments            available in the US may provide greater liquidity to the Fund than actual purchases of            foreign currency-denominated securities in addition to providing superior returns in            some cases. Depending on (a) the Fund’s liquidity needs, (b) the relative yields            of securities denominated in different currencies and (c) spot and forward currency            rates, a significant portion of the Fund’s assets may be invested in synthetic            investment positions, subject to compliance with the tax requirements for qualification            as a regulated investment company.

There is a risk in adopting a synthetic investment position. It is            impossible to forecast with absolute precision what the market value of a particular            security will be at any given time. If the value of the US dollar-denominated security            is not exactly matched with the Fund’s obligation under a forward currency            contract on the date of maturity, the Fund may be exposed to some risk of loss from            fluctuations in the value of the US dollar. Although the Advisor will attempt to hold            such mismatching to a minimum, there can be no assurance that the Advisor will be able            to do so.

**Options on Foreign Currencies.**The Fund may            write covered put and call options and purchase put call options on foreign currencies            for the purpose of protecting against declines in the dollar value of portfolio            securities and against increases in the dollar cost of securities to be acquired. The            Fund may also use currency options to achieve a desired currency weighting in a            cost-effective manner. The Fund may use options on currencies to cross-hedge, which            involves writing or purchasing options on one currency to hedge against changes in            exchange rates for a different, but related currency. As with other types of options,            however, the writing of an option on foreign currency will constitute only a partial            hedge up to the amount of the premium received, and the Fund could be required to            purchase or sell foreign currencies at disadvantageous exchange rates, thereby            incurring losses. The purchase of an option on foreign currency may be used to hedge            against fluctuations in exchange rates although, in the event of exchange rate            movements adverse to the Fund’s position, it may forfeit the entire amount of the            premium plus related transaction costs. In addition the Fund may purchase call options            on currency when the Advisor anticipates that the currency will appreciate in            value.

The            Fund may also write options on foreign currencies for the same types of hedging or            currency management purposes. For example, where the Fund anticipates a decline in the            dollar value of foreign currency denominated securities due to adverse fluctuations in            exchange rates it could, instead of purchasing a put option, write a call option on the            relevant currency. If the expected decline occurs, the options will most likely not be            exercised, and the diminution in value of portfolio securities will be offset by the            amount of the premium received.

Similarly, instead of purchasing a call option to hedge against an            anticipated increase in the dollar cost of securities to be acquired, the Fund could            write a put option on the relevant currency which, if rates move in the manner            projected, will expire unexercised and allow the Fund to hedge such increased cost up            to the amount of the premium.

 

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As            in the case of other types of options, however, the writing of a foreign currency            option will constitute only a partial hedge up to the amount of the premium, and only            if rates move in the expected direction. If this does not occur, the option may be            exercised and the Fund would be required to purchase or sell the underlying currency at            a loss which may not be offset by the amount of the premium. Through the writing of            options on foreign currencies, the Fund also may be required to forego all or a portion            of the benefits which might otherwise have been obtained from favorable movements in            exchange rates.

The            Fund may write covered call options on foreign currencies. A call option written on a            foreign currency by the Fund is “covered” if the Fund owns the underlying            foreign currency covered by the call or has an absolute and immediate right to acquire            that foreign currency without additional cash consideration (or for additional cash            consideration identified on the Fund’s books) upon conversion or exchange of            other foreign currency held in its portfolio. A call option is also covered if the Fund            has a call on the same foreign currency and in the same principal amount as the call            written where the exercise price of the call held (a) is equal to or less than the            exercise price of the call written or (b) is greater than the exercise price of            the call written if the difference is segregated by the Fund in cash or liquid            securities.

The            Fund also may write call options on foreign currencies that are not covered for            cross-hedging purposes. A call option on a foreign currency is for cross-hedging            purposes if it is not covered, but is designed to provide a hedge against a decline in            the US dollar value of a security which the Fund owns or has the right to acquire and            which is denominated in the currency underlying the option due to an adverse change in            the exchange rate. In such circumstances, the Fund collateralizes the option by            segregating cash or liquid securities in an amount not less than the value of the            underlying foreign currency in US dollars marked to market daily.

There is no assurance that a liquid secondary market will exist for any            particular option, or at any particular time. If the Fund is unable to effect a closing            purchase transaction with respect to covered options it has written, the Fund will not            be able to sell the underlying currency or dispose of assets held in a segregated            account until the options expire or are exercised. Similarly, if the Fund is unable to            effect a closing sale transaction with respect to options it has purchased, it would            have to exercise the options in order to realize any profit and will incur transaction            costs upon the purchase or sale of underlying currency. The Fund pays brokerage            commissions or spreads in connection with its options transactions.

Certain options on foreign currencies are traded OTC and involve            liquidity and credit risks which may not be present in the case of exchange-traded            currency options. In some circumstances, the Fund’s ability to terminate OTC            options may be more limited than with exchange-traded options. It is also possible that            broker-dealers participating in OTC options transactions will not fulfill their            obligations. See “Illiquid Securities.”

***Additional Limitations and Risk Factors***

In            addition to the risks discussed above, the Fund’s investments may be subject to            the following limitations and risk factors:

**Asset Coverage.**The Fund will comply with            the segregation or coverage guidelines established by the SEC and other applicable            regulatory bodies with respect to certain transactions, including (but not limited to)            options written on securities and indexes; currency, interest rate and security index            futures contracts and options on these futures contracts; forward currency contracts;            and swaps, caps, floors and collars. These guidelines may, in certain instances,            require segregation by the Fund of cash or liquid securities to the extent the            Fund’s obligations with respect to these strategies are not otherwise covered            through ownership of the underlying security or financial instrument, by other            portfolio positions or by other means consistent with applicable regulatory policies.            Unless the transaction is covered, the segregated assets must at all times equal or            exceed the Fund’s obligations with respect to these strategies. Segregated assets            cannot be sold or transferred unless equivalent assets are substituted in their place            or it is no longer necessary to segregate them. As a result, there is a possibility            that segregation of a large percentage of the Fund’s assets could impede            portfolio management or the Fund’s ability to meet redemption requests or other            current obligations.

For            example, a call option written on securities may require the Fund to hold the            securities subject to the call (or securities convertible into the securities without            additional consideration) or to segregate assets (as described above)

 

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sufficient to purchase and deliver the securities if the call is            exercised. A call option written on an index may require the Fund to own portfolio            securities that correlate with the index or to segregate assets (as described above)            equal to the excess of the index value over the exercise price on a current basis. A            put option written by the Fund may require the Fund to segregate assets (as described            above) equal to the exercise price. The Fund could purchase a put option if the strike            price of that option is the same or higher than the strike price of a put option sold            by the Fund. If the Fund holds a futures contract, the Fund could purchase a put option            on the same futures contract with a strike price as high or higher than the price of            the contract held. The Fund may enter into fully or partially offsetting transactions            so that its net position, coupled with any segregated assets (equal to any remaining            obligation), equals its net obligation. Asset coverage may be achieved by other means            when consistent with applicable regulatory policies.

The            use of derivatives is a highly specialized activity which involves investment            techniques and risks that are different from those associated with ordinary portfolio            transactions. Gains and losses on these derivatives depend on the Advisor’s            ability to predict the direction of stock prices, interest rates, currency movements            and other economic factors. The loss that may be incurred by the Fund in entering into            futures contracts, written options, forward currency contracts and certain swaps is            potentially unlimited. There is no assurance that higher than anticipated trading            activity or other unforeseen events might not, at times, render certain facilities of            an options clearing entity or other entity performing the regulatory and liquidity            functions of an options clearing entity inadequate, and thereby result in the            institution by an exchange of special procedures which may interfere with the timely            execution of customers” orders. Most futures exchanges limit the amount of            fluctuation permitted in a futures contract’s prices during a single trading day.            Once the limit has been reached no further trades may be made that day at a price            beyond the limit. The price limit will not limit potential losses, and may in fact            prevent the prompt liquidation of futures positions, ultimately resulting in further            losses. Options and futures traded on foreign exchanges generally are not regulated by            US authorities, and may offer less liquidity and less protection to the Fund in the            event of default by the other party to the contract.

Except as set forth above under “Derivative Securities: Futures            Contracts and Options on Futures Contracts”, there is no limit on the percentage            of the assets of the Fund that may be at risk with respect to futures contracts and            related options or forward currency contracts. The Fund’s transactions in            options, forward currency contracts, futures contracts, options on futures contracts            and swaps may be limited by the requirements for qualification of the Fund as a            regulated investment company for tax purposes. See “Taxes.” There can be no            assurance that the use of these portfolio strategies will be successful.

**Non-US Securities.**The value of the            Fund’s investments may be adversely affected by changes in political or social            conditions, diplomatic relations, confiscatory taxation, expropriation,            nationalization, limitation on the removal of funds or assets, or imposition of (or            change in) exchange control or tax regulations in those foreign countries. In addition,            changes in government administrations or economic or monetary policies in the United            States or abroad could result in appreciation or depreciation of portfolio securities            and could favorably or unfavorably affect the Fund’s operations. Furthermore, the            economies of individual foreign nations may differ from the US economy, whether            favorably or unfavorably, in areas such as growth of gross national product, rate of            inflation, capital reinvestment, resource self-sufficiency and balance of payments            position; it may also be more difficult to obtain and enforce a judgment against a            foreign issuer. In general, less information is publicly available with respect to            non-US issuers than is available with respect to US companies. Most foreign companies            are also not subject to the uniform accounting and financial reporting requirements            applicable to issuers in the United States. Any foreign investments made by the Fund            must be made in compliance with US and foreign currency restrictions and tax laws            restricting the amounts and types of foreign investments.

Because non-US securities generally are denominated and pay dividends or            interest in foreign currencies, and the Fund may hold various foreign currencies from            time to time, the value of the net assets of the Fund as measured in US dollars will be            affected favorably or unfavorably by changes in exchange rates. Generally, the            Fund’s currency exchange transactions will be conducted on a spot            (i.e., cash) basis at the spot rate            prevailing in the currency exchange market. The cost of the Fund’s currency            exchange transactions will generally be the difference between the bid and offer spot            rate of the currency being purchased or sold. In order to protect against uncertainty            in the level of future foreign currency exchange rates, the Fund is authorized to enter            into certain foreign currency exchange transactions.

 

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In            addition, while the volume of transactions effected on foreign securities exchanges has            increased in recent years, in most cases it remains appreciably below that of The New            York Stock Exchange, Inc. (the “Exchange”). Accordingly, the Fund’s            foreign investments may be less liquid and their prices may be more volatile than            comparable investments in securities of US issuers. Moreover, the settlement periods            for non-US securities, which are often longer than those for securities of US issuers,            may affect portfolio liquidity. In buying and selling securities on foreign exchanges,            the Fund normally pays fixed commissions that are generally higher than the negotiated            commissions charged in the United States. In addition, there is generally less            government supervision and regulation of securities exchanges, brokers and issuers in            foreign countries than in the United States.

The            Advisor considers these factors in making investments for the Fund and limits the            amount of the Fund’s assets that may be invested in non-US securities to 25% of            its total assets for each asset class and to less than 50% for all classes under normal            conditions. However, within the Fund’s limitations, investments in any one            country or currency are not restricted.

**Rating Services.**The ratings of            Moody’s and S&P represent their opinions as to the quality of the securities            that they undertake to rate. It should be emphasized, however, that ratings are            relative and subjective and are not absolute standards of quality. Although these            ratings are an initial criterion for selection of Fund investments, the Advisor also            makes its own evaluation of these securities, subject to review by the Board of            Trustees. After purchase by the Fund, an obligation may cease to be rated or its rating            may be reduced below the minimum required for purchase by the Fund. Neither event would            require the Fund to eliminate the obligation from its portfolio, but the Advisor will            consider such an event in its determination of whether the Fund should continue to hold            the obligation. A description of the ratings used herein and in the Prospectus is set            forth in Appendix to this SAI.

**Other Investments and Investment Practices**

**Illiquid Securities.**Historically, illiquid            securities have included securities subject to contractual or legal restrictions on            resale because they have not been registered under the Securities Act of 1933, as            amended (the “1933 Act”), securities which are otherwise not readily            marketable and repurchase agreements having a maturity of longer than seven days.            Securities which have not been registered under the 1933 Act are referred to as            private placements or restricted securities and are purchased directly from the issuer            or in the secondary market. Investments in non-publicly traded securities (including            Rule 144A Securities) may involve a high degree of business and financial risk and may            result in substantial losses. These securities may be less liquid than publicly traded            securities, and it may take longer to liquidate these positions than would be the case            for publicly traded securities. Companies whose securities are not publicly traded may            not be subject to the disclosure and other investor protection requirements applicable            to companies whose securities are publicly traded. Limitations on resale may have an            adverse effect on the marketability of portfolio securities and a mutual fund might be            unable to dispose of restricted or other illiquid securities promptly or at reasonable            prices and might thereby experience difficulty satisfying redemptions within seven            days. An investment in illiquid securities is subject to the risk that, should the Fund            desire to sell any of these securities when a ready buyer is not available at a price            that is deemed to be representative of their value, the value of the Fund’s net            assets could be adversely affected.

Mutual funds do not typically hold a significant amount of these            restricted or other illiquid securities because of the potential for delays on resale            and uncertainty in valuation. A mutual fund might also have to register such restricted            securities in order to dispose of them resulting in additional expense and delay.            Adverse market conditions could impede such a public offering of securities.

A            large institutional market has developed for certain securities that are not registered            under the 1933 Act, including repurchase agreements, commercial paper, non-US            securities, municipal securities and corporate bonds and notes. Institutional investors            depend on an efficient institutional market in which the unregistered security can be            readily resold or on an issuer’s ability to honor a demand for repayment. The            fact that there are contractual or legal restrictions on resale of such investments to            the general public or to certain institutions may not be indicative of their            liquidity.

The            SEC has adopted Rule 144A, which allows a broader institutional trading market for            securities otherwise subject to restriction on their resale to the general public.            Rule 144A establishes a “safe harbor” from the registration            requirements of the 1933 Act for resales of certain securities to qualified            institutional buyers. The

 

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Advisor anticipates that the market for certain restricted securities            such as institutional commercial paper will expand further as a result of this            regulation and the development of automated systems for the trading, clearance and            settlement of unregistered securities of domestic and non-US issuers, such as the            PORTAL System sponsored by the NASD.

An            investment in Rule 144A Securities will be considered illiquid and therefore subject to            the Fund’s limit on the purchase of illiquid securities unless the Advisor            determines that the Rule 144A Securities are liquid. In reaching liquidity decisions,            the Advisor may consider, inter alia, the following factors: (i) the unregistered            nature of the security; (ii) the frequency of trades and quotes for the security; (iii)            the number of dealers wishing to purchase or sell the security and the number of other            potential purchasers; (iv) dealer undertakings to make a market in the security and (v)            the nature of the security and the nature of the marketplace trades (e.g., the time            needed to dispose of the security, the method of soliciting offers and the mechanics of            the transfer).

Investing in Rule 144A Securities could have the effect of increasing            the level of illiquidity in the Fund to the extent that qualified institutional buyers            are unavailable or uninterested in purchasing such securities from the Fund. The Board            has adopted guidelines and delegated to the Advisor the daily function of determining            and monitoring the liquidity of Rule 144A Securities, although the Board will retain            ultimate responsibility for any liquidity determinations.

**Impact of Large Redemptions and Purchases of Fund Shares.**From time to time, shareholders of the Fund (which may include            affiliated and/or non-affiliated registered investment companies that invest in the            Fund) may make relatively large redemptions or purchases of Fund shares. These            transactions may cause the Fund to have to sell securities or invest additional cash,            as the case may be. While it is impossible to predict the overall impact of these            transactions over time, there could be adverse effects on the Fund’s performance            to the extent that the Fund may be required to sell securities or invest cash at times            when it would not otherwise do so. These transactions could also accelerate the            realization of taxable income if sales of securities resulted in gains and could also            increase transaction costs, which may impact the Fund’s expense ratio.

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

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

**TBA Purchase Commitments.**The Fund may            enter into TBA purchase commitments to purchase securities for a fixed price at a            future date, typically not exceeding 45 days. TBA purchase commitments may be            considered securities in themselves, and involve a risk of loss if the value of the            security to be purchased declines prior to settlement date, which risk is in addition            to the risk of decline in the value of the Fund’s other assets. Unsettled TBA            purchase commitments are valued at the current market value of the underlying            securities.

**When-Issued and Delayed Delivery Securities.**The Fund may purchase securities on a when-issued or delayed delivery            basis. Delivery of and payment for these securities can take place a month or more            after the date of the purchase commitment. The payment obligation and the interest rate            that will be received on when-issued and delayed-delivery securities are fixed at the            time the buyer enters into the commitment. Due to fluctuations in the

 

----

 

value of securities purchased or sold on a when-issued or            delayed-delivery basis, the yields obtained on such securities may be higher or lower            than the yields available in the market on the dates when the investments are actually            delivered to the buyers. When-issued securities may include securities purchased on a            “when, as and if issued” basis, under which the issuance of the security            depends on the occurrence of a subsequent event, such as approval of a merger,            corporate reorganization or debt restructuring. The value of such securities is subject            to market fluctuation during this period and no interest or income, as applicable,            accrues to the Fund until settlement takes place.

At            the time the Fund makes the commitment to purchase securities on a when-issued or            delayed delivery basis, it will record the transaction, reflect the value each day of            such securities in determining its net asset value and, if applicable, calculate the            maturity for the purposes of average maturity from that date. At the time of settlement            a when-issued security may be valued at less than the purchase price. To facilitate            such acquisitions, the Fund identifies on its books cash or liquid assets in an amount            at least equal to such commitments. It may be expected that the Fund’s net assets            will fluctuate to a greater degree when it sets aside portfolio securities to cover            such purchase commitments than when it sets aside cash. On delivery dates for such            transactions, the Fund will meet its obligations from maturities or sales of the            segregated securities and/or from cash flow. If the Fund chooses to dispose of the            right to acquire a when-issued security prior to its acquisition, it could, as with the            disposition of any other portfolio obligation, incur a gain or loss due to market            fluctuation. When the Fund engages in when-issued or delayed-delivery transactions, it            relies on the other party to consummate the trade. Failure of the seller to do so may            result in the Fund’s incurring a loss or missing an opportunity to obtain a price            considered to be advantageous.

**Repurchase Agreements.**The Fund may engage            in repurchase agreement transactions with member banks of the Federal Reserve System,            certain non-US banks and certain non-bank dealers, including governmental securities            dealers. Under the terms of a typical repurchase agreement, the Fund would acquire any            underlying security for a relatively short period (usually not more than one week),            subject to an obligation of the seller to repurchase, and the Fund to resell, the            obligation at an agreed price and time, thereby determining the yield during the            Fund’s holding period. This arrangement results in a fixed rate of return that is            not subject to market fluctuations during the Fund’s holding period. The value of            the underlying securities will be at least equal at all times to the total amount of            the repurchase obligations, including interest. The Fund bears a risk of loss in the            event of default by or bankruptcy of the other party to a repurchase agreement. The            Fund may be delayed in, or prevented from, exercising its rights to dispose of the            collateralized securities. To the extent that, in the meantime, the value of the            securities repurchased had decreased or the value of the securities had increased, the            Fund could experience a loss. The Advisor reviews the creditworthiness of those banks            and dealers with which the Fund enters into repurchase agreements and monitors on an            ongoing basis the value of the securities subject to repurchase agreements to ensure            that it is maintained at the required level. A repurchase agreement is considered to be            a loan under the 1940 Act.

**Reverse Repurchase Agreements.**The Fund may            borrow funds by, among other things, agreeing to sell portfolio securities to financial            institutions that meet the standards described under “Repurchase            Agreements” and to repurchase them at a mutually agreed date and price (a            “reverse repurchase agreement”). The Fund may enter into reverse repurchase            agreements with banks and domestic broker-dealers. At the time the Fund enters into a            reverse repurchase agreement it will segregate cash or liquid securities having a value            equal to the repurchase price, including accrued interest. The segregated assets will            be marked-to-market daily and additional assets will be segregated on any day in which            the assets fall below the repurchase price (plus accrued interest). The Fund’s            liquidity and ability to manage its assets might be affected when it sets aside cash or            portfolio securities to cover such commitments. Reverse repurchase agreements involve            the risk that the market value of the securities sold by the Fund may decline below the            repurchase price of those securities. In the event the buyer of securities under a            reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or            its trustee or receiver may receive an extension of time to determine whether to            enforce the Fund’s obligation to repurchase the securities, and the Fund’s            use of the proceeds of the reverse repurchase agreement may effectively be restricted            pending such decision. Reverse repurchase agreements are considered to be borrowings by            the Fund.

**Lending of Fund Securities.**The Fund has            the authority to lend up to 30% of the value of its portfolio securities to brokers,            dealers and other financial organizations that meet capital and other credit            requirements or other criteria established by the Fund’s Board of Trustees. The            Fund will not lend securities to the Advisor, the Distributor or their affiliates,            except as may be permitted by the 1940 Act or an order from the SEC. The Board of            Trustees will make a determination that the fee paid to the placing broker is            reasonable. These loans must be collateralized by

 

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cash or liquid securities at least equal to the market value of the            securities loaned plus accrued income. By lending its securities, the Fund may increase            its income by continuing to receive payments in respect of dividends and interest on            the loaned securities as well as by either investing the cash collateral in short-term            securities or obtaining yield in the form of interest paid by the borrower when            irrevocable letters of credit and US government obligations are used as collateral. Any            gain or loss in the market price of the securities loaned that might occur during the            term of the loan would be for the account of the Fund. From time to time, the Fund may            return a part of the interest earned from the investment of collateral received for            securities loaned to the borrower and/or a third party that is unaffiliated with the            Fund and that is acting as a “finder.”

The            Fund will adhere to the following conditions whenever its securities are loaned:            (1) the Fund must receive collateral consisting of cash or equivalent securities            of the type discussed above having a value at all times not less than 102% of the            market value of the securities loaned plus accrued interest from the borrower;            (2) the borrower must increase this collateral whenever the market value of the            securities including accrued interest rises above the level of the collateral;            (3) the Fund must be able to terminate the loan at any time; (4) the Fund            must receive reasonable interest on the loan, as well as any dividends, interest or            other distributions on the loaned securities; (5) the Fund may pay only reasonable            custodian fees in connection with the loan; and (6) voting rights on the loaned            securities may pass to the borrower;provided,however, that if a material event adversely            affecting the investment occurs, the Fund must retain the right to terminate the loan            and recall and vote the securities.

During the term of the loan, the Fund continues to bear the risk of            fluctuations in the price of the loaned securities. In lending securities to brokers,            dealers and other organizations, the Fund is subject to risks which, like those            associated with other extensions of credit, include delays in receiving additional            collateral, in recovery of the securities or even loss of rights in the collateral            should the borrower of the securities fail financially. Default by or bankruptcy of a            borrower would expose the Fund to possible loss because of adverse market action,            expenses and/or delays in connection with the disposition of the underlying securities.            Cash collateral may be invested in a money market fund managed by the Advisor (or one            of its affiliates), and the Advisor (or one of its affiliates) may serve as the            Fund’s lending agent and may share in revenue received from securities lending            transactions as compensation for this service.

**Short Sales.**The Fund may engage in short            sales with respect to securities that it owns or has the right to obtain (for example,            through conversion of a convertible bond). These transactions, known as short sales            “against the box,” allow the Fund to hedge against price fluctuations by            locking in a sale price for securities it does not wish to sell immediately. In a short            sale, the Fund sells a borrowed security and has a corresponding obligation to the            lender to return the identical security. The seller does not immediately deliver the            securities sold and is said to have a short position in those securities until delivery            occurs.

The            Fund may invest up to 10% of its total assets in short positions of international and            US equity or fixed income futures as described in the Fund’s            Prospectuses.

The            Fund may also invest up to 25% of its total assets in short positions of US stock or            fixed income index futures, provided that the Fund also invest the same amount in long            positions in these same types of securities.

**Other Investment Companies.**Securities of            other investment companies may be acquired by the Fund to the extent permitted under            the 1940 Act, that is, the Fund may invest a maximum of up to 10% of its total assets            in securities of other investment companies so long as not more than 3% of the total            outstanding voting stock of any one investment company is held by the Fund. In            addition, not more than 5% of the Fund’s total assets may be invested in the            securities of any one investment company. The Fund may be permitted to exceed these            limitations by an exemptive order of the SEC. It should be noted that investment            companies incur certain expenses such as management, custodian and transfer agency            fees, and therefore any investment by the Fund in shares of other investment companies            would be subject to such duplicate expenses.

The            Fund will indirectly bear its proportionate share of any management or other fees paid            by investment companies in which it invests, in addition to its own fees.

**DIAMONDS, SPDRs and WEBS (“Equity            Equivalents”).**DIAMONDS (“Dow Jones Industrial            Average Model New Depositary Shares”) and SPDRs (“Standard &            Poor’s Depositary Receipts”) are exchanged-traded securities

 

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that represent ownership in long-term unit investment trusts            (i.e., a type of US-registered            investment company) established to accumulate and hold a portfolio of common stocks            that is intended to track the price performance and dividend yield of the Dow Jones            Industrial Average and the Standard & Poor’s Composite Stock Price Index,            respectively. WEBS (“World Equity Benchmark Shares”) are exchange-traded            shares of series of an investment company that are designed to replicate the            performance of a particular foreign equity market index.

Equity Equivalents may be used for several purposes, including to            simulate full investment in the underlying index while retaining a cash balance for            fund management purposes, to facilitate trading, to reduce transaction costs or to seek            higher investment returns if an Equity Equivalent is priced more attractively than            securities in the underlying index. Because the expense associated with an investment            in Equity Equivalents may be substantially lower than the expense of small investments            directly in the securities comprising the indices they seek to track, investments in            Equity Equivalents may provide a cost-effective means of diversifying the Fund’s            assets across a broad range of equity securities.

To            the extent the Fund invests in securities of other investment companies, Fund            shareholders would indirectly pay a portion of the operating costs of such companies in            addition to the expenses of its own operation. These costs include management,            brokerage, shareholder servicing and other operational expenses. Indirectly, then,            shareholders of the Fund that invests in Equity Equivalents may pay higher operational            costs than if they owned the underlying investment companies directly. Additionally,            the Fund’s investments in such investment companies are subject to limitations            under the 1940 Act and market availability.

The            prices of Equity Equivalents are derived and based upon the securities held by the            particular investment company. Accordingly, the level of risk involved in the purchase            or sale of an Equity Equivalent is similar to the risk involved in the purchase or sale            of traditional common stock, except that the pricing mechanism for such instruments is            based on a basket of stocks. The market prices of Equity Equivalents are expected to            fluctuate in accordance with both changes in the net asset values of their underlying            indices and the supply and demand for the instruments on the exchanges on which they            are traded. Substantial market or other disruptions affecting an Equity Equivalent            could adversely affect the liquidity and value of the shares of the Fund investing in            such instruments.

**Temporary Defensive Investments.**For            temporary defensive purposes during periods when the Advisor determines that conditions            warrant, the Fund may invest up to 100% of its assets in cash and money market            instruments, including (but not limited to) securities issued or guaranteed by the US            government, its agencies or instrumentalities; certificates of deposit, time deposits,            and bankers’ acceptances issued by banks or savings and loans associations having            net assets of at least $100 million as of the end of their most recent fiscal year;            commercial paper rated at the time of purchase at least A-1/2 by S&P or P-1/2 by            Moody’s, or unrated commercial paper determined by the Advisor to be of            comparable quality; repurchase agreements involving any of the foregoing; and, to the            extent permitted by applicable law, shares of other investment companies investing            solely in money market instruments.

**Diversification.**The Fund is            “diversified” under the 1940 Act and is also subject to issuer            diversification requirements imposed on regulated investment companies by Subchapter M            of the Code. See “Investment Restrictions” and            “Taxes.”

**Indexed Securities.**The Fund may invest in            indexed securities whose value depends on the price of foreign currencies, securities            indices or other financial values or statistics. Examples include debt securities whose            value at maturity is determined by reference to the relative prices of various            currencies or to the price of a stock index. These securities may be positively or            negatively indexed; that is, their value may increase or decrease if the underlying            instrument appreciates.

***Summary of Investment Practices***

The            following is a chart of the various types of securities and investment strategies            employed by the Fund. Unless otherwise indicated, the Fund is not obligated to pursue            any of the following strategies and does not represent that these techniques are            available now or will be available at any time in the future. If the Fund’s            investment in a particular type of security is limited to a certain percentage of the            Fund’s assets, that percentage limitation is listed in the chart. Following the            chart, there is a description of how each type of security and investment strategy may            be

 

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used by the Fund. As a matter of non-fundamental operating policy, the            Fund may be subject to additional restrictions. See the section entitled            “Investment Restrictions.”

 

| **INVESTMENT PRACTICE**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **Fund** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **KEY TO TABLE**:

+      Permitted                            without stated limito       Permitted                            without stated limit, but not expected to be used to a significant                            extentX      Not                            permitted

*Italic type (e.g. 20%)*represents an investment limitation as a percentage                            of**net**fund assets;                            does not indicate actual use

Roman type (e.g. 20%) represents an investment                            limitation as a percentage of**total**fund assets; does not indicate actual use

  |
| **EQUITY SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | +        |
| Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | +        |
| Preferred Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | +        |
| Convertible Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | +        |
| Medium-Capitalization Stocks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | +        |
| Small Capitalization Stocks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | +        |
| Micro Capitalization Stocks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | +        |
| **FIXED INCOME SECURITIES & MONEY MARKET                            INSTRUMENTS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Short-Term Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | o        |
| Obligations of Banks and Other Financial                            Institutions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | o        |
| Certificates of Deposit and Bankers’                            Acceptances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | o        |
| Commercial Paper                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | o        |
| Variable Rate Master Demand Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | o        |
| US Government Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | o        |
| Custodial Receipts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | o        |
| Zero Coupon Securities and Deferred Interest                            Bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | o        |
| Variable Rate Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | o        |
| Inverse Floating Rate Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | o        |
| Lower-Rated Debt Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | *5%*     |
| Registered Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | o        |
| Put Bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | o        |
| Other Debt Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | o        |
| **MUNICIPAL SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Municipal Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | o        |
| Tax Anticipation Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | o        |
| Revenue Anticipation Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | o        |
| Bond Anticipation Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | o        |
| Tax and Revenue Anticipation Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | o        |
| Construction Loan Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | o        |
| Miscellaneous, Temporary and Anticipatory                            Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | o        |
| Tax-Exempt Commercial Paper                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | o        |
| Municipal Bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | o        |
| General Obligations Bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | o        |
| Revenue Bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | o        |
| Private Activity Bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | o        |
| Tender Option Bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | o        |
| Municipal Leases, Certificates of Participation and                            Other Participation Interests                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | o        |
| Pre-Refunded Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | o        |
| Auction Rate Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | o        |
| **DERIVATIVE SECURITIES (OPTIONS)**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

 

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| Options on Securities                                                                                     | o     |
|-----------------------------------------------------------------------------------------------------------|-------|
| Options on Securities Indices                                                                             | o     |
| Options on Non-US Securities Indices                                                                      | o     |
| Yield Curve Options                                                                                       | o     |
| Spreadlocks                                                                                               | o     |
| **DERIVATIVE SECURITIES (FUTURES CONTRACTS AND                            OPTIONS ON FUTURES CONTRACTS)** |
| Futures Contracts*                                                                                        | 5%    |
| Futures Contracts on Securities Indices*                                                                  | 5%    |
| Options on Futures Contracts (including Contracts on                            Security Indices)         | o     |
| **DERIVATIVE SECURITIES (SWAPS)**                                                                         |
| Swaps Agreements                                                                                          | o     |
| **DERIVATIVE SECURITIES (HEDGING                            STRATEGIES)**                                 |
| Hedging Strategies                                                                                        | o     |
| **MORTGAGE-BACKED AND ASSET-BACKED                            SECURITIES**                                |
| Government Guaranteed Mortgage-Backed                            Securities                               | o     |
| Ginnie Mae Certificates                                                                                   | o     |
| Fannie Mae Certificates                                                                                   | o     |
| Freddie Mac Certificates                                                                                  | o     |
| Multi-Class Mortgage-Backed Securities (CMOs and                            REMICs)                       | o     |
| Privately Issued Mortgage -Backed                            Securities                                   | o     |
| Mortgage Pass-Through Securities                                                                          | o     |
| Stripped-Mortgage Backed Securities                                                                       | o     |
| Adjustable Rate Mortgages — Interest Rate                            Indices                        | o     |
| Asset-Backed Securities                                                                                   | o     |
| Types of Credit Support                                                                                   | o     |
| **SECURITIES OF NON-US ISSUERS**                                                                          |
| Foreign Securities & Depository                            Receipts

(ADRs, EDRs, GDRs and IDRs)      | 25%   |
| Foreign Corporate Debt Securities                                                                         | 25%   |
| Foreign Government Debt Securities                                                                        | 25%   |
| Investments in Emerging Markets                                                                           | o     |
| **CURRENCY MANAGEMENT**                                                                                   |
| Currency Exchange Transactions                                                                            | 25%   |
| Currency Hedging Transactions                                                                             | +     |
| Cross Hedging                                                                                             | +     |
| Forward Currency Exchange Contracts                                                                       | 25%   |
| Options on Foreign Currencies                                                                             | 25%   |
| **OTHER INVESTMENTS AND INVESTMENT                            PRACTICES**                                 |
| Illiquid Securities                                                                                       | *15%* |
| TBA Purchase Commitments                                                                                  | +     |
| When-Issued and Delayed Delivery                            Securities                                    | +     |
| Repurchase Agreements                                                                                     | o     |
| Reverse Repurchase Agreements                                                                             | o     |
| Lending of Fund Securities                                                                                | 30%   |
| Short Sales                                                                                               | 25%   |
| Other Investment Companies                                                                                | 10%   |
| DIAMONDS, SPDRs and WEBs(“Equity Equivalents”`)                                               | +     |
| Temporary Defensive Investments                                                                           | +     |

 

 

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| Diversification          | + |
|--------------------------|---|
| Indexed Securities       | + |
| S&P 500 Index Assets | + |
| Merger Arbitrage Assets  | + |

             

| * | Aggregate initial margin and premiums required to                            establish positions other than those considered by the CFTC to be                            “bona fide hedging” will not exceed 5% of the Fund’s                            net asset value, after taking into account unrealized profits and                            unrealized losses on any such contracts (see                            “*Derivative Securities: Futures                            Contracts and Options on Futures                            Contracts*”, page 18). |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Portfolio Holdings**

In            addition to the public disclosure of Fund portfolio holdings through required            Securities and Exchange Commission (“SEC”) quarterly filings, the Fund may            make its portfolio holdings information publicly available on the DWS Funds’ Web            site as described in the Fund’s prospectus. The Fund does not disseminate            non-public information about portfolio holdings except in accordance with policies and            procedures adopted by the Fund.

The            Fund’s procedures permit non-public portfolio holdings information to be shared            with Deutsche Asset Management and its affiliates (collectively “DeAM”),            subadvisors, if any, custodians, independent registered public accounting firms,            attorneys, officers and trustees and each of their respective affiliates and advisers            who require access to this information to fulfill their duties to the Fund and are            subject to the duties of confidentiality, including the duty not to trade on non-public            information, imposed by law or contract, or by the Fund’s procedures. This            non-public information may also be disclosed, subject to the requirements described            below, to securities lending agents, financial printers, proxy voting firms, mutual            fund analysts and rating and tracking agencies, or to shareholders in connection with            in-kind redemptions (collectively, “Authorized Third Parties”).

Prior to any disclosure of the Fund’s non-public portfolio            holdings information to Authorized Third Parties, a person authorized by the            Fund’s Trustees must make a good faith determination in light of the facts then            known that the Fund has a legitimate business purpose for providing the information,            that the disclosure is in the best interest of the Fund, and that the recipient assents            or otherwise has a duty to keep the information confidential and to not trade based on            the information receivedwhile the information remains non-public.            No compensation is received by the Fund or DeAM for disclosing non-public holdings            information. Periodic reports regarding these procedures will be provided to the            Fund’s Trustees.

Portfolio holdings information distributed by the trading desks of DeAM            or a subadvisor for the purpose of facilitating efficient trading of such securities            and receipt of relevant research is not subject to the foregoing requirements.            Non-public portfolio holding information does not include portfolio characteristics            (other than holdings or subsets of holdings) about the Fund and information derived            therefrom, including, but not limited to, how the Fund’s investments are divided            among various sectors, industries, countries, value and growth stocks, bonds,            currencies and cash, types of bonds, bond maturities, duration, bond coupons and bond            credit quality ratings so long as the Fund’s holdings could not be derived from            such information.

Registered investment companies that are subadvised by DeAM may be            subject to different portfolio holdings disclosure policies, and neither DeAM nor the            Fund’s Trustees exercise control over such policies. In addition, separate            account clients of DeAM have access to their portfolio holdings and are not subject to            the Fund’s portfolio holdings disclosure policy. The portfolio holdings of some            of the funds subadvised by DeAM and some of the separate accounts managed by DeAM may            substantially overlap with the portfolio holdings of the Fund.

DeAM also manages certain unregistered commingled trusts and creates            model portfolios, the portfolio holdings of which may substantially overlap with the            portfolio holdings of the Fund. To the extent that investors in these commingled trusts            or recipients of model portfolio holdings information may receive portfolio holdings            information

 

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of            their trust or of a model portfolio on a different basis from that on which Fund            portfolio holdings information is made public, DeAM has implemented procedures            reasonably designed to encourage such investors and recipients to keep such information            confidential, and to prevent those investors from trading on the basis of non-public            holdings information.

There is no assurance that the Fund’s policies and procedures with            respect to the disclosure of portfolio holdings information will protect the Fund from            the potential misuse of portfolio holdings information by those in possession of that            information.

**MANAGEMENT OF THE FUND**

**Investment Advisor**

The            Trust has retained the services of Deutsche Investment Management Americas Inc.            (“DIMA”) as investment advisor. DIMA is located at 345 Park Avenue, New            York, New York 10154. DIMA is registered with the SEC as an investment adviser and            provides a full range of investment advisory services to institutional clients. DIMA is            an indirect wholly owned subsidiary of Deutsche Bank AG (“Deutsche Bank”),            an international commercial and investment banking group. On December 31, 2006,            Deutsche Asset Management, Inc. (“DAMI”) merged into DIMA. Prior to            December 31, 2006, DAMI was the investment advisor to the Fund. As a result of the            merger, DIMA is now the investment advisor.

The            Advisor provides investment counsel for many individual and institutions, including            insurance companies, industrial corporations, and financial and banking organizations,            as well as providing investment advice to open- and closed-end SEC registered            funds.

Effective June 1, 2006, the Board and shareholders approved an amended            and restated investment management agreement (the “Investment Management            Agreement”) between the Trust and the Advisor for the Fund. Pursuant to the            Investment Management Agreement, the Advisor provides continuing investment management            of the assets of the Fund. In addition to the investment management of the assets of            the Fund, the Advisor determines the investments to be made for the Fund, including            what portion of its assets remain uninvested in cash or cash equivalents, and with whom            the orders for investments are placed, consistent with the Fund’s policies as            adopted by the Board of Trustees. The Advisor will also monitor, to the extent not            monitored by the Fund’s administrator or other agent, the Fund’s compliance            with its investment and tax guidelines and other compliance policies.

For            all services provided under the Investment Management Agreement, the Fund pays the            Advisor a fee of 0.60% on the first $250 million in average daily net assets, which            declines to a fee of 0.575% on average daily net assets in excess of $250 million up to            $1 billion, and to 0.55% on average daily net assets in excess of $1 billion. Prior to            June 1, 2006, the Advisor received a fee from the Fund, computed daily and paid            monthly, at the annual rate of 0.65% of the average daily net assets of the            Fund.

The            Advisor provides assistance to the Fund’s Board in valuing the securities and            other instruments held by the Fund, to the extent reasonably required by valuation            policies and procedures that may be adopted by the Fund. Pursuant to the Investment            Management Agreement (unless otherwise provided in the agreement or as determined by            the Fund’s Board and to the extent permitted by applicable law), the Advisor pays            the compensation and expenses of all the Board members, officers, and executive            employees of the Fund, including the Fund’s share of payroll taxes, who are            affiliated persons of the Advisor.

The            Investment Management Agreement provides that the Fund is generally responsible for            expenses that include: fees payable to the Advisor; outside legal, accounting or            auditing expenses including with respect to expenses related to negotiation,            acquisition or distribution of portfolio investments; maintenance of books and records            that are maintained by the Fund, the Fund’s custodian, or other agents of the            Fund; taxes and governmental fees; fees and expenses of the Fund’s accounting            agent, custodian, sub-custodians, depositories, transfer agents, dividend reimbursing            agents and registrars; payment for portfolio pricing or valuation services to pricing            agents, accountants, bankers and other specialists, if any; brokerage commissions or            other costs of acquiring or disposing of any Fund

 

----

 

securities or other instruments of the Fund; and litigation expenses and            other extraordinary expenses not incurred in the ordinary course of the Fund’s            business.

The            Investment Management Agreement allows the Advisor to delegate any of its duties under            the Agreement to a sub-adviser, subject to a majority vote of the Board of Trustees,            including a majority of the Board of Trustees who are not interested persons of the            Fund, and, if required by applicable law, subject to a majority vote of the            Fund’s shareholders.

In            addition, the Fund has a subadvisor approval policy (the “Sub-advisor Approval            Policy”). The Sub-advisor Approval Policy permits the Advisor, subject to the            approval of the Board, including a majority of its independent board members, to            appoint and replace sub-advisors and to amend sub-advisory contracts without obtaining            shareholder approval. Under the Sub-advisor Approval Policy, the Board, including its            independent board members, will continue to evaluate and approve all new sub-advisory            contracts between the Advisor and any subadvisor, as well as all changes to any            existing sub-advisory contract. The Fund cannot implement the Sub-advisor Approval            Policy without the SEC either adopting revisions to current rules (as it proposed to do            in October 2003) or granting the Fund exemptive relief from existing rules. The Fund            and the Advisor would be subject to certain conditions imposed by the SEC (and certain            conditions that may be imposed in the future within either exemptive relief or a rule)            to ensure that the interests of the Fund and its shareholders are adequately protected            whenever the Advisor acts under the Sub-advisor Approval Policy, including any            shareholder notice requirements.

The            Investment Management Agreement provides that the Advisor shall not be liable for any            error of judgment or mistake of law or for any loss suffered by the Fund in connection            with matters to which the Agreement relates, except a loss resulting from willful            malfeasance, bad faith or gross negligence on the part of the Advisor in the            performance of its duties or from reckless disregard by the Advisor of its obligations            and duties under the Agreement. The Investment Management Agreement may be terminated            at any time, without payment of penalty, by either party or by vote of a majority of            the outstanding voting securities of the Fund on 60 days’ written            notice.

Fund shareholders also approved an amended and restated investment            management agreement with Deutsche Investment Management Americas Inc.            (“DIMA”) (the “DIMA Agreement”). The terms of the DIMA            Agreement are identical to the terms of the Investment Management Agreement except for            the name of the investment manager and the dates of execution, effectiveness and            initial term. The DIMA Agreement was implemented on March 31, 2007, upon approval by            the members of the Fund board who are not “interested persons” as defined            in the 1940 Act. DIMA now provides continuing investment management of the assets of            the Fund on terms that are identical to the terms of the Investment Management            Agreement, except as described above.

The            following table sets forth the advisory fees that the Fund paid to the Advisor during            the periods indicated:

 

|                          | **2007**   | **2006**   | **2005**   |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| DWS Lifecycle Long Range Fund | $4,499,191 | $4,952,295 | $3,055,340 |

 

The            Fund’s Prospectuses contain disclosure as to the amount of the Advisor’s            investment advisory and the Administrator’s administration and services fees,            including waivers thereof. The Advisor and the Administrator may not recoup any of            their waived investment advisory or administration and services fees.

The            Fund is managed by a team of investment professionals who each play an important role            in the Fund’s management process. Team members work together to develop            investment strategies and select securities for the Fund’s portfolio. This team            works for the Advisor or its affiliates and is supported by a large staff of            economists, research analysts, traders and other investment specialists. The Advisor or            its affiliates believe(s) its team approach benefits Fund investors by bringing            together many disciplines and leveraging its extensive resources. Team members with            primary responsibility for management of the Funds, as well as team members who have            other ongoing management responsibilities for the Fund, are identified in the            Fund’s Prospectuses, as of the date of the Fund’s Prospectuses. Composition            of the team may change over time, and Fund shareholders and investors will be notified            of changes affecting individuals with primary Fund management            responsibility.

 

----

 

The            Advisor may enter into arrangements with affiliates and third party service providers            to perform various administrative, back-office and other services relating to client            accounts. Such service providers may be located in the US or in non-US            jurisdictions.

**Subadvisors**

For            the period from April 1, 2006 through January 21, 2007, Northern            Trust Investments, N.A. (“NTI”), formerly known and conducting business as            Northern Trust Investments, Inc., was a subadvisor to the Fund. NTI is located at 50            South LaSalle Street, Chicago, IL 60603. With respect to only the passive equity            portion of the Fund, NTI made the investment decisions, bought and sold securities and            conducted the research that led to the purchase and sale decisions. DAMI compensated            NTI out of its management fee received from the Fund. Pursuant to the subadvisory            agreement with DAMI, (all references to a subadvisory agreement between DAMI and NTI            are hereinafter referred to as an “NTI Subadvisory Agreement”), NTI            received an annual fee, paid monthly in arrears, from DAMI. Effective June 1, 2006,            DAMI paid NTI a fee of 0.015% of the first $2 billion in assets under management, which            declined to a fee of 0.01% on assets in excess of $2 billion up to $4 billion and            0.005% of assets in excess of $4 billion. Prior to June 1, 2006, DAMI paid NTI a            monthly fee at the annual rate of 0.20% of the first $200 million of the Fund’s            average daily net assets, 0.15% of the next $300 million of such assets and 0.12% of            such assets exceeding $500 million.

The            subadvisory fee paid by DAMI to NTI for the fiscal years ended March 31, 2007 and            March 31, 2006 was $200,248 and $704,687.41, respectively.

**Aberdeen Asset Management Inc.**As of            December 2, 2005, the Fund’s Advisor, entered into an investment subadvisory            agreement with Aberdeen Asset Management Inc. (“AAMI”), a US registered            investment advisor. AAMI acts as a subadvisor for the Fund with respect to the core            bond and active fixed income portions of the Fund only. AAMI makes the investment            decisions, buys and sells securities, and conducts the research that leads to these            purchase and sale decisions. AAMI is also responsible for selecting brokers and dealers            to negotiate portfolio transactions and for negotiating brokerage commissions and            dealer charges. AAMI provides a full range of international investment advisory            services to institutional and retail clients.

AAMI will be paid for its services by DIMA from its fee as investment            advisor to the Fund. DIMA pays AAMI a fee at the annual rate of 0.18% of the average            daily net assets of the fund, computed daily and paid monthly.

The            subadvisory fee paid by the advisor to AAMI for the fiscal years ended            March 31, 2007 and March 31, 2006 was $477,083 and $159,000, respectively.            For the March 31, 2006 fiscal year end, the subadvisory fee was paid for the            period from December 2, 2005 through March 31, 2006.

AAMI is a direct wholly owned subsidiary of Aberdeen Asset Management            PLC, the parent company of an asset management group formed in 1983. AAMI’s            principal business address is 1735 Market Street, Philadelphia, PA 19103.

***Compensation of Portfolio Managers —            Advisor***

The            Fund has been advised that the Advisor seeks to offer its investment professionals            competitive short-term and long-term compensation. Portfolio managers and research            professionals are paid (i) fixed base salaries, which are linked to job function,            responsibilities and financial services industry peer comparison and (ii) variable            compensation, which is linked to investment performance, individual contributions to            the team and DWS Scudder’s and Deutsche Bank’s financial results. Variable            compensation may include a cash bonus incentive and participation in a variety of            long-term equity programs (usually in the form of Deutsche Bank equity).

Bonus and long-term incentives comprise a greater proportion of total            compensation as an investment professional’s seniority and compensation levels            increase. Top performing investment professionals earn a total compensation package            that is highly competitive, including a bonus that is a multiple of their base salary.            The amount of equity awarded under the long-term equity programs is generally based on            the individual’s total compensation package and may comprise from 0%-40% of the            total compensation award. As incentive compensation increases, the            percentage

 

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of            compensation awarded in Deutsche Bank equity also increases. Certain senior investment            professionals may be subject to a mandatory diverting of a portion of their equity            compensation into proprietary mutual funds that they manage.

To            evaluate its investment professionals, the Advisor uses a Performance Management            Process. Objectives evaluated by the process are related to investment performance and            generally take into account peer group and benchmark related data. The ultimate goal of            this process is to link the performance of investment professionals with client            investment objectives and to deliver investment performance that meets or exceeds            clients’ risk and return objectives. When determining total compensation, the            Advisor considers a number of quantitative and qualitative factors such as:

| **•** | DWS Scudder performance and the performance of Deutsche                            Asset Management, quantitative measures which include 1-, 3- and 5-year                            pre-tax returns versus benchmark (such as the benchmark used in the                            prospectus) and appropriate peer group, taking into consideration risk                            targets. Additionally, the portfolio manager’s                            retail/institutional asset mix is weighted, as appropriate for                            evaluation purposes. |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Qualitative measures include adherence to the investment                            process and individual contributions to the process, among other                            things. In addition, the Advisor assesses compliance, risk management                            and teamwork skills. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Other factors, including contributions made to the                            investment team as well as adherence to compliance, risk management,                            and “living the values” of the Advisor, are part of a                            discretionary component which gives management the ability to reward                            these behaviors on a subjective basis through bonus                            incentives. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

In            addition, the Advisor analyzes competitive compensation levels through the use of            extensive market data surveys. Portfolio manager compensation is reviewed and may be            modified each year as appropriate to reflect changes in the market, as well as to            adjust the factors used to determine overall compensation to promote good sustained            investment performance.

**Fund Ownership of Portfolio Managers —            Advisor**

The            following table shows the dollar range of shares owned beneficially and of record by            each member of the Fund’s portfolio management team in the Fund as well as in all            DWS Funds as a group (i.e. those funds advised by Deutsche Asset Management or its            affiliates), including investments by their immediate family members sharing the same            household and amounts invested through retirement and deferred compensation plans. This            information is provided as of the Fund’s most recent fiscal year end.

 

| **Name of Portfolio Manager**

        | **Dollar Range of**

**Fund Shares Owned**

                              | **Dollar Range of All DWS**

**Fund Shares Owned** |
|---------------------------------------------|--------------------------------------------------------------------------------|----------------------------------------------------|
| Robert                            Wang      | $10,001 -                            $50,000                                   | $100,001 -                            $500,000     |
| Thomas                            Picciochi | $0                                                                             | $50,001 -                            $100,000      |
| Inna                            Okounkova   | $0                                                                             | $100,001 -                            $500,000     |
| Jin                            Chen         | $1 –                            10,000                                   | $100,001 -                            $500,000     |
| Julie                            Abbett     | $0                                                                             | $50,001 -                            $100,000      |

 

**Conflicts of Interest**

In            addition to managing the assets of the Fund, the Fund’s portfolio managers may            have responsibility for managing other client accounts of the Advisor or its            affiliates. The tables below show, for each portfolio manager, the number and asset            size of (1) SEC registered investment companies (or series thereof) other than the            Fund, (2) pooled investment vehicles that are not registered investment companies and            (3) other accounts (e.g., accounts managed for individuals or organizations) managed by            each portfolio manager. The tables also show the number of performance

 

----

 

based fee accounts, as well as the total assets of the accounts for            which the advisory fee is based on the performance of the account. This information is            provided as of the Fund’s most recent fiscal year end.

**Other SEC Registered Investment Companies Managed:**

 

| **Name of Portfolio Manager** | **Number of Registered Investment****Companies** | **Total Assets of Registered Investment****Companies** | **Number of Investment Company Accounts with                            Performance-****Based                            Fee** | **Total Assets of Performance- Based Fee****Accounts** |
|-------------------------------|--------------------------------------------------|--------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|
|                          |                                             |                                                   |                                                                                                                           |                                                   |
| Robert Wang                   | 36                                               | $12,686,689,270                                        | 0                                                                                                                              | $0                                                     |
| Thomas Picciochi              | 10                                               | $3,518,431,144                                         | 0                                                                                                                              | $0                                                     |
| Inna Okounkova                | 11                                               | $3,812,333,710                                         | 0                                                                                                                              | $0                                                     |
| Jin Chen                      | 22                                               | $10,603,896,694                                        | 0                                                                                                                              | $0                                                     |
| Julie Abbett                  | 22                                               | $10,603,896,694                                        | 0                                                                                                                              | $0                                                     |

 

**Other Pooled Investment Vehicles Managed:**

 

| **Name of Portfolio Manager** | **Number of Pooled Investment****Vehicles** | **Total Assets of Pooled Investment****Vehicles** | **Number of Pooled Investment Vehicle Accounts with                            Performance-****Based                            Fee** | **Total Assets of Performance- Based Fee****Accounts** |
|-------------------------------|---------------------------------------------|---------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|
|                          |                                        |                                              |                                                                                                                                  |                                                   |
| Robert Wang                   | 11                                          | $994,592,207                                      | 0                                                                                                                                     | $0                                                     |
| Thomas Picciochi              | 3                                           | $813,419,747                                      | 0                                                                                                                                     | $0                                                     |
| Inna Okounkova                | 3                                           | $218,487,915                                      | 0                                                                                                                                     | $0                                                     |
| Jin Chen                      | 4                                           | $115,532,920                                      | 0                                                                                                                                     | $0                                                     |
| Julie Abbett                  | 4                                           | $115,532,920                                      | 0                                                                                                                                     | $0                                                     |

 

**Other Accounts Managed:**

 

| **Name of Portfolio Manager** | **Number of Other****Accounts** | **Total Assets of****Other                            Accounts** | **Number of Other Accounts with Performance-****Based Fee** | **Total Assets of Performance- Based Fee****Accounts** |
|-------------------------------|---------------------------------|------------------------------------------------------------------|-------------------------------------------------------------|--------------------------------------------------------|
|                          |                            |                                                             |                                                        |                                                   |
| Robert Wang                   | 46                              | $6,953,210,652                                                   | 0                                                           | $0                                                     |
| Thomas Picciochi              | 13                              | $285,649,449                                                     | 0                                                           | $0                                                     |
| Inna Okounkova                | 1                               | $93,445,152                                                      | 0                                                           | $0                                                     |
| Jin Chen                      | 7                               | $757,537,372                                                     | 0                                                           | $0                                                     |
| Julie Abbett                  | 7                               | $757,537,372                                                     | 0                                                           | $0                                                     |

 

In            addition to the accounts above, an investment professional may manage accounts in a            personal capacity that may include holdings that are similar to, or the same as, those            of the Fund. The Advisor has in place a Code of Ethics that is designed to address            conflicts of interest and that, among other things, imposes restrictions on the ability            of portfolio managers and other “access persons” to invest in securities            that may be recommended or traded in the Fund and other client accounts.

Real, potential or apparent conflicts of interest may arise when a            portfolio manager has day-to-day portfolio management responsibilities with respect to            more than one fund or account, including the following:

 

----

 

| **•** | Certain investments may be appropriate for the Fund and                            also for other clients advised by the Advisor, including other client                            accounts managed by the Fund’s portfolio management team.                            Investment decisions for the Fund and other clients are made with a                            view to achieving their respective investment objectives and after                            consideration of such factors as their current holdings, availability                            of cash for investment and the size of their investments generally. A                            particular security may be bought or sold for only one client or in                            different amounts and at different times for more than one but less                            than all clients. Likewise, because clients of the Advisor may have                            differing investment strategies, a particular security may be bought                            for one or more clients when one or more other clients are selling the                            security. The investment results achieved for the Fund may differ from                            the results achieved for other clients of the Advisor. In addition,                            purchases or sales of the same security may be made for two or more                            clients on the same day. In such event, such transactions will be                            allocated among the clients in a manner believed by the Advisor to be                            most equitable to each client, generally utilizing a pro rata                            allocation methodology. In some cases, the allocation procedure could                            potentially have an adverse effect or positive effect on the price or                            amount of the securities purchased or sold by the Fund. Purchase and                            sale orders for the Fund may be combined with those of other clients of                            the Advisor in the interest of achieving the most favorable net results                            to the Fund and the other clients. |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | To the extent that a portfolio manager has                            responsibilities for managing multiple client accounts, a portfolio                            manager will need to divide time and attention among relevant accounts.                            The Advisor attempts to minimize these conflicts by aligning its                            portfolio management teams by investment strategy and by employing                            similar investment models across multiple client accounts. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | In some cases, an apparent conflict may arise where the                            Advisor has an incentive, such as a performance-based fee, in managing                            one account and not with respect to other accounts it manages. The                            Advisor will not determine allocations based on whether it receives a                            performance-based fee from the client. Additionally, the Advisor has in                            place supervisory oversight processes to periodically monitor                            performance deviations for accounts with like strategies. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | The Advisor and its affiliates and the investment team                            of the Fund may manage other mutual funds and separate accounts on a                            long-short basis. The simultaneous management of long and short                            portfolios creates potential conflicts of interest including the risk                            that short sale activity could adversely affect the market value of the                            long positions (and vice versa), the risk arising from sequential                            orders in long and short positions, and the risks associated with                            receiving opposing orders at the same time. The Advisor has adopted                            procedures that it believes are reasonably designed to mitigate these                            potential conflicts of interest. Included in these procedures are                            specific guidelines developed to ensure fair and equitable treatment                            for all clients whose accounts are managed by each Fund’s                            portfolio management team. The Advisor and the portfolio management                            team have established monitoring procedures, a protocol for supervisory                            reviews, as well as compliance oversight to ensure that potential                            conflicts of interest relating to this type of activity are properly                            addressed. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

The            Advisor is owned by Deutsche Bank AG, a multi-national financial services company.            Therefore, the Advisor is affiliated with a variety of entities that provide, and/or            engage in commercial banking, insurance, brokerage, investment banking, financial            advisory, broker-dealer activities (including sales and trading), hedge funds, real            estate and private equity investing, in addition to the provision of investment            management services to institutional and individual investors. Since Deutsche Bank AG,            its affiliates, directors, officers and employees (the “Firm”) are engaged            in businesses and have interests other than managing asset management accounts, such            other activities involve real, potential or apparent conflicts of interest. These            interests and activities include potential advisory, transactional and financial            activities and other interests in securities and companies that may be directly or            indirectly purchased or sold by the Firm for its clients’ advisory accounts.            These are considerations of which advisory clients should be aware and which may cause            conflicts that could be to the disadvantage of the Advisor’s advisory clients.            The Advisor has instituted business and compliance policies, procedures and disclosures            that are designed to identify, monitor and mitigate conflicts of interest and, as            appropriate, to report them to the Fund’s Board.

 

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***Fund Ownership of Portfolio Managers —            AAMI***

The            following table shows the dollar range of shares owned beneficially and of record by            the Fund’s portfolio managers in the Fund, including investments by their            immediate family members sharing the same household and amounts invested through            retirement and deferred compensation plans. This information is provided as of the            Fund’s most recent fiscal year end.

 

| **Name of Portfolio                            Manager** | **Dollar Range of Fund**

**Shares Owned** |
|----------------------------------------------------------|--------------------------------------------|
|                                                     |                                       |
| Gary W. Barlett                                          | $0                                         |
| J. Christopher                            Gagnier        | $0                                         |
| Warren S. Davis                                          | $0                                         |
| Thomas J. Flaherty                                       | $0                                         |
| William T.                            Lissenden          | $0                                         |
| Daniel R. Taylor                                         | $0                                         |
| Timothy C. Vile                                          | $0                                         |

 

***Conflicts of Interest — AAMI***

In            addition to managing the assets of the Fund, the Fund’s portfolio manager may            have responsibility for managing other client accounts of AAMI or its affiliates. The            tables below show, for the portfolio managers, the number and asset size of (1) SEC            registered investment companies (or series thereof) other than the Fund, (2) pooled            investment vehicles that are not registered investment companies and (3) other accounts            (e.g., accounts managed for individuals or organizations) managed by the portfolio            managers. The tables also show the number of performance based fee accounts, as well as            the total assets of the accounts for which the advisory fee is based on the performance            of the account. This information is provided as of the Fund’s most recent fiscal            year end.

***Other SEC Registered Investment Companies            Managed:***

 

| **Name of Portfolio****Manager**                  | **Number of Registered Investment****Companies** | **Total Assets of Registered Investment****Companies** | **Number of Investment Company Accounts with                            Performance-****Based                            Fee** | **Total Assets of Performance-Based                            Fee****Accounts** |
|---------------------------------------------------|--------------------------------------------------|--------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|
|                                              |                                             |                                                   |                                                                                                                           |                                                                             |
| Gary W. Barlett                                   | 8                                                | $3,584,086,575                                         | 0                                                                                                                              | 0                                                                                |
| J. Christopher                            Gagnier | 8                                                | $3,584,086,575                                         | 0                                                                                                                              | 0                                                                                |
| Warren S. Davis                                   | 8                                                | $3,584,086,575                                         | 0                                                                                                                              | 0                                                                                |
| Thomas J. Flaherty                                | 8                                                | $3,584,086,575                                         | 0                                                                                                                              | 0                                                                                |
| William T.                            Lissenden   | 8                                                | $3,584,086,575                                         | 0                                                                                                                              | 0                                                                                |
| Daniel R. Taylor                                  | 8                                                | $3,584,086,575                                         | 0                                                                                                                              | 0                                                                                |
| Timothy C. Vile                                   | 8                                                | $3,584,086,575                                         | 0                                                                                                                              | 0                                                                                |

 

***Other Pooled Investment Vehicles Managed:***

 

| **Name of Portfolio****Manager**                  | **Number of Pooled Investment****Vehicles** | **Total Assets of**

**Pooled**

**Investment**

**Vehicles** | **Number of Pooled Investment Vehicle Accounts with                            Performance-****Based                            Fee** | **Total Assets of Performance-Based Fee****Accounts** |
|---------------------------------------------------|---------------------------------------------|---------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------|
|                                              |                                        |                                                          |                                                                                                                                  |                                                  |
| Gary W. Barlett                                   | 8                                           | $3,484,897,005                                                | 0                                                                                                                                     | 0                                                     |
| J. Christopher                            Gagnier | 8                                           | $3,484,897,005                                                | 0                                                                                                                                     | 0                                                     |
| Warren S. Davis                                   | 8                                           | $3,484,897,005                                                | 0                                                                                                                                     | 0                                                     |
| Thomas J. Flaherty                                | 8                                           | $3,484,897,005                                                | 0                                                                                                                                     | 0                                                     |

 

 

----

 

 

| William T.                            Lissenden | 8 | $3,484,897,005 | 0 | 0 |
|-------------------------------------------------|---|----------------|---|---|
| Daniel R. Taylor                                | 8 | $3,484,897,005 | 0 | 0 |
| Timothy C. Vile                                 | 8 | $3,484,897,005 | 0 | 0 |

 

***Other Accounts Managed:***

 

| **Name of Portfolio****Manager** | **Number of Other****Accounts** | **Total Assets of**

**Other Accounts** | **Number of Other Accounts with                            Performance-****Based                            Fee** | **Total Assets of Performance-Based                            Fee****Accounts** |
|----------------------------------|---------------------------------|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|
|                             |                            |                                    |                                                                                                              |                                                                             |
| Gary W. Barlett                  | 153                             | $22,559,060,086                         | 4                                                                                                                 | $339,846,902                                                                     |
| J. Christopher Gagnier           | 153                             | $22,559,060,086                         | 4                                                                                                                 | $339,846,902                                                                     |
| Warren S. Davis                  | 153                             | $22,559,060,086                         | 4                                                                                                                 | $339,846,902                                                                     |
| Thomas J. Flaherty               | 153                             | $22,559,060,086                         | 4                                                                                                                 | $339,846,902                                                                     |
| William T. Lissenden             | 153                             | $22,559,060,086                         | 4                                                                                                                 | $339,846,902                                                                     |
| Daniel R. Taylor                 | 153                             | $22,559,060,086                         | 4                                                                                                                 | $339,846,902                                                                     |
| Timothy C. Vile                  | 153                             | $22,559,060,086                         | 4                                                                                                                 | $339,846,902                                                                     |

 

***Compensation of Portfolio Managers —            Aberdeen***

***Remuneration of Personnel***

Aberdeen recognizes the need to provide a competitive compensation            package in order to attract and retain high caliber staff. In addition to an attractive            base salary and performance-related bonus, investment professionals also receive a            competitive benefits package and participate in a company-wide stock ownership            plan.

Performance is reviewed on a formal basis once a year and this review            influences individual staff members’ subsequent remuneration. The review process            looks at all of the ways in which an individual has contributed to the organization,            and specifically, in the case of investment managers, to the investment team.            Discretionary bonuses are based on a combination of the team and the individual’s            performance, as well as industry comparatives and Aberdeen’s performance as a            whole. The weighting of these factors varies and overall participation in team            meetings, generation of original research ideas and contribution to presenting the team            externally are also contributory factors. Bonuses may be 100% of salary or more; equity            incentives could provide a significant part of compensation over the longer term (3            years or more).

Aberdeen has informed the Fund that compared to published industry            statistics; Aberdeen is highly competitive in terms of compensation. Moreover, Aberdeen            has informed the Fund that it offers a meritocracy and a very flat management structure            and that the culture is entrepreneurial, and hence, enthusiastic, hard-working and            talented employees are given plenty of opportunity to prove themselves and obtain a            high level of job satisfaction. Aberdeen believes this to be more effective than long            term employment contracts in retaining key executives.

***Retention and incentive arrangements for former Deutsche Asset            Management Staff***

Appropriate retention and incentive arrangements have been put into            place for certain employees of the former Deutsche Asset Management businesses,            including in some cases, participation in the Aberdeen Asset Management 2005 Long Term            Incentive Plan. The costs of these arrangements are borne by both Deutsche Asset            Management and Aberdeen.

 

----

 

***Conflicts of Interest***

In            addition to the accounts above, an investment professional may manage accounts in a            personal capacity that may include holdings that are similar to, or the same as, those            of the Fund. AAMI has in place a Code of Ethics that is designed to address conflicts            of interest and that, among other things, imposes restrictions on the ability of            portfolio managers and other “access persons” to invest in securities that            may be recommended or traded in the funds and other client accounts.

Real, potential or apparent conflicts of interest may arise when a            portfolio manager has day-to-day portfolio management responsibilities with respect to            more than one fund or account, including the following:

| **•** | Certain investments may be appropriate for the Fund and                            also for other clients advised by AAMI, including other client accounts                            managed by the Fund’s portfolio management team. Investment                            decisions for the Fund and other clients are made with a view to                            achieving their respective investment objectives and after                            consideration of such factors as their current holdings, availability                            of cash for investment and the size of their investments generally. A                            particular security may be bought or sold for only one client or in                            different amounts and at different times for more than one but less                            than all clients. Likewise, because clients of AAMI may have differing                            investment strategies, a particular security may be bought for one or                            more clients when one or more other clients are selling the security.                            The investment results achieved for the Fund may differ from the                            results achieved for other clients of AAMI. In addition, purchases or                            sales of the same security may be made for two or more clients on the                            same day. In such event, such transactions will be allocated among the                            clients in a manner believed by AAMI to be most equitable to each                            client, generally utilizing a pro rata allocation methodology. In some                            cases, the allocation procedure could potentially have an adverse                            effect or positive effect on the price or amount of the securities                            purchased or sold by the Fund. Purchase and sale orders for the Fund                            may be combined with those of other clients of AAMI in the interest of                            achieving the most favorable net results to the Fund and the other                            clients. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | To the extent that a portfolio manager has                            responsibilities for managing multiple client accounts, a portfolio                            manager will need to divide time and attention among relevant accounts.                            The Advisor attempts to minimize these conflicts by aligning its                            portfolio management teams by investment strategy and by employing                            similar investment models across multiple client accounts. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

In            some cases, an apparent conflict may arise where AAMI has an incentive, such as a            performance-based fee, in managing one account and not with respect to other accounts            it manages. The Advisor will not determine allocations based on whether it receives a            performance-based fee from the client. Additionally, AAMI has in place supervisory            oversight processes to periodically monitor performance deviations for accounts with            like strategies.

***Codes of Ethics***

The            Board of Trustees of the Trust has adopted a Code of Ethics pursuant to Rule 17j-1            under the 1940 Act. The Trust’s Code of Ethics permits Fund personnel to invest            in securities for their own accounts, but requires compliance with the Code’s            pre-clearance requirements (with certain exceptions). In addition, the Trust’s            Code of Ethics provides for trading “blackout periods” that prohibit            trading by personnel within periods of trading by each Trust in the same security. The            Trust’s Code of Ethics also prohibits short-term trading profits and personal            investment in initial public offerings. The Code of Ethics requires prior approval with            respect to purchases of securities in private placements.

The            Trust’s advisor and its affiliates (including the Fund’s Distributor,            DWS-SDI) have each adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act            (“Consolidated Code”). The Consolidated Code permits access persons to            trade in securities that may be purchased or held by the Funds for their own accounts,            subject to compliance with the Consolidated Code’s preclearance requirements. In            addition, the Consolidated Code also provides for trading “blackout            periods” that prohibit trading by personnel within periods of trading by the            Funds in the same security. The Consolidated Code also prohibits short-term trading            profits and personal investment in initial public offerings and requires prior approval            with respect to purchases of securities in private placements.

 

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***Regulatory Matters***

On            September 28, 2006, the SEC and the National Association of Securities Dealers            (“NASD”) announced final agreements in which Deutsche Investment Management            Americas Inc. (“DIMA”), Deutsche Asset Management, Inc.            (“DAMI”) and Scudder Distributors, Inc. (“DWS-SDI”) (now known            as DWS Scudder Distributors, Inc.) settled administrative proceedings regarding            disclosure of brokerage allocation practices in connection with sales of the Scudder            Funds’ (now known as the DWS Scudder Funds) shares during 2001-2003. The            agreements with the SEC and NASD are reflected in orders which state, among other            things, that DIMA and DAMI failed to disclose potential conflicts of interest to the            funds’ Boards and to shareholders relating to DWS-SDI’s use of certain            funds’ brokerage commissions to reduce revenue sharing costs to broker-dealer            firms with whom it had arrangements to market and distribute Scudder Fund shares. These            directed brokerage practices were discontinued in October 2003.

Under the terms of the settlements, in which DIMA, DAMI and DWS-SDI            neither admitted nor denied any of the regulators’ findings, DIMA, DAMI and            DWS-SDI agreed to pay disgorgement, prejudgment interest and civil penalties in the            total amount of $19.3 million. The portion of the settlements distributed to the funds            was approximately $17.8 million and was paid to the funds as prescribed by the            settlement orders based upon the amount of brokerage commissions from each fund used to            satisfy revenue sharing agreements with broker-dealers who sold fund shares.

As            part of the settlements, DIMA, DAMI and DWS-SDI also agreed to implement certain            measures and undertakings relating to revenue sharing payments including making            additional disclosures in the funds’ Prospectuses or Statements of Additional            Information, adopting or modifying relevant policies and procedures and providing            regular reporting to the fund Boards.

Additional information announced by DeAM regarding the terms of the            settlements is made available at www.dws-scudder.com/regulatory_settlements.

For            discussion of other regulatory matters see the Fund’s prospectuses.

**FUND SERVICE PROVIDERS**

**Administrator**

The            Fund also has an administrative services agreement (the “Administrative Services            Agreement”) with the Advisor (or the “Administrator”), 345 Park            Avenue, New York, New York 10154, pursuant to which DIMA provides most administrative            services to the Fund including, among others, providing the Fund with personnel,            preparing and making required filings on behalf of the Fund, maintaining books and            records for the Fund, and monitoring the valuation of Fund securities. For all services            provided under the Administrative Services Agreement, the Fund pays the DIMA a fee of            0.10% of the Fund’s average daily net assets.

Under the Administrative Services Agreement, DIMA is obligated on a            continuous basis to provide such administrative services as the Board of the Fund            reasonably deems necessary for the proper administration of the Fund. DIMA provides the            Fund with personnel; arranges for the preparation and filing of the Fund’s tax            returns; prepares and submits reports and meeting materials to the Board and the            shareholders; prepares and files updates to the Fund’s Prospectus and SAI            information as well as other reports required to be filed by the SEC; maintains the            Fund’s records; provides the Fund with office space, equipment and services;            supervises, negotiates the contracts of and monitors the performance of third parties            contractors; oversees the tabulation of proxies; monitors the valuation of portfolio            securities and monitors compliance with Board-approved valuation procedures; assists in            establishing the accounting and tax policies of the Fund; assists in the resolution of            accounting issues that may arise with respect to the Fund; establishes and monitors the            Fund’s operating expense budgets; reviews and processes the Fund’s bills;            assists in determining the amount of dividends and distributions available to be paid            by the Fund, prepares and arranges dividend notifications and provides information to            agents to effect payments thereof; provides to the Board periodic and special reports;            provides assistance with investor and public relations matters; and monitors the            registration of shares under applicable federal and state law. The Advisor also            performs certain fund accounting services under the Administrative Services Agreement.            The Administrative Services Agreement provides that the

 

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Advisor will not be liable under the Administrative Services Agreement            except for willful misfeasance, bad faith or negligence in the performance of its            duties or from the reckless disregard by it of its duties and obligations            thereunder.

Pursuant to an agreement between DIMA and State Street Bank and Trust            Company (“SSB”), DIMA has delegated certain administrative functions to            SSB. The costs and expenses of such delegation are borne by DIMA, not by the            Fund.

Prior to June 1, 2006, ICCC received a fee for serving as administrator            of 0.22% of the Fund — Institutional Class average daily net assets and paid            transfer agency fees out of the administrative fee.

The            following table sets forth the net administration fees that the Fund or Portfolio            paid.

 

|                                                                                 | **For                            the fiscal year ended March 31,** |
|--------------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                                                                 | **2007**                                                           | **2006** | **2005** |
|                                                                                 |                                                               |   |   |
| Asset Management Portfolio                                                           | -                                                                  | - | $296,367 |
|                                                                                 |                                                               |   |   |
| DWS Lifecycle Long Range Fund — Institutional                            Class | $265,004                                                           | $291,936 | $1,363,333 |

 

***Waivers and Reimbursements***

The            following table sets forth the amounts waived and/or reimbursed by the Advisor and/or            administrator for the fiscal year ended March 31:

 

|                          | **2007**      | **2006**    | **2005                            (Fees Waived by                            the****Advisor)** | **2005                            (Fees Waived by                            the****Administrator)** |
|-------------------------------|---------------|-------------|------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|
|                          |          |        |                                                                                           |                                                                                                 |
| Asset Management Portfolio    | —       | —     | $688,395                                                                                       | —                                                                                              |
|                          |          |        |                                                                                           |                                                                                                 |
| DWS Lifecycle Long Range Fund | $1,167,730*** | $2,753,856* | $1,072,694                                                                                     | $1,094,109**                                                                                         |

             

| * | The 2006 fee waivers by the Advisor and administrator                            are $1,366,352 and $1,387,504, respectively. |
|---|-------------------------------------------------------------------------------------------------------------------------------|

| ** | ICCC waived $981,233 of the Administrator Service Fee                            for the Institutional Class of the Long Range Fund. |
|----|--------------------------------------------------------------------------------------------------------------------------------------|

| *** | The 2007 fee waives by the Advisor and administrator are                            $1,364,070 and $253,660, respectively. |
|-----|----------------------------------------------------------------------------------------------------------------------------|

**Custodian**

The            Fund employs State Street Bank and Trust Company (“SSB”) 225 Franklin            Street, Boston, Massachusetts 02110 as custodian. SSB has entered into agreements with            foreign subcustodians approved by the Trustees pursuant to Rule 17f-5 under the 1940            Act. SSB uses Deutsche Bank AG, an affiliate of the Advisor, as subcustodian (“DB            Subcustodian”) in certain countries. To the extent the Fund holds any securities            in the countries in which SSB uses DB Subcustodian as a subcustodian, those securities            will be held by DB Subcustodian as part of a larger omnibus account in the name of SSB            (the “Omnibus Account”). For its services, DB Subcustodian receives (1) an            annual fee based on a percentage of the average daily net assets of the Omnibus Account            and (2) transaction charges with respect to transactions that occur within the Omnibus            Account.

**Transfer Agent**

DWS            Scudder Investments Service Company (“DWS-SISC”) serves as            transfer agent of the Trust and of the Fund pursuant to a transfer agency            agreement. Under its transfer agency agreement with the Trust, DWS-SISC            maintains

 

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the            shareholder account records for the Fund, handles certain communications between            shareholders and the Trust and causes to be distributed any dividends and distributions            payable by the Trust.

The            Transfer Agent receives an annual service fee for each account of the Fund, based on            the type of account. For open retail accounts, the fee is a flat fee ranging from            $20.00 to $27.50 per account, for open wholesale money funds the fee is $32.50 per            account, while for certain retirement accounts serviced on the recordkeeping system of            ADP, Inc., the fee is a flat fee up to $3.46 per account (as of October 2006, indexed            to inflation) plus an asset based fee of up to 0.25% of average net assets. 1/12th of            the annual service charge for each account is charged and payable to the Transfer Agent            each month. A fee is charged for any account which at any time during the month had a            share balance in the Fund. Smaller fees are also charged for closed accounts for which            information must be retained on the Transfer Agent’s system for up to 18 months            after closing for tax reporting purposes.

Certain out-of-pocket expenses incurred by the Transfer Agent, including            expenses of printing and mailing routine fund disclosure documents, costs of record            retention and transaction processing costs are reimbursed by the Fund or are paid            directly by the Fund. Certain additional out-of-pocket expenses, including costs of            computer hardware and software, third party record-keeping and processing of proxy            statements, may only be reimbursed by the Fund with the prior approval of the            Fund’s Board.

Effective April 1, 2007, DWS Scudder Investments Service Company is the            Transfer Agent for all classes of all DWS funds.

Pursuant to a sub-transfer agency agreement between DWS-SISC and DST            Systems, Inc. (“DST”), DWS-SISC has delegated certain transfer agent and            dividend paying agent functions to DST.

**Distributor**

DWS-SDI serves as the distributor of the Fund’s shares pursuant to            the Distribution Agreement. The terms and conditions of the Distribution Agreement are            exactly the same as the Distribution Agreement with ICC Distributors, Inc., the former            distributor of the Fund. DWS-SDI enters into a Selling Group Agreement with certain            broker-dealers (each a “Participating Dealer”). If a Participating Dealer            previously had agreements in place with DWS-SDI and ICC Distributors, Inc., the DWS-SDI            Agreement will control. If the Participating Dealer did not have an agreement with            DWS-SDI, then the terms of your assigned ICC Distributors, Inc. agreement will remain            in effect. These Selling Group Agreements may be terminated by their terms or by the            terms of the Distribution Agreement, as applicable. DWS-SDI is a wholly-owned            subsidiary of Deutsche Bank AG. The address for DWS-SDI is 222 South Riverside Plaza,            Chicago, IL 60606.

**Legal Counsel**

Willkie Farr & Gallagher, LLP 787 7th Avenue, New York, New York            10019, serves as counsel to the Trust and the Fund.

Ropes & Gray LLP, One International Place, Boston, Massachusetts            02110-2624, serves as counsel to the Independent Trustees of the Trust.

**Independent Registered Public Accounting            Firm**

PricewaterhouseCoopers LLP has been selected as the Independent            Registered Public Accounting Firm for the Trust and the Fund.

**PORTFOLIO TRANSACTIONS**

The            Advisor is generally responsible for placing the orders for the purchase and sale of            portfolio securities, including the allocation of brokerage. With respect to those            funds for which a sub-investment advisor manages the fund’s investments,            references in this section to the “Advisor” should be read to mean the            Sub-Advisor, except as noted below.

 

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The            policy of the Advisor in placing orders for the purchase and sale of securities for the            Fund is to seek best execution, taking into account such factors, among others, as            price; commission (where applicable); the broker-dealer’s ability to ensure that            securities will be delivered on settlement date; the willingness of the broker-dealer            to commit its capital and purchase a thinly traded security for its own inventory;            whether the broker-dealer specializes in block orders or large program trades; the            broker-dealer’s knowledge of the market and the security; the            broker-dealer’s ability to maintain confidentiality; the broker-dealer’s            ability to provide access to new issues; the broker-dealer’s ability to provide            support when placing a difficult trade; the financial condition of the broker-dealer;            and whether the broker-dealer has the infrastructure and operational capabilities to            execute and settle the trade. The Advisor seeks to evaluate the overall reasonableness            of brokerage commissions with commissions charged on comparable transactions and            compares the brokerage commissions (if any) paid by the Funds to reported commissions            paid by others. The Advisor routinely reviews commission rates, execution and            settlement services performed and makes internal and external comparisons.

Commission rates on transactions in equity securities on US securities            exchanges are subject to negotiation. Commission rates on transactions in equity            securities on foreign securities exchanges are generally fixed. Purchases and sales of            fixed-income securities and certain over-the-counter securities are effected on a net            basis, without the payment of brokerage commissions. Transactions in fixed income and            certain over-the-counter securities are generally placed by the Advisor with the            principal market makers for these securities unless the Advisor reasonably believes            more favorable results are available elsewhere. Transactions with dealers serving as            market makers reflect the spread between the bid and asked prices. Purchases of            underwritten issues will include an underwriting fee paid to the underwriter. Money            market instruments are normally purchased in principal transactions directly from the            issuer or from an underwriter or market maker.

It            is likely that the broker-dealers selected based on the considerations described in            this section will include firms that also sell shares of the Fund to their customers.            However, the Advisor does not consider sales of shares of the Fund as a factor in the            selection of broker-dealers to execute portfolio transactions for the Fund and,            accordingly, has implemented policies and procedures reasonably designed to prevent its            traders from considering sales of shares of the Fund as a factor in the selection of            broker-dealers to execute portfolio transactions for the Fund.

The            Advisor is permitted by Section 28(e) of the Securities Exchange Act of 1934, as            amended (“1934 Act”), when placing portfolio transactions for the Fund, to            cause the Fund to pay brokerage commissions in excess of that which another            broker-dealer might charge for executing the same transaction in order to obtain            research and brokerage services if the Advisor determines that such commissions are            reasonable in relation to the overall services provided. The Advisor may from time to            time, in reliance on Section 28(e) of the 1934 Act, execute portfolio transactions with            broker-dealers that provide research and brokerage services to the Advisor. Consistent            with the Advisor’s policy regarding best execution, where more than one broker is            believed to be capable of providing best execution for a particular trade, the Advisor            may take into consideration the receipt of research and brokerage services in selecting            the broker-dealer to execute the trade. Although certain research and brokerage            services from broker-dealers may be useful to the Fund and to the Advisor, it is the            opinion of the Advisor that such information only supplements its own research effort            since the information must still be analyzed, weighed and reviewed by the            Advisor’s staff. To the extent that research and brokerage services of value are            received by the Advisor, the Advisor may avoid expenses that it might otherwise incur.            Research and brokerage services received from a broker-dealer may be useful to the            Advisor and its affiliates in providing investment management services to all or some            or of its clients, which includes a Fund. Services received from broker-dealers that            executed securities transactions for a Fund will not necessarily be used by the Advisor            specifically to service such Fund.

Research and brokerage services provided by broker-dealers may include,            but are not limited to, information on the economy, industries, groups of securities,            individual companies, statistical information, accounting and tax law interpretations,            political developments, legal developments affecting portfolio securities, technical            market action, pricing and appraisal services, credit analysis, risk measurement            analysis, performance analysis and measurement and analysis of corporate responsibility            issues. Research and brokerage services are typically received in the form of written            or electronic reports, access to specialized financial publications, telephone contacts            and personal meetings with security analysts, but may also be provided in the form of            access to various computer software and meetings arranged with corporate and industry            representatives.

 

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The            Advisor may also select broker-dealers and obtain from them research and brokerage            services that are used in connection with executing trades provided that such services            are consistent with interpretations under Section 28(e) of the 1934 Act. Typically,            these services take the form of computer software and/or electronic communication            services used by the Advisor to facilitate trading activity with those            broker-dealers.

Research and brokerage services may include products obtained from third            parties if the Advisor determines that such product or service constitutes brokerage            and research as defined in Section 28(e) and interpretations thereunder. Currently, it            is the Advisor’s policy that Sub-Advisors may not execute portfolio transactions            on behalf of the Fund to obtain third party research and brokerage services. The            Advisor may, in the future, change this policy. Regardless, certain Sub-Advisors may,            as matter of internal policy, limit or preclude third party research and brokerage            services.

The            Advisor may use brokerage commissions to obtain certain brokerage products or services            that have a mixed use (i.e., it also serves a function that does not relate to the            investment decision-making process). In those circumstances, the Advisor will make a            good faith judgment to evaluate the various benefits and uses to which it intends to            put the mixed use product or service and will pay for that portion of the mixed use            product or service that it reasonably believes does not constitute research and            brokerage services with its own resources.

DIMA will monitor regulatory developments and market practice in the use            of client commissions to obtain research and brokerage services and may adjust its            portfolio transactions policies in response thereto.

Investment decisions for the Fund and for other investment accounts            managed by the Advisor are made independently of each other in light of differing            conditions. However, the same investment decision may be made for two or more of such            accounts. In such cases, simultaneous transactions are inevitable. To the extent            permitted by law, the Advisor may aggregate the securities to be sold or purchased for            a Fund with those to be sold or purchased for other accounts in executing transactions.            Purchases or sales are then averaged as to price and commission and allocated as to            amount in a manner deemed equitable to each account. While in some cases this practice            could have a detrimental effect on the price paid or received by, or on the size of the            position obtained or disposed of for, the Fund, in other cases it is believed that the            ability to engage in volume transactions will be beneficial to the Fund.

DIMA and its affiliates and the Fund’s management team manage            other mutual funds and separate accounts, some of which use short sales of securities            as a part of its investment strategy. The simultaneous management of long and short            portfolios creates potential conflicts of interest including the risk that short sale            activity could adversely affect the market value of the long positions (and vice            versa), the risk arising from sequential orders in long and short positions, and the            risks associated with receiving opposing orders at the same time.

DIMA has adopted procedures that it believes are reasonably designed to            mitigate these potential conflicts of interest. Incorporated in the procedures are            specific guidelines developed to ensure fair and equitable treatment for all clients.            DIMA and the investment team have established monitoring procedures and a protocol for            supervisory reviews, as well as compliance oversight to ensure that potential conflicts            of interest relating to this type of activity are properly addressed.

Deutsche Bank AG or one of its affiliates (or in the case of a            Sub-Advisor, the Sub-Advisor or one of its affiliates) may act as a broker for the Fund            and receive brokerage commissions or other transaction-related compensation from the            Fund in the purchase and sale of securities, options or futures contracts when, in the            judgment of the Advisor, and in accordance with procedures approved by the Fund’s            Board, the affiliated broker will be able to obtain a price and execution at least as            favorable as those obtained from other qualified brokers and if, in the transaction,            the affiliated broker charges the Fund a rate consistent with that charged to            comparable unaffiliated customers in similar transactions.

The            Fund did not pay any affiliated brokerage commissions for the fiscal years ended March            31, 2007, 2006 and 2005.

 

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Affiliated Brokers do not knowingly participate in commissions paid by            the Fund to other brokers or dealers and do not seek or knowingly receive any            reciprocal business as the result of the payment of such commissions. In the event that            an Affiliated Broker learns at any time that it has knowingly received reciprocal            business, it will so inform the Board.

The            following table sets forth the brokerage commissions paid by the Fund during the            periods indicated:

 

|                          | **For                            the fiscal year ended March 31,** |
|-------------------------------|--------------------------------------------------------------------|
|                          | **2007**                                                           | **2006** | **2005** |
|                          |                                                               |   |   |
| DWS Lifecycle Long Range Fund | $0                                                                 | $275,800 | $320,490 |

 

**Securities of Regular Broker-Dealers.**The            Fund is required to identify any securities of its “regular brokers or            dealers” (as such term is defined in the 1940 Act) that the Fund has acquired            during the most recent fiscal year. As of March 31, 2007, the Fund held no securities            of its regular brokers or dealers.

***Portfolio Turnover***

The            Fund’s annual portfolio turnover rate (the lesser of the value of the purchases            or sales for the year divided by the average monthly market value of the portfolio            during the year, excluding US government securities and securities with maturities of            one year or less) may vary from year to year, as well as within a year, depending on            market conditions. For the fiscal years ended March 31, 2007 and March 31, 2006, the            Fund’s portfolio turnover rate was 174% and 101%, respectively.

A            higher rate involves greater brokerage and transaction expenses to the Fund and may            result in the realization of net capital gains, which would be taxable to shareholders            when distributed. Purchases and sales are made for the Fund’s portfolio whenever            necessary, in management’s opinion, to meet the Fund’s investment            objective. The increase in the Fund’s portfolio turnover rate from fiscal year            March 31, 2006 and March 31, 2007 is attributable to the equity strategy change from            passive management to active management.

 

**PURCHASE AND REDEMPTION OF SHARES**

***General Information***

Policies and procedures affecting transactions in Fund shares can be            changed at any time without notice, subject to applicable law. Transactions may be            contingent upon proper completion of application forms and other documents by            shareholders and their receipt by the Fund’s agents. Transaction delays in            processing (and changing account features) due to circumstances within or beyond the            control of the Fund and its agents may occur. Shareholders (or their financial service            firms) are responsible for all losses and fees resulting from bad checks, cancelled            orders or the failure to consummate transactions effected pursuant to instructions            reasonably believed to be genuine.

A            distribution will be reinvested in shares of the same Fund and class if the            distribution check is returned as undeliverable.

Orders will be confirmed at a price based on the net asset value of the            Fund next determined after receipt in good order by DWS Scudder Investments Service            Company of the order accompanied by payment. Orders received by dealers or other            financial services firms prior to the determination of net asset value and received in            good order by DWS Scudder Distributors, Inc. (“DWS-SDI”) prior to the            determination of net asset value will be confirmed at a price based on the net asset            value next determined after receipt by DWS-SDI (“trade date”).

**Certificates.**Share certificates will not            be issued. Share certificates now in a shareholder’s possession may be sent to            the transfer agent for cancellation and book-entry credit to such shareholder’s            account. Certain telephone and other procedures require book-entry holdings.            Shareholders with outstanding certificates bear the risk of loss.

 

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**Use of Financial Services Firms.**Investment            dealers and other firms provide varying arrangements for their clients to purchase and            redeem the Fund’s shares, including higher minimum investments, and may assess            transaction or other fees. Firms may arrange with their clients for other investment or            administrative services. Such firms may independently establish and charge additional            amounts to their clients for such services. Firms also may hold the Fund’s shares            in nominee or street name as agent for and on behalf of their customers. In such            instances, the Fund’s transfer agent, DWS Scudder Investments Service Company            (the “Transfer Agent” or “DWS-SISC”) will have no information            with respect to or control over the accounts of specific shareholders. Such            shareholders may obtain access to their accounts and information about their accounts            only from their firm. Certain of these firms may receive compensation from the Fund            through the Shareholder Service Agent for record-keeping and other expenses relating to            these nominee accounts. In addition, certain privileges with respect to the purchase            and redemption of shares or the reinvestment of dividends may not be available through            such firms. Some firms may participate in a program allowing them access to their            clients’ accounts for servicing including, without limitation, transfers of            registration and dividend payee changes; and may perform functions such as generation            of confirmation statements and disbursement of cash dividends. Such firms, including            affiliates of DWS-SDI, may receive compensation from the Fund through the Shareholder            Service Agent for these services.

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

DWS-SDI has adopted an Incentive Plan (the “Plan”) covering            wholesalers that are regional vice presidents (“DWS Scudder Wholesalers”).            Generally, DWS Scudder Wholesalers market shares of the DWS funds to your financial            advisor, who in turn may recommend that you purchase shares of a DWS fund. The Plan is            an incentive program that combines a monthly incentive component with a quarterly            strategic bonus component. Under the Plan, DWS Scudder Wholesalers will receive a            monetary monthly incentive based on the amount of sales generated from their marketing            of the funds, and that incentive will differ depending on the product category of the            fund. Each fund is assigned to one of four product categories —            “Core,” “Strategic,” “Satellite” or            “Non-CSS” — taking into consideration, among other things, the            following criteria, where applicable:

| **•** | The Fund’s 3-year performance; |
|------------|--------------------------------------|

| **•** | The Fund’s Morningstar rating; |
|------------|--------------------------------------|

| **•** | Market size for the fund category; |
|------------|------------------------------------|

| **•** | The Fund’s size, including sales and redemptions                            of the Fund’s shares; |
|------------|---------------------------------------------------------------------------------------------------------------|

| **•** | The length of time the Fund’s Portfolio Managers                            have managed the Fund; and |
|------------|--------------------------------------------------------------------------------------------------------------|

| **•** | The Fund’s consistency with DWS Scudder’s                            branding. |
|------------|--------------------------------------------------------------------------------------------|

This information and other factors are presented to a committee            comprised of representatives from various groups within DWS Scudder, who review on a            quarterly basis the funds assigned to each product category described above, and make            any changes to those assignments at that time. No one factor, whether positive or            negative, determines a fund’s placement in a given category; all these factors            together are considered, and the designation of funds in the Core, Strategic and            Satellite categories represents management’s judgment based on the above            criteria. In addition, management may consider a fund’s profile over the course            of several review periods before making a change to its category assignment. These            category assignments will be posted quarterly to the DWS funds’ Web site            atwww.dws-scudder.com            , approximately one month after the end of each quarter. DWS Scudder Wholesalers            will

 

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receive the highest compensation for Core and Strategic funds, less for            Satellite funds and the lowest for Non-CSS funds.

In            the normal course of business, DWS Scudder will from time to time introduce new funds            into the DWS family of funds. As a general rule, all new funds will be placed in the            Strategic compensation category for a minimum period of four consecutive quarters, and            DWS Scudder Wholesalers will be paid at a rate that is equivalent to that of the Core            Fund category. After that four quarter period, each new fund in the New Fund category            will be reviewed by the committee and either assigned to one of the four categories or            continued as a Strategic fund at that time.

The            prospect of receiving, or the receipt of, additional compensation by a DWS Scudder            Wholesaler under the Plan may provide an incentive to favor marketing the Core,            Strategic or Satellite funds over the NSS funds. The Plan, however, will not change the            price that you pay for shares of a fund. The DWS Scudder Compliance Department monitors            DWS Scudder Wholesaler sales and other activity in an effort to detect unusual activity            in the context of the compensation structure under the Plan. However, investors may            wish to take the Plan and the product category of the fund into account when            considering purchasing a fund or evaluating any recommendations relating to fund            shares.

**Telephone and Electronic Transaction Procedures.**Shareholders have various telephone, Internet, wire and other electronic            privileges available. The Fund or its agents may be liable for any losses, expenses or            costs arising out of fraudulent or unauthorized instructions pursuant to these            privileges unless the Fund or its agents reasonably believe, based upon reasonable            verification procedures, that the instructions were genuine. Verification procedures            include recording instructions, requiring certain identifying information before acting            upon instructions and sending written confirmations. During periods when it is            difficult to contact the Shareholder Service Agent, it may be difficult to use            telephone, wire and other privileges.

**QuickBuy and QuickSell.**QuickBuy and            QuickSell permits the transfer of money via the Automated Clearing House System            (minimum $50, maximum $250,000) from or to a shareholder’s bank, savings and            loan, or credit union account in connection with the purchase or redemption of Fund            shares. Shares purchased by check or through QuickBuy and QuickSell or Direct Deposit            may not be redeemed under this privilege until such Shares have been owned for at least            10 calendar days. QuickBuy and QuickSell cannot be used with passbook savings accounts            or for certain tax-deferred plans such as IRAs.

**Tax-Sheltered Retirement Plans.**The            Shareholder Service Agent provides retirement plan services and documents and DWS-SDI            can establish investor accounts in any of the following types of retirement            plans:

| **•** | *Traditional, Roth and Education IRAs.*This includes Savings Incentive Match Plan for Employees                            of Small Employers (“SIMPLE”), Simplified Employee Pension                            Plan (“SEP”) IRA accounts and prototype                            documents. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | *403(b)(7) Custodial Accounts.*This type of plan is available to employees of most                            non-profit organizations. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Prototype money purchase pension and profit-sharing                            plans may be adopted by employers. |
|------------|-------------------------------------------------------------------------------------------------------------------|

Brochures describing these plans as well as model defined benefit plans,            target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and materials for            establishing them are available from the Shareholder Service Agent upon request.            Additional fees and transaction policies and procedures may apply to such plans.            Investors should consult with their own tax advisors before establishing a retirement            plan.

***Purchases***

The            minimum initial investment for the Institutional Class shares is $1,000,000, and there            is no minimum subsequent investment. These minimum amounts may be changed at any time            in management’s discretion.

The            Fund reserves the right to withdraw all or any part of the offering made by its            Prospectuses and to reject purchase orders for any reason. Also, from time to time, the            Fund may temporarily suspend the offering of any class

 

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of            its shares to new investors. During the period of such suspension, persons who are            already shareholders of such class of the Fund may be permitted to continue to purchase            additional shares of such class and to have dividends reinvested.

To            help the government fight the funding of terrorism and money laundering activities,            federal law requires all financial institutions to obtain, verify and record            information that identifies each person who opens an account. For more information,            please see “Policies You Should Know About” in the Fund            Prospectuses.

Fees generally charged to IRA accounts will be charged to accounts of            employees and directors.

It            is our policy to offer purchase privileges to current or former directors or trustees            of the Deutsche or Scudder mutual funds, employees, their spouses or life partners and            children or stepchildren age 21 or younger of Deutsche Bank or its affiliates or a            subadvisor to any fund in the DWS family of funds or a broker-dealer authorized to sell            shares of the funds. Qualified individuals will generally be allowed to purchase shares            in the class with the lowest expense ratio. The Fund also reserves the right to waive            the minimum account balance requirement for employee and director accounts.

**Revenue Sharing**

In            light of recent regulatory developments, the Advisor, the Distributor and their            affiliates have undertaken to furnish certain additional information below regarding            the level of payments made by them to selected affiliated and unaffiliated brokers,            dealers, participating insurance companies or other financial intermediaries            (“financial advisors”) in connection with the sale and/or distribution of            Fund shares or the retention and/or servicing of investors and Fund shares            (“revenue sharing”).

The            Advisor, the Distributor and/or their affiliates may pay additional compensation, out            of their own assets and not as an additional charge to the Fund, to financial advisors            in connection with the sale and/or distribution of Fund shares or the retention and/or            servicing of Fund investors and Fund shares. Such revenue sharing payments are in            addition to any distribution or service fees payable under any Rule 12b-1 or service            plan of any fund, any record keeping/sub-transfer agency/networking fees payable by the            Fund (generally through the Distributor or an affiliate) and/or the Distributor to            certain financial advisors for performing such services and any sales charges,            commissions, non-cash compensation arrangements expressly permitted under applicable            rules of the NASD or other concessions described in the fee table or elsewhere in the            Prospectuses or the SAI as payable to all financial advisors. For example, the Advisor,            the Distributor and/or their affiliates may compensate financial advisors for providing            the Fund with “shelf space” or access to a third party platform or fund            offering list, or other marketing programs including, without limitation, inclusion of            the Fund on preferred or recommended sales lists, mutual fund “supermarket”            platforms and other formal sales programs; granting the Distributor access to the            financial advisor’s sales force; granting the Distributor access to the financial            advisor’s conferences and meetings; assistance in training and educating the            financial advisor’s personnel; and, obtaining other forms of marketing support.            The level of revenue sharing payments made to financial advisors may be a fixed fee or            based upon one or more of the following factors: gross sales, current assets and/or            number of accounts of the Fund attributable to the financial advisor, the particular            fund or fund type or other measures as agreed to by the Advisor, the Distributor and/or            their affiliates and the financial advisors or any combination thereof. The amount of            these payments is determined at the discretion of the Advisor, the Distributor and/or            their affiliates from time to time, may be substantial, and may be different for            different financial advisors based on, for example, the nature of the services provided            by the financial advisor.

The            Advisor, the Distributor and/or their affiliates currently make revenue sharing            payments from their own assets in connection with the sale and/or distribution of DWS            Fund shares, or the retention and/or servicing of investors and DWS Fund shares to            financial advisors in amounts that generally range from .01% up to .50% of assets of            the Fund serviced and maintained by the financial advisor, .10% to .25% of sales of the            Fund attributable to the financial advisor, a flat fee of $12,500 up to $500,000, or            any combination thereof. These amounts are subject to change at the discretion of the            Advisor, the Distributor and/or their affiliates. Receipt of, or the prospect of            receiving, this additional compensation, may influence your financial advisor’s            recommendation of this Fund or of any particular share class of the Fund. You should            review your financial advisor’s compensation disclosure and/or talk to your            financial advisor to obtain more information on how this compensation may have            influenced your financial advisor’s recommendation of this Fund.

 

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The            Advisor, the Distributor and/or their affiliates may also make such revenue sharing            payments to financial advisors under the terms discussed above in connection with the            distribution of both DWS funds and non-DWS funds by financial advisors to retirement            plans that obtain record keeping services from ADP, Inc. on the DWS Scudder branded            retirement plan platform (the “Platform") with the level of revenue sharing            payments being based upon sales of both the DWS funds and the non-DWS funds by the            financial advisor on the Platform or current assets of both the DWS funds and the            non-DWS funds serviced and maintained by the financial advisor on the            Platform.

As            of the date hereof, the Fund has been advised that the Advisor, the Distributor and            their affiliates expect that the following firms will receive revenue sharing payments            at different points during the coming year as described above:

 

**Channel: Broker-Dealers and Financial Advisors**

 

A G            Edwards & Sons Inc.

AIG            Advisors Group

Ameriprise

Cadaret, Grant & Co. Inc.

Capital            Analyst, Incorporated

Citigroup Global Markets, Inc. (dba Smith Barney)

Commonwealth Equity Services, LLP (dba Commonwealth Financial            Network)

First            Clearing/Wachovia Securities

HD Vest            Investment Securities, Inc.

ING            Group

LaSalle            Financial Services, Inc. (dba ABN Amro)

Linsco/Private Ledger Corp.

Marsh            Insurance and Investment Company

Merrill            Lynch, Pierce, Fenner & Smith Inc.

Morgan            Stanley

Oppenheimer & Co., Inc.

Pacific            Select Distributors Group

Raymond            James & Associates

Raymond            James Financial Services

RBC            Dain Rauscher, Inc

Securities America, Inc.

UBS            Financial Services

Wells            Fargo Investments, LLC

 

**Channel: Cash Product Platform**

 

ADP            Clearing & Outsourcing

Allegheny Investments LTD

Bank of            New York (Hare & Co.)

Brown            Investment Advisory & Trust Company

Cadaret            Grant & Co.

D.A.            Davidson & Company

Emmett            A. Larkin Company

Fiduciary Trust Co. – International

Huntleigh Securities

Lincoln            Investment Planning

Linsco            Private Ledger Financial Services

Mellon            Bank

Penson            Financial Services

Pershing Choice Platform

SAMCO            Capital Markets (Fund Services, Inc.)

Smith            Moore & Company

William            Blair & Company

 

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**Channel: Third Party Insurance Platforms**

 

Acacia            National Life Insurance

Allmerica Financial Life Insurance Company

Allstate Life Insurance Company of New York

Ameritas Life Insurance Group

American General Life Insurance Company

Annuity            Investors Life Insurance Company

Columbus Life Insurance Company

Commonwealth Annuity and Life Insurance Company

Companion Life Insurance Company

Connecticut General Life Insurance Company

Farmers            New World Life Insurance Company

Fidelity Security Life Insurance Company

First            Allmerica Financial Life Insurance Company

Genworth Life Insurance Company of New York

Genworth Life and Annuity Insurance Company

Great            West Life and Annuity Insurance Company

Hartford Life Insurance Company

ICMG            Registered Variable Life

Integrity Life Insurance Company

John            Hancock Life Insurance companies

Kemper            Investors Life Insurance Company

Lincoln            Benefit Life Insurance Company

Lincoln            Life & Annuity Company of New York

Lincoln            National Life Insurance Company

Massachusetts Mutual Life Insurance Group

MetLife            Group

Minnesota Life Insurance Company

Mutual            of America Life Insurance Company

National Life Insurance Company

National Integrity Life Insurance Company

Nationwide Group

New            York Life Insurance and Annuity Corporation

Phoenix            Life Insurance Company

Protective Life Insurance

Provident Mutual Life Insurance

Prudential Insurance Company of America

Sun            Life GroupSymetra Life Insurance Company

Transamerica Life Insurance Company

Union            Central Life Insurance Company

United            of Omaha Life Insurance Company

United            Investors Life Insurance Company

Western            Southern Life Assurance Company

Any            additions, modifications or deletions to the financial advisors identified above that            have occurred since the date hereof are not reflected.

The            Advisor, the Distributor or their affiliates may enter into additional revenue sharing            arrangements or change or discontinue existing arrangements with financial advisors at            any time without notice.

The            prospect of receiving, or the receipt of additional compensation or promotional            incentives described above by financial advisors may provide such financial advisors            and/or their salespersons with an incentive to favor sales of shares of the DWS Funds            or a particular DWS Fund over sales of shares of mutual funds (or non-mutual fund            investments) with respect to which the financial advisor does not receive additional            compensation or promotional

 

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incentives, or receives lower levels of additional compensation or            promotional incentives. Similarly, financial advisors may receive different            compensation or incentives that may influence their recommendation of any particular            share class of the Fund or of other funds. These payment arrangements, however, will            not change the price that an investor pays for Fund shares or the amount that the Fund            receives to invest on behalf of an investor and will not increase Fund expenses. You            may wish to take such payment arrangements into account when considering and evaluating            any recommendations relating to Fund shares and you should discuss this matter with            your financial advisor and review your financial advisor’s            disclosures.

**Financial Services Firms’ Compensation.**Banks and other financial services firms may provide administrative            services related to order placement and payment to facilitate transactions in shares of            the Fund for their clients, and DWS-SDI may pay them a transaction fee up to the level            of the discount or commission allowable or payable to dealers.

DWS-SDI may, from time to time, pay or allow to firms a 1% commission on            the amount of shares of the Fund sold under the following conditions: (i) the purchased            shares are held in a DWS Scudder IRA account, (ii) the shares are purchased as a direct            “roll over” of a distribution from a qualified retirement plan account            maintained on a participant subaccount record keeping system provided by DWS Scudder            Investments Service Company, (iii) the registered representative placing the trade is a            member of Executive Council, a group of persons designated by DWS-SDI in acknowledgment            of their dedication to the employee benefit plan area; and (iv) the purchase is not            otherwise subject to a commission.

In            addition to the discounts or commissions described herein and the Prospectus, DWS-SDI            may pay or allow additional discounts, commissions or promotional incentives, in the            form of cash, to firms that sell shares of the Fund. In some instances, such amounts            may be offered only to certain firms that sell or are expected to sell during specified            time periods certain minimum amounts of shares of the Fund, or other funds underwritten            by DWS-SDI.

The            Fund will be deemed to have received a purchase or redemption order when an authorized            broker, service organization or, if applicable, an authorized designee, accepts the            order. Shares of the Fund may be purchased or redeemed on any business day at the net            asset value next determined after receipt of the order, in good order, by DWS Scudder            Investments Service Company. Investors who invest through authorized brokers, service            organizations or their designated intermediaries should submit purchase and redemption            orders directly to their broker, service organization or designated intermediary. The            broker or intermediary may charge you a transaction fee.

To            sell shares in a retirement account other than an IRA, your request must be made in            writing, except for exchanges to other eligible funds in the DWS family of funds, which            can be requested by phone or in writing. To sell shares by bank wire you will need to            sign up for these services in advance when completing your account            application.

**Automatic Investment Plan.**A shareholder            may purchase shares of the Fund through an automatic investment program. With the            Direct Deposit Purchase Plan (“Direct Deposit”), investments are made            automatically (minimum $1,000 for initial investment, $50 minimum for subsequent            investment and maximum $250,000 for initial investment and a minimum of $50 and maximum            $250,000 subsequent investments) from the shareholder’s account at a bank,            savings and loan or credit union into the shareholder’s Fund account. Termination            by a shareholder will become effective within thirty days after the Shareholder Service            Agent has received the request. The Fund may immediately terminate a            shareholder’s Direct Deposit in the event that any item is unpaid by the            shareholder’s financial institution.

**Payroll Investment Plans.**A shareholder may            purchase shares through Payroll Direct Deposit or Government Direct Deposit. Under            these programs, all or a portion of a shareholder’s net pay or government check            is invested each payment period. A shareholder may terminate participation in these            programs by giving written notice to the shareholder’s employer or government            agency, as appropriate. (A reasonable time to act is required.) The Fund is not            responsible for the efficiency of the employer or government agency making the payment            or any financial institutions transmitting payments.

 

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***Redemptions***

The            Fund imposes a redemption fee of 2% of the total redemption amount (calculated at net            asset value) on all Fund shares redeemed or exchanged within 15 days of buying them            (either by purchase or exchange). The redemption fee is paid directly to the Fund, and            is designed to encourage long-term investment and to offset transaction and other costs            associated with short-term or excessive trading. For purposes of determining whether            the redemption fee applies, shares held the longesttime will be            treated as being redeemed first and shares held the shortest time will be treated as            being redeemed last. The redemption fee is applicable to Fund shares purchased either            directly or through a financial intermediary, such as a broker-dealer. Transactions            through financial intermediaries typically are placed with the Fund on an omnibus basis            and include both purchase and sale transactions placed on behalf of multiple investors.            These purchase and sale transactions are generally netted against one another and            placed on an aggregate basis; consequently the identities of the individuals on whose            behalf the transactions are placed generally are not known to the Fund. For this            reason, the Fund has undertaken to notify financial intermediaries of their obligation            to assess the redemption fee on customer accounts and to collect and remit the proceeds            to the Fund. However, due to operational requirements, the intermediaries’            methods for tracking and calculating the fee may be inadequate or differ in some            respects from the Fund’s.

Policies and procedures affecting transactions in Fund shares can be            changed at any time without notice, subject to applicable law. Transactions may be            contingent upon proper completion of application forms and other documents by            shareholders and their receipt by the Fund’s agents. Transaction delays in            processing (and changing account features) due to circumstances within or beyond the            control of the Fund and its agents may occur. Shareholders (or their financial service            firms) are responsible for all losses and fees resulting from bad checks, cancelled            orders or the failure to consummate transactions effected pursuant to instructions            reasonably believed to be genuine.

A            distribution will be reinvested in shares of the same Fund and class if the            distribution check is returned as undeliverable.

Orders will be confirmed at a price based on the net asset value            (including any applicable sales charge) of the Fund next determined after receipt in            good order by DWS-SDI of the order accompanied by payment. However, orders received by            dealers or other financial services firms prior to the determination of net asset value            and received in good order by DWS-SDI prior to the close of its business day will be            confirmed at a price based on the net asset value effective on that day (“trade            date”).

The            Fund may suspend or postpone redemptions as permitted pursuant to Section 22(e) of the            Investment Company Act of 1940. Generally, those circumstances are when: 1) the New            York Stock Exchange is closed other than customary weekend or holiday closings; 2)            trading on the New York Stock Exchange is restricted; 3) an emergency exists which            makes the disposal of securities owned by the fund or the fair determination of the            value of the fund’s net assets not reasonably practicable; or 4) the SEC, by            order, permits the suspension of the right of redemption. Redemption payments by wire            may also be delayed in the event of a nonroutine closure of the Federal Reserve wire            payment system.

A            request for repurchase (confirmed redemption) may be communicated by a shareholder            through a financial services firm to DWS-SDI, which firms must promptly submit orders            to be effective.

Redemption requests must be unconditional. Redemption requests (and a            stock power for certificated shares) must be duly endorsed by the account holder. As            specified in the prospectus, signatures may need to be guaranteed by a commercial bank,            trust company, savings and loan association, federal savings bank, member firm of a            national securities exchange or other financial institution permitted by SEC rule.            Additional documentation may be required, particularly from institutional and fiduciary            account holders, such as corporations, custodians (e.g., under the Uniform Transfers to            Minors Act), executors, administrators, trustees or guardians.

If            the proceeds of the redemption (prior to the imposition of any contingent deferred            sales charge) are $100,000 or less and the proceeds are payable to the shareholder of            record at the address of record, normally a telephone request or a written request by            any one account holder without a signature guarantee is sufficient for redemptions by            individual or joint account holders, and trust, executor and guardian account holders,            provided the trustee, executor or guardian is named in the account registration. Other            institutional account holders may exercise this special

 

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privilege of redeeming shares by telephone request or written request            without signature guarantee subject to the same conditions as individual account            holders, provided that this privilege has been pre-authorized by the institutional            account holder by written instruction to the Shareholder Service Agent with signatures            guaranteed. This privilege may not be used to redeem shares held in certificated form            and may not be used if the shareholder’s account has had an address change within            15 days of the redemption request.

**Wires.**Delivery of the proceeds of a wire            redemption of $250,000 or more may be delayed by the Fund for up to seven days if the            Fund or the Shareholder Service Agent deems it appropriate under then-current market            conditions. The ability to send wires is limited by the business hours and holidays of            the firms involved. The Fund is not responsible for the efficiency of the federal wire            system or the account holder’s financial services firm or bank. The account            holder is responsible for any charges imposed by the account holder’s firm or            bank. To change the designated account to receive wire redemption proceeds, send a            written request to the Fund Shareholder Service Agent with signatures guaranteed as            described above or contact the firm through which Fund shares were            purchased.

**Automatic Withdrawal Plan.**The owner of            $5,000 or more of a class of the Fund’s shares at the offering price may provide            for the payment from the owner’s account of any requested dollar amount to be            paid to the owner or a designated payee monthly, quarterly, semiannually or annually.            The $5,000 minimum account size is not applicable to IRAs. The minimum periodic payment            is $50. Shares are redeemed so that the payee should receive payment approximately the            first of the month. Investors using this Plan must reinvest Fund            distributions.

**In-kind Redemptions.**The Fund reserves the            right to honor any request for redemption or repurchase by making payment in whole or            in part in readily marketable securities. These securities will be chosen by the Fund            and valued as they are for purposes of computing the Fund’s net asset value. A            shareholder may incur transaction expenses in converting these securities to cash. The            Trust, on behalf of the Fund, has elected, however, to be governed by Rule 18f-1 under            the 1940 Act, as a result of which the Fund is obligated to redeem shares or beneficial            interests, as the case may be, with respect to any one investor during any 90-day            period, solely in cash up to the lesser of $250,000 or 1% of the net asset value of the            Fund, at the beginning of the period.

***Exchanges***

Shareholders may request a taxable exchange of their shares for shares            of the corresponding class of other DWS Funds without imposition of a sales charge,            subject to the provisions below.

Shares of money market funds that were acquired by purchase (not            including shares acquired by dividend reinvestment) are subject to the applicable sales            charge on exchange. Series of DWS Target Fund are available on exchange only during the            offering period for such series as described in the applicable prospectus. Tax Free            Money Fund Investment, NY Tax-Free Money Fund Investment, Treasury Money Fund —            Class Investment, Cash Management Fund Institutional, Cash Reserves Fund Institutional,            Treasury Money Fund — Institutional, Cash Reserve Fund, Inc. Prime Series,            Tax-Exempt California Money Market Fund, Cash Account Trust and Investors Cash Trust            are available on exchange but only through a financial services firm having a services            agreement with DWS-SDI. All exchanges among money funds must meet applicable investor            eligibility and investment requirements. Exchanges may only be made for funds that are            available for sale in the shareholder’s state of residence. Currently, Tax-Exempt            California Money Market Fund is available for sale only in California.

Shareholders must obtain prospectus(es) of the fund they are exchanging            into from dealers, other firms or DWS-SDI.

**Automatic Exchange Plan.**The owner of            $1,000 or more of any class of shares of a DWS Fund may authorize the automatic            exchange of a specified amount ($50 minimum) of such shares for shares of the same            class of another such DWS Fund. Exchanges will be made automatically until the            shareholder or the Fund terminates the privilege. Exchanges are subject to the terms            and conditions described above.

 

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**DIVIDENDS**

The            Fund intends to follow the practice of distributing substantially all of its investment            company taxable income, which includes any excess of net realized short-term capital            gains over net realized long-term capital losses. The Fund may follow the practice of            distributing the entire excess of net realized long-term capital gains over net            realized short-term capital losses. However, the Fund may retain all or part of such            gain for reinvestment, after paying the related federal taxes for which shareholders            may then be able to claim a credit against their federal tax liability. In such a case,            shareholders would also have to include in their income their pro rata portion of the            amount of such gain. If the Fund does not distribute the amount of capital gain and/or            ordinary income required to be distributed by an excise tax provision of the Code, the            Fund may be subject to that excise tax. In certain circumstances, the Fund may            determine that it is in the interest of shareholders to distribute less than the amount            necessary to avoid excise taxes.

The            Fund distributes income dividends quarterly. The Fund intends to distribute net            realized capital gains after utilization of capital loss carryforwards, if any, in            December to prevent application of a federal excise tax. An additional distribution may            be made, if necessary.

Any            dividends or capital gains distributions declared in October, November or December with            a record date in such a month and paid during the following January will be treated by            shareholders for federal income tax purposes as if received on December 31 of the            calendar year declared.

Income and capital gain dividends, if any, of the Fund will be credited            to shareholder accounts in full and fractional shares of the same class of the Fund at            net asset value on the reinvestment date, except that, upon written request to the            Shareholder Service Agent, a shareholder may select one of the following            options:

| 1. | To receive income and short-term capital gain dividends                            in cash and long-term capital gain dividends in shares of the same                            class at net asset value; or |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | To receive income and all capital gain dividends in                            cash. |
|----|--------------------------------------------------------------------------------------|

Dividends will be reinvested in Shares of the same class of the Fund            unless shareholders indicate in writing that they wish to receive them in cash or in            shares of other DWS Funds with multiple classes of shares or as provided in the            prospectus. To use this privilege of investing dividends of the Fund in shares of            another DWS Fund, shareholders must maintain a minimum account value of $1,000 in the            Fund distributing the dividends. The Fund will reinvest dividend checks (and future            dividends) in shares of that same Fund and class if checks are returned as            undeliverable. Dividends and other distributions of the Fund in the aggregate amount of            $10 or less are automatically reinvested in shares of the Fund unless the shareholder            requests that such policy not be applied to the shareholder’s account.

If            an investment is in the form of a retirement plan, all dividends and capital gains            distributions must be reinvested into the shareholder’s account.

If            a shareholder has elected to reinvest any dividends and/or other distributions, such            distributions will be made in shares of that Fund and confirmations will be mailed to            each shareholder. If a shareholder has chosen to receive cash, a check will be sent.            Distributions of investment company taxable income and net realized capital gains are            taxable, whether made in shares or cash.

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

The            Fund may at any time vary its foregoing dividend practices and, therefore, reserves the            right from time to time to either distribute or retain for reinvestment such of its net            investment income and its net short-term and long-term capital gains as its Board            determines appropriate under the then current circumstances. In particular, and            without

 

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limiting the foregoing, the Fund may make additional distributions of            net investment income or capital gain net income in order to satisfy the minimum            distribution requirements contained in the Code.

**TRUSTEES AND OFFICERS**

The            following table presents certain information regarding the Board Members of the Trust.            Each Board Member’s year of birth is set forth in parentheses after his or her            name. Unless otherwise noted, (i) each Board Member has engaged in the principal            occupation(s) noted in the table for at least the most recent five years, although not            necessarily in the same capacity, and (ii) the address of each Board Member that is not            an “interested persons” (as defined in the 1940 Act) of the Trust or the            Advisor (each, an “Independent Board Member”), is c/o Dawn-Marie Driscoll,            PO Box 100176, Cape Coral, FL 33904. The term of office for each Board Member is until            the election and qualification of a successor, or until such Board Member sooner dies,            resigns, is removed or as otherwise provided in the governing documents of the Trust.            Because the Fund does not hold an annual meeting of shareholders, each Board Member            will hold office for an indeterminate period. The Board Members may also serve in            similar capacities with other funds in the DWS fund complex.

***Independent Board Members***

 

| **Name, Year of                            Birth, Position with the Trust and Length of Time Served** | **Business                            Experience and****Directorships During the Past 5 Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | **Number of                            Funds in DWS Fund Complex Overseen** |
|-------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------|
| Dawn-Marie Driscoll (1946)Chairperson since 2006Board Member since2006                           | President, Driscoll Associates (consulting firm);                            Executive Fellow, Center for Business Ethics, Bentley College;                            formerly, Partner, Palmer & Dodge (1988-1990); Vice President of                            Corporate Affairs and General Counsel, Filene’s (1978-1988).                            Directorships: Trustee of 8 open-end mutual funds managed by Sun                            Capital Advisers, Inc. (since 2007); Director of ICI Mutual Insurance                            Company (since 2007); Advisory Board, Center for Business Ethics,                            Bentley College; Trustee, Southwest Florida Community Foundation                            (charitable organization); Former Directorships: Investment Company                            Institute (audit, executive, nominating committees) and Independent                            Directors Council (governance, executive committees) | 79                                                                          |
| Henry P. Becton, Jr. (1943)Board Member since2006                                                     | President, WGBH Educational Foundation. Directorships:                            Association of Public Television Stations; Becton Dickinson and                            Company(1) (medical technology company); Belo                            Corporation(1) (media company); Boston Museum of Science;                            Public Radio International. Former Directorships: American Public                            Television; Concord Academy; New England Aquarium; Mass. Corporation                            for Educational Telecommunications; Committee for Economic Development;                            Public Broadcasting Service                                                                                                                                                                                                                                                                                                                                        | 79                                                                          |
| Keith R. Fox (1954)Board Member since2006                                                             | Managing General Partner, Exeter Capital Partners (a                            series of private equity funds). Directorships: Progressive Holding                            Corporation (kitchen goods importer and distributor); Natural History,                            Inc. (magazine publisher); Box Top Media Inc. (advertising); The Kennel                            Shop (retailer)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 79                                                                          |
| Kenneth C. Froewiss(1945)Board Member since2006                                                       | Clinical Professor of Finance, NYU Stern School of                            Business (1997-present); Member, Finance Committee, Association for                            Asian Studies (2002-present); Director, Mitsui Sumitomo Insurance Group                            (US) (2004-present); prior thereto, Managing Director, J.P. Morgan                            (investment banking firm) (until 1996)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 79                                                                          |

 

 

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| Martin J. Gruber(1937)Board Member since1999                           | Nomura Professor of Finance, Leonard N. Stern School of                            Business, New York University (since September 1965); Director, Japan                            Equity Fund, Inc. (since January 1992), Thai Capital Fund, Inc. (since                            January 2000), Singapore Fund, Inc. (since January 2000), National                            Bureau of Economic Research (since January 2006). Formerly, Trustee,                            TIAA (pension funds) (January 1996-January 2000); Trustee, CREF and                            CREF Mutual Funds (January 2000-March 2005); Chairman, CREF and CREF                            Mutual Funds (February 2004-March 2005); and Director, S.G. Cowen                            Mutual Funds (January 1985-January 2001) | 79 |
|------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
| Richard J. Herring(1946)Board Member since1999                         | Jacob Safra Professor of International Banking and                            Professor, Finance Department, The Wharton School, University of                            Pennsylvania (since July 1972); Co-Director, Wharton Financial                            Institutions Center (since July 2000). Formerly, Vice Dean and                            Director, Wharton Undergraduate Division (July 1995-June 2000);                            Director, Lauder Institute of International Management Studies (July                            2000-June 2006)                                                                                                                                                                                                                                                 | 79 |
| Graham E. Jones(1933)Board Member since2002                            | Senior Vice President, BGK Realty, Inc. (commercial real                            estate) (since 1995). Formerly, Trustee of various investment companies                            managed by Sun Capital Advisors, Inc. (1998-2005), Morgan Stanley Asset                            Management (1985-2001) and Weiss, Peck and Greer (1985-2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 79 |
| Rebecca W. Rimel(1951)Board Member since2002                           | President and Chief Executive Officer, The Pew                            Charitable Trusts (charitable foundation) (1994 to present); Trustee,                            Thomas Jefferson Foundation (charitable organization) (1994 to                            present); Trustee, Executive Committee, Philadelphia Chamber of                            Commerce (2001 to present). Formerly, Executive Vice President, The                            Glenmede Trust Company (investment trust and wealth management) (1983                            to 2004); Board Member, Investor Education (charitable organization)                            (2004-2005); Director, Viasys Health Care(1) (January                            2007-June 2007)                                                         | 79 |
| Philip Saunders, Jr.(1935)Board Member since1996                       | Principal, Philip Saunders Associates (economic and                            financial consulting) (since November 1988). Formerly, Director,                            Financial Industry Consulting, Wolf & Company (consulting)                            (1987-1988); President, John Hancock Home Mortgage Corporation                            (1984-1986); Senior Vice President of Treasury and Financial Services,                            John Hancock Mutual Life Insurance Company, Inc. (1982-1986)                                                                                                                                                                                                                                                                                            | 79 |
| William N. Searcy, Jr.(1946)Board Member since2002 | Private investor since October 2003; Trustee of 8                            open-end mutual funds managed by Sun Capital Advisers, Inc. (since                            October 1998). Formerly, Pension & Savings Trust Officer, Sprint                            Corporation(1) (telecommunications) (November 1989-September                            2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 79 |
| Jean Gleason Stromberg(1943)Board Member since2006                     | Retired. Formerly, Consultant (1997-2001); Director, US                            Government Accountability Office (1996-1997); Partner, Fulbright &                            Jaworski, L.L.P. (law firm) (1978-1996). Directorships: The William and                            Flora Hewlett Foundation; Service Source, Inc. Former Directorships:                            Mutual Fund Directors Forum (2002-2004), American Bar Retirement                            Association (funding vehicle for retirement plans) (1987-1990 and                            1994-1996)                                                                                                                                                                                                                              | 79 |

 

 

----

 

 

| Carl W. Vogt(1936)Board Member since2006 | Retired Senior Partner, Fulbright & Jaworski, L.L.P.                            (law firm); formerly, President (interim) of Williams College                            (1999-2000); formerly, President of certain funds in the Deutsche Asset                            Management family of funds (formerly, Flag Investors family of funds)                            (registered investment companies) (1999-2000). Directorships: Yellow                            Corporation (trucking); American Science & Engineering (x-ray                            detection equipment). Former Directorships: ISI Family of Funds                            (registered investment companies, 4 funds overseen); National Railroad                            Passenger Corporation (Amtrak) Waste Management, Inc. (solid waste                            disposal); formerly, Chairman and Member, National Transportation                            Safety Board | 77 |
|------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|

 

***Interested Board Member***

 

| **Name, Year of                            Birth, Position with the Trust and Length of Time Served** | **Business                            Experience and****Directorships During the Past 5 Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **Number of                            Funds in DWS Fund Complex Overseen** |
|-------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------|
| Axel Schwarzer(2)(1958)Board Member since2006                                                         | Managing Director(4), Deutsche Asset                            Management; Head of Deutsche Asset Management Americas; CEO of DWS                            Scudder; formerly board member of DWS Investments, Germany (1999-2005);                            formerly, Head of Sales and Product Management for the Retail and                            Private Banking Division of Deutsche Bank in Germany (1997-1999);                            formerly, various strategic and operational positions for Deutsche Bank                            Germany Retail and Private Banking Division in the field of investment                            funds, tax driven instruments and asset management for corporates                            (1989-1996) | 80                                                                          |

 

***Officers*****(3)**

 

| **Name, Year of                            Birth, Position with the Trust and Length of Time Served**             | **Business                            Experience and****Directorships During the Past 5 Years**                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Michael G. Clark(5) (1965)President, 2006-present                                                                 | Managing Director(4), Deutsche Asset                            Management (2006-present); President of DWS family of funds; formerly,                            Director of Fund Board Relations (2004-2006) and Director of Product                            Development (2000-2004), Merrill Lynch Investment Managers; Senior Vice                            President Operations, Merrill Lynch Asset Management                            (1999-2000) |
| John                            Millette(6) (1962)Vice President and Secretary, 2003-present                      | Director(4), Deutsche Asset                            Management                                                                                                                                                                                                                                                                                                                                                                                                |
| Paul                            H. Schubert(5) (1963)Chief Financial Officer, 2004-presentTreasurer, 2005-present | Managing Director(4), Deutsche Asset                            Management (since July 2004); formerly, Executive Director, Head of                            Mutual Fund Services and Treasurer for UBS Family of Funds (1998-2004);                            Vice President and Director of Mutual Fund Finance at UBS Global Asset                            Management (1994-1998)                                                                       |
| Patricia DeFilippis(5) (1963)Assistant Secretary, 2005-present                                                    | Vice President, Deutsche Asset Management (since June                            2005); Counsel, New York Life Investment Management LLC (2003-2005);                            legal associate, Lord, Abbett & Co. LLC (1998-2003)                                                                                                                                                                                                                         |
| Elisa                            D. Metzger(5) (1962)Assistant Secretary, 2005-present                            | Director(4), Deutsche Asset Management (since                            September 2005); Counsel, Morrison and Foerster LLP                            (1999-2005)                                                                                                                                                                                                                                                                                              |

 

 

----

 

 

| Caroline Pearson(6) (1962)Assistant Secretary, 2002-present                                                                         | Managing Director(4), Deutsche Asset                            Management                                                                                                                                                                                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Paul                            Antosca(6)(1957)Assistant Treasurer, 2007-present                                                   | Director(4), Deutsche Asset Management (since                            2006); Vice President, The Manufacturers Life Insurance Company                            (U.S.A.) (1990-2006)                                                                                                                                                                                              |
| Kathleen Sullivan D’Eramo(6)(1957)Assistant Treasurer, 2003-present                                                           | Director(4), Deutsche Asset                            Management                                                                                                                                                                                                                                                                                                                     |
| Jason                            Vazquez(5) (1972)Anti-Money Laundering Compliance Officer,                            2007-present | Vice President, Deutsche Asset Management (since 2006);                            formerly, AML Operations Manager for Bear Stearns (2004-2006),                            Supervising Compliance Principal and Operations Manager for AXA                            Financial (1999-2004)                                                                                         |
| Robert                            Kloby(5) (1962)Chief Compliance Officer, 2006-present                                             | Managing Director(4), Deutsche Asset                            Management (2004-present); formerly, Chief Compliance Officer/Chief                            Risk Officer, Robeco USA (2000-2004); Vice President, The Prudential                            Insurance Company of America (1988-2000); E.F. Hutton and Company                            (1984-1988)               |
| J.                            Christopher Jackson(5)

(1951)Chief Legal Officer, 2006-present                                       | Director(4), Deutsche Asset Management                            (2006-present); formerly, Director, Senior Vice President, General                            Counsel, and Assistant Secretary, Hansberger Global Investors, Inc.                            (1996-2006); Director, National Society of Compliance Professionals                            (2002-2005) (2006-2009) |

             

| (1) | A publicly held company with securities registered                            pursuant to Section 12 of the Securities Exchange Act of                            1934. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The mailing address of Axel Schwarzer is c/o Deutsche                            Investment Management Americas Inc., 345 Park Avenue, New York, New                            York 10154. Mr. Schwarzer is an interested Board Member by virtue of                            his positions with Deutsche Asset Management. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | As a result of their respective positions held with the                            Advisor, these individuals are considered “interested                            persons” of the Advisor within the meaning of the 1940 Act.                            Interested persons receive no compensation from the Funds. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Executive title, not a board directorship. |
|-----|--------------------------------------------|

| (5) | Address: 345 Park Avenue, New York, New York                            10154. |
|-----|--------------------------------------------------------------------------------|

| (6) | Address: Two International Place, Boston, Massachusetts                            02110. |
|-----|-------------------------------------------------------------------------------------------|

Each Officer also holds similar positions for other investment companies            for which DIMA or an affiliate serves as the advisor.

**Officer’s Role with Principal Underwriter: DWS Scudder            Distributors, Inc.**

 

| Paul H. Schubert: | Vice President |
|-------------------|----------------|
| Caroline Pearson: | Secretary      |

 

 

----

 

***Information Concerning Committees and Meetings of Board            Members***

The            Board of the Trust met ten (10) times during the calendar year ended December 31,            2006 and each Board Member attended at least 80% of the meetings of the Board and            meetings of the committees of the Board on which such Board Member served.

**Board Committees.**Ms. Driscoll has            served as Chair of the Board of the Funds since June 2006.

The            Board has established the following standing committees: Audit Committee,            Nominating/Corporate Governance Committee, Valuation Committee, Equity Oversight            Committee, Fixed Income Oversight Committee, Marketing/Distribution/Shareholder Service            Committee, Legal/Regulatory/Compliance Committee and Expense/Operations            Committee.

**The Audit Committee**assists the Board in            fulfilling its responsibility for oversight of the quality and integrity of the            accounting, auditing and financial reporting practices of the applicable Fund. It also            makes recommendations regarding the selection of an independent registered public            accounting firm for a Fund, reviews the independence of such firm, reviews the scope of            audit and internal controls, considers and reports to the Board on matters relating to            a Fund’s accounting and financial reporting practices, and performs such other            tasks as the full Board deems necessary or appropriate. The Audit Committee receives            annual representations from the independent registered public accounting firm as to its            independence. The members of the Audit Committee are Keith R. Fox (Chair and Audit            Committee Financial Expert), Kenneth C. Froewiss, Richard J. Herring, Graham E. Jones,            Philip Saunders, Jr., William N. Searcy, Jr. and Jean Gleason Stromberg. The Audit            Committee held eight (8) meetings during the calendar year 2006.

**The Nominating/Corporate Governance Committee**(i) recommends to the Board candidates to serve as Board Members            and (ii) oversees and, as appropriate, makes recommendations to the Board            regarding other fund governance-related matters, including but not limited to Board            compensation practices, retirement policies, self-evaluations of effectiveness, review            of possible conflicts of interest and independence issues involving Board Members,            allocations of assignments and functions of committees of the Board, and share            ownership policies. The members of the Nominating/Corporate Governance Committee are            Henry P. Becton, Jr. (Chair), Graham E. Jones, Rebecca W. Rimel and Jean Gleason            Stromberg. The Nominating/Corporate Governance Committee (previously known as the            Committee on Independent Directors) held three (3) meetings during the calendar year            2006.

**The Valuation Committee**oversees Fund            valuation matters, reviews valuation procedures adopted by the Board, determines the            fair value of the Fund’s securities as needed in accordance with the valuation            procedures when actual market values are unavailable and performs such other tasks as            the full Board deems necessary or appropriate. The members of the Valuation Committee            are Keith R. Fox, Kenneth C. Froewiss, Martin J. Gruber, Richard J. Herring and Philip            Saunders, Jr. (Chair). The Valuation Committee held six (6) meetings during the            calendar year 2006.

The            Board has established two**Investment Oversight            Committees**, one focusing on Funds primarily investing in            equity securities (the “Equity Oversight Committee”) and one focusing on            Funds primarily investing in fixed income securities (the “Fixed Income Oversight            Committee”). These Committees meet regularly with Fund portfolio managers and            other investment personnel to review the relevant Funds’ investment strategies            and investment performance. The members of the**Equity            Oversight Committee**are Henry P. Becton, Jr., Martin J.            Gruber (Chair), Richard J. Herring, Rebecca W. Rimel, Philip Saunders, Jr. and Carl W.            Vogt. The members of the**Fixed Income Oversight            Committee**are Dawn-Marie Driscoll, Keith R. Fox, Kenneth C.            Froewiss, Graham E. Jones, William N. Searcy, Jr. (Chair) and Jean Gleason Stromberg.            Each Investment Oversight Committee held six (6) meetings during the calendar year            2006.

**The Marketing/Distribution/Shareholder Service Committee**oversees (i) the quality, costs and types of shareholder services            provided to the Funds and their shareholders, and (ii) the distribution-related            services provided to the Funds and their shareholders. The members of the            Marketing/Distribution/Shareholder Service Committee are Martin J. Gruber, Richard J.            Herring (Chair), Rebecca W. Rimel, Jean Gleason Stromberg and Carl W. Vogt. The            Marketing/Distribution/Shareholder Service Committee held six (6) meetings during the            calendar year 2006.

 

----

 

**The Legal/Regulatory/Compliance Committee**oversees (i) the significant legal affairs of the Funds, including            the handling of pending or threatened litigation or regulatory action involving the            Funds, (ii) general compliance matters relating to the Funds and (iii) proxy            voting. The members of the Legal/Regulatory/Compliance Committee are Henry P. Becton,            Jr., Dawn-Marie Driscoll, Rebecca W. Rimel, William N. Searcy, Jr., Jean Gleason            Stromberg and Carl W. Vogt (Chair). The Legal/Regulatory/Compliance Committee held            six (6) meetings during the calendar year 2006.

**The Expense/Operations Committee**(i) monitors the Fund’s total operating expense levels,            (ii) oversees the provision of administrative services to the Fund, including the            Fund's custody, fund accounting and insurance arrangements, and (iii) reviews the            Fund's investment advisers’ brokerage practices, including the implementation of            related policies. The members of the Expense/Operations Committee are Henry P. Becton,            Jr., Dawn-Marie Driscoll, Keith R. Fox, Kenneth C. Froewiss, Graham E. Jones (Chair),            Philip Saunders, Jr. and William N. Searcy, Jr. This committee held seven            (7) meetings during the calendar year 2006.

**Ad Hoc Committees.**In addition to the            standing committees described above, from time to time the Board also forms ad hoc            committees to consider specific issues. In 2006, various ad hoc committees of the Board            held an additional seven (7) meetings.

**Remuneration.**Each Independent Board Member            receives compensation from the Fund for his or her services, which includes an annual            retainer and an attendance fee for each meeting attended. No additional compensation is            paid to any Independent Board Member for travel time to meetings, attendance at            directors' educational seminars or conferences, service on industry or association            committees, participation as speakers at directors' conferences or service on special            fund industry director task forces or subcommittees. Independent Board Members do not            receive any employee benefits such as pension or retirement benefits or health            insurance from the Fund or any fund in the DWS fund complex.

Members of the Board who are officers, directors, employees or            stockholders of Deutsche Asset Management or its affiliates receive no direct            compensation from a Fund, although they are compensated as employees of Deutsche Asset            Management, or its affiliates, and as a result may be deemed to participate in fees            paid by the Funds. The following tables show compensation from the Fund and aggregate            compensation from all of the funds in the DWS fund complex received by each Board            Member during the calendar year 2006. Mr. Schwarzer became a member of the Board            on May 5, 2006, is an interested person of the Funds and received no compensation from            the Funds or any fund in the DWS fund complex during the relevant periods.

 

| **Name of Board Member**        | **Aggregate Compensation****from Fund** | **Total** **Compensation** **from Fund** **and** **DWS Fund Complex(1)** |
|---------------------------------|-----------------------------------------|----------------------------------------------------------------------------------------------|
|                            |                                    |                                                                                         |
| Henry P. Becton, Jr.(3)(5)      | $1,005                                  | $189,000                                                                                     |
| Dawn-Marie Driscoll(2)(3)(4)(5) | $1,269                                  | $251,000                                                                                     |
| Keith R. Fox(3)(4)(5)           | $1,005                                  | $195,000                                                                                     |
| Kenneth C. Froewiss(3)(4)(5)    | $1,066                                  | $234,988                                                                                     |
| Martin J. Gruber(3)(5)          | $2,808                                  | $188,000                                                                                     |
| Richard J. Herring(3)(4)(5)     | $2,771                                  | $184,000                                                                                     |
| Graham E. Jones(3)(4)(5)        | $3,071                                  | $206,000                                                                                     |
| Rebecca W. Rimel(3)(5)          | $2,778                                  | $185,000                                                                                     |
| Philip Saunders, Jr.(3)(4)(5)   | $3,094                                  | $207,000                                                                                     |
| William N. Searcy, Jr.(3)(4)(5) | $3,071                                  | $206,000                                                                                     |
| Jean Gleason Stromberg(3)(4)(5) | $1,035                                  | $202,000                                                                                     |
| Carl W. Vogt(3)(5)              | $1,005                                  | $189,000                                                                                     |

             

| (1) | The DWS Fund Complex is composed of 155 funds as of                            December 31, 2006. |
|-----|---------------------------------------------------------------------------------------------------|

| (2) | Includes $50,000 in annual retainer fees in                            Ms. Driscoll’s role as Chairperson of the Board. |
|-----|------------------------------------------------------------------------------------------------------------------------------------|

 

----

 

| (3) | For each Board Member, except Mr. Becton, Mr.                            Froewiss and Mr. Vogt, total compensation includes compensation for                            service on the boards of 34 trusts/corporations comprised of 87                            funds/portfolios. For Messrs. Becton and Vogt total compensation                            includes compensation for service on the boards of 32                            trusts/corporations comprised of 85 funds/portfolios. For Mr. Froewiss                            total compensation includes compensation for services on the boards of                            37 trusts/corporations comprised of 90 funds/portfolios. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Aggregate compensation includes amounts paid to the                            Board Members for special meetings of ad hoc committees of the board in                            connection with the possible consolidation of the various DWS Fund                            boards and funds, meetings for considering fund expense simplification                            initiatives, and consideration of issues specific to the Funds’                            direct shareholders (i.e., those shareholders who did not purchase                            shares through financial intermediaries). Such amounts totaled $16,000                            for Ms. Driscoll, $1,000 for Mr. Fox, $17,000 for Mr.                            Froewiss, $1,000 for Dr. Herring, $16,000 for Mr. Jones,                            $17,000 for Dr. Saunders, $16,000 for Mr. Searcy and $16,000                            for Ms. Stromberg. These meeting fees were borne by the applicable                            DWS Funds. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | During calendar year 2006, the total number of funds                            overseen by each Board Member was 87 funds, except for Mr. Becton and                            Mr. Vogt, who oversaw 85 funds, and Mr. Froewiss, who oversaw 90                            funds. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Board Member Ownership in the            Fund***(1)

The            following table shows the dollar range of equity securities beneficially owned by each            Board Member in the Funds and DWS Fund Complex as of December 31, 2006.

 

| **Board Member**              | **Dollar Range of Beneficial Ownership****in DWS Lifecycle                            Long****Range Fund** | **Aggregate Dollar Range of****Ownership in all Funds Overseen by****Board Member****in the DWS Fund                            Complex(2)** |
|-------------------------------|------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                       |                                                                                                                                         |
| **Independent Board Member:** |                                                                                                       |                                                                                                                                         |
|                          |                                                                                                       |                                                                                                                                         |
| Henry P. Becton, Jr.          | None                                                                                                       | Over $100,000                                                                                                                                |
| Dawn-Marie Driscoll           | None                                                                                                       | Over $100,000                                                                                                                                |
| Keith R. Fox                  | None                                                                                                       | Over $100,000                                                                                                                                |
| Kenneth C. Froewiss           | None                                                                                                       | Over $100,000                                                                                                                                |
| Martin J. Gruber              | None                                                                                                       | Over $100,000                                                                                                                                |
| Richard J. Herring            | None                                                                                                       | Over $100,000                                                                                                                                |
| Graham E. Jones               | None                                                                                                       | Over $100,000                                                                                                                                |
| Rebecca W. Rimel              | None                                                                                                       | Over $100,000                                                                                                                                |
| Philip Saunders, Jr.          | None                                                                                                       | Over $100,000                                                                                                                                |
| William N. Searcy, Jr.        | None                                                                                                       | Over $100,000                                                                                                                                |
| Jean Gleason Stromberg        | None                                                                                                       | Over $100,000                                                                                                                                |
| Carl W. Vogt                  | None                                                                                                       | Over $100,000                                                                                                                                |
|                          |                                                                                                       |                                                                                                                                         |
| **Interested Board Member:**  |                                                                                                       |                                                                                                                                         |
|                          |                                                                                                       |                                                                                                                                         |
| Axel Schwarzer                | None                                                                                                       | Over $100,000                                                                                                                                |

             

| (1) | The amount shown includes share equivalents of funds                            which the Board Member is deemed to be invested pursuant to the                            Fund’s deferred compensation plan. The inclusion therein of any                            shares deemed beneficially owned does not constitute an admission of                            beneficial ownership of the shares. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Securities beneficially owned as defined under the 1934                            Act include direct and/or indirect ownership of securities where the                            Board Member’s economic interest is tied to the securities,                            employment ownership and securities when the Board Member can exert                            voting power and when the Board Member has authority to sell the                            securities. The dollar ranges are: None, $1-$10,000, $10,001-$50,000,                            $50,001-$100,000, over $100,000. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

----

 

***Ownership in Securities of the Advisor and Related            Companies***

As            reported to the Funds, the information in the following table reflects ownership by the            Independent Board Members and their immediate family members of certain securities as            of December 31, 2006. An immediate family member can be a spouse, children residing in            the same household including step and adoptive children and any dependents. The            securities represent ownership in the Advisor or principal underwriter of the Fund and            any persons (other than a registered investment company) directly or indirectly            controlling, controlled by, or under common control with the Advisor or principal            underwriter of the Fund (including Deutsche Bank AG).

             

| **Independent****Board Member**                   | **Owner and Relationship to****Board Member** | **Company** | **Title of****Class** | **Value of Securities on an Aggregate****Basis** | **Percent of Class on an Aggregate****Basis** |
|---------------------------------------------------|-----------------------------------------------|-------------|-----------------------|--------------------------------------------------|-----------------------------------------------|
|                                              |                                          |        |                  |                                             |                                          |
| Henry P. Becton, Jr.                              |                                          | None        |                  |                                             |                                          |
| Dawn-Marie Driscoll                               |                                          | None        |                  |                                             |                                          |
| Keith R. Fox                                      |                                          | None        |                  |                                             |                                          |
| Kenneth C. Froewiss                               |                                          | None        |                  |                                             |                                          |
| Martin J. Gruber                                  |                                          | None        |                  |                                             |                                          |
| Richard J. Herring                                |                                          | None        |                  |                                             |                                          |
| Graham E. Jones                                   |                                          | None        |                  |                                             |                                          |
| Rebecca W. Rimel                                  |                                          | None        |                  |                                             |                                          |
| Philip Saunders, Jr.                              |                                          | None        |                  |                                             |                                          |
| William N. Searcy, Jr.                            |                                          | None        |                  |                                             |                                          |
| Jean                            Gleason Stromberg |                                          | None        |                  |                                             |                                          |
| Carl                            W. Vogt           |                                          | None        |                  |                                             |                                          |

 

***Securities Beneficially Owned***

As            of July 6, 2007, the Board Members and officers of the Trust owned, as a group, less            than 1% of the outstanding shares of the Fund.

To            the best of the Fund’s knowledge, as of July 6, 2007, no person owned of record            or beneficially 5% or more of any class of the Fund’s outstanding shares, except            as noted below.

 

| **Name and Address of Investor                            Ownership**                                               | **Shares**    | **% of Total Shares**         |
|---------------------------------------------------------------------------------------------------------------------|---------------|-------------------------------|
|                                                                                                                |          |                          |
| STATE STREET BANK AND TRUSTEEFBO KRAFT FOODS INC SVGS PLANMASTER TRUSTATTN MICHELLE L ROBBINSWESTWOOD MA 02090-2318 | 44,875,265.27 | 64.34% of Institutional Class |
|                                                                                                                |          |                          |
| STATE STREET BANK & TR TTEEFBO ALTRIA CORPORATE SERVICESDEFERRED PROFIT SHARING MASTER TRWESTWOOD MA 02090-2318 | 14,618,345.53 | 20.96% of Institutional Class |
|                                                                                                                |          |                          |
| NORTHERN TRUST CO TTEEFBO NORTEL NETWORKS LONG TERMINVESTMENT PLAN-DVCHICAGO IL 60675-0001                          | 7,256,950.93  | 10.40% of Institutional Class |
|                                                                                                                |          |                          |

 

 

----

 

 

| CHARLES SCHWAB & CO/SCHWABOMNIBUS ACCOUNT REINVESTATTN: MUTUAL FUND ACCT MGMT TEAMSAN FRANCISCO CA 94104-4151 | 267,173.68 | 58.46% of Class S |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------|
|                                                                                                              |       |              |
| NAT'L FINANCIAL SERVICES CORP FOREXCL BENEFIT OUR CUSTOMERSCHURCH STREET STATIONNEW YORK NY 10008-3908            | 42,017.75  | 9.19% of Class S  |

 

***Certain Indemnification Arrangements***

In            addition to customary indemnification rights provided by the governing instruments of            the Trust, Trustees may be eligible to seek indemnification from the Advisor in            connection with certain matters as follows. In connection with litigation or regulatory            action related to possible improper market timing or other improper trading activity or            possible improper marketing and sales activity in the Fund, the Fund’s investment            advisor has agreed, subject to applicable law and regulation, to indemnify and hold            harmless the Fund against any and all loss, damage, liability and expense, arising from            market timing or marketing and sales matters alleged in any enforcement actions brought            by governmental authorities involving or potentially affecting the Fund or the            investment advisor (“Enforcement Actions”) or that are the basis for            private actions brought by shareholders of the Fund against the Fund, its Board Members            and officers, the investment advisor and/or certain other parties (“Private            Litigation”), or any proceedings or actions that may be threatened or commenced            in the future by any person (including governmental authorities), arising from or            similar to the matters alleged in the Enforcement Actions or Private Litigation. In            recognition of its undertaking to indemnify the Fund and in light of the rebuttable            presumption generally afforded to Independent Board Members of investment companies            that they have not engaged in disabling conduct, the Fund’s investment advisor            has also agreed, subject to applicable law and regulation, to indemnify the            Fund’s Independent Board Members against certain liabilities the Independent            Board Members may incur from the matters alleged in any Enforcement Actions or Private            Litigation or arising from or similar to the matters alleged in the Enforcement Actions            or Private Litigation, and advance expenses that may be incurred by the Independent            Board Members in connection with any Enforcement Actions or Private Litigation. The            Fund’s investment advisor is not, however, required to provide indemnification            and advancement of expenses: (1) in connection with any proceeding or action with            respect to which the Fund’s Board determines that the Independent Board Member            ultimately would not be entitled to indemnification or (2) for any liability of            the Independent Board Member to the Fund or its shareholders to which the Independent            Board Member would otherwise be subject by reason of willful misfeasance, bad faith,            gross negligence or reckless disregard of the Independent Board Members’ duties            as a director or trustee of the Fund as determined in a final adjudication in such            action or proceeding. The estimated amount of any expenses that may be advanced to the            Independent Board Members or indemnity that may be payable under the indemnity            agreements is currently unknown. These agreements by the investment advisor will            survive the termination of the investment management agreements between the applicable            Deutsche Asset Management entity and the Fund.

**PROXY VOTING GUIDELINES**

The            Fund has delegated proxy voting responsibilities to its investment advisor, subject to            the Board’s general oversight. The Fund has delegated proxy voting to the Advisor            with the direction that proxies should be voted consistent with the Fund’s best            economic interests. The Advisor has adopted its own Proxy Voting Policies and            Procedures (“Policies”), and Proxy Voting Guidelines            (“Guidelines”) for this purpose. The Policies address, among other things,            conflicts of interest that may arise between the interests of the Fund, and the            interests of the Advisor and its affiliates, including the Fund’s principal            underwriter. The Guidelines set forth the Advisor’s general position on various            proposals, such as:

| **•** | Shareholder Rights—                            The Advisor generally votes against proposals that restrict shareholder                            rights. |
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| **•** | Corporate Governance— The Advisor generally votes for confidential and                            cumulative voting and against supermajority voting requirements for                            charter and bylaw amendments. The Advisor generally votes for proposals                            to restrict a chief executive officer from serving on more than three                            outside boards of directors. The Advisor generally votes against                            proposals that require a company to appoint a Chairman who is an                            independent director. |
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| **•** | Anti-Takeover Matters— The Advisor generally votes for proposals that                            require shareholder ratification of poison pills or that request boards                            to redeem poison pills, and votes against the adoption of poison pills                            if they are submitted for shareholder ratification. The Advisor                            generally votes for fair price proposals. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Compensation Matters— The Advisor generally votes for executive cash                            compensation proposals, unless they are unreasonably excessive. The                            Advisor generally votes against stock option plans that do not meet the                            Advisor’s criteria. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Routine Matters— The                            Advisor generally votes for the ratification of auditors, procedural                            matters related to the annual meeting and changes in company name, and                            against bundled proposals and adjournment. |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

The            general provisions described above do not apply to investment companies. The Advisor            generally votes proxies solicited by investment companies in accordance with the            recommendations of an independent third party, except for proxies solicited by or with            respect to investment companies for which the Advisor or an affiliate serves as            investment advisor or principal underwriter (“affiliated investment            companies”). The Advisor votes affiliated investment company proxies in the same            proportion as the vote of the investment company’s other shareholders (sometimes            called “mirror” or “echo” voting). Master fund proxies            solicited from feeder funds are voted in accordance with applicable requirements of the            1940 Act.

Although the Guidelines set forth the Advisor’s general voting            positions on various proposals, the Advisor may, consistent with the Fund’s best            interests, determine under some circumstances to vote contrary to those            positions.

The            Guidelines on a particular issue may or may not reflect the view of individual members            of the Board or of a majority of the Board. In addition, the Guidelines may reflect a            voting position that differs from the actual practices of the public companies within            the Deutsche Bank organization or of the investment companies for which the Advisor or            an affiliate serves as investment advisor or sponsor. The Advisor may consider the            views of a portfolio company’s management in deciding how to vote a proxy or in            establishing general voting positions for the Guidelines, but management’s views            are not determinative.

As            mentioned above, the Policies describe the way in which the Advisor resolves conflicts            of interest. To resolve conflicts, the Advisor, under normal circumstances, votes            proxies in accordance with its Guidelines. If the Advisor departs from the Guidelines            with respect to a particular proxy or if the Guidelines do not specifically address a            certain proxy proposal, a proxy voting committee established by the Advisor will vote            the proxy. Before voting any such proxy, however, the Advisor’s conflicts review            committee will conduct an investigation to determine whether any potential conflicts of            interest exist in connection with the particular proxy proposal. If the conflicts            review committee determines that the Advisor has a material conflict of interest, or            certain individuals on the proxy voting committee should be recused from participating            in a particular proxy vote, it will inform the proxy voting committee. If notified that            the Advisor has a material conflict, or fewer than three voting members are eligible to            participate in the proxy vote, typically the Advisor will engage an independent third            party to vote the proxy or follow the proxy voting recommendations of an independent            third party.

Under certain circumstances, the Advisor may not be able to vote proxies            or the Advisor may find that the expected economic costs from voting outweigh the            benefits associated with voting. For example, the Advisor may not vote proxies on            certain foreign securities due to local restrictions or customs. The Advisor generally            does not vote proxies on securities subject to share blocking restrictions.

You            may obtain information about how the Fund voted proxies related to its portfolio            securities during the 12-month period ended June 30 by visiting the SEC’s Web            site at www.sec.gov or by visiting our Web site at: www.dws-scudder.com (click on            “proxy voting” at the bottom of the page).

 

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**ORGANIZATION            OF THE TRUST**

The            Fund is a series of DWS Advisor Funds. The Trust is a Massachusetts business trust            organized under the laws of Massachusetts on July 21, 1986, and is governed by an            Amended and Restated Declaration of Trust that was approved by shareholders in the            second quarter of 2006, as may be further amended from time to time (the            “Declaration of Trust”). The Trust was organized under the name BT Tax-Free            Investment Trust and assumed its former name of BT Investment Funds on May 16, 1988.            The Trust’s name was changed to Scudder Advisor Funds effective May 16, 2003 and            to DWS Advisor Funds as of February 6, 2006. All shares issued and outstanding are            fully paid and non-assessable, transferable, have no pre-emptive or conversion rights            (except as may be determined by the Board of Trustees) and are redeemable as described            in the SAI and the Fund’s Prospectus. Each share has equal rights with each other            share of the same class of the Fund as to voting, dividends, exchanges, conversion            features and liquidation. Shareholders are entitled to one vote for each full share            held and fractional votes for fractional shares held.

On            July 10, 2006, the Predecessor Fund transferred all its assets and liabilities from DWS            Advisor Funds III, an open-end, management investment company, into a new series of the            Trust, under the same fund name. Effective October 23, 2006, the Fund’s            Investment Class shares were renamed Class S shares.

A            Fund generally is not required to hold meetings of its shareholders. Under the            Declaration of Trust, however, shareholder meetings will be held in connection with the            following matters to the extent and as provided in the Declaration of Trust and as            required by applicable law: (a) the election or removal of trustees if a meeting is            called for such purpose; (b) the termination of the Trust or a Fund; (c) an amendment            of the Declaration of Trust; (d) to the same extent as stockholders of Massachusetts            business corporation as to whether or not a court action, proceeding or claims should            or should not be brought or maintained derivatively or as a class action on behalf of            the Trust or any series or class thereof or the Shareholders; and (e) such additional            matters as may be required by law, the Declaration of Trust, the By-laws of the Trust,            or any registration of a Fund with the SEC or any state, or as the Trustees may            determine to be necessary or desirable. Shareholders also vote upon changes in            fundamental policies or restrictions.

On            any matter submitted to a vote of shareholders, all shares of the Trust entitled to            vote shall, except as otherwise provided in the Trust’s By-Laws, be voted in the            aggregate as a single class without regard to series or classes of Shares, except (a)            when required by applicable law or when the Trustees shall have determined that the            matter affects one or more series or classes of shares materially differently, shares            shall be voted by individual series or class; and (b) when the Trustees have determined            that the matter affects only the interests of one or more series or classes, only            shareholders of such series or classes shall be entitled to vote thereon.

The            Declaration of Trust provides that the Board of Trustees may, in its discretion,            establish minimum investment amounts for shareholder accounts, impose fees on accounts            that do not exceed a minimum investment amount and involuntarily redeem shares in any            such account in payment of such fees. The Board of Trustees, in its sole discretion,            also may cause the Trust to redeem all of the shares of the Trust or one or more series            or classes held by any shareholder for any reason, to the extent permissible by the            1940 Act, including (a) if the shareholder owns shares having an aggregate net asset            value of less than a specified minimum amount, (b) if a particular shareholder’s            ownership of shares would disqualify a series from being a regulated investment            company, (c) upon a shareholder’s failure to provide sufficient identification to            permit the Trust to verify the shareholder’s identity, (d) upon a            shareholder’s failure to pay for shares or meet or maintain the qualifications            for ownership of a particular class or series of shares, (e) if the Board of Trustees            determines (or pursuant to policies established by the Board it is determined) that            share ownership by a particular shareholder is not in the best interests of remaining            shareholders, (f) when a Fund is requested or compelled to do so by governmental            authority or applicable law and (g) upon a shareholder’s failure to comply with a            request for information with respect to the direct or indirect ownership of shares of            the Trust. The Declaration of Trust also authorizes the Board of Trustees to terminate            a Fund or any class without shareholder approval, and the Trust may suspend the right            of shareholders to require the Trust to redeem shares to the extent permissible under            the 1940 Act.

Under Massachusetts law, shareholders of a Massachusetts business trust            could, under certain circumstances, be held personally liable for obligations of a            Fund. The Declaration of Trust, however, disclaims shareholder liability for acts or            obligations of the Fund and requires that notice of such disclaimer be given in each            agreement, obligation, or

 

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instrument entered into or executed by the Fund or the Fund’s            Trustees. Moreover, the Declaration of Trust provides for indemnification out of Fund            property for all losses and expenses of any shareholder held personally liable for the            obligations of the Fund and the Fund may be covered by insurance which the Trustees            consider adequate to cover foreseeable tort claims. Thus, the risk of a shareholder            incurring financial loss on account of shareholder liability is considered by the            Advisor remote and not material, since it is limited to circumstances in which a            disclaimer is inoperative and the Fund itself is unable to meet its            obligations.

**TAXES**

The            following is intended to be a general summary of certain federal income tax            consequences of investing in the Fund. It is not intended as a complete discussion of            all such consequences, nor does it purport to deal with all categories of investors.            Investors are therefore advised to consult with their tax advisors before making an            investment in the Fund. The summary is based on the laws in effect on the date of this            statement of additional information and existing judicial and administrative            interpretations thereof, all of which are subject to change, possibly with retroactive            effect.

The            Fund has elected to be treated as a regulated investment company under Subchapter M of            the Internal Revenue Code of 1986, as amended (the “Code”) and has            qualified as such since inception. The Fund intends to continue to so qualify in each            taxable year as required under the Code in order to avoid payment of federal income tax            at the Fund level. In order to qualify as a regulated investment company, the Fund must            meet certain requirements regarding the source of its income, the diversification of            its assets and the distribution of its income. The Fund must derive at least 90% of its            gross income from dividends, interest, payments with respect to certain securities            loans, and gains from the sale of stock, securities and foreign currencies, other            income (including but not limited to gains from options, futures, or forward contracts)            derived with respect to its business of investing in such stock, securities, or            currencies and net income derived from interests in “qualified publicly traded            partnerships”            (*i*.*e*            ., partnerships that are traded on an established security market or tradable on a            secondary market, other than partnerships that derive 90% of their income from            interest, dividends, capital gains, and other traditional permitted mutual fund            income). The Fund must diversify its holdings so that, at the end of each quarter of            its taxable year, (i) at least 50% of the market value of the Fund’s assets is            represented by cash and cash items, US government securities, securities of other            regulated investment companies, and other securities limited in respect of any one            issuer of such other securities to a value not greater than 5% of the value of the            Fund’s total assets and to not more than 10% of the outstanding voting securities            of such issuer, and (ii) not more than 25% of the value of its assets is invested in            the securities (other than those of the US Government or other regulated investment            companies) of any one issuer, of two or more issuers which the Fund controls and which            are engaged in the same, similar, or related trades or businesses or in the securities            of one or more qualified publicly traded partnerships. The Fund is required to            distribute to its shareholders at least 90% of its taxable and tax-exempt net            investment income (including the excess of net short-term capital gains over net            long-term capital losses) and generally is not subject to federal income tax to the            extent that it distributes annually its net investment income and net realized capital            gain in the manner required under the Code.

Fund investments in partnerships, including in qualified publicly traded            partnerships, may result in the Fund’s being subject to state, local or foreign            income, franchise or withholding tax liabilities.

If            for any taxable year the Fund does not qualify for the special federal income tax            treatment afforded regulated investment companies, all of its taxable income will be            subject to federal income tax at regular corporate rates (without any deduction for            distributions to its shareholders), and all distributions from earnings and profits,            including any distributions of net tax-exempt income and net long-term capital gains,            will be taxable to shareholders as ordinary income. Such distributions will be eligible            (i) to be treated as qualified dividend income in the case of shareholders taxed as            individuals and (ii) for the dividends received deduction in the case of corporate            shareholders. In addition, the Fund could be required to recognize unrealized gains,            pay substantial taxes and interest and make substantial distributions before            requalifying as a regulated investment company that is accorded special tax            treatment.

The            Fund is subject to a 4% nondeductible excise tax on amounts required to be but not            distributed under a prescribed formula. The formula requires payment to shareholders            during a calendar year of distributions representing at least 98% of the Fund’s            ordinary income for the calendar year and at least 98% of the excess of its

 

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capital gains over capital losses realized during the one-year period            ending October 31 (in most cases) of such year as well as amounts that were neither            distributed by, nor taxed to, the Fund during any prior calendar year. Although the            Fund’s distribution policies should enable it to avoid excise tax liability, the            Fund may retain (and be subject to income or excise tax on) a portion of its capital            gains or other income if it appears to be in the interest of the Fund.

Dividends or other income (including, in some cases, capital gains)            received by the Fund from investments in foreign securities may be subject to            withholding and other taxes imposed by foreign countries. Tax conventions between            certain countries and the United States may reduce or eliminate such taxes in some            cases. Foreign taxes paid by the Fund will reduce the return from the Fund’s            investments. As it is not expected that more than 50% of the value of the Fund’s            total assets will consist of securities issued by foreign corporations, the Fund will            not be eligible to pass through to shareholders their proportionate share of any            foreign taxes paid, with the result that shareholders will not be able to include in            income, and will not be entitled to take any credits or deductions for, such foreign            taxes.

In            addition, Fund investments in certain foreign entities (for example, passive foreign            investment companies) will subject the Fund to special federal tax rules that may,            among other things, cause the Fund to recognize income prior to the corresponding            receipt of cash. The Fund will make the appropriate tax elections, if possible, and            take any additional steps that are necessary to mitigate the effect of these            rules.

For            federal income tax purposes, distributions of investment income are generally taxable            as ordinary income. For taxable years beginning before January 1, 2011,            distributions of investment income designated by the Fund as derived from            “qualified dividend income” will be taxed in the hands of individuals at            the rates applicable to long-term capital gain, provided holding period and other            requirements are met at both the shareholder and fund level.

In            order for some portion of the dividends received by the Fund shareholder to be            “qualified dividend income,” the Fund must meet holding period and other            requirements with respect to some portion of the dividend paying stocks in its            portfolio and the shareholder must meet holding period and other requirements with            respect to the Fund’s shares. A dividend will not be treated as qualified            dividend income (at either the Fund or shareholder level) (1) if the dividend is            received with respect to any share of stock held for fewer than 61 days during the            121-day period beginning on the date which is 60 days before the date on which such            share becomes ex-dividend with respect to such dividend (or, in the case of certain            preferred stock, for fewer than 91 days during the 181-day period beginning 90 days            before such date), (2) to the extent that the recipient is under an obligation (whether            pursuant to a short sale or otherwise) to make related payments with respect to            positions in substantially similar or related property, (3) if the recipient elects to            have the dividend income treated as investment income for purposes of the limitation on            deductibility of investment interest, or (4) if the dividend is received from a foreign            corporation that is (a) not eligible for the benefits of a comprehensive income tax            treaty with the United States (with the exception of dividends paid on stock of such a            foreign corporation readily tradable on an established securities market in the United            States) or (b) a passive foreign investment company in the year the dividend is paid or            the preceding taxable year. Also, dividends received by the Fund from a real estate            investment trust or another regulated investment company generally are qualified            dividend income only to the extent the dividend distributions are made out of qualified            dividend income received by such real estate investment trust or other regulated            investment company. In the case of securities lending transactions, payments in lieu of            dividends are not qualified dividend income.

In            general, distributions of investment income designated by the Fund as derived from            qualified dividend income will be treated as qualified dividend income by a shareholder            taxed as an individual provided the shareholder meets the holding period and other            requirements described above with respect to the Fund’s shares. If the aggregate            dividends received by the Fund during any taxable year are 95% or more of its gross            income (excluding net long-term capital gain over net short-term capital loss), then            100% of the Fund’s dividends (other than dividends properly designated as capital            gain dividends) will be eligible to be treated as qualified dividend income.

Dividends from domestic corporations may comprise a substantial part of            the Fund’s gross income. If any such dividends constitute a portion of the            Fund’s gross income, a portion of the income distributions of the Fund may be            eligible for the 70% deduction for dividends received by corporations. Shareholders            will be informed of the portion of dividends which so qualify. The dividends-received            deduction is reduced to the extent the shares of the Fund with respect to which the            dividends are received are treated as debt-financed under federal income tax law and is            eliminated if either those shares or the shares of the Fund are deemed to have been            held by the Fund or the

 

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shareholder, as the case may be, for fewer than 46 days during the            91-day period beginning 45 days before the shares become ex-dividend.

Taxes on distributions of capital gains are determined by how long the            Fund owned the investments that generated them, rather than how long a shareholder has            owned his or her shares. Distributions of net capital gains that are properly            designated by the Fund as capital gain dividends will be taxable as long-term capital            gains. “Net capital gains” for this purpose are the Fund’s (x) net            long-term capital gains for the taxable year less (y) the sum of the Fund’s (i)            net short-term capital losses for the taxable year and (ii) available capital loss            carryforwards. Distributions of net short-term capital gains, which are gains            attributable to the sales of investments that the Fund owned for one year or less, will            be taxable as ordinary income. If the Fund retains for investment an amount equal to            all or a portion of its net capital gains, it will be subject to tax at regular            corporate rates on the amount retained. In that event, the Fund will designate such            retained amounts as undistributed capital gains in a notice to its shareholders who            (a) will be required to include in income for federal income tax purposes, as            long-term capital gains, their proportionate shares of the undistributed amount,            (b) will be entitled to credit their proportionate shares of the 35% tax paid by            the Fund on the undistributed amount against their federal income tax liabilities, if            any, and to claim refunds to the extent their credits exceed their liabilities, if any,            and (c) will be entitled to increase their tax basis, for federal income tax            purposes, in their shares by an amount equal to 65% of the amount of undistributed            capital gains included in the shareholder’s income. Organizations or persons not            subject to federal income tax on such capital gains will be entitled to a refund of            their pro rata share of such taxes paid by the Fund upon filing appropriate returns or            claims for refund with the IRS.

Capital gains distributions may be reduced if Fund capital loss            carryforwards are available. Any capital loss carryforwards and any post-October loss            deferrals to which the Fund is entitled are disclosed in the Fund’s annual and            semi-annual reports to shareholders.

Long-term capital gain rates applicable to individuals have been reduced            — in general, to 15% with a lower rate applying to taxpayers in the 10% and 15%            ordinary income rate brackets — for taxable years beginning before            January 1, 2011.

Dividends and other distributions by the Fund are generally treated            under the Code as received by the shareholders at the time the dividend or distribution            is made. However, any dividend or distribution declared by the Fund in October,            November or December of any calendar year and payable to shareholders of record on a            specified date in such a month shall be deemed to have been received by each            shareholder on December 31 of such calendar year and to have been paid by the Fund not            later than such December 31, provided such dividend is actually paid by the Fund during            January of the following calendar year.

Distributions are taxable to shareholders even if they are paid from            income or gains earned by the Fund before a shareholder’s investment (and thus            were included in the price the shareholder paid). Distributions are taxable whether            shareholders receive them in cash or reinvest them in additional shares through the            reinvestment privilege. A shareholder whose distributions are reinvested in shares will            be treated as having received a dividend equal to the fair market value of the new            shares issued to the shareholder.

The            sale, exchange or redemption of Fund shares may give rise to a gain or loss. In            general, any gain or loss realized on a taxable disposition of shares will be treated            as long-term capital gain or loss if the shares have been held for more than one year.            Otherwise, the gain or loss on the taxable disposition of Fund shares will be treated            as short-term capital gain or loss. However, any loss realized upon the redemption of            shares held for six months or less at the time of redemption will be treated as a            long-term capital loss to the extent of any amounts treated as distributions of            long-term capital gain during such six-month period. Furthermore, any loss from the            sale or redemption of shares held six months or less generally will be disallowed to            the extent that tax-exempt interest dividends were paid on such shares. In addition,            any loss realized on a sale or exchange will be disallowed to the extent the shares            disposed of are replaced with a 61-day period beginning 30 days before and ending 30            days after the disposition of the shares. In such a case, the basis of the shares            acquired will be increased to reflect the disallowed loss.

Under current law, the Fund serves to block unrelated business taxable            income (“UBTI”) from being realized by its tax-exempt shareholders.            Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue            of

 

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its            investment in the Fund if shares in the Fund constitute debt-financed property in the            hands of the tax-exempt shareholder within the meaning of Code Section 514(b). Certain            types of income received by the Fund from real estate investment trusts            (“REITs”), real estate mortgage investment conduits (“REMICs”),            taxable mortgage pools or other investments may cause the Fund to designate some or all            of its distributions as “excess inclusion income.” To Fund shareholders            such excess inclusion income may (1) constitute taxable income, as UBTI for those            shareholders who would otherwise be tax-exempt such as individual retirement accounts,            401(k) accounts, Keogh plans, pension plans and certain charitable entities; (2) as            UBTI cause a charitable remainder trust to become subject to an excise tax of 100% of            its UBTI; (3) not be offset against net operating losses for tax purposes; (4) not be            eligible for reduced US withholding for non-US shareholders even from tax treaty            countries; and (5) cause the Fund to be subject to tax if certain “disqualified            organizations” as defined by the Code are Fund shareholders.

The            Fund’s use of options, futures contracts, forward contracts (to the extent            permitted) and certain other investments will be subject to special tax rules            (including mark-to-market, constructive sale, straddle, wash sale, short sale and other            rules), the effect of which may be to accelerate income, defer losses, cause            adjustments in the holding periods of portfolio securities, convert capital gains into            ordinary income and convert short-term capital losses into long-term capital losses.            These rules could therefore affect the amount, timing and character of distributions to            investors.

The            Fund’s investment in so-called “section 1256 contracts,” such as            regulated futures contracts, most foreign currency forward contracts traded in the            interbank market and options on most stock indices, are subject to special tax rules.            All section 1256 contracts held by the Fund at the end of its taxable year are required            to be marked to their market value, and any unrealized gain or loss on those positions            will be included in the Fund’s income as if each position had been sold for its            fair market value at the end of the taxable year. The resulting gain or loss will be            combined with any gain or loss realized by the Fund from positions in section 1256            contracts closed during the taxable year. Provided such positions were held as capital            assets and were not part of a “hedging transaction” nor part of a            “straddle,” 60% of the resulting net gain or loss will be treated as            long-term capital gain or loss, and 40% of such net gain or loss will be treated as            short-term capital gain or loss, regardless of the period of time the positions were            actually held by the Fund.

As            a result of entering into swap contracts, the Fund may make or receive periodic net            payments. The Fund may also make or receive a payment when a swap is terminated prior            to maturity through an assignment of the swap or other closing transaction. Periodic            net payments will generally constitute ordinary income or deductions, while termination            of a swap will generally result in capital gain or loss (which will be a long-term            capital gain or loss if the Fund has been a party to the swap for more than one year).            The tax treatment of many types of credit default swaps is uncertain.

In            general, gain or loss on a short sale is recognized when the Fund closes the sale by            delivering the borrowed property to the lender, not when the borrowed property is sold.            Gain or loss from a short sale is generally considered as capital gain or loss to the            extent that the property used to close the short sale constitutes a capital asset in            the Fund’s hands. Except with respect to certain situations where the property            used by the Fund to close a short sale has a long-term holding period on the date of            the short sale, special rules would generally treat the gains on short sales as            short-term capital gains. These rules may also terminate the running of the holding            period of “substantially identical property” held by the Fund. Moreover, a            loss on a short sale will be treated as a long-term capital loss if, on the date of the            short sale, “substantially identical property” has been held by the Fund            for more than one year. In general, the Fund will not be permitted to deduct payments            made to reimburse the lender of securities for dividends paid on borrowed stock if the            short sale is closed on or before the 45th day after the short sale is entered            into.

*Foreign Investments*. Dividends or other            income (including, in some cases, capital gains) received by the Fund from investments            in foreign securities may be subject to withholding and other taxes imposed by foreign            countries. Tax conventions between certain countries and the United States may reduce            or eliminate such taxes in some cases. The Fund will not be eligible to elect to treat            any foreign taxes it pays as paid by its shareholders, who therefore will not be            entitled to credits or deductions for such taxes on their own tax returns. Foreign            taxes paid by the Fund will reduce the return from the Fund’s            investments.

 

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*Passive Foreign Investment Companies.*If            the Fund purchases shares in certain foreign investment entities, called “passive            foreign investment companies” (“PFICs”), it may be subject to US            federal income tax on a portion of any “excess distribution” or gain from            the disposition of such shares even if such income is distributed as a taxable dividend            by the Fund to its shareholders. Additional charges in the nature of interest may be            imposed on the Fund in respect of deferred taxes arising from such distributions or            gains.

If            the Fund were to invest in a PFIC and elect to treat the PFIC as a “qualified            electing fund” under the Code, in lieu of the foregoing requirements, the Fund            might be required to include in income each year a portion of the ordinary earnings and            net capital gains of the qualified electing fund, even if not distributed to the Fund,            and such amounts would be subject to the 90% and excise tax distribution requirements            described above. In order to make this election, the Fund would be required to obtain            certain annual information from the PFICs in which it invests, which may be difficult            or impossible to obtain.

Alternatively, the Fund may make a mark-to-market election that will            result in the Fund being treated as if it had sold and repurchased its PFIC stock at            the end of each year. In such case, the Fund would report any such gains as ordinary            income and would deduct any such losses as ordinary losses to the extent of previously            recognized gains. The election must be made separately for each PFIC owned by the Fund            and, once made, would be effective for all subsequent taxable years, unless revoked            with the consent of the Internal Revenue Service (the “IRS”). By making the            election, the Fund could potentially ameliorate the adverse tax consequences with            respect to its ownership of shares in a PFIC, but in any particular year may be            required to recognize income in excess of the distributions it receives from PFICs and            its proceeds from dispositions of PFIC stock. The Fund may have to distribute this            “phantom” income and gain to satisfy the 90% distribution requirement and            to avoid imposition of the 4% excise tax.

The            Fund will make the appropriate tax elections, if possible, and take any additional            steps that are necessary to mitigate the effect of these rules.

Under the backup withholding provisions of the Code, redemption proceeds            as well as distributions may be subject to federal income tax withholding for certain            shareholders, including those who fail to furnish the Fund with their taxpayer            identification numbers and certifications as to their tax status.

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

Special tax rules apply to investments through defined contribution            plans and other tax-qualified plans. Shareholders should consult their tax advisors to            determine the suitability of shares of the Fund as an investment through such plans and            the precise effects of an investment on their particular tax situation.

All            distributions by the Fund result in a reduction in the net asset value of Fund shares.            Should a distribution reduce the net asset value below a shareholder’s cost            basis, such distribution would nevertheless be taxable to the shareholder as ordinary            income or capital gain as described above, even though, from an investment standpoint,            it may constitute a partial return of capital. In particular, investors should be            careful to consider the tax implications of buying shares just prior to a distribution.            The price of shares purchased at that time includes the amount of the forthcoming            distribution. Those purchasing just prior to a distribution will receive a partial            return of capital upon the distribution, which will nevertheless be taxable to            them.

Shareholders will receive, if appropriate, various written notices after            the close of the Fund’s taxable year regarding the federal income tax status of            certain dividends, distributions and deemed distributions that were paid (or that are            treated as having been paid) by the Fund to its shareholders during the preceding            taxable year.

Under Treasury regulations, if a shareholder recognizes a loss with            respect to the Fund’s shares of $2 million or more for an individual shareholder            or $10 million or more for a corporate shareholder, the shareholder must file with the            Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders of            portfolio securities are in many cases excepted from this reporting requirement, but            under current guidance, shareholders of a regulated investment company are not            excepted. The fact that a loss is reportable under these regulations does not affect            the

 

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legal determination of whether the taxpayer’s treatment of the            loss is proper. Shareholders should consult their tax advisors to determine the            applicability of these regulations in light of their individual            circumstances.

***Other Taxation***

The            Trust is organized as a Massachusetts business trust and, under current law, neither            the Trust nor the Fund is liable for any income or franchise tax in the Commonwealth of            Massachusetts, provided that the Fund continues to qualify as a regulated investment            company under Subchapter M of the Code.

***Taxation of Non-US Shareholders***

Dividends paid by the Fund to non-US shareholders are generally subject            to withholding tax at a 30% rate or a reduced rate specified by an applicable income            tax treaty to the extent derived from investment income and short-term capital gains.            In order to obtain a reduced rate of withholding, a non-US shareholder will be required            to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty.            The withholding tax does not apply to regular dividends paid to a non-US shareholder            who provides a Form W-8ECI, certifying that the dividends are effectively connected            with the non-US shareholder’s conduct of a trade or business within the United            States. Instead, the effectively connected dividends will be subject to regular US            income tax as if the non-US shareholder were a US shareholder. A non-US corporation            receiving effectively connected dividends may also be subject to additional            “branch profits tax” imposed at a rate of 30% (or lower treaty            rate).

A            non-US shareholder who fails to provide an IRS Form W-8BEN or other applicable form may            be subject to backup withholding at the appropriate rate.

In            general, United States federal withholding tax will not apply to any gain or income            realized by a non-US shareholder in respect of any distributions of net long-term            capital gains over net short-term capital losses, exempt-interest dividends, or upon            the sale or other disposition of shares of the Fund.

For            taxable years beginning before January 1, 2008, properly-designated dividends are            generally exempt from United States federal withholding tax where they (i) are paid in            respect of the Fund’s “qualified net interest income” (generally, the            Fund’s US source interest income, other than certain contingent interest and            interest from obligations of a corporation or partnership in which the Fund is at least            a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are            paid in respect of the Fund’s “qualified short-term capital gains”            (generally, the excess of the Fund’s net short-term capital gain over the            Fund’s long-term capital loss for such taxable year). However, depending on its            circumstances, the Fund may designate all, some or none of its potentially eligible            dividends as such qualified net interest income or as qualified short-term capital            gains, and/or treat such dividends, in whole or in part, as ineligible for this            exemption from withholding. In order to qualify for this exemption from withholding, a            non-US shareholder will need to comply with applicable certification requirements            relating to its non-US status (including, in general, furnishing an IRS Form W-8BEN or            substitute Form). In the case of shares held through an intermediary, the intermediary            may withhold even if the Fund designates the payment as qualified net interest income            or qualified short-term capital gain. Non-US shareholders should contact their            intermediaries with respect to the application of these rules to their            accounts.

A            distribution from the Fund to foreign shareholders who have held more than 5% of the            Fund at any time during the one-year period ending on the date of distribution is            treated as real property gain subject to 35% withholding tax and treated as income            effectively connected to a US trade or business with certain tax filing requirements            applicable, if such distribution is attributable to a distribution of real property            gain received by the Fund from a REIT and if 50% or more of the value of the            Fund’s assets are invested in REITs and other US real property holding            corporations. A distribution paid prior to 2008 attributable to the Fund’s sale            of a REIT or other US real property holding company will also be treated as real            property gain if 50% or more of the value of the Fund’s assets are invested in            REITs and other US real property holding corporations and if the foreign shareholder            has held more than 5% of a class of stock at any time during the one-year period ending            on the date of the distribution.

 

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***The foregoing is only a summary of certain material US federal            income tax consequences affecting the Fund and its shareholders. Current and            prospective shareholders are advised to consult their own tax advisors with respect to            the particular tax consequences to them of an investment in a Fund.***

**NET ASSET VALUE**

The            net asset value per share of the Fund is computed as of the close of regular trading on            the Exchange on each day the Exchange is open for trading (the “Value            Time”). The Exchange is scheduled to be closed on the following holidays: New            Year’s Day, Dr. Martin Luther King, Jr. Day, Presidents’ Day, Good Friday,            Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on the            preceding Friday or subsequent Monday when one of these holidays falls on a Saturday or            Sunday, respectively. Net asset value per share is determined separately for each class            of shares by dividing the value of the total assets of the Fund attributable to the            shares of that class, less all liabilities attributable to that class, by the total            number of shares of that class outstanding. The per share net asset value may be lower            for certain classes of the Fund because of higher expenses borne by these            classes.

An            equity security is valued at its most recent sale price on the security’s primary            exchange or over-the-counter OTC market as of the Value Time. Lacking any sales, the            security is valued at the calculated mean between the most recent bid quotation and the            most recent asked quotation (the “Calculated Mean”) on such exchange or OTC            market as of the Value Time. If it is not possible to determine the Calculated Mean,            the security is valued at the most recent bid quotation on such exchange or OTC market            as of the Value Time. In the case of certain foreign exchanges or OTC markets, the            closing price reported by the exchange or OTC market (which may sometimes be referred            to by the exchange or one or more pricing agents as the “official close” or            the “official closing price” or other similar term) will be considered the            most recent sale price.

Debt securities are valued as follows. Money market instruments            purchased with an original or remaining maturity of 60 days or less, maturing at par,            are valued at amortized cost. Other money market instruments are valued based on            information obtained from an approved pricing agent or, if such information is not            readily available, by using matrix pricing techniques (formula driven calculations            based primarily on current market yields). Bank loans are valued at prices supplied by            an approved pricing agent (which are intended to reflect the mean between the bid and            asked prices), if available, and otherwise at the mean of the most recent bid and asked            quotations or evaluated prices, as applicable, based on quotations or evaluated prices            obtained from one or more broker-dealers. Privately placed debt securities, other than            Rule 144A debt securities, initially are valued at cost and thereafter based on all            relevant factors, including type of security, size of holding and restrictions on            disposition. Municipal debt securities are valued at prices supplied by an approved            pricing agent (which are intended to reflect the mean between the bid and asked            prices), if available, and otherwise at the mean of the most recent bid and asked            quotations or evaluated prices obtained from a broker-dealer. Other debt securities are            valued at prices supplied by an approved pricing agent, if available, and otherwise at            the most recent bid quotation or evaluated price, as applicable, obtained from one or            more broker-dealers. If it is not possible to value a particular debt security pursuant            to the above methods, the security is valued on the basis of factors including (but not            limited to) maturity, coupon, creditworthiness, currency denomination, and the movement            of the market in which the security is normally traded.

An            exchange-traded option contract on securities, currencies and other financial            instruments is valued at its most recent sale price on the relevant exchange. Lacking            any sales, the option contract is valued at the Calculated Mean. If it is not possible            to determine the Calculated Mean, the option contract is valued at the most recent bid            quotation in the case of a purchased option contract or the most recent asked quotation            in the case of a written option contract, in each case as of the Value Time. An option            contract on securities, currencies and other financial instruments traded in the OTC            market is valued on the Value Date at the evaluated price provided by the broker-dealer            with which it was traded. Futures contracts (and options thereon) are valued at the            most recent settlement price, if available, on the exchange on which they are traded            most extensively. With the exception of stock index futures contracts which trade on            the Chicago Mercantile Exchange, closing settlement times are prior to the close of            trading on the Exchange. For stock index futures contracts which trade on the Chicago            Mercantile Exchange, closing settlement prices are normally available at approximately            4:20 pm Eastern time. If no settlement price is available, the last traded price on            such exchange will be used.

If            market quotations for Fund assets are not readily available or the value of the Fund            asset as determined in accordance with Board-approved procedures does not represent the            fair market value of the Fund asset, the value of

 

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the            Fund asset is taken to be an amount which, in the opinion of the Fund’s Pricing            Committee (or, in some cases, the Board’s Valuation Committee), represents fair            market value. The value of other holdings is determined in a manner which is intended            to fairly reflect the fair market value of the asset on the valuation date, based on            valuation procedures adopted by the Fund’s Board and overseen primarily by the            Fund’s Pricing Committee.

**Redemptions and Purchases In Kind**

The            Trust, on behalf of the Fund, reserves the right, if conditions exist which make cash            payments undesirable, to honor any request for redemption or repurchase order by making            payment in whole or in part in readily marketable securities chosen by the Trust, or            the Fund, as the case may be, and valued as they are for purposes of computing the            Fund’s net asset value, as the case may be (a redemption in kind). If payment is            made to the Fund shareholder in securities, the shareholder may incur transaction            expenses in converting these securities into cash. The Trust, on behalf of the Fund,            has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a            result of which the Fund is obligated to redeem shares or beneficial interests, as the            case may be, with respect to any one investor during any 90-day period, solely in cash            up to the lesser of $250,000 or 1% of the net asset value of the Fund, as the case may            be, at the beginning of the period.

Each investor in the Fund, may add to or reduce its investment in the            Fund on each day the Fund determines its net asset value. At the close of each such            business day, the value of each investor’s beneficial interest in the Fund will            be determined by multiplying the net asset value of the Fund by the percentage,            effective for that day, which represents that investor’s share of the aggregate            beneficial interests in the Fund. Any additions or withdrawals which are to be effected            as of the close of business on that day will then be effected. The investor’s            percentage of the aggregate beneficial interests in the Fund will then be recomputed as            the percentage equal to the fraction (i) the numerator of which is the value of such            investor’s investment in the Fund as of the close of business on such day plus or            minus, as the case may be, the amount of net additions to or withdrawals from the            investor’s investment in the Fund effected as of the close of business on such            day, and (ii) the denominator of which is the aggregate net asset value of the Fund as            of the close of business on such day plus or minus, as the case may be, the amount of            net additions to or withdrawals from the aggregate investments in the Fund by all            investors in the Fund. The percentage so determined will then be applied to determine            the value of the investor’s interest in the Fund as the close of business on the            following business day.

The            Fund may, at its own option, accept securities in payment for shares. The securities            delivered in payment for shares are valued by the method described under “Net            Asset Value” as of the day the Fund receives the securities. This is a taxable            transaction to the shareholder. Securities may be accepted in payment for shares only            if they are, in the judgment of the Advisor, appropriate investments for the Fund. In            addition, securities accepted in payment for shares must: (i) be acquired by the            Fund for investment and not for resale; (ii) be liquid securities which are not            restricted as to transfer either by law or liquidity of market; and (iii) if            stock, have a value which is readily ascertainable as evidenced by a listing on a stock            exchange, over-the-counter market or by readily available market quotations from a            dealer in such securities. The Fund reserves the right to accept or reject at its own            option any and all securities offered in payment for its shares.

***Trading in Foreign Securities***

Trading in foreign markets may be completed at times which vary from the            closing of the Exchange. In computing the net asset value, the Fund values foreign            securities at the latest closing price on the exchange on which they are traded            immediately prior to the closing of the Exchange. Similarly, foreign securities quoted            in foreign currencies are translated into US dollars at the foreign exchange            rates.

Occasionally, events that affect values and exchange rates may occur            between the times at which they are determined and the closing of the Exchange. If such            events materially affect the value of the portfolio securities, these securities may be            valued at their fair value as determined in good faith by the Trustees, although the            actual calculation may be done by others.

 

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**FINANCIAL            STATEMENTS**

The            financial statements for the Lifecycle Long Range Fund for the fiscal year ended March            31, 2007, and the Report of the Independent Registered Public Accounting Firm are            incorporated herein by reference to the Annual Report to shareholders of the Lifecycle            Long Range Fund dated March 31, 2007. Copies of the Annual Report may be obtained            without charge by contacting the Service Center at 1-800-730-1313.

**ADDITIONAL INFORMATION**

***Internet Access***

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

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

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

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

The            Fund will reinvest dividend checks (and future dividends) in shares of that same Fund            and class if checks are returned as undeliverable.

Dividends will be reinvested in shares of the same class of the Fund            unless shareholders indicate in writing that they wish to receive them in cash or in            shares of other DWS Funds with multiple classes of shares or DWS Funds as provided in            the prospectus. To use this privilege of investing dividends of the Fund in shares of            another DWS Fund, shareholders must maintain a minimum account value of $1,000 in the            Fund distributing the dividends. The Fund automatically will reinvest dividend checks            (and future dividends) in shares of that same Fund and class unless the shareholder            requests payment in cash at the time the application is completed. Dividends and other            distributions of the Fund in the aggregate amount of $10 or less are automatically            reinvested in shares of the Fund unless the shareholder requests that such policy not            be applied to the shareholder’s account.

You            may obtain information about how a fund voted proxies related to its portfolio            securities during the 12-month period ended June 30 by visiting the SEC’s Web            site at www.sec.gov or by visiting our Web site at: dws-scudder.com (click on            “proxy voting” at the bottom of the page).

***Other Information***

The            CUSIP number:

 

| DWS Lifecycle Long Range Fund – Institutional                            Class | 23339E525 |
|--------------------------------------------------------------------------------------|-----------|

 

| DWS Lifecycle Long Range Fund has a fiscal year ending                            March 31st. |
|-----------------------------------------------------------------------------------------------|

 

 

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The            Fund’s Prospectuses and this Statement of Additional Information omit certain            information contained in the Registration Statement and its amendments which the Fund            has filed with the SEC under the 1933 Act and reference is hereby made to the            Registration Statement for further information with respect to the Fund and the            securities offered hereby.

The            Trust has filed with the SEC, 100 F Street, N.E., Washington, D.C. 20549, a            Registration Statement under the 1933 Act with respect to the securities of the Fund            and certain other series of the Trust. If further information is desired with respect            to the Trust, the Fund or such other series, reference is made to the Registration            Statement and the exhibits filed as a part thereof. The Registration Statement and its            amendments are available for inspection by the public at the SEC in Washington,            D.C.

 

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**APPENDIX**

**BOND AND COMMERCIAL PAPER RATINGS**

Set            forth below are descriptions of ratings which represent opinions as to the quality of            the securities. It should be emphasized, however, that ratings are relative and            subjective and are not absolute standards of quality.

***Moody’s Investors Service, Inc.’s            (“Moody’s”) Corporate Bond Ratings***

**Aaa:**Bonds which are rated Aaa are judged            to be of the best quality. They carry the smallest degree of investment risk and are            generally referred to as “gilt-edged”. Interest payments are protected by a            large or by an exceptionally stable margin and principal is secure. While the various            protective elements are likely to change, such changes as can be visualized are most            unlikely to impair the fundamentally strong position of such issues.

**Aa:**Bonds which are rated Aa are judged to            be of high quality by all standards. Together with the Aaa group they comprise what are            generally known as high grade bonds. They are rated lower than the best bonds because            margins of protection may not be as large as in Aaa securities or fluctuations of            protective elements may be of greater amplitude or there may be other elements present            which make the long-term risk appear somewhat larger than in Aaa securities.

**A:**Bonds which are rated A possess many            favorable investment attributes and are to be considered as upper medium grade            obligations. Factors giving security to principal and interest are considered adequate,            but elements may be present which suggest a susceptibility to impairment sometime in            the future.

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

**Ba:**Bonds which are rated Ba are judged to            have speculative elements; their future cannot be considered as well assured. Often the            protection of interest and principal payments may be very moderate and thereby not well            safe-guarded during both good and bad times over the future. Uncertainty of position            characterizes bonds in this class.

**B:**Bonds which are rated B generally lack            characteristics of the desirable investment. Assurance of interest and principal            payments or of maintenance of other terms of the contract over any long period of time            may be small.

**Caa:**Bonds which are rated Caa are of poor            standing. Such issues may be in default or there may be present elements of danger with            respect to principal or interest.

**Ca:**Bonds which are rated Ca represent            obligations which are speculative in a high degree. Such issues are often in default or            have other marked shortcomings.

**C:**Bonds which are rated C are the lowest            rated class of bonds and issues so rated can be regarded as having extremely poor            prospects of ever attaining any real investment standing.

Issues that are secured by escrowed funds held in trust, reinvested in            direct, non-callable US government obligations or noncallable obligations            unconditionally guaranteed by the US Government or Resolution Funding Corporation are            identified with a # (hash mark) symbol, e.g., #Aaa.

Con. (...): Bonds for which the security depends on the completion of            some act or the fulfillment of some condition are rated conditionally. These are bonds            secured by a) earnings of projects under construction, b) earnings of projects            unseasoned in operation experience, c) rentals which begin when facilities are            completed, or d) payments to which some other limiting condition attaches. The            parenthetical rating denotes probable credit stature upon completion of construction or            elimination of the basis of the condition.

 

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Moody’s assigns ratings to individual debt securities issued from            medium-term note (MTN) programs, in addition to indicating ratings to MTN programs            themselves. Notes issued under MTN programs with such indicated ratings are rated at            issuance at the rating applicable to all pari passu notes issued under the same            program, at the program’s relevant indicated rating, provided such notes do not            exhibit any of the characteristics listed below. For notes with any of the following            characteristics, the rating of the individual note may differ from the indicated rating            of the program:

| 1. | Notes containing features which link the cash flow                            and/or market value to the credit performance of any third party or                            parties. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | Notes allowing for negative coupons, or negative                            principal. |
|----|----------------------------------------------------------------------------------------|

Notes containing any provision which could obligate the investor to make            any additional payments.

Market participants must determine whether any particular note is rated,            and if so, at what rating level. Moody’s encourages market participants to            contact Moody’s Rating Desks directly if they have questions regarding ratings            for specific notes issued under a medium-term note program.

**Note:**Moody’s applies numerical            modifiers, 1, 2 and 3 in each generic rating classification from Aa through Caa in its            corporate bond rating system. The modifier 1 indicates that the security ranks in the            higher end of its generic rating category; the modifier 2 indicates a mid range            ranking; and the modifier 3 indicates that the issue ranks in the lower end of its            generic rating category.

**Moody’s Short-Term Debt Ratings**

Moody’s short-term debt ratings are opinions of the ability of            issuers to repay punctually promissory obligations not having an original maturity in            excess of one year. Such obligations generally have an original maturity not exceeding            one year.

Moody’s employs the following three designations, all judged to be            investment grade, to indicate the relative repayment ability of rated            issuers:

Issuers rated Prime-1 or P-1 (or supporting institutions) have a            superior ability for repayment of senior short-term debt obligations. Prime-1 or P-1            repayment ability will often be evidenced by many of the following            characteristics:

| **•** | Leading market positions in well established                            industries. |
|------------|-------------------------------------------------------------------------------------|

| **•** | High rates of return on funds employed. |
|------------|-----------------------------------------|

| **•** | Conservative capitalization structure with moderate                            reliance on debt and ample asset protection. |
|------------|-----------------------------------------------------------------------------------------------------------------------------|

| **•** | Broad margins in earnings coverage of fixed financial                            charges and high internal cash generation. |
|------------|-----------------------------------------------------------------------------------------------------------------------------|

| **•** | Well established access to a range of financial markets                            and assured sources of alternate liquidity. |
|------------|--------------------------------------------------------------------------------------------------------------------------------|

Issuers rated**Prime-2**or**P-2**(or supporting            institutions) have a strong ability for repayment of senior short-term debt            obligations. This will normally be evidenced by many of the characteristics cited above            but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more            subject to variation. Capitalization characteristics, while still appropriate, may be            more affected by external conditions. Ample alternate liquidity is            maintained.

Issuers rated Prime-3 (or supporting institutions) have an acceptable            ability for repayment of senior short-term obligations. The effect of industry            characteristics and market compositions may be more pronounced. Variability in earnings            and profitability may result in changes in the level of debt protection measurements            and may require relatively high financial leverage. Adequate alternate liquidity is            maintained.

 

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Issuers rated Not Prime do not fall within any of the Prime rating            categories.

If            an issuer represents to Moody’s that its short-term debt obligations are            supported by the credit of another entity or entities, then the name or names of such            supporting entity or entities are listed within the parenthesis beneath the name of the            issuer, or there is a footnote referring the reader to another page for the name or            names of the supporting entity or entities. In assigning ratings to such issuers,            Moody’s evaluates the financial strength of the affiliated corporations,            commercial banks, insurance companies, foreign governments or other entities, but only            as one factor in the total rating assessment. Moody’s makes no representation and            gives no opinion on the legal validity or enforceability of any support            arrangements.

**Standard & Poor’s (“S&P”) Corporate Bond            Ratings**

***Investment Grade***

**AAA:**Debt rated AAA has the highest rating            assigned by S&P to a debt obligation. Capacity to pay interest and repay principal            is extremely strong.

**AA:**Debt rated AA has a very strong            capacity to pay interest and repay principal and differs from the higher rated issues            only in small degree.

**A:**Debt rated A has a strong capacity to            pay interest and repay principal although it is somewhat more susceptible to the            adverse effects of changes in circumstances and economic conditions than bonds in            higher rated categories.

**BBB:**Debt rated BBB is regarded as having            an adequate capacity to pay interest and repay principal. Whereas it normally exhibits            adequate protection parameters, adverse economic conditions or changing circumstances            are more likely to lead to a weakened capacity to pay interest and repay principal for            debt in this category than in higher rated categories.

***Speculative Grade***

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

**BB:**Debt rated BB has less near-term            vulnerability to default than other speculative issues. However, it faces major ongoing            uncertainties or exposure to adverse business, financial, or economic conditions which            could lead to inadequate capacity to meet timely interest and principal            payments.

**B:**Debt rated B has a greater vulnerability            to default but currently has the capacity to meet interest payments and principal            repayments. Adverse business, financial, or economic conditions will likely impair            capacity or willingness to pay interest and repay principal.

**CCC:**Debt rated CCC has a currently            identifiable vulnerability to default, and is dependent upon favorable business,            financial, and economic conditions to meet timely payment of interest and repayment of            principal. In the event of adverse business, financial, or economic conditions, it is            not likely to have the capacity to pay interest and repay principal.

**CC:**Debt rated CC has a currently            identifiable vulnerability to default.

**C:**The C rating may be used to cover a            situation where a bankruptcy petition has been filed, but debt service payments are            continued. Debt rated C has a currently highly identifiable vulnerability to default. A            “C” will also be assigned to a preferred stock issue in arrears on            dividends or sinking fund payments, but that is currently paying.

 

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**D:**Debt rated D is in payment default. The            D rating category is used when interest payments or principal payments are not made on            the date due even if the applicable grace period has not expired, unless S&P            believes that such payments will be made during such grace period. The D rating also            will be used upon the filing of a bankruptcy petition if debt service payments are            jeopardized.

**Plus (+) or Minus (-):**The ratings from AA            to CCC may be modified by the addition of a plus or minus sign to show relative            standing within the major rating categories.

**NR:**Bonds may lack a S&P’s rating            because no public rating has been requested, because there is insufficient information            on which to base a rating, or because S&P’s does not rate a particular type            of obligation as a matter of policy.

**r:**This symbol is attached to the ratings            of instruments with significant non-credit risks. It highlights risks to principal            expected returns which are not addressed in the credit rating.

**S&P’s Commercial Paper Ratings**

S&P’s commercial paper rating is a current assessment of the            likelihood of timely payment of debt considered short-term in the relevant            market.

**A-1:**A short-term obligation rated            “A-1” is rated in the highest category by Standard & Poor’s. The            obligor’s capacity to meet its financial commitment on the obligation is strong.            Within this category, certain obligations are designated with a plus sign (+). This            indicates that the obligor’s capacity to meet its financial commitment on these            obligations is extremely strong.

**A-2:**A short-term obligation rated            “A-2” is somewhat more susceptible to the adverse effects of changes in            circumstances and economic conditions than obligations in higher rating categories.            However, the obligor’s capacity to meet its financial commitment on the            obligation is satisfactory.

**A-3:**A short-term obligation rated            “A-3” exhibits adequate protection parameters. However, adverse economic            conditions or changing circumstances are more likely to lead to a weakened capacity of            the obligor to meet its financial commitment on the obligation.

**B:**A short-term obligation rated            “B” is regarded as having significant speculative characteristics. The            obligor currently has the capacity to meet its financial commitment on the obligation;            however, it faces major ongoing uncertainties which could lead to the obligor’s            inadequate capacity to meet its financial commitment on the obligation.

**C:**A short-term obligation rated            “C” is currently vulnerable to nonpayment and is dependent upon favorable            business, financial, and economic conditions for the obligor to meet its financial            commitment on the obligation.

**D:**A short-term obligation rated            “D” is in payment default. The “D” rating category is used when            payments on an obligation are not made on the date due even if the applicable grace            period has not expired, unless Standard & Poor’s believes that such payments            will be made during such grace period. The “D” rating also will be used            upon the filing of a bankruptcy petition or the taking of a similar action if payments            on an obligation are jeopardized.

**Local Currency and Foreign Currency Risks**

County risk considerations are a standard part of Standard &            Poor’s analysis for credit ratings on any issuer or issue. Currency of repayment            is a key factor in this analysis. An obligor’s capacity to repay foreign currency            obligation may be lower than its capacity to repay obligations in its local currency            due to the sovereign government’s own relatively lower capacity to repay external            versus domestic debt. These sovereign risk considerations are incorporated in the debt            ratings assigned to specific issues. Foreign currency issuer ratings are also            distinguished from local currency issuer ratings to identify those instances where            sovereign risks make them different for the same issuer.

 

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**Fitch Inc. (“Fitch”) Bond Ratings**

***Investment Grade***

**AAA:**Highest credit quality.            “AAA” ratings denote the lowest expectation of credit risk. They are            assigned only in case of exceptionally strong capacity for timely payment of financial            commitments. This capacity is highly unlikely to be adversely affected by foreseeable            events.

**AA:**Very high credit quality.            “AA” ratings denote a very low expectation of credit risk. They indicate            very strong capacity for timely payment of financial commitments. This capacity is not            significantly vulnerable to foreseeable events.

**A:**High credit quality. “A”            ratings denote a low expectation of credit risk. The capacity for timely payment of            financial commitments is considered strong. This capacity may, nevertheless, be more            vulnerable to changes in circumstances or in economic conditions than is the case for            higher ratings.

**BBB:**Good credit quality. “BBB”            ratings indicate that there is currently a low expectation of credit risk. The capacity            for timely payment of financial commitments is considered adequate, but adverse changes            in circumstances and in economic conditions are more likely to impair this capacity.            This is the lowest investment-grade category.

**Speculative Grade**

**BB:**Speculative. “BB” ratings            indicate that there is a possibility of credit risk developing, particularly as the            result of adverse economic change over time; however, business or financial            alternatives may be available to allow financial commitments to be met. Securities            rated in this category are not investment grade.

**B:**Highly speculative. “B”            ratings indicate that significant credit risk is present, but a limited margin of            safety remains. Financial commitments are currently being met; however, capacity for            continued payment is contingent upon a sustained, favorable business and economic            environment.

**CCC, CC, C:**High default risk. Default is a            real possibility. Capacity for meeting financial commitments is solely reliant upon            sustained, favorable business or economic developments. A “CC” rating            indicates that default of some kind appears probable. “C” ratings signal            imminent default.

**DDD, DD, D:**Default. The ratings of            obligations in this category are based on their prospects for achieving partial or full            recovery in a reorganization or liquidation of the obligor. While expected recovery            values are highly speculative and cannot be estimated with any precision, the following            serve as general guidelines. “DDD” obligations have the highest potential            for recovery, around 90% - 100% of outstanding amounts and accrued interest.            “DD” indicates potential recoveries in the range of 50% - 90% and            “D” the lowest recovery potential i.e., below 50%.

Entities rated in this category have defaulted on some or all of their            obligations. Entities rated “DDD” have the highest prospect for resumption            of performance or continued operation with or without a formal reorganization process.            Entities rated “DD” and “D” are generally undergoing a formal            reorganization or liquidation process; those rated “DD” are likely to            satisfy a higher portion of their outstanding obligations, while entities rated            “D” have a poor prospect of repaying all obligations.

**Fitch Short-Term Ratings**

**F-1:**Highest credit quality. Indicates the            strongest capacity for timely payment of financial commitments; may have an added            “+” to denote any exceptionally strong credit feature.

**F-2**: Good credit quality. A satisfactory            capacity for timely payment of financial commitments, but the margin of safety is not            as great as in the case of the higher ratings.

 

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**F-3:**Fair credit quality. The capacity for            timely payment of financial commitments is adequate; however, near-term adverse changes            could result in a reduction to non-investment grade.

**B:**Speculative. Minimal capacity for timely            payment of financial commitments; plus vulnerability to near-term adverse changes in            financial and economic conditions.

**C:**High default risk. Default is a real            possibility. Capacity for meeting financial commitments is solely reliant upon a            sustained, favorable business and economic environment.

**D:**Default. Denotes actual or imminent            payment default.

**Notes to Long-Term and Short-Term Ratings**

“+” or “-” may be appended to a rating to denote            relative status within major rating categories. Such suffixes are not added to the            “AAA” Long-Term rating category, to categories below “CCC,” or            to Short-Term ratings other than “F1.”

**NR:**“NR” indicates that Fitch            does not rate the issuer or issue in question.

**Withdrawn:**A rating is withdrawn when Fitch            deems the amount of information available to be inadequate for rating purposes, or when            an obligation matures, is called, or refinanced.

**Rating Watch:**Ratings are placed on Rating            Watch to notify investors that there is a reasonable probability of a rating change and            the likely direction of such change. These are designated as “Positive,”            indicating a potential upgrade. “Negative,” for a potential downgrade or            “Evolving,” if rating may be raised, lowered, or maintained. Rating Watch            is typically resolved over a relatively short period.

A            Rating Outlook indicates the direction a rating is likely to move over a one to            two-year period. Outlooks may be positive, stable or negative. A positive or negative            Rating Outlook does not imply a rating change is inevitable. Similarly, companies whose            outlooks are “stable” could be upgraded or downgraded before an outlook            moves to positive or negative if circumstances warrant such an action. Occasionally,            Fitch may be unable to identify the fundamental trend. In these cases, the Rating            Outlook may be described as evolving.

 

**STATEMENT OF ADDITIONAL INFORMATION**

**August 1, 2007, as Revised December 31, 2007**

**Investment Advisor**

DEUTSCHE INVESTMENT MANAGEMENT AMERICAS INC.

345            Park Avenue

New            York, NY 10154

**Sub-Advisor**

 

ABERDEEN ASSET MANAGEMENT INC.

1735            Market Street, 37th Floor

Philadelphia, PA 19103

 

**Administrator**

DEUTSCHE INVESTMENT MANAGEMENT AMERICAS INC.

345            Park Avenue

New            York, NY 10154

 

**Transfer Agent**

DWS            SCUDDER INVESTMENTS SERVICE COMPANY

c/o DWS            Scudder

210 W.            10th Street

Kansas            City, MO 64105

 

**Distributor**

DWS            SCUDDER DISTRIBUTORS, INC.

222            South Riverside Plaza

Chicago, IL 60606-5808

**Custodian**

STATE            STREET BANK and TRUST COMPANY

One            Heritage Drive

North            Quincy, MA 02171

**Independent Registered Public Accounting Firm**

PricewaterhouseCoopers LLP

125            High Street

Boston,            MA 02110

 

**Legal Counsel**

WILLKIE            FARR & GALLAGHER LLP

787            Seventh Avenue

New            York, NY 10019

No            person has been authorized to give any information or to make any representations other            than those contained in the Fund’s Prospectus, its Statement of Additional            Information or the Fund’s official sales literature in connection with the            offering of the Fund’s shares and, if given or made, such other information or            representations must not be relied on as having been authorized by the Fund. Neither            the Prospectuses nor this Statement of Additional Information constitute an offer in            any state in which, or to any person to whom, such offer may not lawfully be            made.