N-CSR 1 trf.htm ANUUAL REPORT 

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM N-CSR

Investment Company Act file number 811-1236

                            SCUDDER TOTAL RETURN FUND
                          -----------------------------
               (Exact Name of Registrant as Specified in Charter)

                  222 South Riverside Plaza, Chicago, IL 60606
                 ----------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

        Registrant's Telephone Number, including Area Code: (212) 454-7190
                                                            --------------

                                  Paul Schubert
                                 345 Park Avenue
                               New York, NY 10154
                     ---------------------------------------
                     (Name and Address of Agent for Service)

Date of fiscal year end:        10/31

Date of reporting period:       10/31/05



ITEM 1.  REPORT TO STOCKHOLDERS



Scudder Total Return Fund

 

 

 

Annual Report to Shareholders

 

October 31, 2005

Contents

 

Click Here Performance Summary

Click Here Information About Your Fund's Expenses

Click Here Portfolio Management Review

Click Here Portfolio Summary

Click Here Investment Portfolio

Click Here Financial Statements

Click Here Financial Highlights

Click Here Notes to Financial Statements

Click Here Report of Independent Registered Public Accounting Firm

Click Here Tax Information

Click Here Investment Management Agreement Approval

Click Here Trustees and Officers

Click Here Account Management Resources

This report must be preceded or accompanied by a prospectus. To obtain a prospectus for any of our funds, refer to the Account Management Resources information provided in the back of this booklet. We advise you to consider the fund's objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the fund. Please read the prospectus carefully before you invest.

Investments in mutual funds involve risk. Some funds have more risk than others. The fund is subject to stock market risk, meaning stocks in the fund may decline in value for extended periods due to the activities and financial prospects of individual companies, or due to general market and economic conditions. The fund also invests in individual bonds whose yields and market values fluctuate, so that your investment may be worth more or less than its original cost. Bond investments are subject to interest rate risk such that when interest rates rise, the prices of the bonds, and thus the value of the fund, can decline and the investor can lose principal value. Please read the prospectus for details regarding the fund's risk.

Scudder Investments is part of Deutsche Asset Management, which is the marketing name in the US for the asset management activities of Deutsche Bank AG, Deutsche Investment Management Americas Inc., Deutsche Asset Management Inc., Deutsche Bank Trust Company Americas and Scudder Trust Company.

Fund shares are not FDIC-insured and are not deposits or other obligations of, or guaranteed by, any bank. Fund shares involve investment risk, including possible loss of principal.

Performance Summary October 31, 2005

 

Classes A, B, C, R and Institutional

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Please visit scudder.com for the Fund's most recent month-end performance.

The maximum sales charge for Class A shares is 5.75%. For Class B shares, the maximum contingent deferred sales charge (CDSC) is 4% within the first year after purchase, declining to 0% after six years. Class C shares have no adjustment for front-end sales charges but redemptions within one year of purchase may be subject to a CDSC of 1%. Unadjusted returns do not reflect sales charges and would have been lower if they had. Class R and Institutional Class shares are not subject to sales charges.

To discourage short-term trading, shareholders redeeming shares held less than 15 days will have a lower total return due to the effect of the 2% short-term redemption fee.

Returns and rankings for all periods shown reflect a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns and rankings would have been lower.

Performance figures do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns and rankings may differ by share class.

Returns shown for Class R shares prior to its inception on October 1, 2003 are derived from the historical performance of Class A shares of the Scudder Total Return Fund during such periods and have been adjusted to reflect the higher gross total annual operating expenses of each specific class. Any difference in expenses will affect performance.

Average Annual Total Returns (Unadjusted for Sales Charge) as of 10/31/05

Scudder Total Return Fund

1-Year

3-Year

5-Year

10-Year

Class A

5.97%

7.69%

-.85%

6.19%

Class B

5.30%

6.84%

-1.70%

5.24%

Class C

5.09%

6.79%

-1.69%

5.26%

Class R

5.71%

7.35%

-1.15%

5.89%

S&P 500 Index+

8.72%

12.85%

-1.74%

9.34%

Russell 1000 Growth Index++

8.81%

11.07%

-7.93%

6.78%

Lehman Brothers Aggregate Bond Index+++

1.13%

3.84%

6.31%

6.32%

Sources: Lipper Inc. and Deutsche Investment Management Americas Inc.

Average Annual Total Returns as of 10/31/05

Scudder Total Return Fund

1-Year

3-Year

5-Year

10-Year

Institutional Class

6.32%

8.08%

-.50%

6.59%

S&P 500 Index+

8.72%

12.85%

-1.74%

9.34%

Russell 1000 Growth Index++

8.81%

11.07%

-7.93%

6.78%

Lehman Brothers Aggregate Bond Index+++

1.13%

3.84%

6.31%

6.32%

Sources: Lipper Inc. and Deutsche Investment Management Americas Inc.

Net Asset Value and Distribution Information

 

Class A

Class B

Class C

Class R

Institutional Class

Net Asset Value:

10/31/05

$ 8.99

$ 9.01

$ 8.97

$ 8.99

$ 9.01

10/31/04

$ 8.68

$ 8.69

$ 8.66

$ 8.68

$ 8.70

Distribution Information:

Twelve Months:

Income Dividends as of 10/31/05

$ .21

$ .14

$ .13

$ .17

$ .24

Class A Lipper Rankings — Balanced Funds Category as of 10/31/05

Period

Rank

 

Number of Funds Tracked

Percentile Ranking

1-Year

412

of

634

65

3-Year

387

of

466

83

5-Year

323

of

374

87

10-Year

123

of

175

70

Source: Lipper Inc. Rankings are historical and do not guarantee future results. Rankings are based on total return unadjusted for sales charges with distributions reinvested. If sales charges had been included, rankings might have been less favorable. Rankings are for Class A shares; other share classes may vary.

Growth of an Assumed $10,000 Investment (Adjusted for Maximum Sales Charge)

[] Scudder Total Return Fund — Class A

[] S&P 500 Index+

[] Russell 1000 Growth Index++

[] Lehman Brothers Aggregate Bond Index+++

trf_g10k3C0

Yearly periods ended October 31

The Fund's growth of an assumed $10,000 investment is adjusted for the maximum sales charge of 5.75%. This results in a net initial investment of $9,425.

Comparative Results (Adjusted for Maximum Sales Charge) as of 10/31/05

Scudder Total Return Fund 

1-Year

3-Year

5-Year

10-Year

Class A

Growth of $10,000

$9,987

$11,772

$9,030

$17,190

Average annual total return

-0.13%

5.59%

-2.02%

5.57%

Class B

Growth of $10,000

$10,230

$11,996

$9,101

$16,661

Average annual total return

2.30%

6.25%

-1.87%

5.24%

Class C

Growth of $10,000

$10,509

$12,179

$9,184

$16,701

Average annual total return

5.09%

6.79%

-1.69%

5.26%

Class R

Growth of $10,000

$10,571

$12,370

$9,438

$17,726

Average annual total return

5.71%

7.35%

-1.15%

5.89%

S&P 500 Index+

Growth of $10,000

$10,872

$14,371

$9,162

$24,429

Average annual total return

8.72%

12.85%

-1.74%

9.34%

Russell 1000 Growth Index++

Growth of $10,000

$10,881

$13,703

$6,615

$19,271

Average annual total return

8.81%

11.07%

-7.93%

6.78%

Lehman Brothers Aggregate Bond Index+++

Growth of $10,000

$10,113

$11,196

$13,581

$18,463

Average annual total return

1.13%

3.84%

6.31%

6.32%

The growth of $10,000 is cumulative.

+ The Standard & Poor's 500 (S&P 500) Index is an unmanaged capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

++ The unmanaged Russell 1000 Growth Index consists of those stocks in the Russell 1000 Index that have greater-than-average growth orientation.

+++ The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of treasury issues, corporate bond issues and mortgage securities.

Index returns assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

Comparative Results as of 10/31/05

Scudder Total Return Fund 

1-Year

3-Year

5-Year

10-Year

Institutional Class

Growth of $1,000,000

$1,063,200

$1,262,700

$975,100

$1,893,400

Average annual total return

6.32%

8.08%

-.50%

6.59%

S&P 500 Index+

Growth of $1,000,000

$1,087,200

$1,437,100

$916,200

$2,442,900

Average annual total return

8.72%

12.85%

-1.74%

9.34%

Russell 1000 Growth Index++

Growth of $1,000,000

$1,088,100

$1,370,300

$661,500

$1,927,100

Average annual total return

8.81%

11.07%

-7.93%

6.78%

Lehman Brothers Aggregate Bond Index+++

Growth of $1,000,000

$1,011,300

$1,119,600

$1,358,100

$1,846,300

Average annual total return

1.13%

3.84%

6.31%

6.32%

The growth of $1,000,000 is cumulative.

The minimum initial investment for the Institutional Class is $1,000,000.

+ The Standard & Poor's 500 (S&P 500) Index is an unmanaged capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

++ The unmanaged Russell 1000 Growth Index consists of those stocks in the Russell 1000 Index that have greater-than-average growth orientation.

+++ The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of treasury issues, corporate bond issues and mortgage securities.

Index returns assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

Class AARP and Class S

Class AARP has been created especially for members of AARP. Class S shares are no longer available to new investors except under certain circumstances. (Please refer to the Fund's Statement of Additional Information.)

All performance shown is historical, assumes reinvestment of all dividend and capital gain distributions, and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Please visit myScudder.com for the Fund's most recent month-end performance.

To discourage short-term trading, shareholders redeeming shares held less than 15 days will have a lower total return due to the effect of the 2% short-term redemption fee.

Returns during the Life of Class period shown reflects a fee waiver and/or expense reimbursement. Without this waiver/reimbursement, returns would have been lower.

Performance figures do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemptions of fund shares. Returns may differ by share class.

Average Annual Total Returns as of 10/31/05

Scudder Total Return Fund Fund

Life of Class*

Class AARP

1.95%

Class S

1.97%

S&P 500 Index+

3.27%

Russell 1000 Growth Index++

5.54%

Lehman Brothers Aggregate Bond Index+++

1.50%

Sources: Lipper Inc. and Deutsche Investment Management Americas Inc.

* The Class commenced operations on March 14, 2005. Index returns begin March 31, 2005.

Net Asset Value and Distribution Information

 

Class AARP

Class S

Net Asset Value:

10/31/05

$ 8.99

$ 8.99

3/14/05 (commencement of operations)

$ 8.98

$ 8.98

Distribution Information:

Since commencement of 3/14/05:

Income Dividends as of 10/31/05

$ .16

$ .17

+ The Standard & Poor's 500 (S&P 500) Index is an unmanaged capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

++ The Russell 1000 Growth Index consists of those stocks in the Russell 1000 Index that have greater-than-average growth orientation.

+++ The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of treasury issues, corporate bond issues and mortgage securities.

Index returns assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

Information About Your Fund's Expenses

 

As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include sales charges (loads), redemption fees and account maintenance fees, which are not shown in this section. The following tables are intended to help you understand your ongoing expenses (in dollars) of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. In the most recent six-month period, the Fund limited these expenses; had it not done so, expenses would have been higher. The tables are based on an investment of $1,000 made at the beginning of the six-month period ended October 31, 2005.

The tables illustrate your Fund's expenses in two ways:

Actual Fund Return. This helps you estimate the actual dollar amount of ongoing expenses (but not transaction costs) paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the "Expenses Paid per $1,000" line under the share class you hold.

Hypothetical 5% Fund Return. This helps you to compare your Fund's ongoing expenses (but not transaction costs) with those of other mutual funds using the Fund's actual expense ratio and a hypothetical rate of return of 5% per year before expenses. Examples using a 5% hypothetical fund return may be found in the shareholder reports of other mutual funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Please note that the expenses shown in these tables are meant to highlight your ongoing expenses only and do not reflect any transaction costs. The "Expenses Paid per $1,000" line of the tables is useful in comparing ongoing expenses only and will not help you determine the relative total expense of owning different funds. If these transaction costs had been included, your costs would have been higher.

Expenses and Value of a $1,000 Investment for the six months ended October 31, 2005

Actual Fund Return

Class A

Class B

Class C

Class R

Beginning Account Value 5/1/05

$ 1,000.00

$ 1,000.00

$ 1,000.00

$ 1,000.00

Ending Account Value 10/31/05

$ 1,041.20

$ 1,038.20

$ 1,036.70

$ 1,039.20

Expenses Paid per $1,000*

$ 4.73

$ 7.71

$ 9.29

$ 6.89

 

 

Class AARP**

Class S**

Institutional Class

Beginning Account Value 5/1/05

 

$ 1,000.00

$ 1,000.00

$ 1,000.00

Ending Account Value 10/31/05

 

$ 1,042.20

$ 1,042.30

$ 1,042.80

Expenses Paid per $1,000*

 

$ 3.86

$ 3.81

$ 3.09

Hypothetical 5% Fund Return

Class A

Class B

Class C

Class R

Beginning Account Value 5/1/05

$ 1,000.00

$ 1,000.00

$ 1,000.00

$ 1,000.00

Ending Account Value 10/31/05

$ 1,020.57

$ 1,017.64

$ 1,016.08

$ 1,018.45

Expenses Paid per $1,000*

$ 4.69

$ 7.63

$ 9.20

$ 6.82

 

 

Class AARP**

Class S**

Institutional Class

Beginning Account Value 5/1/05

 

$ 1,000.00

$ 1,000.00

$ 1,000.00

Ending Account Value 10/31/05

 

$ 1,021.42

$ 1,021.48

$ 1,022.18

Expenses Paid per $1,000*

 

$ 3.82

$ 3.77

$ 3.06

* Expenses are equal to the Fund's annualized expense ratio for each share class, multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by 365.

Annualized Expense Ratios

Class A

Class B

Class C

Class R

Scudder Total Return Fund

.92%

1.50%

1.81%

1.34%

 

 

Class AARP

Class S

Institutional Class

 

 

.75%

.74%

.60%

** For the period March 14, 2005 (commencement of operations) to October 31, 2005.

For more information, please refer to the Fund's prospectus.

Portfolio Management Review

 

Scudder Total Return Fund: A Team Approach to Investing

Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor"), which is part of Deutsche Asset Management, is the investment advisor for Scudder Total Return Fund. DeIM and its predecessors have more than 80 years of experience managing mutual funds and DeIM provides a full range of investment advisory services to institutional and retail clients. DeIM is also responsible for selecting brokers and dealers and for negotiating brokerage commissions and dealer charges.

Deutsche Asset Management is a global asset management organization that offers a wide range of investing expertise and resources. This well-resourced global investment platform brings together a wide variety of experience and investment insight across industries, regions, asset classes and investing styles.

DeIM is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche Bank AG is a major global banking institution that is engaged in a wide range of financial services, including investment management, mutual funds, retail, private and commercial banking, investment banking and insurance.

Portfolio Management Team

The fund is managed by a team of investment professionals who share responsibility for the fund's investment management decisions. The following people handle the day-to-day management of the fund:

Andrew P. Cestone

Managing Director of Deutsche Asset Management and Portfolio Manager of the fund.

Joined Deutsche Asset Management in 1998 and the fund in 2002.

Head of High Yield.

Previous experience includes five years as an investment analyst at Phoenix Investment Partners and as a credit officer in the asset-based lending group at Fleet Financial Group.

BA, University of Vermont.

William Chepolis, CFA

Managing Director of Deutsche Asset Management and Portfolio Manager of the fund.

Joined Deutsche Asset Management in 1998 after 13 years of experience as vice president and portfolio manager for Norwest Bank where he managed the bank's fixed income and foreign exchange portfolios.

Senior Portfolio Manager for Mortgage Backed Securities, New York.

Joined the fund in 2005.

BIS, University of Minnesota.

Inna Okounkova

Director of Deutsche Asset Management and Portfolio Manager of the fund.

Global Asset Allocation portfolio manager: New York.

Joined Deutsche Asset Management in 1999 as a quantitative analyst, becoming an associate portfolio manager in 2001.

Joined the fund in 2005.

BS, MS, Moscow State University; MBA, University of Chicago.

Thomas F. Sassi

Managing Director of Deutsche Asset Management and Portfolio Manager of the fund.

Joined Deutsche Asset Management in 1996 and the fund in 2004.

Over 32 years of investment industry experience.

BBA, MBA, Hofstra University.

Julie M. Van Cleave, CFA

Managing Director of Deutsche Asset Management and Portfolio Manager of the fund.

Joined Deutsche Asset Management and the fund in 2002.

Head of Large Cap Growth Portfolio Selection Team.

Previous experience includes 18 years of investment industry experience at Mason Street Advisors, as Managing Director and team leader for the large cap investment team.

BBA, MBA, University of Wisconsin — Madison.

Robert Wang

Managing Director of Deutsche Asset Management and Portfolio Manager of the fund.

Global Asset Allocation senior portfolio manager: New York.

Joined Deutsche Asset Management in 1995 as a senior fixed income portfolio manager after 13 years of experience at J.P. Morgan & Co. trading fixed income, derivatives and foreign exchange products.

Joined the fund in 2005.

BS, The Wharton School, University of Pennsylvania.

In the following interview, Portfolio Manager Arnim Holzer and Portfolio Managers Andrew Cestone, William Chepolis, Christopher Gagnier, Inna Okounkova, Thomas Sassi, Julie Van Cleave and Robert Wang discuss the economy, stock and bond markets, portfolio management strategy and the resulting performance of Scudder Total Return Fund for the 12 months ended October 31, 2005. (Mr. Holzer and Mr. Gagnier were Portfolio Managers of the fund until November 30, 2005.)

Q:  How would you describe the economic and investment environment over the last 12 months?

A:  Both stocks and bonds had positive returns for the 12 months ended October 31, 2005. The return of the Standard & Poor's 500 (S&P 500) Index was 8.72%, significantly higher than the 1.13% return of the Lehman Brothers Aggregate Bond Index.1 Returns of small-cap stocks were higher than large-cap returns for the period, and value stocks outperformed growth stocks for the period, although market leadership shifted several times.

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

The Lehman Brothers Aggregate Bond Index is an unmanaged, market-value-weighted measure of Treasury issues, corporate bond issues and mortgage securities.

Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

A glut of global savings and fairly positive inflation statistics caused fixed-income markets to perform remarkably well in the face of resilient economic growth. In the bond market, high-yield and emerging market debt provided higher returns than investment-grade bonds.

There have been many ups and downs in the economy and markets over the last 12 months. A year ago, there was considerable doubt about the sustainability of the US economy's expansion. Now, four years into the recovery that followed a brief recession in 2001, the economic expansion still appears to have momentum, although it is approaching its later stage. Recent economic news has been reasonably positive, especially regarding productivity, the proportion of manufacturing capacity that is being used and end demand. Companies are experiencing some increase in labor costs, mainly the cost of health care benefits, but employees' fears of exportation of jobs to China and India have squelched demands for higher wages.

Energy has been much in the news over the last year. After moving slowly upward through much of 2004 and 2005, oil prices spiked as the damaging effects of Hurricanes Katrina and Rita on the US oil industry became evident. Oil prices began to have a powerful influence on financial markets at the end of the summer, as equities sold off on fears that rapidly rising gasoline prices would produce more-generalized inflation and dampen spending by US consumers. The September and October decisions by the Federal Reserve Board (the Fed) to continue raising interest rates provided conclusive evidence that the Fed is more concerned about inflation than about an economic slowdown.

The US dollar performed well versus the euro, as the interest rate differential between the United States and Europe widened. European indicators have been negative over most of the last year, though there has been a recent improvement in export-related trends. The main sources of earnings growth in Europe at present are expense control and corporate restructurings. Economies in the Asia/Pacific region look fairly strong, especially in Japan and in China, which continues its commitment to being a major exporter of manufactured goods and an increasingly significant player in the world economy.

Q:  What is the outlook for the next few months?

A:  Pessimism about global growth has receded because of signs of strength in industrial production and continued strength in US consumer spending. However, historically high oil prices raise concerns about growth, and it is likely that elevated energy prices, together with higher interest rates, will eventually put pressure on consumers.

Central banks around the world are transitioning to more-normal policies, indicating that the deflation scare that was much in the news over the past few years has passed. Now monetary policies in the United States and elsewhere are focused on vigilance against inflation. The likely result for the bond market will be more-normal risk premiums and valuations and a move from the current flattish yield curve to a more-normal relationship between short-term and long-term interest rates.2

2 The yield curve is a graph with a left-to-right line that shows how high or low yields are, from the shortest to the longest maturities. Typically, the line rises from left to right as investors who are willing to tie up their money for a longer period are rewarded with higher yields.

We see no drastic change in the economy in the near future. Despite the lingering effects of the hurricanes, we believe overall growth should be solid in the fourth quarter of 2005 and the first quarter of next year. We consider equities to be fairly valued, as corporate earnings trends appear better than we would normally expect this late in an economic cycle. A diversified portfolio, with a modest overweight in equities, therefore seems appropriate.

Q:  How is Scudder Total Return Fund managed?

A:  We made some changes in investment strategy in the fourth quarter of 2004, expanding the fund's investable universe to a broader set of asset classes, with a goal of increasing returns while managing risk. In the past, the fund's investment strategy consisted of a rather simple combination of large-capitalization US growth stocks and core US bonds. This strategy did not provide the opportunity for participation in other important sectors of the equity and bond markets. Within equities, we can now allocate a portion of the portfolio to value stocks and small-cap stocks, in addition to large-cap growth stocks. Most stocks are from US issuers, although up to 25% of assets may be invested in foreign securities. In the bond portion of the portfolio, we are now able to invest in high-yield bonds, international bonds and emerging market bonds, as well as core US bonds. We believe that these changes will help reduce volatility and enhance performance, and results in the 10 months since the changes were implemented support this view.

The fund normally invests approximately 60% of its net assets in common stocks and other equity securities and 40% in fixed income securities. The asset-allocation mix is determined monthly by the portfolio management team, supported by a quantitatively based risk-management model overseen by the Advanced Research and Quantitative Strategies group at Deutsche Asset Management. The model seeks to manage asset-allocation risk, keeping it at a modest level across the portfolio.

Over the last 12 months, the equity/fixed-income mix has been maintained close to a neutral position of 60% stocks and 40% bonds, but with a modest overweight in equities. Within the equity portion of the portfolio, there was a shift from large-cap growth to value and small-cap stocks, consistent with the revised investment strategy. Similarly, a portion of bond holdings was moved from core US bonds to foreign and high-yield securities.

Q:  How did the fund perform for the last year?

A:  In evaluating performance, we look at the fund's returns relative to indices that represent the various asset classes, and we also compare returns with those of our Lipper peer group of Balanced Funds.3 For the 12 months ended October 31, 2005, Scudder Total Return Fund's return (Class A shares) was 5.97%. (Returns are unadjusted for sales charges. If sales charges had been included, returns would have been lower. Past performance is no guarantee of future results. Please see pages 3 through 7 for complete performance information.) The return of the Standard & Poor's 500 Index (S&P 500) over this period was 8.72%, while our other equity benchmark, the Russell 1000 Growth Index, had a return of 8.81%.4 To evaluate performance of the bond portion of the portfolio, we compare results with the Lehman Brothers Aggregate Bond Index, which had a return of 1.13%, and the Lehman Brothers Government/ Credit Index, which had a return of 0.83%.5

3 The Lipper Balanced Funds category includes portfolios whose primary objective is to conserve principal by maintaining at all times a balance of stocks and bonds. Typically, the stock/bond ratio is around 60%/40%. It is not possible to invest directly into a Lipper category.

4 The Russell 1000 Growth Index consists of those stocks in the Russell 1000 Index that have greater than average growth orientation.

5 The Lehman Brothers Government/Credit Index is an unmanaged index comprising intermediate- and long-term government and investment-grade corporate debt securities.

Index returns assume reinvestment of dividends and, unlike fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.

For the 12 months ended October 31, 2005, the fund's total return ranked it in the 65th percentile of the Lipper Balanced Funds peer group, which had an average return of 6.81%. We are encouraged that our ranking within the peer group has improved in the 10 months that our new strategy has been in place.

Scudder Total Return Fund's Lipper Balanced Funds category rankings
as of 10/31/05

Period

Rank

Percentile

1-Year

#412 of 634

65%

5-Year

#323 of 374

87%

10-Year

#123 of 175

70%

Source: Lipper Inc. Rankings are historical and do not guarantee future results. Rankings are based on the fund's total return unadjusted for sales charges with distributions reinvested. If sales charges had been included, results might have been less favorable. Rankings are for Class A shares; other share classes may vary.

Q:  What were the main drivers of equity performance?

A:  Performance of the growth portion of the equity portfolio was outstanding, both on an absolute basis and relative to the growth benchmark, the Russell 1000 Growth Index. The most significant factor was our decision to maintain a sizable overweight in energy. Further, within energy, the emphasis has been on independent exploration companies and oil and gas producers, which derive significant benefit from rising oil prices. Among the strongest contributors to absolute and relative performance were EOG Resources, Inc., and Devon Energy Corp., two of the leading US-based independent oil and gas producers, as well as ConocoPhillips, an integrated international energy company.

In health care, performance benefited from an emphasis on biotechnology names, such as Genentech, Inc., rather than major pharmaceutical companies. In information technology, the portfolio benefited from a focus on stocks that are not overly sensitive to broad market moves, including companies that improve productivity such as Broadcom Corp. and Fiserv, Inc.

An underweight position in small-cap versus large-cap stocks was negative for performance. The value-versus- growth positioning of the portfolio produced mixed results as performance of these two categories changed during the year. Early in the year, the portfolio's emphasis was on value; a move toward growth in March and April did not begin to help performance until the July-through-September quarter, when market leadership shifted to growth. For the 12-month period, the stock most negative for performance was Harley-Davidson, Inc., a longtime holding that dropped sharply after the company reported disappointing earnings. We continue to hold the stock, as we believe that the market overreacted, and we think that the company still has solid growth prospects.

Q:  What factors were important for performance in the bond portion of the portfolio?

A:  In managing the fixed-income part of the portfolio, we seek not just to mute market swings, but to make a positive contribution to returns. Although returns of investment-grade bonds were below equity returns, an underweight in bonds detracted from overall portfolio performance because high-yield and emerging market bonds delivered good total returns. Our holdings in these two sectors of the bond market contributed to performance, demonstrating the wisdom of adding these categories to the investable universe. The bond portion of the portfolio achieved a return significantly higher than the bond benchmarks, the Lehman Brothers Aggregate Bond Index and the Lehman Brothers Government/ Credit Index.

Q:  Do you have other comments for shareholders?

A:  The fund's performance in the first 10 months under the new investment strategy is most encouraging. We feel confident that the enhanced breadth of opportunity represented by this strategy will prove beneficial over the long term, especially during times of pronounced market volatility. Already we have seen performance versus our Lipper peer group improve relative to results in the past, under the more restrictive asset-mix policies. With the ability to invest in many different types of equity and fixed-income securities, and to adjust holdings according to opportunities we perceive at different times, we believe that we will be able to provide additional value to our shareholders and also improve relative performance within our peer group.

The views expressed in this report reflect those of the portfolio managers only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions and should not be construed as a recommendation.

Portfolio Summary October 31, 2005

 

Asset Allocation (Excludes Securities Lending Collateral)

10/31/05

10/31/04

 

Common Stocks

58%

65%

Corporate Bonds

12%

9%

Commercial and Non-Agency Mortgage-Backed Securities

7%

4%

Cash Equivalents

5%

1%

Collateralized Mortgage Obligations

5%

8%

Foreign Bonds — US$ Denominated

4%

3%

US Treasury Obligations

3%

3%

Asset Backed

2%

3%

US Government Agency Sponsored Pass-Throughs

2%

2%

Municipal Investments

2%

2%

 

100%

100%

Sector Diversification (Excludes Cash Equivalents and Securities Lending Collateral)

10/31/05

10/31/04

 

Financials

19%

12%

Information Technology

17%

20%

Energy

13%

10%

Consumer Discretionary

12%

14%

Health Care

11%

20%

Industrials

11%

8%

Consumer Staples

6%

11%

Materials

4%

2%

Utilities

3%

2%

Telecommunication Services

3%

1%

Sovereigns

1%

—

 

100%

100%

Asset allocation and sector diversification are subject to change.

 

 

Ten Largest Equity Holdings at October 31, 2005 (10.6% of Net Assets)

1. Microsoft Corp.

Developer of computer software

1.5%

2. Johnson & Johnson

Provider of health care products

1.2%

3. Intel Corp.

Designer, manufacturer and seller of computer components and related products

1.2%

4. General Electric Co.

Industrial conglomerate

1.2%

5. ExxonMobil Corp.

Explorer and producer of oil and gas

1.1%

6. Bank of America Corp.

Provider of commercial banking systems

1.1%

7. UnitedHealth Group, Inc.

Operator of organized health systems

0.9%

8. Cisco Systems, Inc.

Developer of computer network products

0.8%

9. Baxter International, Inc.

Manufacturer and distributor of hospital and laboratory products and services

0.8%

10. Abbot Laboratories

Developer of health care products

0.8%

Portfolio holdings are subject to change.

For more complete details about the Fund's investment portfolio, see page 21. A quarterly Fact Sheet is available upon request. Information concerning portfolio holdings of the Fund as of month end will be posted to scudder.com on the 15th day of the following month. Please see the Account Management Resources section for contact information.

Following the Fund's fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC's Web site at www.sec.gov, and it also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the SEC's Public Reference Room may be obtained by calling (800) SEC-0330.

Investment Portfolio as of October 31, 2005

 

 


Shares

Value ($)

 

 

Common Stocks 57.9%

Consumer Discretionary 5.8%

Auto Components 0.2%

Accuride Corp.*

21,700

275,590

American Axle & Manufacturing Holdings, Inc.

54,100

1,179,380

ArvinMeritor, Inc.

37,400

599,522

Commercial Vehicle Group, Inc.*

4,300

83,936

CSK Auto Corp.*

68,200

1,031,866

Modine Manufacturing Co.

24,900

823,194

 

3,993,488

Automobiles 0.3%

Harley-Davidson, Inc.

139,900

6,929,247

Distributors 0.0%

Audiovox Corp. "A"*

29,700

422,037

Diversified Consumer Services 0.0%

Alderwoods Group, Inc.*

54,700

860,978

Hotels Restaurants & Leisure 0.6%

Ameristar Casinos, Inc.

45,300

966,249

CKE Restaurants, Inc.

70,300

894,216

Isle of Capri Casinos, Inc.*

9,000

191,520

MTR Gaming Group, Inc.*

40,100

268,670

Multimedia Games, Inc.*

88,800

880,896

Starbucks Corp.*

104,000

2,941,120

YUM! Brands, Inc.

109,960

5,593,665

 

11,736,336

Household Durables 0.2%

American Woodmark Corp.

28,600

885,742

Fortune Brands, Inc.

51,200

3,889,664

WCI Communities, Inc.*

8,600

215,172

 

4,990,578

Internet & Catalog Retail 0.3%

eBay, Inc.*

127,300

5,041,080

J. Jill Group, Inc.*

21,100

267,970

 

5,309,050

Leisure Equipment & Products 0.1%

Callaway Golf Co.

29,000

413,250

JAKKS Pacific, Inc.*

55,200

1,014,576

West Marine, Inc.*

15,400

208,978

 

1,636,804

Media 1.1%

Arbitron, Inc.

37,300

1,395,393

Comcast Corp. Special "A"*

146,700

4,021,047

Insight Communications Co., Inc. "A"*

14,500

166,750

McGraw-Hill Companies, Inc.

158,200

7,742,308

Omnicom Group, Inc.

86,800

7,200,928

Reader's Digest Association, Inc.

37,200

569,904

Salem Communications Corp. "A"*

10,300

192,816

Scholastic Corp.*

34,000

1,106,700

Sinclair Broadcast Group, Inc. "A"

40,600

336,574

 

22,732,420

Multiline Retail 1.1%

Federated Department Stores, Inc.

20,200

1,239,674

Kohl's Corp.*

165,100

7,946,263

Retail Ventures, Inc.*

53,000

550,670

ShopKo Stores, Inc.*

36,500

1,046,455

Target Corp.

221,000

12,307,490

 

23,090,552

Specialty Retail 1.8%

Aeropostale, Inc.*

42,500

830,450

Bed Bath & Beyond, Inc.*

65,600

2,658,112

Cato Corp. "A"

59,250

1,183,815

Charlotte Russe Holding, Inc.*

23,000

405,260

Genesco, Inc.*

17,600

647,680

Hibbett Sporting Goods, Inc.*

14,650

384,269

Home Depot, Inc.

36,850

1,512,324

Jo-Ann Stores, Inc.*

4,700

68,667

Jos. A. Bank Clothiers, Inc.*

23,500

959,035

Limited Brands, Inc.

202,500

4,052,025

Lowe's Companies, Inc.

130,300

7,918,331

Movie Gallery, Inc.

105,800

736,368

Staples, Inc.

240,600

5,468,838

Stein Mart, Inc.

12,400

227,540

The Buckle, Inc.

4,100

151,044

TJX Companies, Inc.

433,800

9,339,714

Trans World Entertainment Corp.*

11,000

70,180

 

36,613,652

Textiles, Apparel & Luxury Goods 0.1%

Guess?, Inc.*

27,100

734,952

Hartmarx Corp.*

8,900

62,122

K-Swiss, Inc. "A"

10,100

307,545

Oakley, Inc.

7,300

108,040

UniFirst Corp.

3,500

122,710

Wolverine World Wide, Inc.

10,150

212,643

 

1,548,012

Consumer Staples 4.6%

Beverages 0.6%

PepsiCo, Inc.

234,150

13,833,582

Food & Staples Retailing 0.8%

Longs Drug Stores Corp.

28,600

1,192,906

Nash Finch Co.

16,100

500,066

Pantry, Inc.*

24,200

936,298

Wal-Mart Stores, Inc.

131,300

6,211,803

Walgreen Co.

183,900

8,354,577

 

17,195,650

Food Products 1.5%

Chiquita Brands International, Inc.

12,900

356,169

Dean Foods Co.*

54,900

1,984,635

General Mills, Inc.

200,700

9,685,782

Kellogg Co.

93,800

4,143,146

Lance, Inc.

18,800

329,564

Ralcorp Holdings, Inc.*

11,800

459,020

The Hershey Co.

70,200

3,989,466

TreeHouse Foods, Inc.*

10,960

283,207

Unilever NV (NY Shares)

131,800

9,266,858

 

30,497,847

Household Products 1.6%

Central Garden & Pet Co.*

9,100

390,117

Colgate-Palmolive Co.

201,700

10,682,032

Kimberly-Clark Corp.

165,700

9,418,388

Procter & Gamble Co.

213,600

11,959,464

 

32,450,001

Personal Products 0.1%

Chattem, Inc.*

25,900

854,700

USANA Health Sciences, Inc.*

17,800

783,556

 

1,638,256

Tobacco 0.0%

Vector Group Ltd.

7,140

142,514

Energy 8.3%

Energy Equipment & Services 1.9%

Baker Hughes, Inc.

239,100

13,140,936

Cal Dive International, Inc.*

24,500

1,507,730

Halliburton Co.

116,500

6,885,150

Noble Corp.

39,300

2,530,134

Schlumberger Ltd.

100,020

9,078,816

Transocean, Inc.*

103,400

5,944,466

 

39,087,232

Oil, Gas & Consumable Fuels 6.4%

Anadarko Petroleum Corp.

60,700

5,506,097

BP PLC (ADR)

162,200

10,770,080

Cabot Oil & Gas Corp.

30,800

1,410,332

Callon Petroleum Co.*

40,800

746,640

Chevron Corp.

236,300

13,485,641

Comstock Resources, Inc.*

9,000

270,990

ConocoPhillips

230,600

15,076,628

Devon Energy Corp.

180,700

10,910,666

Energy Partners Ltd.*

44,400

1,126,428

EOG Resources, Inc.

204,800

13,881,344

ExxonMobil Corp.

421,000

23,634,940

Frontier Oil Corp.

10,100

372,488

Harvest Natural Resources, Inc.*

68,200

660,176

Houston Exploration Co.*

1,500

77,325

KCS Energy, Inc.*

47,500

1,145,700

Marathon Oil Corp.

99,000

5,955,840

Penn Virginia Corp.

9,000

489,240

Remington Oil & Gas Corp.*

14,300

500,500

Royal Dutch Shell PLC "A" (ADR)

148,300

9,200,532

St. Mary Land & Exploration Co.

40,100

1,363,801

Stone Energy Corp.*

24,100

1,106,190

Swift Energy Co.*

25,000

1,091,500

Valero Energy Corp.

73,900

7,777,236

XTO Energy, Inc.

114,166

4,961,654

 

131,521,968

Financials 9.6%

Banks 4.5%

AmSouth Bancorp.

269,900

6,809,577

Anchor BanCorp Wisconsin, Inc.

2,400

75,984

BancFirst Corp.

700

58,156

Bank of America Corp.

534,800

23,392,152

BankAtlantic Bancorp., Inc. "A"

11,800

163,902

Banner Corp.

9,600

288,192

BB&T Corp.

109,400

4,631,996

Center Financial Corp.

18,000

456,120

Central Pacific Financial Corp.

2,600

93,860

Chemical Financial Corp.

2,725

87,718

City Holding Co.

5,400

197,856

CoBiz, Inc.

3,200

56,736

Columbia Banking System, Inc.

1,500

43,365

Corus Bankshares, Inc.

20,900

1,147,410

CVB Financial Corp.

31,900

628,749

Fidelity Bancshares, Inc.

10,800

304,560

First BanCorp.-North Carolina

1,700

35,717

First BanCorp.-Puerto Rico

71,200

813,104

First Charter Corp.

4,300

109,607

First Community Bancorp.

10,100

508,232

First Merchants Corp.

1,900

47,766

First Midwest Bancorp., Inc.

4,400

167,288

First Niagara Financial Group, Inc.

53,000

780,690

First Republic Bank

2,600

98,566

FirstFed Financial Corp.*

28,100

1,503,069

Fremont General Corp.

19,900

431,631

Frontier Financial Corp.

7,200

232,128

Hancock Holding Co.

200

7,134

Hanmi Financial Corp.

59,700

1,093,107

Harbor Florida Bancshares, Inc.

19,800

699,732

Independent Bank Corp.-Massachusetts

3,400

101,966

Independent Bank Corp.-Michigan

2,400

68,616

Integra Bank Corp.

2,700

54,567

Nara Bancorp, Inc.

16,700

301,101

National Penn Bancshares, Inc.

5,750

112,757

NetBank, Inc.

41,700

326,094

Oriental Financial Group, Inc.

49,800

618,516

Pacific Capital Bancorp.

6,000

216,420

PFF Bancorp., Inc.

30,800

925,232

PNC Financial Services Group, Inc.

103,100

6,259,201

Prosperity Bancshares, Inc.

21,300

649,437

Republic Bancorp., Inc.

41,900

571,935

Republic Bancorp., Inc. "A"

2,950

60,475

Sandy Spring Bancorp., Inc.

1,600

56,400

Simmons First National Corp. "A"

1,200

33,840

Sterling Bancshares, Inc.

45,300

669,987

SunTrust Banks, Inc.

73,100

5,298,288

Texas Capital Bancshares, Inc.*

11,800

252,638

TierOne Corp.

11,000

310,860

TriCo Bancshares

1,500

33,855

Umpqua Holdings Corp.

9,700

258,020

United Community Banks, Inc.

2,800

82,992

US Bancorp.

174,700

5,167,626

Wachovia Corp.

237,700

12,008,604

Wells Fargo & Co.

208,100

12,527,620

WesBanco, Inc.

8,800

270,160

West Coast Bancorp.

2,500

66,125

WSFS Financial Corp.

6,500

402,675

 

92,670,111

Capital Markets 1.2%

Ameriprise Financial, Inc.*

19,680

732,490

Bear Stearns Companies, Inc.

49,500

5,237,100

Lehman Brothers Holdings, Inc.

54,700

6,545,949

Merrill Lynch & Co., Inc.

96,400

6,240,936

The Goldman Sachs Group, Inc.

49,900

6,305,863

 

25,062,338

Consumer Finance 0.3%

American Express Co.

98,400

4,897,368

Euronet Worldwide, Inc.*

18,900

531,090

 

5,428,458

Diversified Financial Services 1.9%

Accredited Home Lenders Holding Co.*

26,400

954,096

Apollo Investment Corp.

66,954

1,250,701

Citigroup, Inc.

343,995

15,748,091

CompuCredit Corp.*

18,300

801,906

Freddie Mac

94,000

5,766,900

JPMorgan Chase & Co.

400,500

14,666,310

TNS, Inc.*

1,600

28,128

United PanAm Financial Corp.*

3,600

80,244

 

39,296,376

Insurance 1.1%

AFLAC, Inc.

216,800

10,358,704

American International Group, Inc.

149,400

9,681,120

Argonaut Group, Inc.*

21,100

615,276

Bristol West Holdings, Inc.

7,400

142,672

Navigators Group, Inc.*

11,900

461,720

Tower Group, Inc.

21,700

418,159

Zenith National Insurance Corp.

34,200

1,539,684

 

23,217,335

Real Estate 0.6%

Alexandria Real Estate Equities, Inc. (REIT)

4,500

363,825

Amli Residential Properties Trust (REIT)

17,200

651,020

Colonial Properties Trust (REIT)

15,100

660,021

Commercial Net Lease Realty (REIT)

27,100

525,198

Corporate Office Properties Trust (REIT)

16,000

556,160

Cousins Properties, Inc. (REIT)

18,100

534,674

EastGroup Properties, Inc. (REIT)

2,800

122,360

Entertainment Properties Trust (REIT)

1,700

68,170

FelCor Lodging Trust, Inc. (REIT)*

9,400

140,248

First Industrial Realty Trust, Inc. (REIT)

15,300

621,639

Glenborough Realty Trust, Inc. (REIT)

3,700

70,781

Glimcher Realty Trust (REIT)

3,200

73,504

Heritage Property Investment Trust (REIT)

17,600

573,760

Highwoods Properties, Inc. (REIT)

16,600

468,286

Home Properties, Inc. (REIT)

15,900

617,715

Jones Lang LaSalle, Inc.

2,800

140,784

Kilroy Realty Corp. (REIT)

11,700

656,955

Lexington Corporate Properties Trust (REIT)

23,200

505,296

LTC Properties, Inc. (REIT)

1,300

26,637

Maguire Properties, Inc. (REIT)

9,300

279,000

Nationwide Health Properties, Inc. (REIT)

25,800

598,302

Newcastle Investment Corp. (REIT)

13,000

341,770

OMEGA Healthcare Investors, Inc. (REIT)

9,200

113,068

Parkway Properties, Inc. (REIT)

11,300

531,213

Pennsylvania Real Estate Investment Trust (REIT)

5,800

223,300

Senior Housing Properties Trust (REIT)

32,000

566,720

Taubman Centers, Inc. (REIT)

12,300

405,531

Town & Country Trust (REIT)

8,800

260,480

Trustreet Properties, Inc. (REIT)

1,600

24,048

Urstadt Biddle Properties "A" (REIT)

1,100

18,238

Washington Real Estate Investment Trust (REIT)

22,500

671,625

 

11,410,328

Health Care 8.4%

Biotechnology 1.8%

Albany Molecular Research, Inc.*

64,100

858,940

Alkermes, Inc.*

53,200

866,628

Amgen, Inc.*

91,900

6,962,344

Bioenvision, Inc.*

24,200

148,346

Genentech, Inc.*

170,800

15,474,480

Geron Corp.*

58,700

530,061

Gilead Sciences, Inc.*

203,900

9,634,275

ImmunoGen, Inc.*

14,300

80,080

LifeCell Corp.*

35,700

578,340

Orchid Cellmark, Inc.*

11,000

64,680

Regeneron Pharmaceuticals, Inc.*

59,500

744,345

Serologicals Corp.*

25,000

487,000

 

36,429,519

Health Care Equipment & Supplies 2.1%

Alliance Imaging, Inc.*

72,300

499,593

American Medical Systems Holdings, Inc.*

58,900

963,015

Baxter International, Inc.

438,500

16,763,855

Boston Scientific Corp.*

141,900

3,564,528

C.R. Bard, Inc.

56,900

3,549,422

Computer Programs & Systems, Inc.

12,600

464,940

Haemonetics Corp.*

6,800

329,460

Hologic, Inc.*

10,500

582,330

Kyphon, Inc.*

20,000

801,800

Medtronic, Inc.

142,800

8,091,048

Mentor Corp.

22,300

1,003,500

West Pharmaceutical Services, Inc.

3,200

76,736

Zimmer Holdings, Inc.*

116,800

7,448,336

 

44,138,563

Health Care Providers & Services 1.2%

American Healthways, Inc.*

23,600

957,216

Centene Corp.*

38,200

769,730

Chemed Corp.

27,300

1,312,584

CorVel Corp.*

12,500

274,750

Kindred Healthcare, Inc.*

200

5,600

LCA-Vision, Inc.

11,400

478,914

Lifeline Systems, Inc.*

3,000

99,000

MedCath Corp.*

33,100

608,709

Odyssey HealthCare, Inc.*

43,200

746,496

Per-Se Technologies, Inc.*

51,400

1,142,622

PRA International*

2,200

58,432

Res-Care, Inc.*

34,200

551,988

United Surgical Partners International, Inc.*

13,000

466,050

UnitedHealth Group, Inc.

303,500

17,569,615

 

25,041,706

Pharmaceuticals 3.3%

Abbott Laboratories

382,800

16,479,540

Alpharma, Inc. "A"

30,700

764,123

Connetics Corp.*

43,100

562,024

Durect Corp.*

72,200

457,748

Eli Lilly & Co.

67,000

3,335,930

Enzon Pharmaceuticals, Inc.*

118,300

829,283

First Horizon Pharmaceutical Corp.*

23,000

331,890

Johnson & Johnson

408,816

25,600,058

K-V Pharmaceutical Co. "A"*

12,600

215,838

Medicis Pharmaceutical Corp. "A"

14,900

439,550

Mylan Laboratories, Inc.

77,400

1,486,854

Nektar Therapeutics*

39,000

587,340

Pfizer, Inc.

223,775

4,864,868

Progenics Pharmaceuticals, Inc.*

27,700

652,058

Salix Pharmaceuticals Ltd.*

33,500

600,990

SuperGen, Inc.*

87,000

491,550

United Therapeutics Corp.*

16,600

1,226,076

Wyeth

181,100

8,069,816

 

66,995,536

Industrials 5.9%

Aerospace & Defense 1.4%

AAR Corp.*

40,300

641,979

DRS Technologies, Inc.

20,000

985,200

HEICO Corp.

10,100

223,917

Hexcel Corp.*

46,700

738,794

Honeywell International, Inc.

195,600

6,689,520

L-3 Communications Holdings, Inc.

66,300

5,159,466

Teledyne Technologies, Inc.*

34,100

1,202,366

United Technologies Corp.

269,000

13,794,320

 

29,435,562

Air Freight & Logistics 0.6%

FedEx Corp.

137,400

12,631,182

Airlines 0.1%

Continental Airlines, Inc. "B"*

21,400

277,130

ExpressJet Holdings, Inc.*

87,700

788,423

 

1,065,553

Building Products 0.1%

Apogee Enterprises, Inc.

15,500

253,890

Eagle Materials, Inc.

12,800

1,363,072

LSI Industries, Inc.

25,700

462,343

 

2,079,305

Commercial Services & Supplies 0.8%

Acco Brands Corp.*

12,032

292,498

Administaff, Inc.

18,900

799,848

American Ecology Corp.

14,400

232,992

Brady Corp. "A"

39,500

1,136,415

Clean Harbors, Inc.*

17,700

600,030

Consolidated Graphics, Inc.*

14,100

549,759

DiamondCluster International, Inc.*

46,400

298,352

Electro Rent Corp.*

26,100

335,124

John H. Harland Co.

33,400

1,389,106

Korn/Ferry International*

56,700

976,374

Labor Ready, Inc.*

48,100

1,123,135

NuCo2, Inc.*

42,000

961,800

Pitney Bowes, Inc.

163,600

6,884,288

Resources Connection, Inc.*

6,000

171,300

TeleTech Holdings, Inc.*

80,900

843,787

Ventiv Health, Inc.*

8,100

204,444

Viad Corp.

6,400

184,384

 

16,983,636

Construction & Engineering 0.2%

EMCOR Group, Inc.*

7,100

433,100

Granite Construction, Inc.

29,300

999,423

Perini Corp.*

32,700

666,426

Quanta Services, Inc.*

38,300

440,067

URS Corp.*

11,600

468,988

Washington Group International, Inc.*

16,200

805,140

 

3,813,144

Electrical Equipment 0.5%

Emerson Electric Co.

121,600

8,457,280

Franklin Electric Co., Inc.

15,900

690,219

General Cable Corp.*

18,400

299,000

Genlyte Group, Inc.*

7,800

397,566

 

9,844,065

Industrial Conglomerates 1.2%

Blount International, Inc.*

59,600

945,256

General Electric Co.

700,600

23,757,346

 

24,702,602

Machinery 0.8%

Caterpillar, Inc.

83,600

4,396,524

Dover Corp.

131,500

5,125,870

Ingersoll-Rand Co., Ltd. "A"

177,100

6,692,609

JLG Industries, Inc.

30,000

1,150,800

Mueller Industries, Inc.

12,400

341,496

Stewart & Stevenson Services, Inc.

8,200

195,652

 

17,902,951

Marine 0.0%

Kirby Corp.*

3,500

180,845

Road & Rail 0.1%

Marten Transport Ltd.*

7,000

185,990

Old Dominion Freight Line, Inc.*

19,000

672,410

SCS Transportation, Inc.*

3,100

61,938

US Xpress Enterprises, Inc., "A"*

25,200

307,440

 

1,227,778

Trading Companies & Distributors 0.1%

Applied Industrial Technologies, Inc.

32,500

1,070,875

WESCO International, Inc.*

24,700

981,825

 

2,052,700

Information Technology 12.5%

Communications Equipment 1.9%

Avocent Corp.*

18,800

576,408

Cisco Systems, Inc.*

961,100

16,771,195

Comtech Telecommunications Corp.*

20,000

767,200

InterDigital Communications Corp.*

39,000

748,410

Ixia*

6,300

79,506

Nokia Oyj (ADR)

623,000

10,478,860

QUALCOMM, Inc.

231,300

9,196,488

Symmetricom, Inc.*

100,600

801,782

 

39,419,849

Computers & Peripherals 2.3%

Apple Computer, Inc.*

110,300

6,352,177

Dell, Inc.*

175,100

5,582,188

EMC Corp.*

669,600

9,347,616

Hewlett-Packard Co.

328,800

9,219,552

International Business Machines Corp.

192,100

15,729,148

Palm, Inc.*

22,300

572,887

 

46,803,568

Electronic Equipment & Instruments 0.1%

Agilysys, Inc.

49,400

738,036

Bell Microproducts, Inc.*

16,000

110,240

LeCroy Corp.*

34,800

534,528

Plexus Corp.*

45,200

798,684

Trident Microsystems, Inc.*

10,300

311,678

 

2,493,166

Internet Software & Services 0.5%

CNET Networks, Inc.*

33,400

453,906

EarthLink, Inc.*

55,800

614,358

Google, Inc. "A"*

3,700

1,376,918

j2 Global Communications, Inc.*

5,100

225,471

Jupitermedia Corp.*

15,200

258,400

ProQuest Co.*

12,600

373,590

ValueClick, Inc.*

31,200

546,000

WebEx Communications, Inc.*

21,700

497,147

Websense, Inc.*

7,300

431,284

Yahoo!, Inc.*

157,500

5,822,775

 

10,599,849

IT Consulting & Services 1.7%

Accenture Ltd., "A"*

189,300

4,980,483

Automatic Data Processing, Inc.

212,600

9,919,916

Covansys Corp.*

44,400

710,400

CSG Systems International, Inc.*

39,100

919,241

First Data Corp.

169,800

6,868,410

Fiserv, Inc.*

174,600

7,626,528

ManTech International Corp. "A"*

16,500

457,050

Paychex, Inc.

71,700

2,779,092

StarTek, Inc.

16,100

204,792

 

34,465,912

Semiconductors & Semiconductor Equipment 3.3%

Advanced Energy Industries, Inc.*

53,800

578,350

Applied Materials, Inc.

586,200

9,601,956

Broadcom Corp. "A"*

123,400

5,239,564

Cymer, Inc.*

28,600

996,710

Cypress Semiconductor Corp.*

52,900

719,440

Diodes, Inc.*

20,100

728,826

Emulex Corp.*

43,400

803,334

Entegris, Inc.*

38,800

378,688

Fairchild Semiconductor International, Inc.*

59,000

908,600

Integrated Silicon Solution, Inc.*

69,500

536,540

Intel Corp.

1,021,100

23,995,850

IXYS Corp.*

70,900

726,016

Kulicke & Soffa Industries, Inc.*

71,900

450,813

Linear Technology Corp.

156,600

5,200,686

Maxim Integrated Products, Inc.

63,300

2,195,244

Micrel, Inc.*

62,000

620,000

Microsemi Corp.*

35,900

831,803

OmniVision Technologies, Inc.*

58,600

755,354

Photronics, Inc.*

34,500

621,000

Texas Instruments, Inc.

426,900

12,187,995

TTM Technologies, Inc.*

38,400

306,816

 

68,383,585

Software 2.7%

Adobe Systems, Inc.

156,400

5,043,900

Advent Software, Inc.*

22,000

675,840

Altiris, Inc.*

36,700

620,230

Ansoft Corp.*

34,100

1,091,200

ANSYS, Inc.*

4,300

160,218

Blackbaud, Inc.

55,700

802,080

Electronic Arts, Inc.*

107,900

6,137,352

FactSet Research Systems, Inc.

5,100

178,857

Internet Security Systems, Inc.*

25,000

615,750

Intuit, Inc.*

55,400

2,544,522

Lawson Software, Inc.*

100,700

771,362

Microsoft Corp.

1,216,900

31,274,330

MicroStrategy, Inc., "A"*

24

1,702

Oracle Corp.*

251,000

3,182,680

Parametric Technology Corp.*

156,200

1,016,862

Progress Software Corp.*

33,000

1,027,620

SPSS, Inc.*

3,700

84,360

 

55,228,865

Materials 1.0%

Chemicals 0.5%

Air Products & Chemicals, Inc.

65,800

3,766,392

Compass Minerals International, Inc.

37,700

844,103

Ecolab, Inc.

131,400

4,346,712

Symyx Technologies, Inc.*

27,200

727,328

Terra Industries, Inc.*

77,900

475,969

W.R. Grace & Co.*

71,100

534,672

 

10,695,176

Construction Materials 0.0%

Texas Industries, Inc.

8,800

436,480

Containers & Packaging 0.2%

Rock-Tenn Co. "A"

4,200

58,254

Silgan Holdings, Inc.

37,600

1,209,592

Sonoco Products Co.

124,500

3,523,350

 

4,791,196

Metals & Mining 0.2%

Carpenter Technology Corp.

19,500

1,175,850

Cleveland-Cliffs, Inc.

12,200

994,788

NS Group, Inc.*

23,500

813,335

Quanex Corp.

20,050

1,161,095

 

4,145,068

Paper & Forest Products 0.1%

Deltic Timber Corp.

14,700

676,200

Telecommunication Services 0.9%

Diversified Telecommunication Services 0.8%

Alaska Communications Systems Group, Inc.

55,700

612,143

CT Communications, Inc.

46,900

530,908

General Communication, Inc., "A"*

84,800

814,928

Golden Telecom, Inc.

13,500

392,175

North Pittsburgh Systems, Inc.

17,900

359,790

Premiere Global Services, Inc.*

91,200

773,376

SBC Communications, Inc.

297,900

7,104,915

TALK America Holdings, Inc.*

73,400

707,576

Verizon Communications, Inc.

205,700

6,481,607

 

17,777,418

Wireless Telecommunication Services 0.1%

Centennial Communications Corp.*

45,400

672,374

Dobson Communications Corp. "A"*

59,000

430,110

UbiquiTel, Inc.*

64,300

555,552

USA Mobility, Inc.*

2,900

72,529

 

1,730,565

Utilities 0.9%

Electric Utilities 0.8%

ALLETE, Inc.

14,500

638,145

Cleco Corp.

13,800

292,560

Progress Energy, Inc.

163,600

7,131,324

Sierra Pacific Resources*

83,700

1,083,915

Southern Co.

223,000

7,802,770

 

16,948,714

Gas Utilities 0.0%

New Jersey Resources Corp.

3,000

129,480

South Jersey Industries, Inc.

13,200

368,940

WGL Holdings, Inc.

200

6,216

 

504,636

Independent Power Producers & Energy Traders 0.1%

Black Hills Corp.

13,800

573,666

Total Common Stocks (Cost $960,386,358)

1,193,513,710

 

Warrants 0.0%

Industrials 0.0%

TravelCenters of America, Inc.*

181

23

Information Technology 0.0%

MicroStrategy, Inc.*

106

21

Materials 0.0%

Dayton Superior Corp. 144A*

15

0

Total Warrants (Cost $754)

44

 

Preferred Stock 0.1%

Consumer Discretionary 0.0%

Paxson Communications Corp., 14.25% (PIK)

72

491,580

Financials 0.1%

Markel Capital Trust I "B", 8.71%

321,000

342,003

Farm Credit Bank of Texas, Series 1

1,375,000

1,501,046

 

1,843,049

Total Preferred Stocks (Cost $2,371,623)

2,334,629

 

Principal Amount ($)(f)

Value ($)

 

 

Convertible Bond 0.1%

Consumer Discretionary

HIH Capital Ltd.:

 

 

144A, Series DOM, 7.5%, 9/25/2006

660,000

653,400

144A, Series EURO, 7.5%, 9/25/2006

530,000

524,700

Total Convertible Bond (Cost $1,184,742)

1,178,100

 

Corporate Bonds 12.0%

Consumer Discretionary 2.5%

155 East Tropicana LLC, 8.75%, 4/1/2012 (a)

395,000

378,213

Adesa, Inc., 7.625%, 6/15/2012

120,000

120,600

AMC Entertainment, Inc., 8.0%, 3/1/2014

765,000

661,725

Amscan Holdings, Inc., 8.75%, 5/1/2014

95,000

76,000

Auburn Hills Trust, 12.375%, 5/1/2020

322,000

474,587

AutoNation, Inc., 9.0%, 8/1/2008

395,000

426,600

Aztar Corp., 7.875%, 6/15/2014

890,000

916,700

Cablevision Systems Corp. New York Group, Series B, 8.716%**, 4/1/2009

240,000

245,400

Caesars Entertainment Inc.:

8.875%, 9/15/2008

300,000

322,500

9.375%, 2/15/2007

230,000

239,775

Charter Communications Holdings LLC:

9.625%, 11/15/2009

85,000

70,125

10.25%, 9/15/2010

1,514,000

1,517,785

144A, 11.0%, 10/1/2015

1,124,000

1,017,220

Comcast Cable Communications Holdings, Inc., 9.455%, 11/15/2022

665,000

863,552

Comcast MO of Delaware, Inc., 9.0%, 9/1/2008

2,404,000

2,640,467

Cooper-Standard Automotive, Inc., 8.375%, 12/15/2014

640,000

480,000

CSC Holdings, Inc.:

 

 

7.25%, 7/15/2008

220,000

222,200

7.875%, 12/15/2007

805,000

825,125

DaimlerChrysler NA Holding Corp.:

4.75%, 1/15/2008

1,320,000

1,306,292

Series E, 4.78%**, 10/31/2008

1,165,000

1,164,350

Dex Media East LLC/Financial, 12.125%, 11/15/2012

2,171,000

2,534,642

Dura Operating Corp., Series B, 8.625%, 4/15/2012 (a)

580,000

491,550

EchoStar DBS Corp., 6.625%, 10/1/2014

215,000

208,550

Foot Locker, Inc., 8.5%, 1/15/2022

405,000

437,906

Ford Motor Co., 7.45%, 7/16/2031

320,000

235,200

General Motors Corp., 8.25%, 7/15/2023

115,000

84,813

Goodyear Tire & Rubber Co.:

 

 

144A, 9.0%, 7/1/2015

20,000

19,300

144A, Series AI, 12.75%, 3/1/2011

20,000

22,100

GSC Holdings Corp., 144A, 8.0%, 10/1/2012

245,000

238,263

Harrah's Operating Co., Inc., 144A, 5.625%, 6/1/2015

3,338,000

3,203,051

Interep National Radio Sales, Inc., Series B, 10.0%, 7/1/2008

245,000

196,306

ITT Corp., 7.375%, 11/15/2015

235,000

249,100

Jacobs Entertainment, Inc., 11.875%, 2/1/2009

1,500,000

1,590,000

Levi Strauss & Co.:

 

 

8.804%**, 4/1/2012

305,000

302,713

12.25%, 12/15/2012

215,000

235,963

Liberty Media Corp.:

 

 

Series A, 5.7%, 5/15/2013

20,000

18,042

7.875%, 7/15/2009

25,000

26,155

8.5%, 7/15/2029

55,000

52,440

Mandalay Resort Group:

 

 

6.5%, 7/31/2009

387,000

386,032

Series B, 10.25%, 8/1/2007

145,000

154,425

Mediacom Broadband LLC, 144A, 8.5%, 10/15/2015

285,000

262,200

Mediacom LLC, 9.5%, 1/15/2013

135,000

131,963

MGM MIRAGE:

 

 

6.0%, 10/1/2009

755,000

741,787

144A, 6.625%, 7/15/2015

255,000

247,350

8.375%, 2/1/2011

825,000

872,437

9.75%, 6/1/2007

435,000

456,750

MTR Gaming Group, Inc., Series B, 9.75%, 4/1/2010

225,000

236,813

NCL Corp., 144A, 11.625%, 7/15/2014

390,000

400,725

Norcraft Holdings/Capital, Step-up Coupon, 0% to 9/1/2008, 9.75% to 9/1/2012

835,000

584,500

Paxson Communications Corp.:

 

 

Step-up Coupon, 0% to 1/15/2006, 12.25% to 1/15/2009

228,000

222,870

10.75%, 7/15/2008

260,000

254,150

Petro Stopping Centers, 9.0%, 2/15/2012

655,000

640,262

Pinnacle Entertainment, Inc., 8.75%, 10/1/2013

840,000

859,950

Premier Entertainment Biloxi LLC/Finance, 10.75%, 2/1/2012

625,000

550,000

PRIMEDIA, Inc.:

 

 

8.875%, 5/15/2011

300,000

292,500

9.165%**, 5/15/2010

830,000

832,075

Renaissance Media Group LLC, 10.0%, 4/15/2008

430,000

424,625

Resorts International Hotel & Casino, Inc., 11.5%, 3/15/2009

860,000

957,825

Schuler Homes, Inc., 10.5%, 7/15/2011

890,000

961,200

Simmons Bedding Co.:

 

 

144A, Step-up Coupon, 0% to 12/15/2009, 10.0% to 12/15/2014 (a)

1,160,000

568,400

7.875%, 1/15/2014

90,000

79,425

Sinclair Broadcast Group, Inc., 8.75%, 12/15/2011

1,945,000

2,042,250

Sirius Satellite Radio, Inc., 144A, 9.625%, 8/1/2013

900,000

851,625

TCI Communications, Inc., 8.75%, 8/1/2015

1,638,000

1,976,604

Tele-Communications, Inc., 10.125%, 4/15/2022

800,000

1,082,363

Time Warner, Inc.:

 

 

6.625%, 5/15/2029

295,000

298,158

7.625%, 4/15/2031

2,480,000

2,796,235

Toys "R" Us, Inc., 7.375%, 10/15/2018

395,000

280,450

Trump Entertainment Resorts, Inc., 8.5%, 6/1/2015

1,575,000

1,525,781

TRW Automotive, Inc., 11.0%, 2/15/2013

1,275,000

1,424,812

United Auto Group, Inc., 9.625%, 3/15/2012

705,000

732,319

Wheeling Island Gaming, Inc., 10.125%, 12/15/2009

245,000

256,638

Williams Scotsman, Inc., 144A, 8.5%, 10/1/2015

340,000

345,100

XM Satellite Radio, Inc., Step-up Coupon, 0% to 12/31/2005, 14.0% to 12/31/2009

1,165,000

1,217,425

Young Broadcasting, Inc.:

 

 

8.75%, 1/15/2014

810,000

716,850

10.0%, 3/1/2011

185,000

172,050

 

50,952,234

Consumer Staples 0.2%

Agrilink Foods, Inc., 11.875%, 11/1/2008

66,000

67,485

Alliance One International, Inc.:

 

 

144A, 11.0%, 5/15/2012

555,000

466,200

144A, 12.75%, 11/15/2012

155,000

124,000

Del Laboratories, Inc.:

 

 

8.0%, 2/1/2012

285,000

213,750

144A, 9.23%**, 11/1/2011

315,000

314,212

GNC Corp., 8.5%, 12/1/2010

75,000

62,813

North Atlantic Trading Co., 9.25%, 3/1/2012

1,395,000

1,032,300

Swift & Co.:

 

 

10.125%, 10/1/2009

595,000

627,725

12.5%, 1/1/2010

245,000

260,313

Viskase Co., Inc., 11.5%, 6/15/2011

695,000

747,125

 

3,915,923

Energy 1.0%

Belden & Blake Corp., 8.75%, 7/15/2012

771,000

794,130

Chesapeake Energy Corp.:

 

 

6.25%, 1/15/2018

409,000

396,730

144A, 6.5%, 8/15/2017

461,000

456,390

6.875%, 1/15/2016

395,000

399,937

CITGO Petroleum Corp., 6.0%, 10/15/2011

660,000

693,000

Dynegy Holdings, Inc.:

 

 

6.875%, 4/1/2011

210,000

201,075

7.125%, 5/15/2018

340,000

299,200

7.625%, 10/15/2026

180,000

158,400

8.75%, 2/15/2012

100,000

105,750

144A, 9.875%, 7/15/2010

1,245,000

1,338,375

El Paso Production Holding Corp., 7.75%, 6/1/2013

425,000

437,750

Energy Transfer Partners LP:

 

 

144A, 5.65%, 8/1/2012

835,000

811,582

5.95%, 2/1/2015

650,000

633,723

Enterprise Products Operating LP, 7.5%, 2/1/2011

3,059,000

3,303,744

Newpark Resources, Inc., Series B, 8.625%, 12/15/2007

749,000

746,191

NGC Corp. Capital Trust I, Series B, 8.316%, 6/1/2027

790,000

687,300

Pogo Producing Co., 144A, 6.875%, 10/1/2017

135,000

133,650

Sonat, Inc., 7.0%, 2/1/2018

95,000

89,538

Southern Natural Gas, 8.875%, 3/15/2010

610,000

654,668

Stone Energy Corp.:

 

 

6.75%, 12/15/2014

340,000

323,000

8.25%, 12/15/2011

870,000

904,800

Tri-State Generation & Transmission Association, 144A, 6.04%, 1/31/2018

4,000,000

4,067,200

Williams Companies, Inc.:

 

 

8.125%, 3/15/2012

1,410,000

1,522,800

8.75%, 3/15/2032

380,000

438,425

 

19,597,358

Financials 3.4%

21st Century Insurance Group, 5.9%, 12/15/2013

1,115,000

1,122,329

Affinia Group, Inc., 144A, 9.0%, 11/30/2014

660,000

511,500

Alamosa Delaware, Inc.:

 

 

8.5%, 1/31/2012

90,000

93,375

11.0%, 7/31/2010

225,000

249,187

12.0%, 7/31/2009

360,000

394,200

Alliance Mortgage Cycle Loan, 12.25%**, 6/1/2010

245,833

245,833

American General Finance Corp., Series H, 4.0%, 3/15/2011

5,100,000

4,790,552

American General Institutional Capital, 144A, 8.125%, 3/15/2046

635,000

799,874

American International Group, Inc., 144A, 5.05%, 10/1/2015

2,500,000

2,443,700

AmeriCredit Corp., 9.25%, 5/1/2009

1,455,000

1,509,562

AmerUs Group Co., 5.95%, 8/15/2015

1,345,000

1,319,370

Ashton Woods USA LLC, 144A, 9.5%, 10/1/2015

230,000

215,050

Bear Stearns Companies, Inc., 5.3%, 10/30/2015

1,400,000

1,380,805

Dow Jones CDX HY:

 

 

Series 5-T3, 144A, 8.25%, 12/29/2010

2,065,000

2,034,025

Series 5-T1, 144A, 8.75%, 12/29/2010

6,005,000

5,937,444

Downey Financial Corp., 6.5%, 7/1/2014

780,000

786,771

Duke Capital LLC, 4.302%, 5/18/2006

3,667,000

3,660,583

E*TRADE Financial Corp.:

 

 

144A, 7.375%, 9/15/2013

505,000

497,425

8.0%, 6/15/2011

395,000

400,925

ERP Operating LP, 6.95%, 3/2/2011

181,000

194,722

Farmers Insurance Exchange, 144A, 8.625%, 5/1/2024

1,785,000

2,109,188

Ford Motor Credit Co.:

 

 

6.5%, 1/25/2007

1,555,000

1,536,547

6.875%, 2/1/2006

4,068,000

4,065,909

7.25%, 10/25/2011

2,070,000

1,929,213

7.375%, 10/28/2009

1,845,000

1,760,453

General Motors Acceptance Corp.:

 

 

4.375%, 12/10/2007

720,000

679,745

4.67%**, 3/20/2007

740,000

727,713

6.125%, 9/15/2006

464,000

462,642

6.125%, 2/1/2007

3,477,000

3,442,814

6.125%, 8/28/2007

2,975,000

2,929,200

6.15%, 4/5/2007

285,000

281,194

6.875%, 9/15/2011

435,000

421,784

8.0%, 11/1/2031

5,120,000

5,285,586

H&E Equipment/Finance, 11.125%, 6/15/2012

680,000

753,100

HSBC Bank USA, 5.625%, 8/15/2035

1,114,000

1,057,715

HSBC Finance Corp.:

 

 

4.125%, 12/15/2008

190,000

185,301

5.0%, 6/30/2015

765,000

736,958

JPMorgan Chase Capital XV, 5.875%, 3/15/2035

1,784,000

1,690,932

Merrill Lynch & Co., Inc., Series C, 4.79%, 8/4/2010

1,860,000

1,831,285

Nationwide Financial Services, Inc., 5.1%, 10/1/2015

640,000

620,163

North Front Pass-Through Trust, 144A, 5.81%, 12/15/2024

1,255,000

1,241,897

Ohio Casualty Corp., 7.3%, 6/15/2014

460,000

488,301

PLC Trust, Series 2003-1, 144A, 2.709%, 3/31/2006

640,541

639,094

Poster Financial Group, Inc., 8.75%, 12/1/2011

725,000

739,500

PXRE Capital Trust I, 8.85%, 2/1/2027

405,000

396,900

R.H. Donnelly Finance Corp., 10.875%, 12/15/2012

665,000

744,800

Radnor Holdings Corp., 11.0%, 3/15/2010

620,000

483,600

Rafaella Apparel Group, Inc., 144A, 11.25%, 6/15/2011

145,000

137,750

TIG Capital Holdings Trust, 144A, 8.597%, 1/15/2027

599,000

491,180

Triad Acquisition, 144A, 11.125%, 5/1/2013

310,000

311,550

UGS Corp., 10.0%, 6/1/2012

600,000

655,500

Universal City Development, 11.75%, 4/1/2010

975,000

1,093,219

Verizon Global Funding Corp., 7.75%, 12/1/2030

440,000

510,294

 

69,028,259

Health Care 0.1%

Cinacalcet Royalty Subordinated LLC, 8.0%, 3/30/2017

75,000

78,000

Eszopiclone Royalty Subordinated LLC, 12.0%, 3/15/2014

260,000

260,000

HEALTHSOUTH Corp., 10.75%, 10/1/2008

1,135,000

1,109,462

InSight Health Services Corp.:

 

 

144A, 9.174%**, 11/1/2011

165,000

157,163

Series B, 9.875%, 11/1/2011

220,000

165,550

Tenet Healthcare Corp., 144A, 9.25%, 2/1/2015

1,100,000

1,042,250

 

2,812,425

Industrials 1.3%

Aavid Thermal Technologies, Inc., 12.75%, 2/1/2007

1,111,000

1,158,217

Allied Security Escrow Corp., 11.375%, 7/15/2011

695,000

663,258

Allied Waste North America, Inc.:

 

 

Series B, 5.75%, 2/15/2011

1,025,000

955,812

Series B, 9.25%, 9/1/2012

723,000

779,286

American Color Graphics, 10.0%, 6/15/2010

630,000

417,375

Avondale Mills, Inc., 144A, 11.065%**, 7/1/2012

310,000

303,800

BAE System 2001 Asset Trust, "B", Series 2001, 144A, 7.156%, 12/15/2011

1,691,637

1,769,925

Bear Creek Corp., 144A, 8.87%**, 3/1/2012

145,000

146,450

Beazer Homes USA, Inc.:

 

 

144A, 6.875%, 7/15/2015

50,000

45,875

8.375%, 4/15/2012

485,000

495,306

8.625%, 5/15/2011

520,000

535,600

Browning-Ferris Industries:

 

 

7.4%, 9/15/2035

895,000

778,650

9.25%, 5/1/2021

80,000

80,500

Case New Holland, Inc., 9.25%, 8/1/2011

745,000

784,113

Cenveo Corp., 7.875%, 12/1/2013

495,000

457,875

Collins & Aikman Floor Cover, Series B, 9.75%, 2/15/2010

630,000

589,050

Columbus McKinnon Corp., 10.0%, 8/1/2010

390,000

429,000

Compression Polymers Corp.:

 

 

144A, 10.46%**, 7/1/2012

195,000

179,400

144A, 10.5%, 7/1/2013

520,000

473,200

Congoleum Corp., 8.625%, 8/1/2008*

442,000

450,840

Cornell Companies, Inc., 10.75%, 7/1/2012

370,000

376,475

D.R. Horton, Inc., 5.375%, 6/15/2012

4,490,000

4,275,665

Dana Corp., 7.0%, 3/1/2029 (a)

655,000

484,700

ISP Chemco, Inc., Series B, 10.25%, 7/1/2011

1,155,000

1,228,631

K. Hovnanian Enterprises, Inc.:

 

 

6.25%, 1/15/2015 (a)

1,690,000

1,524,243

144A, 6.25%, 1/15/2016

500,000

446,127

8.875%, 4/1/2012

765,000

795,600

Kansas City Southern, 9.5%, 10/1/2008

1,220,000

1,320,650

Kinetek, Inc., Series D, 10.75%, 11/15/2006

900,000

864,000

Metaldyne Corp., 144A, 11.0%, 11/1/2013 (a)

215,000

193,500

Millennium America, Inc., 9.25%, 6/15/2008

1,040,000

1,115,400

Rainbow National Services LLC, 144A, 10.375%, 9/1/2014

525,000

577,500

Ship Finance International Ltd., 8.5%, 12/15/2013

475,000

453,031

Technical Olympic USA, Inc.:

 

 

7.5%, 3/15/2011

226,000

199,445

10.375%, 7/1/2012

905,000

909,525

The Brickman Group Ltd., Series B, 11.75%, 12/15/2009

415,000

461,688

United Rentals North America, Inc., 7.0%, 2/15/2014 (a)

740,000

680,800

Xerox Capital Trust I, 8.0%, 2/1/2027

360,000

370,800

 

27,771,312

Information Technology 0.2%

Activant Solutions, Inc.:

 

 

144A, 10.054%**, 4/1/2010

85,000

86,913

10.5%, 6/15/2011

515,000

548,475

Eschelon Operating Co., 8.375%, 3/15/2010

383,000

356,190

L-3 Communications Corp., 144A, 6.375%, 10/15/2015

230,000

227,125

Lucent Technologies, Inc., 6.45%, 3/15/2029 (a)

1,090,000

931,950

Sanmina-SCI Corp.:

 

 

6.75%, 3/1/2013 (a)

790,000

738,650

10.375%, 1/15/2010

1,010,000

1,105,950

SunGard Data Systems, Inc., LIBOR, plus .450%, 144A, 10.25%**, 8/15/2015

640,000

634,400

Viasystems, Inc., 10.5%, 1/15/2011

155,000

148,025

 

4,777,678

Materials 1.1%

Alcan, Inc., 5.75%, 6/1/2035

838,000

788,200

ARCO Chemical Co., 9.8%, 2/1/2020

1,615,000

1,800,725

Associated Materials, Inc., Step-up Coupon, 0% to 3/1/2009, 11.25% to 3/1/2014

970,000

455,900

Caraustar Industries, Inc., 9.875%, 4/1/2011

1,125,000

1,102,500

Constar International, Inc.:

 

 

7.165%**, 2/15/2012

260,000

237,900

11.0%, 12/1/2012

220,000

125,400

Dayton Superior Corp.:

 

 

10.75%, 9/15/2008

395,000

383,150

13.0%, 6/15/2009 (a)

600,000

415,500

Edgen Acquisition Corp., 9.875%, 2/1/2011

220,000

220,000

GEO Specialty Chemicals, Inc., 12.004%**, 12/31/2009

692,000

647,885

Georgia-Pacific Corp.:

 

 

7.75%, 11/15/2029

415,000

425,375

8.0%, 1/15/2024

1,005,000

1,070,325

8.875%, 5/15/2031

1,893,000

2,153,287

9.375%, 2/1/2013

765,000

843,412

Huntsman Advanced Materials LLC, 11.0%, 7/15/2010

720,000

799,200

Huntsman LLC, 11.625%, 10/15/2010

925,000

1,047,562

IMC Global, Inc.:

 

 

7.375%, 8/1/2018

155,000

157,325

10.875%, 8/1/2013

798,000

925,680

Intermet Corp., 9.75%, 6/15/2009*

85,000

28,050

International Steel Group, Inc., 6.5%, 4/15/2014

285,000

280,013

MMI Products, Inc., Series B, 11.25%, 4/15/2007

560,000

518,000

Neenah Foundry Co.:

 

 

144A, 11.0%, 9/30/2010

1,475,000

1,629,875

144A, 13.0%, 9/30/2013

137,000

137,343

Newmont Mining Corp., 5.875%, 4/1/2035

1,660,000

1,594,546

NewPage Corp., 10.51%**, 5/1/2012

435,000

400,200

Omnova Solutions, Inc., 11.25%, 6/1/2010

955,000

1,007,525

Oregon Steel Mills, Inc., 10.0%, 7/15/2009

265,000

284,213

Oxford Automotive, Inc., 144A, 12.0%, 10/15/2010*

844,647

71,795

Pliant Corp., 11.625%, 6/15/2009 (PIK)

10

11

Portola Packaging, Inc., 8.25%, 2/1/2012 (a)

475,000

308,750

Rockwood Specialties Group, Inc., 10.625%, 5/15/2011

112,000

119,840

TriMas Corp., 9.875%, 6/15/2012

1,120,000

907,200

UAP Holding Corp., Step-up Coupon, 0% to 1/15/2008, 10.75% to 7/15/2012

345,000

300,150

United States Steel Corp., 9.75%, 5/15/2010

739,000

805,510

Weyerhaeuser Co.:

 

 

7.125%, 7/15/2023

765,000

805,644

7.375%, 3/15/2032

326,000

351,169

 

23,149,160

Telecommunication Services 0.7%

AirGate PCS, Inc., 7.9%**, 10/15/2011

240,000

246,000

American Cellular Corp., Series B, 10.0%, 8/1/2011

250,000

270,000

Anixter International, Inc., 5.95%, 3/1/2015

559,000

532,845

Bell Atlantic New Jersey, Inc., Series A, 5.875%, 1/17/2012

2,585,000

2,597,527

Cincinnati Bell, Inc.:

 

 

7.25%, 7/15/2013

630,000

656,775

8.375%, 1/15/2014

690,000

671,025

Dobson Communications Corp., 8.875%, 10/1/2013

30,000

29,325

Insight Midwest LP, 9.75%, 10/1/2009

145,000

149,350

LCI International, Inc., 7.25%, 6/15/2007

625,000

617,188

Level 3 Financing, Inc., 10.75%, 10/15/2011

100,000

85,000

MCI, Inc., 8.735%, 5/1/2014

1,455,000

1,611,412

Nextel Communications, Inc., Series D, 7.375%, 8/1/2015

2,320,000

2,455,620

Nextel Partners, Inc., 8.125%, 7/1/2011

470,000

501,725

Qwest Corp.:

 

 

144A, 7.12%**, 6/15/2013

150,000

158,250

7.25%, 9/15/2025

465,000

439,425

Qwest Services Corp., 13.5%, 12/15/2010

1,575,000

1,799,437

Rural Cellular Corp., 9.875%, 2/1/2010

20,000

20,800

SBA Telecom, Inc., Step-up Coupon, 0% to 12/15/2007, 9.75% to 12/15/2011

198,000

178,695

Securus Technologies, Inc., 11.0%, 9/1/2011

360,000

309,600

Triton PCS, Inc., 8.5%, 6/1/2013

55,000

51,425

Ubiquitel Operating Co., 9.875%, 3/1/2011

235,000

256,738

US Unwired, Inc., Series B, 10.0%, 6/15/2012

460,000

523,250

 

14,161,412

Utilities 1.5%

AES Corp., 144A, 8.75%, 5/15/2013

1,240,000

1,339,200

Allegheny Energy Supply Co. LLC, 144A, 8.25%, 4/15/2012

1,580,000

1,745,900

Appalachian Power Co, Series L, 5.8%, 10/1/2035

2,415,000

2,310,974

Calpine Generating Co., 13.216%**, 4/1/2011

520,000

484,900

CC Funding Trust I, 6.9%, 2/16/2007

932,000

952,907

Centerior Energy Corp., Series B, 7.13%, 7/1/2007

1,985,000

2,055,061

CMS Energy Corp.:

 

 

8.5%, 4/15/2011

695,000

759,287

9.875%, 10/15/2007

905,000

972,875

Consumers Energy Co.:

 

 

Series F, 4.0%, 5/15/2010

1,820,000

1,729,453

5.0%, 2/15/2012

1,040,000

1,019,784

DPL, Inc., 6.875%, 9/1/2011

230,000

243,800

Entergy Louisiana, Inc., 6.3%, 9/1/2035

650,000

606,967

Mission Energy Holding Co., 13.5%, 7/15/2008

1,850,000

2,141,375

NorthWestern Corp., 5.875%, 11/1/2014

155,000

153,572

NRG Energy, Inc., 8.0%, 12/15/2013

1,070,000

1,166,300

Pedernales Electric Cooperative, Series 02-A, 144A, 6.202%, 11/15/2032

4,810,000

5,208,220

Progress Energy, Inc.:

 

 

6.75%, 3/1/2006

3,725,000

3,748,553

7.0%, 10/30/2031

1,445,000

1,532,235

PSE&G Energy Holdings LLC, 10.0%, 10/1/2009

1,755,000

1,930,500

TXU Corp., Series 0, 4.8%, 11/15/2009

1,863,000

1,765,474

 

31,867,337

Total Corporate Bonds (Cost $254,291,504)

248,033,098

 

Foreign Bonds — US$ Denominated 4.0%

Consumer Discretionary 0.2%

Iesy Repository GmbH, 144A, 10.375%, 2/15/2015

150,000

155,625

Jafra Cosmetics International, Inc., 10.75%, 5/15/2011

993,000

1,089,817

Kabel Deutschland GmbH, 144A, 10.625%, 7/1/2014

655,000

704,944

Royal Caribbean Cruises Ltd., 8.75%, 2/2/2011

777,000

866,355

Shaw Communications, Inc., 8.25%, 4/11/2010

845,000

910,488

Telenet Group Holding NV, 144A, Step-up Coupon, 0% to 12/15/2008, 11.5% to 6/15/2014

710,000

564,450

Vitro SA de CV, Series A, 144A, 12.75%, 11/1/2013

410,000

364,900

 

4,656,579

Energy 0.4%

Luscar Coal Ltd., 9.75%, 10/15/2011

725,000

781,187

OAO Gazprom, 144A, 9.625%, 3/1/2013

810,000

973,012

Pemex Project Funding Master Trust:

 

 

7.375%, 12/15/2014

430,000

469,990

8.0%, 11/15/2011

460,000

514,280

9.5%, 9/15/2027

490,000

634,550

Petro-Canada, 5.95%, 5/15/2035

1,490,000

1,454,553

Petroleum Geo-Services ASA, 10.0%, 11/5/2010

1,972,005

2,179,066

Petronas Capital Ltd., Series REG S, 7.875%, 5/22/2022

170,000

208,318

Secunda International Ltd., 12.15%**, 9/1/2012

325,000

338,000

 

7,552,956

Financials 0.9%

Banco Do Estado De Sao Paulo, 144A, 8.7%, 9/20/2049

505,000

508,787

BNP Paribas SA, 144A, 5.186%, 6/29/2049

400,000

384,604

Conproca SA de CV, 12.0%, 6/16/2010

415,000

507,338

Doral Financial Corp., 5.004%**, 7/20/2007

750,000

671,672

Eircom Funding, 8.25%, 8/15/2013

415,000

447,163

Mantis Reef Ltd., 144A, 4.692%, 11/14/2008

3,760,000

3,681,604

Mizuho Financial Group, 8.375%, 12/29/2049

7,535,000

8,062,450

New ASAT (Finance) Ltd., 9.25%, 2/1/2011

335,000

222,775

Nordea Bank AB, 144A, 5.424%, 12/29/2049

2,570,000

2,531,679

SPI Electricity & Gas Australia Holdings Property Ltd., 144A, 6.15%, 11/15/2013

785,000

832,970

Svenska Handelsbanken AB, 144A, 7.125%, 3/29/2049

990,000

1,017,187

 

18,868,229

Health Care 0.0%

Biovail Corp., 7.875%, 4/1/2010

455,000

469,219

Industrials 0.6%

Autopista Del Maipo, 144A, 7.373%, 6/15/2022

6,805,000

7,752,324

CP Ships Ltd., 10.375%, 7/15/2012

605,000

683,650

Grupo Transportacion Ferroviaria Mexicana SA de CV:

 

 

144A, 9.375%, 5/1/2012

500,000

542,500

10.25%, 6/15/2007

1,218,000

1,291,080

12.5%, 6/15/2012

512,000

591,360

J. Ray McDermott SA, 144A, 11.5%, 12/15/2013

440,000

503,800

LeGrand SA, 8.5%, 2/15/2025

339,000

403,410

Stena AB, 9.625%, 12/1/2012

160,000

172,800

Vale Overseas Ltd., 8.25%, 1/17/2034

1,010,000

1,090,800

 

13,031,724

Materials 0.5%

Cascades, Inc., 7.25%, 2/15/2013

885,000

787,650

Celulosa Arauco y Constitucion SA:

 

 

5.625%, 4/20/2015

367,000

356,415

8.625%, 8/15/2010

2,060,000

2,307,334

Crown Euro Holdings SA, 10.875%, 3/1/2013

70,000

82,425

ISPAT Inland ULC, 9.75%, 4/1/2014

715,000

807,950

Rhodia SA, 8.875%, 6/1/2011 (a)

1,245,000

1,176,525

Sino-Forest Corp., 144A, 9.125%, 8/17/2011

20,000

21,250

Sociedad Concesionaria Autopista Central, 144A, 6.223%, 12/15/2026

2,250,000

2,311,695

Tembec Industries, Inc.:

 

 

8.5%, 2/1/2011 (a)

2,225,000

1,412,875

8.625%, 6/30/2009 (a)

1,365,000

921,375

 

10,185,494

Sovereign Bonds 0.8%

Aries Vermogensverwaltung GmbH, 144A, Series C, 9.6%, 10/25/2014

750,000

959,730

Central Bank of Nigeria, Series WW, 6.25%, 11/15/2020

500,000

496,250

Federative Republic of Brazil:

 

 

8.75%, 2/4/2025

200,000

204,500

8.875%, 10/14/2019

245,000

258,475

9.25%, 10/22/2010

700,000

768,600

11.0%, 1/11/2012

240,000

285,600

11.0%, 8/17/2040

410,000

492,615

Government of Ukraine, Series REG S, 7.65%, 6/11/2013

360,000

387,000

Republic of Argentina:

 

 

Step-up Coupon, 1.33% to 3/31/2009, 2.5% to 3/31/2019, 3.75% to 3/31/2029, 5.25% to 12/31/2038

1,010,000

372,690

8.28%, 12/31/2033 (PIK) (a)

2,140,036

2,081,185

Republic of Bulgaria, 8.25%, 1/15/2015

480,000

574,656

Republic of Colombia:

 

 

10.0%, 1/23/2012

220,000

259,050

10.375%, 1/28/2033

120,000

150,000

10.75%, 1/15/2013

20,000

24,300

Republic of Ecuador, Step-up Coupon, 9.0% to 8/15/2006, 10.0% to 8/15/2030

450,000

399,375

Republic of Indonesia, Series REG S, 7.25%, 4/20/2015

230,000

226,550

Republic of Panama, 9.375%, 1/16/2023

600,000

729,000

Republic of Peru:

 

 

8.375%, 5/3/2016

80,000

90,200

9.875%, 2/6/2015

110,000

135,575

Republic of Philippines:

 

 

8.0%, 1/15/2016

360,000

360,900

9.375%, 1/18/2017

420,000

459,900

9.5%, 2/2/2030

170,000

179,350

9.875%, 1/15/2019

220,000

244,750

Republic of Turkey:

 

 

8.0%, 2/14/2034

330,000

340,725

11.5%, 1/23/2012

440,000

555,500

11.75%, 6/15/2010

320,000

392,800

Republic of Uruguay, 9.25%, 5/17/2017

140,000

152,250

Republic of Venezuela:

 

 

Series A, Collateralized Par Bond, 6.75%, 3/31/2020

750,000

750,000

7.65%, 4/21/2025

400,000

397,000

9.375%, 1/13/2034

180,000

209,340

10.75%, 9/19/2013

465,000

567,300

Russian Federation, Step-up Coupon, 5.0% to 3/31/2007, 7.5% to 3/31/2030

920,000

1,022,672

Russian Ministry of Finance:

 

 

Series V, 3.0%, 5/14/2008

90,000

84,726

Series VII, 3.0%, 5/14/2011

930,000

810,681

United Mexican States, 8.3%, 8/15/2031

140,000

171,500

 

15,594,745

Telecommunication Services 0.6%

America Movil SA de CV, 5.75%, 1/15/2015

780,000

765,747

British Telecommunications PLC, 8.875%, 12/15/2030

1,983,000

2,590,506

Cell C Property Ltd., 144A, 11.0%, 7/1/2015

555,000

525,862

Embratel, Series B, 11.0%, 12/15/2008

310,000

351,075

Global Crossing UK Finance, 10.75%, 12/15/2014

475,000

420,375

Intelsat Bermuda Ltd., 144A, 8.695%**, 1/15/2012

270,000

273,375

Millicom International Cellular SA, 10.0%, 12/1/2013

560,000

576,800

Mobifon Holdings BV, 12.5%, 7/31/2010

840,000

982,800

Nortel Networks Ltd., 6.125%, 2/15/2006

1,115,000

1,112,212

Telecom Italia Capital:

 

 

5.25%, 11/15/2013

1,955,000

1,911,296

5.25%, 10/1/2015

1,310,000

1,261,060

Telecom Personal SA, 10%, 10/15/2011

500,000

496,875

Telefonos de Mexico SA de CV, Series L, 4.75%, 1/27/2010

1,385,000

1,353,680

 

12,621,663

Total Foreign Bonds — US$ Denominated (Cost $82,968,220)

82,980,609

 

Foreign Bonds — Non US$ Denominated 0.1%

Consumer Discretionary 0.0%

IESY Repository GmbH, 144A, 8.75%, 2/15/2015 EUR

315,000

375,624

Victoria Acquisition III BV, 144A, 7.875%, 10/1/2014 EUR

65,000

73,810

 

449,434

Industrials 0.0%

Grohe Holdings GmbH, 144A, 8.625%, 10/1/2014 EUR

315,000

334,098

Sovereign Bonds 0.1%

Mexican Bonds:

 

 

Series MI-10, 8.0%, 12/19/2013 MXN

4,739,000

416,318

Series MI-20, 8.0%, 12/7/2023 MXN

1,630,000

135,411

Series M-20, 10.0%, 12/5/2024 MXN

2,700,000

269,970

Republic of Argentina:

 

 

5.83%, 12/31/2033 (PIK) ARS

994,312

418,762

7.82%, 12/31/2033 (PIK) EUR

116,853

134,791

Republic of Uruguay, 10.5%, 10/20/2006 UYU

4,700,000

247,315

 

1,622,567

Total Foreign Bonds — Non US$ Denominated (Cost $2,317,017)

2,406,099

 

Asset Backed 2.2%

Automobile Receivables 0.1%

MMCA Automobile Trust:

 

 

"B", Series 2002-2, 4.67%, 3/15/2010

943,155

929,341

"A4", Series 2001-4, 4.92%, 8/15/2007

177,071

177,049

"B", Series 2002-1, 5.37%, 1/15/2010

359,298

358,250

 

1,464,640

Home Equity Loans 2.1%

Advanta Mortgage Loan Trust, "A6", Series 2000-2, 7.72%, 3/25/2015

1,049,295

1,069,571

Ameriquest Finance NIM Trust, "B", Series 2004-RN5, 144A, 7.0%, 6/25/2034

1,448,599

1,424,446

Argent NIM Trust, "A", Series 2004-WN10, 144A, 4.212%, 11/25/2034

704,406

702,328

Centex Home Equity, "AF6", Series 2002-A, 5.54%, 1/25/2032

5,728,441

5,730,035

Chase Funding Mortgage Loan Trust, "IA5", Series 1999-2, 7.333%, 11/25/2011

171,889

172,336

Countrywide Asset-Backed Certificates, "N1", Series 2004-2N, 144A, 5.0%, 2/25/2035

227,259

225,891

Countrywide Home Equity Loan Trust, "NOTE", Series 2004-C, 4.19%**, 1/15/2034

825,322

825,905

Credit-Based Asset Servicing and Securities, "AV2", Series 2005-CB5, 4.298%**, 8/25/2035

1,744,000

1,743,926

First Franklin Mortgage Loan NIM:

 

 

"N1", Series 2004-FFH4, 144A, 4.212%, 1/21/2035

533,505

533,505

"A", Series 2005-FFH2, 144A, 4.75%, 4/27/2035

1,865,781

1,862,050

"N", Series 2004-FF4A, 144A, 5.75%, 6/25/2034

2,053,977

2,048,553

First Franklin NIM Trust, "NOTE", Series 2004-FF6A, 144A, 5.75%, 7/25/2034

276,882

277,575

Merrill Lynch Mortgage Investors, Inc., "N1", Series 2005-NC1N, 144A, 5.0%, 10/25/2035

1,388,231

1,391,268

Park Place Securities NIM Trust, "A", Series 2005-WCH1, 144A, 4.0%, 2/25/2035

1,850,170

1,840,919

Renaissance Home Equity Loan Trust:

 

 

"AF3", Series 2004-2, 4.464%, 7/25/2034

3,000,000

2,966,016

"AF2", Series 2005-3, 4.723%, 11/25/2035

4,580,000

4,547,692

Residential Asset Mortgage Products, Inc., "AI2", Series 2004-RS7, 4.0%, 9/25/2025

3,045,000

3,024,028

Residential Funding Mortgage Securities, "A3", Series 2005-HI1, 4.16%, 8/25/2034

2,780,000

2,727,699

Securitized Asset Backed NIM Trust, "NIM", Series 2005-FR4, 144A, 6.0%, 1/25/2036

5,432,945

5,432,097

Terwin Mortgage Trust, "AF2", Series 2005-14HE, 4.849%, 8/25/2036

5,494,000

5,494,000

 

44,039,840

Industrials 0.0%

Northwest Airlines, Inc., "G", Series 1999-3, 7.935%, 4/1/2019

585,196

578,478

Total Asset Backed (Cost $46,440,120)

46,082,958

 

US Government Agency Sponsored Pass-Throughs 2.1%

Federal Home Loan Bank, 6.0%, 11/1/2021

2,133,973

2,171,497

Federal Home Loan Mortgage Corp., 5.0%, 2/1/2034 (h)

4,280,000

4,116,825

Federal National Mortgage Association:

 

 

4.5%, with various maturities from 7/1/2018 until 11/1/2028

6,605,110

6,297,313

5.0%, with various maturities from 9/1/2023 until 3/1/2034

9,326,274

9,034,192

5.5%, with various maturities from 12/1/2024 until 1/1/2034

9,365,543

9,280,346

6.5%, with various maturities from 4/1/2017 until 4/1/2035

7,334,135

7,539,769

7.13%, 1/1/2012

3,745,178

3,805,533

8.0%, 9/1/2015

1,183,348

1,267,456

Total US Government Agency Sponsored Pass-Throughs (Cost $44,324,791)

43,512,931

 

Commercial and Non-Agency Mortgage-Backed Securities 6.9%

Adjustable Rate Mortgage Trust, "3A31", Series 2005-10, 5.444%, 1/25/2036

3,015,000

2,985,459

Aegis Net Interest Margin Trust, "N1", Series 2005-5, 144A, 4.5%, 10/25/2035

2,920,000

2,904,488

Banc of America Commercial Mortgage, Inc., "AJ", Series 2005-1, 5.0%, 11/10/2042

4,910,000

4,854,668

Banc of America Mortgage Securities, "2A8", Series 2003-J, 4.211%**, 11/25/2033

2,945,000

2,877,283

Bank of America Mortgage Securities, "2A6", Series 2004-G, 4.657%**, 8/25/2034

6,600,000

6,579,476

Bear Stearns Adjustable Rate Mortgage Trust, "2A3", Series 2005-4, 4.45%**, 8/25/2035

2,100,000

2,033,085

Citigroup Mortgage Loan Trust, Inc.:

 

 

"1A2", Series 2004-NCM-1, 6.5%, 7/25/2034

2,948,614

3,017,724

"1CB2", Series 2004-NCM2, 6.75%, 8/25/2034

1,268,976

1,306,649

Countrywide Alternative Loan Trust:

 

 

"1A1", Series 2004-2CB, 4.25%, 3/25/2034

2,879,912

2,843,709

"A1", Series 2004-1T1, 5.0%, 2/25/2034

3,679,060

3,647,404

"1A5", Series 2003-J1, 5.25%, 10/25/2033

2,740,822

2,734,432

"A2", Series 2004-1T1, 5.5%, 2/25/2034

2,274,477

2,273,176

"4A3", Series 2005-43, 5.783%, 10/25/2035

5,312,124

5,328,767

"1A1", Series 2004-J1, 6.0%, 2/25/2034

1,387,353

1,387,098

"A1", Series 2004-35T2, 6.0%, 2/25/2035

3,482,980

3,497,748

"1A1", Series 2004-J8, 7.0%, 9/25/2034

2,997,461

3,069,066

DLJ Mortgage Acceptance Corp.:

 

 

"A1B", Series 1997-CF2, 144A, 6.82%, 10/15/2030

2,468,433

2,529,946

"A1B", Series 1997-CF1, 144A, 7.6%, 5/15/2030

1,810,701

1,859,423

GMAC Commercial Mortgage Securities, Inc., "A3", Series 1997-C1, 6.869%, 7/15/2029

1,734,473

1,778,662

GMAC Mortgage Corp. Loan Trust, "A2", Series 2003-GH2, 3.69%, 7/25/2020

2,075,288

2,064,000

Greenwich Capital Commercial Funding Corp.:

 

 

"AJ", Series 2005-GG3, 4.859%, 8/10/2042

2,150,000

2,068,147

"B", Series 2005-GG3, 4.894%, 8/10/2042

3,565,000

3,419,696

GSR Mortgage Loan Trust, "4A5", Series 2005-AR6, 4.556%**, 9/25/2035

3,110,000

3,013,889

Harborview Mortgage Loan Trust, "3A1B", Series 2004-10, 5.125%, 1/19/2035

2,197,992

2,190,453

JPMorgan Chase Commercial Mortgage Securities, "B", Series 2005-CB12, 5.014%**, 9/12/2037

2,830,000

2,744,888

Master Alternative Loans Trust:

 

 

"N5A1", Series 2005-1, 5.5%, 1/25/2020

4,928,047

4,945,184

"2A1", Series 2004-3, 6.25%, 4/25/2034

4,302,718

4,348,434

"3A1", Series 2004-5, 6.5%, 6/25/2034

1,158,087

1,179,440

"5A1", Series 2005-2, 6.5%, 12/25/2034

452,416

456,050

"8A1", Series 2004-3, 7.0%, 4/25/2034

1,032,216

1,042,418

"6A1", Series 2004-5, 7.0%, 6/25/2034

1,630,544

1,645,481

Master Asset Securitization Trust:

 

 

"8A1", Series 2003-6, 5.5%, 7/25/2033

932,112

912,887

"2A7", Series 2003-9, 5.5%, 10/25/2033

2,147,727

2,120,307

Meritage Asset Holdings NIM, "N1", Series 2005-1, 144A, 4.581%, 5/25/2035

1,880,670

1,875,969

NYC Mortgage Loan Trust, "A3", Series 1996, 144A, 6.75%, 9/25/2019

2,620,038

2,733,066

Residential Asset Mortgage Products, "2A6", Series 2005-SP1, 5.25%, 9/25/2034

4,145,000

4,114,540

Structured Adjustable Rate Mortgage Loan:

 

 

"9A1", Series 2005-18, 5.25%, 9/25/2035

2,931,606

2,918,289

"6A3", Series 2005-21, 5.4%, 11/25/2035

2,725,000

2,704,563

"5A1", Series 2005-18, 5.619%**, 9/25/2035

2,966,079

2,974,973

Structured Asset Securities Corp.:

 

 

"4A1", Series 2005-6, 5.0%, 5/25/2035

2,847,716

2,728,468

"2A1", Series 2003-1, 6.0%, 2/25/2018

1,600,604

1,616,986

Wachovia Bank Commercial Mortgage Trust, "AMFX", Series 2005-C20, 5.179%, 7/15/2042

5,620,000

5,529,330

Washington Mutual:

 

 

"A6", Series 2003-AR10, 4.069%, 10/25/2033

5,235,000

5,108,612

"1A6", Series 2005-AR12, 4.845%, 10/25/2035

5,590,000

5,470,263

"1A1", Series 2005-AR14, 5.086%, 12/25/2035

3,010,000

3,010,000

Wells Fargo Mortgage Backed Securities Trust:

 

 

"2A17", Series 2005-AR10, 3.5%**, 6/25/2035

680,000

653,018

"2A11", Series 2005-AR12, 4.321%**, 7/25/2035

3,105,000

2,984,681

"4A1", Series 2005-AR16, 4.993%, 10/25/2035

3,024,716

3,009,382

"4A2", Series 2005-AR16, 4.993%, 10/25/2035

4,510,000

4,440,913

Total Commercial and Non-Agency Mortgage-Backed Securities (Cost $143,579,570)

141,532,590

 

Collateralized Mortgage Obligations 4.5%

Fannie Mae Whole Loan:

"3A2B", Series 2003-W10, 3.056%, 7/25/2037

510,869

506,990

"1A3", Series 2003-W18, 4.732%, 8/25/2043

551,049

549,540

"1A1", Series 2004-W15, 6.0%, 8/25/2044

2,638,432

2,664,218

Federal Home Loan Mortgage Corp.:

 

 

"NB", Series 2750, 4.0%, 12/15/2022

390,000

382,066

"TC", Series 2728, 4.0%, 2/15/2023

910,000

892,002

"TG", Series 2690, 4.5%, 4/15/2032

3,750,000

3,530,847

"LC", Series 2682, 4.5%, 7/15/2032

2,605,000

2,455,391

"HG", Series 2543, 4.75%, 9/15/2028

3,461,613

3,449,380

"QC", Series 2836, 5.0%, 9/15/2022

6,350,000

6,341,302

"PQ", Series 2844, 5.0%, 5/15/2023

6,350,000

6,354,371

"PG", Series 2734, 5.0%, 7/15/2032

1,783,000

1,721,179

"UE", Series 2764, 5.0%, 10/15/2032

1,910,000

1,845,023

"PD", Series 2844, 5.0%, 12/15/2032

660,000

633,376

"EG", Series 2836, 5.0%, 12/15/2032

3,840,000

3,691,235

"PD", Series 2783, 5.0%, 1/15/2033

3,747,000

3,604,511

"TE", Series 2780, 5.0%, 1/15/2033

4,795,000

4,623,305

"PD", Series 2893, 5.0%, 2/15/2033

290,000

277,984

"XD", Series 2941, 5.0%, 5/15/2033

1,470,000

1,410,801

"PE", Series 2864, 5.0%, 6/15/2033

3,650,000

3,528,844

"BG", Series 2869, 5.0%, 7/15/2033

790,000

758,925

"TE", Series 2881, 5.0%, 7/15/2033

940,000

901,147

"PD", Series 2939, 5.0%, 7/15/2033

865,000

830,456

"NE", Series 2921, 5.0%, 9/15/2033

3,650,000

3,497,468

"ND", Series 2938, 5.0%, 10/15/2033

3,655,000

3,509,394

"HD", Series 3056, 5.0%, 2/15/2034

3,115,086

2,983,542

"PE", Series 2533, 5.5%, 12/15/2021

750,000

758,678

"PE", Series 2512, 5.5%, 2/15/2022

1,520,000

1,544,597

"BD", Series 2453, 6.0%, 5/15/2017

692,431

706,613

"PX", Series 2097, 6.0%, 10/15/2027

1,071,288

1,076,172

"Z", Series 2173, 6.5%, 7/15/2029

1,761,333

1,815,131

Federal National Mortgage Association:

 

 

"TU", Series 2003-122, 4.0%, 5/25/2016

2,092,875

2,068,512

"NE", Series 2004-52, 4.5%, 7/25/2033

3,190,000

2,988,846

"LA", Series 2002-50, 5.0%, 12/25/2029

1,230,195

1,227,491

"PE", Series 2005-44, 5.0%, 7/25/2033

1,272,000

1,218,629

"QD", Series 2005-29, 5.0%, 8/25/2033

605,000

578,439

"ME", Series 2005-14, 5.0%, 10/25/2033

1,770,000

1,692,987

"HE", Series 2005-22, 5.0%, 10/25/2033

2,470,000

2,361,681

"EG", Series 2005-22, 5.0%, 11/25/2033

610,000

583,250

"Z", Series 2001-14, 6.0%, 5/25/2031

1,414,003

1,439,688

"HM", Series 2002-36, 6.5%, 12/25/2029

59,474

59,604

"ZQ", Series G92-9, 7.0%, 12/25/2021

1,186,566

1,202,322

FHLMC Structured Pass-Through Securities, "A2B", Series T-56, 4.29%, 7/25/2036

283,664

282,849

Government National Mortgage Association:

 

 

"ND", Series 2003-116, 3.75%, 6/20/2026

1,452,000

1,425,605

"GD", Series 2004-26, 5.0%, 11/16/2032

4,382,000

4,238,972

"PD", Series 2004-30, 5.0%, 2/20/2033

4,383,000

4,228,207

Total Collateralized Mortgage Obligations (Cost $93,743,979)

92,441,570

 

Municipal Bonds and Notes 1.5%

Bergen County, NJ, Improvement Authority Governmental Loan Revenue:

 

 

4.75%, 3/15/2015

2,105,000

2,047,323

4.8%, 3/15/2016

2,315,000

2,253,097

Charlotte-Mecklenberg, NC, Hospital Authority, Health Care System Revenue, ETM, 144A, 5.0%, 8/1/2015

3,880,000

3,859,281

Dallas-Fort Worth, TX, Airport Revenue, Industrial Airport Facility Improvement Corp., Rental Car Facility, 6.6%, 11/1/2012 (b)

1,635,000

1,758,066

Denver, CO, City & County School District 01, Pension School Facilities Lease, 6.82%, 12/15/2009 (b)

1,600,000

1,709,622

Hoboken, NJ, General Obligation, Series B:

 

 

3.57%, 2/1/2008 (b)

1,725,000

1,679,270

3.8%, 1/1/2008 (b)

1,445,000

1,425,709

3.97%, 2/1/2009 (b)

2,860,000

2,780,149

Indian Wells, CA, Redevelopment Agency, Series T, 4.48%, 9/1/2013 (b)

2,325,000

2,245,229

Indiana, Board Bank Revenue, School Severance, Series 3, 5.15%, 7/15/2013 (b)

2,005,000

2,020,920

Jicarilla, NM, Sales & Special Tax Revenue, Apache Nation Revenue, 144A, 5.2%, 12/1/2013

2,990,000

2,980,492

Myrtle Beach, SC, Hospitality Fee Revenue, Series B, 5.75%, 6/1/2019 (b)

1,440,000

1,478,405

North Jersey, NJ, District Water Supply Community, Wanaque South, Series B, 5.19%, 7/1/2019 (b)

1,000,000

991,140

Oregon, School Boards Association, Pension Deferred Interest, Series A, Zero Coupon, 6/30/2014 (b)

6,855,000

4,383,978

Total Municipal Bonds and Notes (Cost $32,035,083)

31,612,681

 

Government National Mortgage Association 0.4%

Government National Mortgage Association:

6.0%, with various maturities from 7/15/2034 until 7/20/2034

6,897,452

7,006,757

6.5%, 8/20/2034

633,904

653,967

Total Government National Mortgage Association (Cost $7,749,551)

7,660,724

 

Loan Participation 0.1%

Intermet Corp., LIBOR plus 4.25%, 8.51%**, 3/31/2009 (Cost $928,077)

1,000,000

997,500

Other Investments 0.0%

Hercules, Inc., (Bond Unit), 6.5%, 6/30/2029 (Cost $492,584)

691,000

500,975

 

US Treasury Obligations 3.3%

US Treasury Bill, 3.75%***, 1/19/06 (g)

1,140,000

1,130,619

US Treasury Bonds:

 

 

5.375%, 2/15/2031

650,000

708,906

6.0%, 2/15/2026 (a)

16,375,000

18,824,847

7.5%, 11/15/2016

582,000

722,203

US Treasury Note:

 

 

3.375%, 2/15/2008

809,000

790,924

4.75%, 5/15/2014

404,000

409,050

5.0%, 8/15/2011 (a)

43,903,000

45,041,851

Total US Treasury Obligations (Cost $67,949,395)

67,628,400

 


Shares

Value ($)

 

 

Exchange Traded Funds 0.5%

iShares Russell 1000 Value Index Fund

58,400

3,902,872

SPDR Trust Series 1

52,700

6,330,851

Total Exchange Traded Funds (Cost $10,127,856)

10,233,723

 

Securities Lending Collateral 3.5%

Scudder Daily Assets Fund Institutional, 3.89% (c) (d) (Cost $72,329,406)

72,329,406

72,329,406

 

Cash Equivalents 4.6%

Scudder Cash Management QP Trust, 3.83% (e) (Cost $95,802,788)

95,802,788

95,802,788

 

% of Net Assets

Value ($)

 

 

Total Investment Portfolio (Cost $1,919,023,418)+

103.8

2,140,782,535

Other Assets and Liabilities, Net

(3.8)

(78,800,256)

Net Assets

100.0

2,061,982,279

* Non-income producing security. In the case of a bond, generally denotes that the issuer has defaulted on the payment of principal or the interest or has filed for bankruptcy. The following table represents bonds that are in default:

Security

Coupon

Maturity Date

Principal Amount ($) (f)

Acquisition Cost ($)

Value ($)

Intermet Corp.

9.75%

6/15/2009

85,000

34,850

28,050

Oxford Automotive, Inc.

12.0%

10/15/2010

844,647

74,937

71,795

Congoleum Corp.

8.625%

8/1/2008

442,000

443,368

450,840

 

553,155

550,685

** Floating rate notes are securities whose yields vary with a designated market index or market rate, such as the coupon-equivalent of the US Treasury bill rate. These securities are shown at their current rate as of October 31, 2005.

*** Annualized yield at time of purchase; not a coupon rate.

+ The cost for federal income tax purposes was $1,940,659,563. At October 31, 2005, net unrealized appreciation for all securities based on tax cost was $200,122,972. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost of $243,443,980 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value of $43,321,008.

(a) All or a portion of these securities were on loan (See Notes to Financial Statements). The value of all securities loaned at October 31, 2005 amounted to $70,799,432 which is 3.4% of net assets.

(b) Bond is insured by one of these companies.

Insurance Coverage

As a % of Total Investment Portfolio

Ambac Assurance Corp.

0.2

Financial Guaranty Insurance Company

0.3

Municipal Bond Investors Assurance

0.4

(c) Scudder Daily Assets Fund Institutional, an affiliated fund, is managed by Deutsche Asset Management, Inc. The rate shown is the annualized seven-day yield at period end.

(d) Represents collateral held in connection with securities lending.

(e) Scudder Cash Management QP Trust is managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end.

(f) Principal amount stated in US dollars unless otherwise noted.

(g) At October 31, 2005, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts.

(h) Mortgage dollar rolls included.

Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal National Mortgage Association and the Government National Mortgage Association issues have similar coupon rates and have been aggregated for presentation purposes in the investment portfolio.

At October 31, 2005, open futures contracts purchased were as follows:

Futures

Expiration Date

Contracts

Aggregate Face Value ($)

Value ($)

Unrealized Depreciation ($)

10 Year Canada Government Bonds

12/19/2005

118

11,478,015

11,340,686

(137,329)

Russell 2000 Index

12/15/2005

10

3,383,745

3,246,000

(137,745)

Total net unrealized depreciation

(275,074)

At October 31, 2005, open futures contracts sold were as follows:

Futures

Expiration Date

Contracts

Aggregate Face Value ($)

Value ($)

Unrealized Appreciation ($)

10 Year Germany Bond

12/8/2005

62

9,082,799

8,947,677

135,122

10 Year US Treasury Note

12/20/2005

24

2,629,052

2,602,875

26,177

United Kingdom Treasury Bonds

12/28/2005

6

1,195,904

1,192,519

3,385

Total net unrealized appreciation

164,684

144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

ADR: American Depositary Receipt

ETM: Bonds bearing the description ETM (escrow to maturity) are collateralized by US Treasury securities which are held in escrow and used to pay principal and interest on bonds so designated.

LIBOR: Represents the London InterBank Offered Rate.

PIK: Denotes that all or a portion of the income is paid in-kind.

REIT: Real Estate Investment Trust

Currency Abbreviation

ARS

Argentine Peso

EUR

Euro

MXN

Mexican Peso

UYU

Uruguay Peso

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

Financial Statements

 

Statement of Assets and Liabilities as of October 31, 2005

Assets

Investments:

Investments in securities, at value (cost $1,750,891,224) — including $70,799,432 of securities loaned

$ 1,972,650,341

Investment in Scudder Daily Assets Fund Institutional (cost $72,329,406)*

72,329,406

Investment in Scudder Cash Management QP Trust (cost $95,802,788)

95,802,788

Total investments in securities, at value (cost $1,919,023,418)

2,140,782,535

Cash

3,484,217

Foreign currency, at value, (cost $39,809)

39,614

Receivable for investments sold

7,131,665

Dividends receivable

1,008,013

Interest receivable

9,391,468

Receivable for Fund shares sold

313,786

Unrealized appreciation on forward foreign currency exchange contracts

162,191

Receivable for daily variation margin on open futures contracts

53,694

Net receivable on closed forward currency exchange contracts

21,930

Other assets

44,892

Total assets

2,162,434,005

Liabilities

Payable upon return of securities loaned

72,329,406

Payable for investments purchased — mortgage dollar rolls

4,174,447

Payable for investments purchased

18,384,902

Payable for Fund shares redeemed

2,963,522

Deferred mortgage dollar roll income

1,698

Unrealized depreciation on forward foreign currency exchange contracts

103,191

Accrued management fee

812,963

Other accrued expenses and payables

1,681,597

Total liabilities

100,451,726

Net assets, at value

$ 2,061,982,279

* Represents collateral on securities loaned.

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

 

 

Statement of Assets and Liabilities as of October 31, 2005 (continued)

Net Assets

Net assets consist of:

Undistributed net investment income

5,701,058

Net unrealized appreciation (depreciation) on:

Investments

221,759,117

Futures

(110,390)

Foreign currency related transactions

58,809

Accumulated net realized gain (loss)

(226,550,599)

Paid-in capital

2,061,124,284

Net assets, at value

$ 2,061,982,279

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

 

 

Statement of Assets and Liabilities as of October 31, 2005 (continued)

Net Asset Value

Class A

Net Asset Value and redemption price(a) per share ($1,458,786,839 ÷ 162,255,979 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 8.99

Maximum offering price per share (100 ÷ 94.25 of $8.99)

$ 9.54

Class B

Net Asset Value, offering and redemption price(a) (subject to contingent deferred sales charge) per share ($114,123,477 ÷ 12,665,411 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 9.01

Class C

Net Asset Value, offering and redemption price(a) (subject to contingent deferred sales charge) per share ($38,220,121 ÷ 4,260,591 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 8.97

Class R

Net Asset Value, offering and redemption price(a) per share ($1,188,124 ÷ 132,160 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 8.99

Class AARP

Net Asset Value, offering and redemption price(a) per share ($295,902,995 ÷ 32,917,279 shares of capital stock outstanding, $.01 par value, unlimited number of shares authorized)

$ 8.99

Class S

Net Asset Value, offering and redemption price(a) per share ($153,369,008 ÷ 17,052,443 shares of capital stock outstanding, $.01 par value, unlimited number of shares authorized)

$ 8.99

Institutional Class

Net Asset Value, offering and redemption price(a) per share ($391,715 ÷ 43,492 outstanding shares of beneficial interest, $.01 par value, unlimited number of shares authorized)

$ 9.01

(a) Redemption price per share for shares held less than 15 days is equal to net asset value less a 2% redemption fee.

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

 

 

Statement of Operations for the year ended October 31, 2005

Investment Income

Interest

$ 44,517,576

Dividends (net of foreign taxes withheld of $143,601)

22,877,451

Interest — Scudder Cash Management QP Trust

2,453,949

Mortgage dollar roll income

13,989

Securities lending income, including income from Scudder Daily Assets Fund Institutional, net of borrower rebates

261,766

Total Income

70,124,731

Expenses:

Management fee

10,227,855

Services to shareholders

5,036,607

Distribution service fees

5,682,881

Custodian fees

146,027

Auditing

64,462

Legal

63,145

Reports to shareholders

340,973

Registration fees

105,793

Trustees' fees and expenses

65,937

Other

147,057

Total expenses, before expense reductions

21,880,737

Expense reductions

(1,155,048)

Total expenses, after expense reductions

20,725,689

Net investment income (loss)

49,399,042

Realized and Unrealized Gain (Loss) on Investment Transactions

Net realized gain (loss) from:

Investments

204,670,873

Futures

918,356

Foreign currency related transactions

37,038

 

205,626,267

Net unrealized appreciation (depreciation) during the period on:

Investments

(139,905,132)

Futures

(110,390)

Foreign currency related transactions

58,809

 

(139,956,713)

Net gain (loss) on investment transactions

65,669,554

Net increase (decrease) in net assets resulting from operations

$ 115,068,596

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

 

 

Statement of Changes in Net Assets

Increase (Decrease) in Net Assets

Years Ended October 31,

2005

2004

Operations:

Net investment income (loss)

$ 49,399,042

$ 28,335,071

Net realized gain (loss) on investment transactions

205,626,267

(2,680,866)

Net unrealized appreciation (depreciation) during the period on investment transactions

(139,956,713)

64,220,469

Net increase (decrease) in net assets resulting from operations

115,068,596

89,874,674

Distributions to shareholders from:

Net investment income:

Class A

(35,535,901)

(28,711,714)

Class B

(2,211,569)

(1,557,191)

Class C

(642,917)

(422,051)

Class R

(18,888)

(7,110)

Class AARP

(5,591,229)

—

Class S

(5,171,692)

—

Institutional Class

(9,985)

(4,954)

Fund share transactions:

Proceeds from shares sold

161,524,022

161,190,832

Net assets acquired in tax-free reorganization

653,736,758

—

Reinvestment of distributions

45,961,609

28,655,702

Cost of shares redeemed

(714,382,555)

(469,004,961)

Redemption fees

5,714

—

Net increase (decrease) in net assets from Fund share transactions

146,845,548

(279,158,427)

Increase (decrease) in net assets

212,731,963

(219,986,773)

Net assets at beginning of period

1,849,250,316

2,069,237,089

Net assets at end of period (including undistributed net investment income of $5,701,058 and $2,738,301, respectively)

$ 2,061,982,279

$ 1,849,250,316

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

Financial Highlights

 

Class A

Years Ended October 31,

2005

2004

2003

2002a

2001

Selected Per Share Data

Net asset value, beginning of period

$ 8.68

$ 8.44

$ 7.62

$ 8.80

$ 11.34

Income (loss) from investment operations:

Net investment incomeb

.21

.13

.13

.17

.24

Net realized and unrealized gain (loss) on investment transactions

.31

.26

.83

(1.15)

(1.69)

Total from investment operations

.52

.39

.96

(.98)

(1.45)

Less distributions from:

Net investment income

(.21)

(.15)

(.14)

(.20)

(.24)

Net realized gains on investment transactions

—

—

—

—

(.85)

Total distributions

(.21)

(.15)

(.14)

(.20)

(1.09)

Redemption fees

.00*

—

—

—

—

Net asset value, end of period

$ 8.99

$ 8.68

$ 8.44

$ 7.62

$ 8.80

Total Return (%)c

5.97d

4.59

12.69

(11.32)

(13.50)d

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

1,459

1,620

1,764

1,774

2,328

Ratio of expenses before expense reductions (%)

.98

1.03

1.06

1.00

1.01e

Ratio of expenses after expense reductions (%)

.96

1.03

1.06

1.00

.99e

Ratio of net investment income (%)

2.40

1.55

1.64

2.01

2.48

Portfolio turnover rate (%)

158f

81f

108

130

105

a As required, effective November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. In addition, paydowns on mortgage backed securities which were included in realized gain/loss on investment transactions prior to November 1, 2001 are included as interest income. The effect of these changes for the year ended October 31, 2002 was to decrease net investment income by $.02, increase net realized and unrealized gain (loss) per share by $.02, and decrease the ratio of net investment income to average net assets from 2.20% to 2.01%. Per share data and ratios for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

b Based on average shares outstanding during the period.

c Total return does not reflect the effect of any sales charges.

d Total return would have been lower had certain expenses not been reduced.

e The ratios of operating expenses excluding costs incurred in connection with the reorganization before and after expense reductions were .99% and .99%, respectively.

f The portfolio turnover rates excluding mortgage dollar roll transactions were 156% and 74% for the years ended October 31, 2005 and October 31, 2004, respectively.

* Amount is less than $.005.

 

Class B

Years Ended October 31,

2005

2004

2003

2002a

2001

Selected Per Share Data

Net asset value, beginning of period

$ 8.69

$ 8.44

$ 7.62

$ 8.79

$ 11.34

Income (loss) from investment operations:

Net investment incomeb

.16

.06

.06

.09

.14

Net realized and unrealized gain (loss) on investment transactions

.30

.25

.82

(1.14)

(1.69)

Total from investment operations

.46

.31

.88

(1.05)

(1.55)

Less distributions from:

Net investment income

(.14)

(.06)

(.06)

(.12)

(.15)

Net realized gains on investment transactions

—

—

—

—

(.85)

Total distributions

(.14)

(.06)

(.06)

(.12)

(1.00)

Redemption fees

.00*

—

—

—

—

Net asset value, end of period

$ 9.01

$ 8.69

$ 8.44

$ 7.62

$ 8.79

Total Return (%)c

5.30e

3.71e

11.67

(12.09)

(14.38)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

114

178

248

298

464

Ratio of expenses before expense reductions (%)

1.94

1.94

1.97

1.89

1.99d

Ratio of expenses after expense reductions (%)

1.54

1.93

1.97

1.89

1.99d

Ratio of net investment income (%)

1.82

.65

.73

1.11

1.48

Portfolio turnover rate (%)

158f

81f

108

130

105

a As required, effective November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. In addition, paydowns on mortgage backed securities which were included in realized gain/loss on investment transactions prior to November 1, 2001 are included as interest income. The effect of these changes for the year ended October 31, 2002 was to decrease net investment income by $.02, increase net realized and unrealized gain (loss) per share by $.02, and decrease the ratio of net investment income to average net assets from 1.31% to 1.11%. Per share data and ratios for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

b Based on average shares outstanding during the period.

c Total return does not reflect the effect of any sales charges.

d The ratios of operating expenses excluding costs incurred in connection with the reorganization before and after expense reductions were 1.95% and 1.95%, respectively.

e Total return would have been lower had certain expenses not been reduced.

f The portfolio turnover rates excluding mortgage dollar roll transactions were 156% and 74% for the years ended October 31, 2005 and October 31, 2004, respectively.

* Amount is less than $.005.

 

Class C

Years Ended October 31,

2005

2004

2003

2002a

2001

Selected Per Share Data

Net asset value, beginning of period

$ 8.66

$ 8.42

$ 7.60

$ 8.78

$ 11.31

Income (loss) from investment operations:

Net investment incomeb

.14

.06

.06

.10

.15

Net realized and unrealized gain (loss) on investment transactions

.30

.25

.83

(1.15)

(1.67)

Total from investment operations

.44

.31

.89

(1.05)

(1.52)

Less distributions from:

Net investment income

(.13)

(.07)

(.07)

(.13)

(.16)

Net realized gains on investment transactions

—

—

—

—

(.85)

Total distributions

(.13)

(.07)

(.07)

(.13)

(1.01)

Redemption fees

.00*

—

—

—

—

Net asset value, end of period

$ 8.97

$ 8.66

$ 8.42

$ 7.60

$ 8.78

Total Return (%)c

5.09d

3.65

11.81

(12.13)

(14.18)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

38

50

57

57

72

Ratio of expenses before expense reductions (%)

1.86

1.90

1.93

1.80

1.89e

Ratio of expenses after expense reductions (%)

1.78

1.89

1.93

1.80

1.87e

Ratio of net investment income (%)

1.58

.69

.77

1.21

1.59

Portfolio turnover rate (%)

158f

81f

108

130

105

a As required, effective November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. In addition, paydowns on mortgage backed securities which were included in realized gain/loss on investment transactions prior to November 1, 2001 are included as interest income. The effect of these changes for the year ended October 31, 2002 was to decrease net investment income by $.02, increase net realized and unrealized gain (loss) per share by $.02, and decrease the ratio of net investment income to average net assets from 1.40% to 1.21%. Per share data and ratios for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

b Based on average shares outstanding during the period.

c Total return does not reflect the effect of any sales charges.

d Total return would have been lower had certain expenses not been reduced.

e The ratios of operating expenses excluding costs incurred in connection with the reorganization before and after expense reductions were 1.87% and 1.87%, respectively.

f The portfolio turnover rates excluding mortgage dollar roll transactions were 156% and 74% for the years ended October 31, 2005 and October 31, 2004, respectively.

* Amount is less than $.005.

 

Class R

Years Ended October 31,

2005

2004

2003a

Selected Per Share Data

Net asset value, beginning of period

$ 8.68

$ 8.44

$ 8.33

Income (loss) from investment operations:

Net investment incomeb

.18

.11

.20

Net realized and unrealized gain (loss) on investment transactions

.30

.25

(.09)

Total from investment operations

.48

.36

.11

Less distributions from:

Net investment income

(.17)

(.12)

—

Redemption fees

.00***

—

—

Net asset value, end of period

$ 8.99

$ 8.68

$ 8.44

Total Return (%)

5.71c

4.12c

1.32**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

1

.57

.01

Ratio of expenses before expense reductions (%)

1.71

1.62

1.33*

Ratio of expenses after expense reductions (%)

1.34

1.34

1.33*

Ratio of net investment income (%)

2.02

1.24

1.37*

Portfolio turnover rate (%)

158d

81d

108*

a For the period from October 1, 2003 (commencement of sales of Class R shares) to October 31, 2003.

b Based on average shares outstanding during the period.

c Total return would have been lower had certain expenses not been reduced.

d The portfolio turnover rates excluding mortgage dollar roll transactions were 156% and 74% for the years ended October 31, 2005 and October 31, 2004, respectively.

* Annualized

** Not annualized

*** Amount is less than $.005.

 

Class AARP

 

2005a

Selected Per Share Data

Net asset value, beginning of period

$ 8.98

Income (loss) from investment operations:

Net investment income (loss)b

.14

Net realized and unrealized gain (loss) on investment transactions

.03

Total from investment operations

.17

Less distributions from:

Net investment income

(.16)

Redemption fees

.00***

Net asset value, end of period

$ 8.99

Total Return (%)c

1.95**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

296

Ratio of expenses before expense reductions (%)

.83*

Ratio of expenses after expense reductions (%)

.75*

Ratio of net investment income (%)

2.42*

Portfolio turnover rate (%)

158d

a For the period from March 14, 2005 (commencement of sales of Class AARP shares) to October 31, 2005.

b Based on average shares outstanding during the period.

c Total return would have been lower had certain expenses not been reduced.

d The portfolio turnover rate excluding mortgage dollar roll transaction was 156% for the period ended October 31, 2005.

* Annualized

** Not annualized

*** Amount is less than $.005.

 

Class S

 

2005a

Selected Per Share Data

Net asset value, beginning of period

$ 8.98

Income (loss) from investment operations:

Net investment incomeb

.14

Net realized and unrealized gain (loss) on investment transactions

.04

Total from investment operations

.18

Less distributions from:

Net investment income

(.17)

Redemption fees

.00***

Net asset value, end of period

$ 8.99

Total Return (%)c

1.97**

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

153

Ratio of expenses before expense reductions (%)

.79*

Ratio of expenses after expense reductions (%)

.74*

Ratio of net investment income (%)

2.43*

Portfolio turnover rate (%)

158d

a For the period from March 14, 2005 (commencement of sales of Class S shares) to October 31, 2005.

b Based on average shares outstanding during the period.

c Total return would have been lower had certain expenses not been reduced.

d The portfolio turnover rate excluding mortgage dollar roll transaction was 156% for the period ended October 31, 2005.

* Annualized

** Not annualized

*** Amount is less than $.005.

 

Institutional Class

Years Ended October 31,

2005

2004

2003

2002a

2001

Selected Per Share Data

Net asset value, beginning of period

$ 8.70

$ 8.45

$ 7.63

$ 8.82

$ 11.36

Income (loss) from investment operations:

Net investment incomeb

.24

.16

.16

.20

.27

Net realized and unrealized gain (loss) on investment transactions

.31

.26

.83

(1.16)

(1.69)

Total from investment operations

.55

.42

.99

(.96)

(1.42)

Less distributions from:

Net investment income

(.24)

(.17)

(.17)

(.23)

(.27)

Net realized gains on investment transactions

—

—

—

—

(.85)

Total distributions

(.24)

(.17)

(.17)

(.23)

(1.12)

Redemption fees

.00*

—

—

—

—

Net asset value, end of period

$ 9.01

$ 8.70

$ 8.45

$ 7.63

$ 8.82

Total Return (%)

6.32d

5.01d

13.09

(11.09)

(13.14)

Ratios to Average Net Assets and Supplemental Data

Net assets, end of period ($ millions)

.39

.35

.41

6

9

Ratio of expenses before expense reductions (%)

.69

.73

.67

.64

.66c

Ratio of expenses after expense reductions (%)

.62

.69

.67

.64

.65c

Ratio of net investment income (%)

2.74

1.89

2.03

2.37

2.82

Portfolio turnover rate (%)

158e

81e

108

130

105

a As required, effective November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium on debt securities. In addition, paydowns on mortgage backed securities which were included in realized gain/loss on investment transactions prior to November 1, 2001 are included as interest income. The effect of these changes for the year ended October 31, 2002 was to decrease net investment income by $.02, increase net realized and unrealized gain (loss) per share by $.02, and decrease the ratio of net investment income to average net assets from 2.56% to 2.37%. Per share data and ratios for periods prior to November 1, 2001 have not been restated to reflect this change in presentation.

b Based on average shares outstanding during the period.

c The ratios of operating expenses excluding costs incurred in connection with the reorganization before and after expense reductions were .64% and .64%, respectively.

d Total return would have been lower had certain expenses not been reduced.

e The portfolio turnover rates excluding mortgage dollar roll transactions were 156% and 74% for the years ended October 31, 2005 and October 31, 2004, respectively.

* Amount is less than $.005.

Notes to Financial Statements  

 

A. Significant Accounting Policies

Scudder Total Return Fund (the ``Fund'') is registered under the Investment Company Act of 1940, as amended (the ``1940 Act''), as an open-end, diversified management investment company organized as a Massachusetts business trust.

The Fund offers multiple classes of shares which provide investors with different purchase options. Class A shares are offered to investors subject to an initial sales charge. Class B shares are offered without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are offered without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Class C shares do not convert into another class. Institutional Class shares are offered to a limited group of investors, are not subject to initial or contingent deferred sales charges and have lower ongoing expenses than other classes. Class R shares are offered to investors without an initial sales charge or contingent deferred sales charge. On March 14, 2005, the Fund commenced offering Class AARP and S shares. Shares of Class AARP are designed for members of AARP. Class AARP and S shares are not subject to initial or contingent deferred sales charges. Class S shares are not available to new investors except under certain circumstances. (Please refer to the Fund's Statement of Additional Information.)

Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares, except that each class bears certain expenses unique to that class such as distribution service fees, administration fees, services to shareholders and certain other class-specific expenses. Differences in class-level expenses may result in payment of different per share dividends by class. All shares of the Fund have equal rights with respect to voting subject to class-specific arrangements.

The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements.

Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading. Equity securities are valued at the most recent sale price or official closing price reported on the exchange (US or foreign) or over-the-counter market on which the security is traded most extensively. Securities for which no sales are reported are valued at the calculated mean between the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, at the most recent bid quotation.

Debt securities are valued by independent pricing services approved by the Trustees of the Fund, whose valuations are intended to reflect the mean between the bid and asked prices. If the pricing services are unable to provide valuations, the securities are valued at the average of the means based on the most recent bid and asked quotations or evaluated price, obtained from a broker-dealer. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes.

Money market instruments purchased with an original or remaining maturity of sixty days or less, maturing at par, are valued at amortized cost. Investments in open-end investments companies and Scudder Cash Management QP Trust are valued at their net asset value each business day.

Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Trustees.

Securities Lending. The Fund may lend securities to financial institutions. The Fund retains beneficial ownership of the securities it has loaned and continues to receive interest and dividends paid by the securities and to participate in any changes in their market value. The Fund requires the borrowers of the securities to maintain collateral with the Fund consisting of liquid, unencumbered assets having a value at least equal to the value of the securities loaned. The Fund may invest the cash collateral into a joint trading account in an affiliated money market fund pursuant to Exemptive Orders issued by the SEC. The Fund receives compensation for lending its securities either in the form of fees or by earning interest on invested cash collateral net of fees paid to a lending agent. Either the Fund or the borrower may terminate the loan. The Fund is subject to all investment risks associated with the value of any cash collateral received, including, but not limited to, interest rate, credit and liquidity risk associated with such investments.

Foreign Currency Translations. The books and records of the Fund are maintained in US dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into US dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into US dollars at the prevailing exchange rates on the respective dates of the transactions.

Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the disposition of forward foreign currency exchange contracts and foreign currencies, and the difference between the amount of net investment income accrued and the US dollar amount actually received. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed but is included with net realized and unrealized gains and losses on investment securities.

Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange contract ("forward currency contract") is a commitment to purchase or sell a foreign currency at the settlement date at a negotiated rate. The Fund may enter into forward currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign currency denominated portfolio holdings and to facilitate transactions in foreign currency denominated securities. The Fund may also engage in forward currency contracts for non-hedging purposes.

Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and unrealized gain (loss) is recorded daily. Sales and purchases of forward currency contracts having the same settlement date and broker are offset and any gain (loss) is realized on the date of offset; otherwise, gain (loss) is realized on settlement date. Realized and unrealized gains and losses which represent the difference between the value of a forward currency contract to buy and a forward currency contract to sell are included in net realized and unrealized gain (loss) from foreign currency related transactions.

Certain risks may arise upon entering into forward currency contracts from the potential inability of counterparties to meet the terms of their contracts. Additionally, when utilizing forward currency contracts to hedge, the Fund gives up the opportunity to profit from favorable exchange rate movements during the term of the contract.

Futures Contracts. A futures contract is an agreement between a buyer or seller and an established futures exchange or its clearinghouse in which the buyer or seller agrees to take or make a delivery of a specific amount of a financial instrument at a specified price on a specific date (settlement date). The Fund may enter into futures contracts as a hedge against anticipated interest rate changes and for duration management, risk management and return enhancement purposes.

Upon entering into a futures contract, the Fund is required to deposit with a financial intermediary an amount ("initial margin") equal to a certain percentage of the face value indicated in the futures contract. Subsequent payments ("variation margin") are made or received by the Fund dependent upon the daily fluctuations in the value of the underlying security and are recorded for financial reporting purposes as unrealized gains or losses by the Fund. When entering into a closing transaction, the Fund will realize a gain or loss equal to the difference between the value of the futures contract to sell and the futures contract to buy. Futures contracts are valued at the most recent settlement price.

Certain risks may arise upon entering into futures contracts, including the risk that an illiquid secondary market will limit the Fund's ability to close out a futures contract prior to the settlement date and that a change in the value of a futures contract may not correlate exactly with the changes in the value of the securities. When utilizing futures contracts to hedge, the Fund gives up the opportunity to profit from favorable price movements in the hedged positions during the term of the contract.

Loan Participations/Assignments. The Fund may invest in US dollar-denominated fixed and floating rate loans ("Loans") arranged through private negotiations between a foreign sovereign entity and one or more financial institutions ("Lenders"). The Fund invests in such Loans in the form of participations in Loans ("Participations") or assignments of all or a portion of loans from third parties ("Assignments"). Participations typically result in the Fund having a contractual relationship only with the Lender, not with the sovereign borrower. The Fund has the right to receive payments of principal, interest and any fees to which it is entitled from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the borrower, and the Fund will not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation.

Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in which the Fund sells to a bank or broker/dealer (the "counterparty") mortgage-backed securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities on a fixed date. The counterparty receives all principal and interest payments, including prepayments, made on the security while it is the holder. The Fund receives compensation as consideration for entering into the commitment to repurchase. The compensation is paid in the form of a lower price for the security upon its repurchase, or alternatively, a fee. Mortgage dollar rolls may be renewed with a new sale and repurchase price and a cash settlement made at each renewal without physical delivery of the securities subject to the contract.

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

Certain risks may arise upon entering into mortgage dollar rolls from the potential inability of counterparties to meet the terms of their commitments. Additionally, the value of such securities may change adversely before the Fund is able to repurchase them. There can be no assurance that the Fund's use of the cash that it receives from a mortgage dollar roll will provide a return that exceeds its borrowing costs.

When-Issued/Delayed Delivery Securities. The Fund may purchase securities with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The price of such security and the date when the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. No interest accrues to the Fund until payment takes place. At the time the Fund enters into this type of transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment.

Certain risks may arise upon entering into when-issued or delayed delivery securities from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic, or other factors. Additionally, losses may arise due to changes in the value of the underlying securities.

Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies, and to distribute all of its taxable income to its shareholders. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required.

At October 31, 2005, the Fund had a net tax basis capital loss carryforward of approximately $205,026,000, of which $50,835,000 was inherited from its merger with Scudder Balanced Fund (see Note I), which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until October 31, 2008 ($2,004,000), October 31, 2009 ($262,000), October 31, 2010 ($48,569,000), October 31, 2011 ($139,944,000) and October 31, 2012 ($14,247,000), the respective expiration dates, whichever occurs first, which may be subject to certain limitations under Sections 382-384 of the Internal Revenue Code.

During the year ended October 31, 2005, the Fund utilized approximately $191,507,000 of prior year capital loss carryforward.

Distribution of Income and Gains. Distributions of net investment income, if any, are made quarterly. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually.

The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to certain securities sold at a loss and premium amortization on debt securities. These differences primarily relate to investments in mortgage backed securities, premium amortization on debt securities and certain securities sold at a loss. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.

At October 31, 2005, the Fund's components of distributable earnings (accumulated losses) on a tax-basis were as follows:

Undistributed ordinary income*

$ 5,803,951

Capital loss carryforwards

$ (205,026,000)

Net unrealized appreciation (depreciation) on investments

$ 200,122,972

In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:

 

Years Ended October 31,

 

2005

2004

Distributions from ordinary income*

$ 49,182,181

$ 30,703,020

* For tax purposes short-term capital gains distributions are considered ordinary income distributions.

Redemption Fees. Effective February 1, 2005, the Fund imposes a redemption fee of 2% of the total redemption amount on the Fund shares redeemed or exchanged within 15 days of buying them, either by purchase or exchange. This fee is assessed and retained by the Fund for the benefit of the remaining shareholders. The redemption fee is accounted for as an addition to paid-in capital.

Expenses. Expense of the Trust arising in connection with a specific Fund are allocated to that Fund. Other expenses which cannot be directly attributed to a Fund are apportioned among the Funds in the Trust.

Contingencies. In the normal course of business, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote.

Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date net of foreign withholding taxes. Certain dividends from foreign securities may be recorded subsequent to the ex-dividend date as soon as the Fund is informed of such dividends. Realized gains and losses from investment transactions are recorded on an identified cost basis.

B. Purchases and Sales of Securities

During the year ended October 31, 2005, purchases and sales of investment securities (excluding short-term investments and US Treasury securities and mortgage dollar rolls) aggregated $2,368,171,231 and $2,933,963,357, respectively. Purchases and sales of US Treasury securities aggregated $799,386,466 and $791,483,187, respectively. Mortgage dollar rolls aggregated $24,092,977 and $19,835,136, respectively.

C. Related Parties

Management Agreement. Under the Management Agreement with Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor"), an indirect, wholly owned subsidiary of Deutsche Bank AG, the Advisor directs the investments of the Fund in accordance with its investment objectives, policies and restrictions. The Advisor determines the securities, instruments and other contracts relating to investments to be purchased, sold or entered into by the Fund. In addition to portfolio management services, the Advisor provides certain administrative services in accordance with the Management Agreement. Prior to September 30, 2005, Deutsche Asset Management Investment Services Ltd. ("DeAMIS"), an affiliate of the Advisor, served as the subadvisor to the Fund. DeAMIS rendered investment advisory and management services including services related to foreign securities, foreign currency transactions and related investments with regard to the portion of the Fund's portfolio that was allocated to it by the Advisor. Effective October 1, 2005, DeIM performs the services previously performed by DeAMIS.

From November 1, 2004 to March 13, 2005, the management fee was computed and accrued daily and payable monthly at the following rates:

First $250 million of the Fund's average daily net assets

0.58%

Next $750 million of such net assets

0.55%

Next $1.5 billion of such net assets

0.53%

Next $2.5 billion of such net assets

0.51%

Next $2.5 billion of such net assets

0.48%

Next $2.5 billion of such net assets

0.46%

Next $2.5 billion of such net assets

0.44%

Over $12.5 billion of such net assets

0.42%

Effective March 14, 2005, the new management fee was computed and accrued daily and payable monthly at the following rates:

First $1.5 billion of the Fund's average daily net assets

0.470%

Next $500 million of such net assets

0.445%

Next $1.5 billion of such net assets

0.410%

Next $2.0 billion of such net assets

0.400%

Next $2.0 billion of such net assets

0.390%

Next $2.5 billion of such net assets

0.380%

Next $2.5 billion of such net assets

0.370%

Over $12.5 billion of such net assets

0.360%

Accordingly, for the year ended October 31, 2005, the fee pursuant to the Management Agreement was equivalent to an annual effective rate of 0.49% of the Fund's average daily net assets.

For the period November 1, 2004 through March 13, 2005, the Advisor had contractually agreed to waive all or a portion of its management fee and reimburse or pay certain operating expenses of the Fund to the extent necessary to
maintain the operating expenses of each class at 0.84%, 0.97%, 0.945% and 0.685% of average daily net assets for Class A, B, C and Institutional Class shares,
respectively (excluding certain expenses such as extraordinary expenses, taxes,
brokerage, interest, Rule 12b-1 distribution and/or service fees, trustee, and trustee counsel fees, and organizational and offering expenses).

Effective March 14, 2005 through February 29, 2008, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay certain operating expenses of the Fund to the extent necessary to maintain the operating expenses of each class at 0.68%, 0.88%, 0.81%, 0.60%, 0.75% and 0.73% of average daily net assets for Class A, B, C, Institutional Class, Class AARP and S shares, respectively (excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest, Rule 12b-1 distribution and/or service fees, trustee, and trustee counsel fees, and organizational and offering expenses). For Class R shares, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay operating expenses at 1.34% of average daily net assets, excluding certain expenses such as extraordinary expenses, taxes, brokerage, interest, and trustee and trustee counsel fees for the period November 1, 2004 through February 29, 2008.

Service Provider Fees. Scudder Investments Service Company ("SISC"), an affiliate of the Advisor, is the transfer, dividend-paying agent and shareholder service agent for Class A, B, C, R and Institutional Class shares of the Fund. Scudder Service Corporation ("SSC"), also an affiliate of the Advisor, is the transfer, dividend-paying agent and shareholder services agent for Class S and AARP shares of the Fund. Pursuant to a sub-transfer agency agreement among SISC, SSC and DST Systems, Inc. ("DST"), SISC and SSC have delegated certain transfer agent and dividend paying agent functions to DST. SISC and SSC compensate DST out of the shareholder serving fee they receive from the Fund. For the year ended October 31, 2005, the amounts charged to the Fund by SISC and SSC were as follows:

Services to Shareholders

Total Aggregated

Waived

Unpaid at October 31, 2005

Class A

$ 2,413,484

$ 274,317

$ 359,305

Class B

516,061

38,917

106,250

Class C

118,986

34,390

17,730

Class R

6,445

3,627

1,331

Class AARP

544,551

141,468

80,766

Class S

377,401

89,739

31,205

Institutional Class

443

257

—

 

$ 3,977,371

$ 582,715

$ 596,587

Distribution Service Agreement. Under the Distribution Service Agreement, in accordance with Rule 12b-1 under the 1940 Act, Scudder Distributors, Inc. ("SDI"), a subsidiary of the Advisor, receives a fee ("Distribution Fee") of 0.75%, 0.75% and 0.25% of average daily net assets of Class B, C and R shares, respectively. For the year ended October 31, 2005, SDI reduced the Distribution Fee to 0.375% of average daily net assets of Class B shares. Pursuant to the agreement, SDI enters into related selling group agreements with various firms at various rates for sales of Class B, C and R shares. For the year ended October 31, 2005, the Distribution Fee was as follows:

Distribution Fee

Total Aggregated

Waived

Unpaid at October 31, 2005

Annual Effective Rate

Class B

$ 1,093,738

$ 546,869

$ 72,960

.375%

Class C

333,382

—

26,460

.75%

Class R

2,500

—

266

.25%

 

$ 1,429,620

$ 546,869

$ 99,686

 

In addition, SDI provides information and administrative services ("Service Fee") to Class A, B, C and R shareholders at an annual rate of up to 0.25% of average daily net assets for each such class. SDI in turn has various agreements with financial services firms that provide these services and pays these fees based upon the assets of shareholder accounts the firms service. For the year ended October 31, 2005, the Service Fee was as follows:

Service Fee

Total Aggregated

Unpaid at October 31, 2005

Annual Effective Rate

Class A

$ 3,787,494

$ 322,797

.24%

Class B

354,684

25,915

.24%

Class C

108,649

8,661

.24%

Class R

2,434

280

.24%

 

$ 4,253,261

$ 357,653

 

Underwriting and Contingent Deferred Sales Charge. SDI is the principal underwriter for the Fund. Underwriting commissions paid in connection with the distribution of Class A shares for the year ended October 31, 2005 aggregated $74,505.

In addition, SDI receives any contingent deferred sales charge ("CDSC") from Class B share redemptions occurring within six years of purchase and Class C share redemptions occurring within one year of purchase. There is no such charge upon redemption of any share appreciation or reinvested dividends. The CDSC is based on declining rates ranging from 4% to 1% for Class B and 1% for Class C, of the value of the shares redeemed. For the year ended October 31, 2005, the CDSC for Class B and C shares aggregated $483,290 and $1,049, respectively. A deferred sales charge of up to 1% is assessed on certain redemptions for Class A shares.

Typesetting and Filing Service Fees. Under an agreement with DeIM, the Advisor is compensated for providing typesetting and regulatory filing services to the Fund. For the year ended October 31, 2005, the amount charged to the Fund by DeIM included in reports to shareholders aggregated $36,290, of which $10,640 is unpaid at October 31, 2005.

Trustees' Fees and Expenses. The Fund pays each Trustee not affiliated with the Advisor retainer fees plus specified amounts for attended board and committee meetings.

Scudder Cash Management QP Trust. Pursuant to an Exemptive Order issued by the SEC, the Fund may invest in the Scudder Cash Management QP Trust (the "QP Trust") and other affiliated funds managed by the Advisor. The QP Trust seeks to provide as high a level of current income as is consistent with the preservation of capital and the maintenance of liquidity. The QP Trust does not pay the Advisor a management fee for the affiliated funds' investments in the QP Trust.

Other Related Parties. AARP through its affiliate, AARP Services, Inc., monitors and oversees the AARP Investment Program from Scudder Investments, but does not act as an investment advisor or recommend specific mutual funds. DeIM has agreed to pay a fee to AARP and/or its affiliates in return for the use of the AARP trademark and services relating to investments by AARP members in Class AARP shares of the Fund. This fee is calculated on a daily basis as a percentage of the combined net assets of the AARP classes of all funds managed by DeIM. The fee rates, which decrease as the aggregate net assets of the AARP classes become larger, are as follows: 0.07% for the first $6 billion of net assets, 0.06% for the next $10 billion of such net assets and 0.05% of such net assets thereafter. These amounts are used for the general purposes of AARP and its members.

D. Expense Reductions

For the year ended October 31, 2005, the Advisor agreed to reimburse the Fund $20,647, which represents a portion of the fee savings expected to be realized by the Advisor related to the outsourcing by the Advisor of certain administrative services to an unaffiliated service provider.

In addition, the Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended October 31, 2005, the custodian fees were reduced by $4,817 for custodian credits earned.

E. Line of Credit

The Fund and several other affiliated funds (the ``Participants'') share in a $1.1 billion revolving credit facility administered by J.P. Morgan Chase Bank for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee which is allocated, based upon net assets, among each of the Participants. Interest is calculated at the Federal Funds Rate plus 0.5 percent. The Fund may borrow up to a maximum of 33 percent of its net assets under the agreement.

F. Share Transactions

The following table summarizes share and dollar activity in the Fund:

 

Year Ended October 31, 2005

Year Ended October 31, 2004

 

Shares

Dollars

Shares

Dollars

Shares sold

Class A

10,691,738

$ 95,788,215

13,938,082

$ 120,735,739

Class B

899,317

8,055,880

3,489,537

30,255,483

Class C

544,054

4,864,677

1,065,106

9,194,346

Class R

102,870

922,700

72,232

630,172

Class AARP*

573,201

5,125,424

—

—

Class S*

5,299,532

46,744,473

—

—

Institutional Class

2,487

22,653

44,329

375,092

 

 

$ 161,524,022

 

$ 161,190,832

Shares issued in tax-free reorganization**

Class AARP*

35,266,918

$ 316,696,924

—

$ —

Class S*

37,532,276

337,039,834

—

—

 

 

$ 653,736,758

 

$ —

Shares issued to shareholders in reinvestment of distributions

Class A

3,708,942

$ 33,150,999

3,101,844

$ 26,779,313

Class B

237,274

2,126,218

173,005

1,494,061

Class C

63,505

566,340

42,967

370,266

Class R

2,107

18,863

572

4,953

Class AARP*

560,814

5,012,375

—

—

Class S*

569,270

5,076,830

—

—

Institutional Class

1,115

9,984

823

7,109

 

 

$ 45,961,609

 

$ 28,655,702

Shares redeemed

Class A

(38,700,506)

$ (347,003,201)

(39,476,228)

$ (341,937,009)

Class B

(9,005,127)

(80,818,821)

(12,543,853)

(108,630,727)

Class C

(2,131,939)

(19,051,249)

(2,070,727)

(17,910,860)

Class R

(38,535)

(343,446)

(8,286)

(72,827)

Class AARP*

(3,483,654)

(31,265,909)

—

—

Class S*

(26,348,635)

(235,896,141)

—

—

Institutional Class

(417)

(3,788)

(53,144)

(453,538)

 

 

$ (714,382,555)

 

$ (469,004,961)

Redemption fees

$ 5,714

$ —

Net increase (decrease)

Class A

(24,299,826)

$ (218,061,848)

(22,436,302)

$ (194,421,957)

Class B

(7,868,536)

(70,633,610)

(8,881,311)

(76,881,183)

Class C

(1,524,380)

(13,620,118)

(962,654)

(8,346,248)

Class R

66,442

598,117

64,518

562,298

Class AARP*

32,917,279

295,568,995

—

—

Class S*

17,052,443

152,965,163

—

—

Institutional Class

3,185

28,849

(7,992)

(71,337)

 

 

$ 146,845,548

 

$ (279,158,427)

* For the period March 14, 2005 (commencement of operations of Class AARP and S shares) to October 31, 2005.

** On March 11, 2005, the Scudder Balanced Fund was acquired by the Fund through a tax-free reorganization (see Note I).

G. Forward Foreign Currency Exchange Contracts

As of October 31, 2005, the Fund had the following open forward foreign currency exchange contracts:

Contracts to Deliver

 

In Exchange For

 

Settlement

Date

 

Unrealized Appreciation (US $)

USD

89,182

 

MXN

976,343

 

11/10/05

 

1,211

EUR

111,425

 

USD

135,232

 

11/16/05

 

1,580

USD

314,287

 

EUR

262,422

 

11/18/05

 

518

EUR

948,801

 

USD

1,230,977

 

11/18/05

 

63,553

EUR

68,888

 

USD

84,717

 

11/18/05

 

2,078

USD

7,599,000

 

AUD

10,200,000

 

1/27/06

 

3,428

USD

2,796,800

 

GBP

1,600,000

 

1/27/06

 

33,392

CAD

6,530,000

 

USD

5,551,258

 

1/27/06

 

8,063

SEK

42,580,000

 

USD

5,430,222

 

1/27/06

 

48,368

Total unrealized appreciation

162,191

Contracts to Deliver

 

In Exchange For

 

Settlement

Date

 

Unrealized Depreciation (US $)

MXN

5,700,915

 

USD

458,337

 

11/10/05

 

(22,166)

USD

37,326

 

EUR

30,487

 

11/18/05

 

(753)

MXN

1,763,000

 

USD

160,705

 

12/09/05

 

(1,833)

EUR

45,085

 

USD

54,151

 

1/12/06

 

(100)

USD

5,594,895

 

JPY

640,000,000

 

1/27/06

 

(39,515)

CHF

5,000,000

 

USD

3,885,004

 

1/27/06

 

(25,383)

EUR

4,600,000

 

USD

5,526,417

 

1/27/06

 

(13,441)

Total unrealized depreciation

(103,191)

Currency Abbreviations

AUD

Australian Dollar

MXN

Mexican Peso

CAD

Canadian Dollar

JPY

Japanese Yen

CHF

Swiss Franc

SEK

Swedish Krona

EUR

Euro

USD

United States Dollar

GBP

British Pound

 

 

H. Regulatory Matters and Litigation

Since at least July 2003, federal, state and industry regulators have been conducting ongoing inquiries and investigations ("inquiries") into the mutual fund industry, and have requested information from numerous mutual fund companies, including Scudder Investments. The funds' advisors have been cooperating in connection with these inquiries and are in discussions with these regulators concerning proposed settlements. Publicity about mutual fund practices arising from these industry-wide inquiries serves as the general basis of a number of private lawsuits against the Scudder funds. These lawsuits, which previously have been reported in the press, involve purported class action and derivative lawsuits, making various allegations and naming as defendants various persons, including certain Scudder funds, the funds' investment advisors and their affiliates, and certain individuals, including in some cases fund Trustees/Directors, officers, and other parties. Each Scudder fund's investment advisor has agreed to indemnify the applicable Scudder funds in connection with these lawsuits, or other lawsuits or regulatory actions that may be filed making allegations similar to these lawsuits regarding market timing, revenue sharing, fund valuation or other subjects arising from or related to the pending inquiries. It is not possible to determine with certainty what the outcome of these inquiries will be or what the effect, if any, would be on the funds or their advisors. Based on currently available information, however, the funds' investment advisors believe the likelihood that the pending lawsuits and any regulatory settlements will have a material adverse financial impact on a Scudder fund is remote and such actions are not likely to materially affect their ability to perform under their investment management agreements with the Scudder funds.

I. Acquisition of Assets

On March 11, 2005, the Fund acquired all of the net assets of Scudder Balanced Fund pursuant to a plan of reorganization approved by shareholders on February 24, 2005. The acquisition was accomplished by a tax-free exchange of 18,290,550 Class AARP shares and 19,470,042 Class S shares of Scudder Balanced Fund for 35,266,918 Class AARP shares and 37,532,276 Class S shares of Scudder Total Return Fund, respectively, outstanding on March 11, 2005. Scudder Balanced Fund's net assets at that date, $653,736,758, including $67,260,052 of net unrealized appreciation, were combined with those of the Fund. The aggregate net assets of the Fund immediately before the acquisition were $1,784,348,295. The combined net assets of the Fund immediately following the acquisition were $2,438,085,053.

J. Payments made by Affiliates

During the year ended October 31, 2005, the Advisor fully reimbursed the Fund $1,550 for losses incurred on a trade executed incorrectly.

K. Other

Prior to September 30, 2005, Deutsche Asset Management Investment Services, Ltd. ("DeAMIS"), an indirect wholly owned subsidiary of Deutsche Bank AG, served as subadvisor to the Fund. The Board voted to permit the Fund's subadvisory agreement with DeAMIS to expire on September 30, 2005 in light of the then pending acquisition of DeAMIS by Aberdeen Asset Management PLC.

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Trustees of Scudder Total Return Fund:

We have audited the accompanying statement of assets and liabilities of Scudder Total Return Fund (the "Fund"), including the investment portfolio, as of October 31, 2005, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2005, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Scudder Total Return Fund at October 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Boston, Massachusetts
December 19, 2005

trf_eny0

Tax Information (Unaudited)

 

For federal income tax purposes, the Fund designates approximately $23,600,000, or the maximum amount allowable under tax law, as qualified dividend income.

Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please call 1-800-621-1048.

Investment Management Agreement Approval

 

The Board of Trustees, including the Independent Trustees, approved the renewal of your Fund's investment management agreement (the "Agreement") with Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor") in September 2005. As part of its review process, the Board requested and evaluated all information it deemed reasonably necessary to evaluate the Agreement. Over the course of several months, the Contract Review Committee, in coordination with the Equity Oversight Committee and the Operations Committee of the Board, reviewed comprehensive materials received from the Advisor, independent third parties and independent counsel. The Board also received extensive information throughout the year regarding performance and operating results of the Fund. After their review of the information received, the Committees presented their findings and recommendations to the Independent Trustees as a group. The Independent Trustees then reviewed the Committees' findings and recommendations and presented their recommendations to the full Board.

In connection with the contract review process, the various Committees and the Board considered the factors discussed below, among others. The Board also considered that the Advisor and its predecessors have managed the Fund since its inception, and the Board believes that a long-term relationship with a capable, conscientious advisor is in the best interests of the Fund. The Board considered, generally, that shareholders invested in the Fund, or approved the investment management agreement for the Fund, knowing that the Advisor managed the Fund and knowing the investment management fee schedule. In connection with recent and ongoing efforts by Deutsche Bank to restructure its US mutual fund business, which resulted in turnover of senior management and other personnel of the Advisor, the Board considered Deutsche Bank's commitment that it will devote to the Advisor and its affiliates all attention and resources that are necessary to provide the Fund with top-quality investment management and shareholder, administrative and product distribution services.

Nature, Quality and Extent of Services. The Board considered the nature, extent and quality of services provided under the Agreement, including portfolio management services and administrative services. The Board considered the experience and skills of senior management and investment personnel, the resources made available to such personnel, the ability of the Advisor to attract and retain high-quality personnel, the impact of recent changes in investment personnel with respect to domestic fixed income securities and the organizational depth and stability of the Advisor. The Board reviewed the Fund's performance over short-term and long-term periods, and compared those returns to various agreed-upon performance measures, including market indices and peer groups. The Board considered whether investment results were consistent with the Fund's investment objective and policies. The Board also noted that it has put a process into place of identifying "Focus Funds" (e.g., funds performing poorly relative to their peer group), and receives more frequent reporting and information from the Advisor regarding such funds, along with the Advisor's remedial plans to address underperformance. The Board believes this process is an effective manner of addressing poorly performing funds at this time.

The Board noted that, in the past, the Advisor delegated a portion of the Fund's assets, to be invested in foreign securities, for management by Deutsche Asset Management Investment Services Limited ("DeAMIS"), an affiliate of the Advisor, pursuant to a sub-advisory agreement. In light of Deutsche Bank's agreement to sell DeAMIS, the Advisor recommended that the Board not renew the sub-advisory agreement with DeAMIS, but, rather, proposed that the assets previously managed by DeAMIS be managed by the Advisor utilizing the Advisor's existing resources. The Board received information related to the resources and capabilities of the Advisor in managing foreign securities.

On the basis of this evaluation and the ongoing review of investment results by the Equity Oversight Committee, the Board concluded that the nature, quality and extent of services provided by the Advisor historically have been and continue to be satisfactory. The Board noted the relative underperformance of the Fund, and took into account the factors contributing to such performance and steps being taken by the Advisor to improve performance. The Board also concluded that the Advisor has the resources and capabilities to manage the foreign securities portion of the Fund previously managed by DeAMIS.

Fees and Expenses. The Board considered the Fund's management fee rate, operating expenses and total expense ratios, and compared management fees to a peer group and total expenses to a broader peer universe based on information and data supplied by Lipper Inc. ("Lipper"). For purposes of this comparison, the Board relied on historical data compiled by Lipper for the peer funds and the Advisor's estimate of current expenses for the Fund (including the effect of the Fund's then-current expense cap). The Board noted that the Fund adopted a lower management fee schedule in connection with the acquisition of the assets and liabilities of Scudder Balanced Fund in March 2005 (the "Balanced Fund Merger"). The information provided to the Board showed that the Fund's management fee rate (taking into account the impact of the Balanced Fund Merger) was below the median of the peer group, and that the Fund's total expense ratio was below the median of the peer universe for all classes except Class R shares, the total expense ratio of which was above the median but below the fourth quartile. The Board also considered the Fund's management fee rate as compared to fees charged by the Advisor and certain of its affiliates for comparable mutual funds and for similarly managed institutional accounts. With respect to institutional accounts, the Board noted that (i) both the mix of services provided and the level of responsibility required under the Agreement were significantly greater as compared to the Advisor's obligations for similarly managed institutional accounts; and (ii) the management fees of institutional accounts are less relevant to the Board's consideration because they reflect significantly different competitive forces from those in the mutual fund marketplace. With respect to other comparable Scudder Funds, the Board considered differences in fund and fee structures among the various legacy organizations. The Board took into account the Advisor's commitment to cap total expenses through February 29, 2008 in connection with the Balanced Fund Merger.

On the basis of the information provided, the Board concluded that management fees, coupled with the expense cap, were reasonable and appropriate in light of the nature, quality and extent of services provided by the Advisor. The Board noted that although the Fund's total expense ratio for Class R shares was above the median of the peer universe, such expenses were within an acceptable range of the peer universe and consistent with reasonable expectations in light of the nature, quality and extent of services provided by the Advisor.

Profitability. The Board reviewed detailed information regarding revenues received by the Advisor under the Agreement. The Board considered the estimated costs and pre-tax profits realized by the Advisor from advising the Scudder Funds, as well as estimates of the pre-tax profits attributable to managing the Fund in particular. The Board also received information regarding the estimated enterprise-wide profitability of the Scudder organization with respect to all fund services in totality and by fund. The Board reviewed DeIM's methodology in allocating its costs to the management of the Fund. Although the Board noted the inherently subjective nature of any allocation methodology, the Board received an attestation report from an accounting firm affirming that the allocation methods were consistently applied and were based upon practices commonly used in the investment management industry. Based on the information provided, the Board concluded that the pre-tax profits realized by DeIM in connection with the management of the Fund were not unreasonable.

Economies of Scale. The Board considered whether there are economies of scale with respect to the management of the Fund and whether the Fund benefits from any economies of scale. The Board considered whether the management fee rate under the Agreement is reasonable in relation to the asset size of the Fund. The Board noted that the management fee included seven breakpoints, designed to share economies of scale with the shareholders. The Board concluded that the management fee schedule, together with the expense cap, reflects an appropriate level of sharing of any economies of scale.

Other Benefits to DeIM and Its Affiliates. The Board also considered the character and amount of other incidental benefits received by DeIM and its affiliates, including fees received by the Advisor for administrative services provided to the Fund and fees received by an affiliate of the Advisor for distribution services. The Board also considered benefits to DeIM related to brokerage and soft-dollar allocations, which pertain primarily to funds investing in equity securities. The Board considered that, during the past year, the Advisor agreed to cease allocating brokerage to acquire research services from third-party service providers. The Board concluded that management fees were reasonable in light of these fallout benefits.

Regulatory Matters. The Board also considered information regarding ongoing inquiries of the Advisor regarding market timing, late trading, and other matters by federal and state regulators and private lawsuits on related topics. Among other matters, the Board considered the Advisor's commitment to indemnify the Scudder Funds against regulatory actions or lawsuits arising from such inquiries. The Board also considered management's representation that such actions will not materially impact the Advisor's ability to perform under the Agreement or materially impact the Fund.

Based on all of the information considered and the conclusions reached, the Board (including a majority of the Independent Trustees) determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board's analysis.

Trustees and Officers

 

The following table presents certain information regarding the Trustees and Officers of the fund as of October 31, 2005. Each individual's year of birth is set forth in parentheses after his or her name. Unless otherwise noted, (i) each individual 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 individual is c/o Deutsche Asset Management, 222 South Riverside Plaza, Chicago, Illinois 60606. Each Trustee's term of office extends until the next shareholders' meeting called for the purpose of electing Trustees and until the election and qualification of a successor, or until such Trustee sooner dies, retires, resigns or is removed as provided in the governing documents of the fund.

Independent Trustees

Name, Year of Birth, Position(s) Held with the Fund and Length of Time Served1

Principal Occupation(s) During Past 5 Years and
Other Directorships Held

Number of Funds in Fund Complex Overseen

Shirley D. Peterson (1941)

Chairperson, 2004-present

Trustee, 1995-present

Retired; formerly, President, Hood College (1995-2000); prior thereto, Partner, Steptoe & Johnson (law firm); Commissioner, Internal Revenue Service; Assistant Attorney General (Tax), US Department of Justice. Directorships: Federal Mogul Corp. (supplier of automotive components and subsystems); AK Steel (steel production); Goodyear Tire & Rubber Co. (April 2004-present) ; Champion Enterprises, Inc. (manufactured home building); Wolverine World Wide, Inc. (designer, manufacturer and marketer of footwear) (April 2005-present); Trustee, Bryn Mawr College. Former Directorship: Bethlehem Steel Corp.

71

John W. Ballantine (1946)

Trustee, 1999-present

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: First Oak Brook Bancshares, Inc.; Oak Brook Bank; American Healthways, Inc. (provider of disease and care management services); Portland General Electric (utility company)

71

Lewis A. Burnham (1933)

Trustee, 1977-present

Retired; formerly, Director of Management Consulting, McNulty & Company (1990-1998); prior thereto, Executive Vice President, Anchor Glass Container Corporation

66

Donald L. Dunaway (1937)

Trustee, 1980-present

Retired; formerly, Executive Vice President, A.O. Smith Corporation (diversified manufacturer) (1963-1994)

71

James R. Edgar (1946)

Trustee, 1999-present

Distinguished Fellow, University of Illinois, Institute of Government and Public Affairs (1999-present); formerly, Governor, State of Illinois (1991-1999). Directorships: Kemper Insurance Companies; John B. Sanfilippo & Son, Inc. (processor/packager/marketer of nuts, snacks and candy products); Horizon Group Properties, Inc.; Youbet.com (online wagering platform); Alberto-Culver Company (manufactures, distributes and markets health and beauty care products)

71

Paul K. Freeman (1950)

Trustee, 2002-present

President, Cook Street Holdings (consulting); Senior Visiting Research Scholar, Graduate School of International Studies, University of Denver; 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)

71

Robert B. Hoffman (1936)

Trustee, 1981-present

Retired; formerly, Chairman, Harnischfeger Industries, Inc. (machinery for the mining and paper industries) (1999-2000); prior thereto, Vice Chairman and Chief Financial Officer, Monsanto Company (agricultural, pharmaceutical and nutritional/food products) (1994-1999). Directorships: RCP Advisors, LLC (a private equity investment advisory firm)

71

William McClayton (1944)

Trustee, 2004-present

Managing Director of Finance and Administration, DiamondCluster International, Inc. (global management consulting firm) (2001-present); formerly, Partner, Arthur Andersen LLP (1986-2001). Formerly: Trustee, Ravinia Festival; Board of Managers, YMCA of Metropolitan Chicago

71

Robert H. Wadsworth

(1940)

Trustee, 2004-present

President, Robert H. Wadsworth Associates, Inc. (consulting firm) (1983-present). Director, The European Equity Fund, Inc. (since 1986), The New Germany Fund, Inc. (since 1992), The Central Europe and Russia Fund, Inc. (since 1990). Formerly, Trustee of New York Board Scudder Funds; President and Trustee, Trust for Investment Managers (registered investment company) (1999-2002). President, Investment Company Administration, L.L.C. (1992*-2001); President, Treasurer and Director, First Fund Distributors, Inc. (June 1990-January 2002); Vice President, Professionally Managed Portfolios (May 1991-January 2002) and Advisors Series Trust (October 1996-January 2002) (registered investment companies)

* Inception date of the corporation which was the predecessor to the L.L.C.

74

John G. Weithers (1933)

Trustee, 1993-present

Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago Stock Exchange. Directorships: Federal Life Insurance Company; Chairman of the Members of the Corporation and Trustee, DePaul University; formerly, International Federation of Stock Exchanges; Records Management Systems

66

Interested Trustee and Officers2

Name, Year of Birth, Position(s) Held with the Fund and Length of Time Served1

Principal Occupation(s) During Past 5 Years and
Other Directorships Held

Number of Funds in Fund Complex Overseen

William N. Shiebler4 (1942)

Trustee, 2004-present

Vice Chairman, Deutsche Asset Management ("DeAM") and a member of the DeAM Global Executive Committee (since 2002); Vice Chairman of Putnam Investments, Inc. (1999); Director and Senior Managing Director of Putnam Investments, Inc. and President, Chief Executive Officer, and Director of Putnam Mutual Funds Inc. (1990-1999)

120

Vincent J. Esposito4 (1956)

President, 2005-present

Managing Director3, Deutsche Asset Management (since 2003); President and Chief Executive Officer of The Central Europe and Russia Fund, Inc., The European Equity Fund, Inc., The New Germany Fund, Inc. (since 2003) (registered investment companies); Vice Chairman and Director of The Brazil Fund, Inc. (2004-present); formerly, Managing Director, Putnam Investments (1991-2002)

n/a

Philip J. Collora (1945)

Vice President and Assistant Secretary, 1986-present

Director3, Deutsche Asset Management

n/a

Paul H. Schubert4 (1963)

Chief Financial Officer, 2004-present

Treasurer, 2005-present

Managing Director3, 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)

n/a

John Millette5 (1962)

Secretary, 2001-present

Director3, Deutsche Asset Management

n/a

Patricia DeFilippis4 (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)

n/a

Daniel O. Hirsch6 (1954)

Assistant Secretary, 2002-present

Consultant. Formerly, Managing Director, Deutsche Asset Management (2002-2005); Director, Deutsche Asset Management (1999-2002), Principal, BT Alex. Brown Incorporated (now Deutsche Bank Securities Inc.) (1998-1999); Assistant General Counsel, United States Securities and Exchange Commission (1993-1998); Director, Deutsche Global Funds Ltd. (2002-2004)

n/a

Elisa D. Metzger4,7 (1962)

Assistant Secretary 2005-present

Director3, Deutsche Asset Management (since September 2005); Counsel, Morrison and Foerster LLP (1999-2005)

n/a

Caroline Pearson5 (1962)

Assistant Secretary, 1998-present

Managing Director3, Deutsche Asset Management

n/a

Scott M. McHugh5 (1971)

Assistant Treasurer, 2005-present

Director3, Deutsche Asset Management

n/a

Kathleen Sullivan D'Eramo5 (1957)

Assistant Treasurer, 2003-present

Director3, Deutsche Asset Management

n/a

John Robbins4 (1966)

Anti-Money Laundering Compliance Officer, 2005-present

Managing Director3, Deutsche Asset Management (since 2005); formerly, Chief Compliance Officer and Anti-Money Laundering Compliance Officer for GE Asset Management (1999-2005)

n/a

Philip Gallo4 (1962)

Chief Compliance Officer, 2004-present

Managing Director3, Deutsche Asset Management (2003-present); formerly, Co-Head of Goldman Sachs Asset Management Legal (1994-2003)

n/a

1 Length of time served represents the date that each Trustee was first elected to the common board of Trustees which oversees a number of investment companies, including the fund, managed by the Advisor. For the Officers of the fund, the length of time served represents the date that each officer was first elected to serve as an officer of any fund overseen by the aforementioned common board of Trustees.

2 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 fund.

3 Executive title, not a board directorship

4 Address: 345 Park Avenue, New York, New York 10154

5 Address: Two International Place, Boston, Massachusetts 02110

6 Address: One South Street, Baltimore, Maryland 21202

7 Elected on November 15, 2005

The fund's Statement of Additional Information ("SAI") includes additional information about the Trustees. The SAI is available, without charge, upon request. If you would like to request a copy of the SAI, you may do so by calling the following toll-free number: 1-800-621-1048.

Account Management Resources

 

For shareholders of Classes A, B, C and Institutional Class

Automated Information Lines

ScudderACCESS (800) 972-3060

Personalized account information, information on other Scudder funds and services via touchtone telephone and for Classes A, B, and C only, the ability to exchange or redeem shares.

Web Site

scudder.com

View your account transactions and balances, trade shares, monitor your asset allocation, and change your address, 24 hours a day.

Obtain prospectuses and applications, blank forms, interactive worksheets, news about Scudder funds, subscription to fund updates by e-mail, retirement planning information, and more.

For More Information

(800) 621-1048

To speak with a Scudder service representative.

Written Correspondence

Scudder Investments

PO Box 219356
Kansas City, MO 64121-9356

Proxy Voting

A description of the fund's policies and procedures for voting proxies for portfolio securities and information about how the fund voted proxies related to its portfolio securities during the 12-month period ended June 30 is available on our Web site — scudder.com (type "proxy voting" in the search field) — or on the SEC's Web site — www.sec.gov. To obtain a written copy of the fund's policies and procedures without charge, upon request, call us toll free at (800) 621-1048.

Principal Underwriter

If you have questions, comments or complaints, contact:

Scudder Distributors, Inc.

222 South Riverside Plaza
Chicago, IL 60606-5808

(800) 621-1148

 

Class A

Class B

Class C

Institutional Class

Nasdaq Symbol

KTRAX

KTRBX

KTRCX

KTRIX

CUSIP Number

81123H-104

81123H-203

81123H-302

81123H-401

Fund Number

002

202

302

1402

 

 

For shareholders of Class R

Automated Information Lines

Scudder Flex Plan Access (800) 532-8411

24-hour access to your retirement plan account.

Web Site

scudder.com

Click "Retirement Plans" to reallocate assets, process transactions and review your funds through our secure online account access.

Obtain prospectuses and applications, blank forms, interactive worksheets, news about Scudder funds, subscription to fund updates by e-mail, retirement planning information, and more.

For More Information

(800) 543-5776

To speak with a Scudder service representative.

Written Correspondence

Scudder Retirement Services

222 South Riverside Plaza
Chicago, IL 60606-5806

Proxy Voting

A description of the fund's policies and procedures for voting proxies for portfolio securities and information about how the fund voted proxies related to its portfolio securities during the 12-month period ended June 30 is available on our Web site — scudder.com (type "proxy voting" in the search field) — or on the SEC's Web site — www.sec.gov. To obtain a written copy of the fund's policies and procedures without charge, upon request, call us toll free at (800) 621-1048.

Principal Underwriter

If you have questions, comments or complaints, contact:

Scudder Distributors, Inc.

222 South Riverside Plaza
Chicago, IL 60606-5808

(800) 621-1148

Nasdaq Symbol

KTRRX

CUSIP Number

81123H-500

Fund Number

1513

 

 

For shareholders of Class AARP and Class S

 

AARP Investment Program Shareholders

Scudder Class S Shareholders

Automated Information Lines

Easy-Access Line

(800) 631-4636

SAILTM

(800) 343-2890

 

Personalized account information, the ability to exchange or redeem shares, and information on other Scudder funds and services via touchtone telephone.

Web Sites

aarp.scudder.com

myScudder.com

 

View your account transactions and balances, trade shares, monitor your asset allocation, and change your address, 24 hours a day.

Obtain prospectuses and applications, blank forms, interactive worksheets, news about Scudder funds, subscription to fund updates by e-mail, retirement planning information, and more.

For More Information

(800) 253-2277

To speak with an AARP Investment Program service representative.

(800) SCUDDER

To speak with a Scudder service representative.

Written Correspondence

AARP Investment Program from Scudder Investments

PO Box 219735
Kansas City, MO 64121-9735

Scudder Investments

PO Box 219669
Kansas City, MO 64121-9669

Proxy Voting

A description of the fund's policies and procedures for voting proxies for portfolio securities and information about how the fund voted proxies related to its portfolio securities during the 12-month period ended June 30 is available on our Web sites — aarp.scudder.com or myScudder.com (type "proxy voting" in the search field) — or on the SEC's Web site — www.sec.gov. To obtain a written copy of the fund's policies and procedures without charge, upon request, call your service representative.

Principal Underwriter

If you have questions, comments or complaints, contact:

Scudder Distributors, Inc.

222 South Riverside Plaza
Chicago, IL 60606-5808

(800) 621-1148

 

Class AARP

Class S

Nasdaq Symbol

KTRPX

KTRSX

Fund Number

133

33

Notes

 

Notes

 

Notes

 

Notes

  


ITEM 2.         CODE OF ETHICS.

As of the end of the period, October 31, 2005, Scudder Total Return Fund has
adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies to
its Principal Executive Officer and Principal Financial Officer.

There have been no amendments to, or waivers from, a provision of the code of
ethics during the period covered by this report that would require disclosure
under Item 2.

A copy of the code of ethics is filed as an exhibit to this Form N-CSR.

ITEM 3.         AUDIT COMMITTEE FINANCIAL EXPERT.

The Fund's Board of Directors/Trustees has determined that the Fund has at least
one "audit committee financial expert" serving on its audit committee: Mr.
Donald L. Dunaway. This audit committee member is "independent," meaning that he
is not an "interested person" of the Fund (as that term is defined in Section
2(a)(19) of the Investment Company Act of 1940) and he does not accept any
consulting, advisory, or other compensatory fee from the Fund (except in the
capacity as a Board or committee member).

An "audit committee financial expert" is not an "expert" for any purpose,
including for purposes of Section 11 of the Securities Act of 1933, as a result
of being designated as an "audit committee financial expert." Further, the
designation of a person as an "audit committee financial expert" does not mean
that the person has any greater duties, obligations, or liability than those
imposed on the person without the "audit committee financial expert"
designation. Similarly, the designation of a person as an "audit committee
financial expert" does not affect the duties, obligations, or liability of any
other member of the audit committee or board of directors.

ITEM 4.         PRINCIPAL ACCOUNTANT FEES AND SERVICES.

                            SCUDDER TOTAL RETURN FUND
                      FORM N-CSR DISCLOSURE RE: AUDIT FEES

The  following  table  shows the  amount of fees that  Ernst  &  Young,  LLP
("E&Y"),  the Fund's auditor,  billed to the Fund during the Fund's last two
fiscal years. For engagements with E&Y entered into on or after May 6, 2003,
the Audit  Committee  approved  in  advance  all audit  services  and  non-audit
services that E&Y provided to the Fund.

The Audit Committee has delegated certain  pre-approval  responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).

               Services that the Fund's Auditor Billed to the Fund

--------------------------------------------------------------------------------
  Fiscal            Audit           Audit-                              All
   Year             Fees           Related           Tax Fees        Other Fees
  Ended            Billed         Fees Billed        Billed           Billed
October 31        to Fund          to Fund           to Fund          to Fund
--------------------------------------------------------------------------------
2005               $54,517           $0             $7,434               $0
--------------------------------------------------------------------------------
2004               $44,568           $0             $7,865               $0
--------------------------------------------------------------------------------

The above "Tax Fees" were  billed for  professional  services  rendered  for tax
compliance and tax return preparation.

           Services that the Fund's Auditor Billed to the Adviser and
                        Affiliated Fund Service Providers

The  following  table  shows the amount of fees  billed by  E&Y to  Deutsche
Investment Management Americas,  Inc. ("DeIM" or the "Adviser"),  and any entity
controlling,   controlled  by  or  under  common  control  with  DeIM  ("Control
Affiliate") that provides ongoing services to the Fund ("Affiliated Fund Service
Provider"),  for  engagements  directly  related  to the Fund's  operations  and
financial reporting, during the Fund's last two fiscal years.

--------------------------------------------------------------------------------
                                             Tax Fees
                     Audit-Related           Billed to             All Other
                      Fees Billed           Adviser and           Fees Billed
   Fiscal             to Adviser            Affiliated            to Adviser
    Year            and Affiliated             Fund             and Affiliated
    Ended            Fund Service             Service            Fund Service
 October 31           Providers              Providers             Providers
--------------------------------------------------------------------------------
2005                   $406,000               $70,570                 $0
--------------------------------------------------------------------------------
2004                   $281,500                 $0                    $0
--------------------------------------------------------------------------------

The  "Audit-Related  Fees"  were  billed for  services  in  connection  with the
assessment of internal controls,  agreed- upon procedures and additional related
procedures and the above "Tax Fees" were billed in connection with  consultation
services and agreed-upon procedures.


                                       1




                               Non-Audit Services

The  following  table shows the amount of fees that  E&Y  billed  during the
Fund's last two fiscal years for non-audit  services.  For  engagements  entered
into on or after May 6, 2003,  the Audit  Committee  pre-approved  all non-audit
services that E&Y  provided to the Adviser and any  Affiliated  Fund Service
Provider that related directly to the Fund's operations and financial reporting.
The Audit Committee  requested and received  information  from E&Y about any
non-audit  services that E&Y  rendered during the Fund's last fiscal year to
the Adviser and any Affiliated Fund Service Provider.  The Committee  considered
this information in evaluating E&Y's independence.

--------------------------------------------------------------------------------
                                  Total
                                Non-Audit
                              Fees billed to
                               Adviser and
                              Affiliated Fund          Total
                                Service              Non-Audit
                                Providers           Fees billed
                              (engagements           to Adviser
                                  related              and
                 Total        directly to the       Affiliated
               Non-Audit        operations         Fund Service
                 Fees         and financial         Providers
   Fiscal      Billed to        reporting           (all other      Total of
    Year         Fund          of the Fund)        engagements)     (A), (B)
    Ended
 October 31       (A)             (B)                  (C)           and (C)
--------------------------------------------------------------------------------
2005            $7,434         $70,570             $33,307           $111,311
--------------------------------------------------------------------------------
2004            $7,685            $0              $386,601           $394,466
--------------------------------------------------------------------------------

All other  engagement  fees were  billed for  services in  connection  with risk
management  and  process  improvement  initiatives  for DeIM and  other  related
entities that provide support for the operations of the fund.

                                       ***

E&Y  recently advised the Fund's Audit Committee that various E&Y member
firms  provided  certain  non-audit  services  to  Deutsche  Bank  entities  and
affiliates  (collectively,  the "DB entities")  between 2004 and 2005 that raise
issues under the SEC auditor  independence rules. The DB entities are within the
"Investment  Company Complex" (as defined by SEC rules) and therefore covered by
the SEC auditor independence rules applicable to the Fund.

E&Y advised the Audit  Committee that in connection  with providing  monthly
payroll  services to employees of certain DB entities  from May 2003 to February
2005,  a member  firm in Chile  ("E&Y  Chile")  received  funds  from the DB
entities  that went into an E&Y  trust  account and were used to pay the net
salaries and social security taxes of executives of the DB entities. E&Y has
advised the Audit  Committee  that handling those funds was in violation of Rule
2-01 of Regulation S-X.


                                       2


E&Y also  advised the Audit  Committee  that in  connection  with  providing
certain  services in  assisting a DB entity with  various  regulatory  reporting
requirements,  a  member  firm in  France  ("E&Y  France")  entered  into an
engagement with the DB entity that resulted in E&Y France staff  functioning
under the direct responsibility and direction of a DB entity supervisor. E&Y
advised the Audit Committee that, although the services provided were "permitted
services" under Rule 2-01 of Regulation S-X, the structure of the engagement was
in violation of Rule 2-01 of Regulation S-X. (Rule 2-01(c)(4)(vi)  provides that
an  accountant's  independence is impaired if the accountant acts as an employee
of an audit client.)

The Audit  Committee  was informed  that E&Y  Chile  received  approximately
$11,724 and E&Y France received approximately $100,000 for the services they
provided  to the DB  entities.  E&Y  advised  the  Audit  Committee  that it
conducted  an  internal  review of the  situation  and, in view of the fact that
similar expatriate tax compliance  services were provided to a number of E&Y
audit clients  unrelated to DB or the Fund,  E&Y has advised the SEC and the
PCAOB of the  independence  issues arising from those services.  E&Y advised
the Audit  Committee  that E&Y  believes  its  independence  as  independent
registered  public  accounting  firm for the Fund was not  impaired  during  the
period the services were provided. In reaching this conclusion,  E&Y noted a
number of factors, including that none of the E&Y personnel who provided the
non-audit  services to the DB entities  were  involved in the provision of audit
services  to the Fund,  the  E&Y  professionals  responsible  for the Fund's
audits were not aware that these  non-audit  services  took place,  and that the
fees charged were not  significant to E&Y  overall or to the fees charged to
the  Investment  Company  Complex.  E&Y also noted that E&Y  Chile is no
longer providing these services and that the E&Y France  engagement has been
restructured.




                                       3


ITEM 5.         AUDIT COMMITTEE OF LISTED REGISTRANTS

                Not Applicable

ITEM 6.         SCHEDULE OF INVESTMENTS

                Not Applicable

ITEM 7.         DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
                CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

                Not Applicable

ITEM 8.         PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

                Not applicable.

ITEM 9.         PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
                INVESTMENT COMPANY AND AFFILIATED PURCHASERS

                Not Applicable.

ITEM 10.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The primary function of the Nominating and Governance Committee is to identify
and recommend individuals for membership on the Board and oversee the
administration of the Board Governance Procedures and Guidelines. Shareholders
may recommend candidates for Board positions by forwarding their correspondence
by U.S. mail or courier service to the Fund's Secretary for the attention of the
Chairman of the Nominating and Governance Committee, Two International Place,
Boston, MA 02110. Suggestions for candidates must include a resume of the
candidate.

ITEM 11.        CONTROLS AND PROCEDURES.

(a) The Chief Executive and Financial Officers concluded that the Registrant's
Disclosure Controls and Procedures are effective based on the evaluation of the
Disclosure Controls and Procedures as of a date within 90 days of the filing
date of this report.

(b) There have been no changes in the registrant's internal control over
financial reporting that occurred during the registrant's last half-year (the
registrant's second fiscal half-year in the case of the annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal controls over financial reporting.

ITEM 12.        EXHIBITS.

(a)(1)   Code of Ethics  pursuant to Item 2 of Form N-CSR is filed and  attached
         hereto as EX-99.CODE ETH.

(a)(2)   Certification  pursuant to Rule 30a-2(a) under the  Investment  Company
         Act of 1940 (17 CFR  270.30a-2(a))  is filed  and  attached  hereto  as
         Exhibit 99.CERT.

(b)      Certification  pursuant to Rule 30a-2(b) under the  Investment  Company
         Act of 1940 (17 CFR  270.30a-2(b))  is furnished and attached hereto as
         Exhibit 99.906CERT.




Form N-CSR Item F

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

Registrant:                         Scudder Total Return Fund


By:                                 /s/Vincent J. Esposito
                                    --------------------------
                                    Vincent J. Esposito
                                    President

Date:                               January 3, 2006


Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Registrant:                         Scudder Total Return Fund


By:                                 /s/Vincent J. Esposito
                                    --------------------------
                                    Vincent J. Esposito
                                    President

Date:                               January 3, 2006



By:                                 /s/Paul Schubert
                                    --------------------------
                                    Paul Schubert
                                    Chief Financial Officer and Treasurer

Date:                               January 3, 2006