JAPAN FUND INC
485BPOS, 1995-04-21
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      Filed with the Securities and Exchange Commission on April 21, 1995.

                                                            File No. 33-13863
                                                            File No. 811-1090

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

         Pre-Effective Amendment No. ____         

         Post-Effective Amendment No. 8     

                                      and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

         Amendment No.     19     

                              The Japan Fund, Inc.
               (Exact Name of Registrant as Specified in Charter)

                      345 Park Avenue, New York, NY 10154
              (Address of Principal Executive Offices) (Zip Code)

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

                              Thomas F. McDonough
                         Scudder, Stevens & Clark, Inc.
                   Two International Place, Boston, MA 02110
                    (Name and Address of Agent for Service)

             It is proposed that this filing will become effective

           ____  immediately upon filing pursuant to paragraph (b)

            X    on May 1, 1995 pursuant to paragraph (b)

           ____  60 days after filing pursuant to paragraph (a)(i)

           ____  on  __________________________  pursuant to paragraph (a)(i)

           ____  75 days after filing pursuant to paragraph (a)(ii)

           ____  on __________________________  pursuant to paragraph (a)(ii)
                 of Rule 485.

If appropriate, check the following:

          ____  this post-effective amendment designates a new effective date 
                for a previously filed post-effective amendment

The  Registrant  has filed a declaration  registering  an  indefinite  amount of
securities  pursuant to Rule 24f-2 under the Investment  Company Act of 1940, as
amended.  The  Registrant  filed the notice  required by Rule 24f-2 for its most
recent fiscal year ended December 31, 1994 on February 28, 1995.


<PAGE>


                              THE JAPAN FUND, INC.
                             CROSS-REFERENCE SHEET

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

PART A

        No.          Item Caption                       Prospectus Caption
        <S>          <C>                                <C>

        1.           Cover Page                         COVER PAGE

        2.           Synopsis                           EXPENSE INFORMATION

        3.           Condensed Financial Information    FINANCIAL HIGHLIGHTS

        4.           General Description of             INVESTMENT OBJECTIVE, POLICIES AND STRATEGIES
                     Registrant                         Risk factors, Fund organization

        5.           Management of the Fund             FUND ORGANIZATION--Investment advisers; Transfer agent,
                                                        dividend-paying and shareholder service agent;
                                                        Distributor; Custodian and sub-custodian
                                                        SHAREHOLDER SERVICES--A team approach to investing

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

        6.           Capital Stock and Other            SHAREHOLDER SERVICES--Shareholder inquiries
                     Securities                         DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and
                                                        capital gain distributions
                                                        TRANSACTION INFORMATION--Tax information
                                                        SHAREHOLDER SERVICES--Dividend reinvestment plan

        7.           Purchase of Securities Being       PURCHASES AND REDEMPTIONS
                     Offered                            TRANSACTION INFORMATION
                                                        SHAREHOLDER SERVICES--Investment flexibility, Low minimum
                                                        investment, Dividend reinvestment plan
                                                        FUND ORGANIZATION--Distributor

        8.           Redemption or Repurchase           PURCHASES AND REDEMPTIONS
                                                        TRANSACTION INFORMATION

        9.           Pending Legal Proceedings          NOT APPLICABLE
</TABLE>





                                       1
<PAGE>


<TABLE>
<CAPTION>

PART B

                                                       Caption in Statement of
    Item No.        Item Caption                       Additional Information
     <S>            <C>                                <C>

       10.          Cover Page                         COVER PAGE

       11.          Table of Contents                  TABLE OF CONTENTS

       12.          General Information and History    JAPAN AND THE JAPANESE ECONOMY

       13.          Investment Objectives and          INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
                    Policies

       14.          Management of the Fund             FUND ORGANIZATION
                                                       DIRECTORS AND OFFICERS
                                                       REMUNERATION

       15.          Control Persons and Principal      FUND ORGANIZATION
                    Holders of Securities              DIRECTORS AND OFFICERS

       16.          Investment Advisory and Other      INVESTMENT ADVISORY ARRANGEMENTS
                    Services                           ADDITIONAL INFORMATION--Experts, Public Official Documents,
                                                       Other Information

       17.          Brokerage Allocation               BROKERAGE AND PORTFOLIO TURNOVER

       18.          Capital Stock and Other            FEATURES AND SERVICES OFFERED BY THE FUND--Dividend
                    Securities                         Reinvestment Plan
                                                       FUND ORGANIZATION

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

       20.          Tax Status                         TAXES--United States Federal Income Taxation, Japanese
                                                       Taxation

       21.          Underwriters                       DISTRIBUTOR

       22.          Calculations of Yield              NOT APPLICABLE
                    Quotations of Money Market Funds

       23.          Financial Statements               FINANCIAL STATEMENTS
</TABLE>



                                       2
<PAGE>
     This prospectus sets forth concisely the information about The Japan Fund,
Inc.,    an open-end management investment company    , that a prospective
investor should know before investing. Please retain it for future reference.

     If you require more detailed information, a Statement of Additional
Information dated May 1,    1995    , as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103, care of The Japan Fund Service
Center or calling 1-800-53-JAPAN. The Statement of Additional Information has
been incorporated by reference into this prospectus and has been filed with the
Securities and Exchange Commission.

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

Contents

Expense information                                                   2

Financial highlights                                                  3

Shareholder benefits                                                  4

Investment objective                                                  4
          
Investment policies                                                   4

Investment strategies                                                 4

Why invest in the Fund?                                               5

Additional information about investment policies and strategies       6

Risk factors                                                          7

Investment results                                                    10

Distribution and performance information                              14    

Fund organization                                                     14

Purchases and redemptions                                             16    

Transaction information                                               19    

Shareholder services                                                  20

Tax-advantaged retirement plans                                       22    

The Scudder Family of Funds                                           23    

How to contact The Japan Fund                                    Back cover

Directors and officers                                           Back cover

Distributor: Scudder Investor Services, Inc.

THE JAPAN FUND, INC.
PROSPECTUS
MAY 1,    1995    

*    Offering opportunities for long-term capital appreciation by investing
     primarily in the equity securities of Japanese companies.

*    A pure no-load(tm) mutual fund with no commissions to buy, sell or exchange
     shares.

   Scudder, Stevens & Clark, Inc.
Investment Adviser    

<PAGE>
Expense information

How to compare The Japan Fund, Inc.

This information is designed to help you understand the various costs and
expenses of investing in The Japan Fund, Inc. (the "Fund"). By reviewing this
table and those in other mutual funds' prospectuses, you can compare the Fund's
fees and expenses with those of other funds. With The Japan Fund, Inc., you pay
no commissions to purchase or redeem your shares. As a result, all of your
investment goes to work for you.

1)   Shareholder transaction expenses: Expenses charged directly to your
     individual account in the Fund for various transactions.




     Sales commissions to purchase shares ("sales           NONE
     load")
     Commissions to reinvest dividends                      NONE
     Deferred sales load                                    NONE
     Redemption fees                                        NONE*
     Fees to exchange shares                                NONE

2)   Annual Fund operating expenses: Expenses paid by the Fund before it
     distributes its net investment income, expressed as a percentage of the
     Fund's average daily net assets for the year ended December 31,
        1994    .

     Investment management fees                             0.73    %
     12b-1 fees                                             NONE
     Other expenses                                         0.35    %
                                                           ------
     Total Fund operating expenses                          1.08    %
                                                           ======

Example



Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)

         1 Year        3 Years        5 Years        10 Years
        -------        -------        -------        -------
       $   11         $   34         $   60        $   132    

See "Fund organization_Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.



*    You may redeem by writing or calling the Fund. If you wish to receive
     your redemption proceeds via wire, there is a $5 wire service fee. For
     additional information, please refer to "Purchases and redemptions."
       



                                       2
<PAGE>

Financial highlights

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements. Prior to August 14, 1987, The Japan Fund, Inc. was operated as a
closed-end, diversified management investment company. Since August 14, 1987,
The Japan Fund, Inc. has operated as an open-end, diversified management
investment company, commonly known as a "mutual fund." Accordingly, except with
respect to information for the period January 1,    1985     to August 14, 1987,
the data set forth below reflect the investment performance of the Fund as a
mutual fund rather than a closed-end investment company.

If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated December 31,    1994     and may be obtained without
charge by writing or calling Scudder Investor Services, Inc.

The following information has been audited by Price Waterhouse    LLP    ,
independent accountants, whose unqualified report thereon is included in the
Annual Report to Shareholders, which is included in the Statement of Additional
Information. The financial highlights should be read in conjunction with the
financial statements and notes thereto included in the Annual Report.

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                               --------------------------------------------------------------------------------------
                                 1994(a)    1993(a)    1992    1991    1990    1989    1988    1987     1986(a) 1985(a)
                               --------------------------------------------------------------------------------------
<S>                            <C>         <C>       <C>     <C>     <C>     <C>     <C>     <C>      <C>     <C>
   
Net asset value,
 beginning of period. . . .    $10.33      $8.90     $10.69  $10.76  $14.27  $16.24  $16.97  $20.28   $15.53  $12.60
                               ------      -----     ------  ------  ------  ------  ------  ------   ------  ------
Income from investment
 operations:
 Net investment
   income (loss)  . . . . .      (.05)      (.05)      (.05)   (.03)    .09     .04     .04     .16      .10     .08
 Net realized and
   unrealized gain
   (loss) on
   investments  . . . . . .      1.07       2.15      (1.74)    .37   (2.41)   1.66    3.13    5.81     9.34    4.28
                               ------      -----      ------  -----   ------  -----   -----   -----    -----   -----
Total from investment
 operations   . . . . . . .      1.02       2.10      (1.79)    .34   (2.32)   1.70    3.17    5.97     9.44    4.36
                               ------      -----      ------  -----   ------  -----   -----   -----    -----   ------
Less distributions from:
 Net investment
   income . . . . . . . . .        --         --         --      --    (.09)   (.08)   (.02)   (.20)    (.02)   (.07)
 In excess of net                                     
   investment income. . . .        --       (.28)        --      --      --      --      --      --       --      --
 Net realized gains on
   investment transactions.      (.80)      (.39)        --    (.41)  (1.10)  (3.59)  (3.88)  (9.08)   (4.67)  (1.36)
 In excess of net
   realized gains . . . . .      (.05)        --         --      --      --      --      --      --       --      --
                               -------    ------     ------   ------  ------ ------  ------  ------   ------  ------
Total distributions . . . .      (.85)      (.67)        --    (.41)  (1.19)  (3.67)  (3.90)  (9.28)   (4.69)  (1.43)
                               -------    ------     ------   ------  ------ ------  ------  ------   ------  ------
Net asset value,
 end of period  . . . . . .    $10.50     $10.33      $8.90   $10.69 $10.76  $14.27  $16.24  $16.97   $20.28  $15.53
                               =======    ======     ======   ====== ======= ======  ======  ======   ======  ======
TOTAL RETURN (%)  . . . . .     10.03      23.64     (16.74)    3.11 (16.36)  11.63   19.40   33.01    77.54   38.89
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
 period ($ millions). . . .       586        471        409     335     313     401     404     394      584     360
Ratio of operating
 expenses to average
 net assets (%)   . . . . .      1.08       1.25       1.42    1.26    1.05    1.02    1.01     .90      .70     .64
Ratio of net investment
 income (loss) to
 average net
 assets (%)   . . . . . . .      (.40)      (.47)      (.31)   (.15)    .72     .34     .28     .41      .51     .63
Portfolio turnover             
 rate (%)   . . . . . . . .      74.3       81.7       47.0    46.4    52.7    60.4    38.8    34.0     38.2    23.9
    
<FN>
(a)  Per share amounts have been calculated using weighted average shares outstanding.
</FN>
</TABLE>



                                       3
<PAGE>


Shareholder benefits

*    broad and diversified investment portfolio

*    active professional management by Scudder, Stevens & Clark, Inc.

*    no sales charges or Rule 12b-1 distribution charges; a pure no-load,,
     fund

*    shares redeemable at net asset value at any time with no redemption
     charge

*    individual attention from a Japan Fund Service Specialist (8 a.m.-
        8     p.m. eastern time, Monday-Friday) at the toll-free number
     1-800-53-JAPAN

*    optional participation in the Scudder Family of Funds, a group of pure
     no-load,, mutual funds managed by Scudder, Stevens & Clark, Inc.

*    $1,000 minimum initial investment

Investment objective

     The investment objective of The Japan Fund, Inc. (the "Fund"),    a
diversified mutual fund    , is long-term capital appreciation, which it seeks
to achieve by investing primarily in equity securities (including American
Depositary Receipts) of Japanese companies. Equity securities are defined as
common and preferred stock, debt securities convertible into common stock
(sometimes referred to as "convertible debentures") and common stock purchase
warrants.

     There can be no assurance that the Fund's objective will be met. The Fund's
objective is a fundamental investment policy and may not be changed without
shareholder approval.

Investment policies

     Unless otherwise noted, the investment policies of the Fund are
non-fundamental and may be changed by the Fund's Board of Directors without
shareholder approval. Shareholders will, however, receive written notice of any
changes in these policies.

     Under normal conditions, the Fund will invest at least 80% of its assets in
Japanese securities, that is, securities issued by entities that are organized
under the laws of Japan ("Japanese companies"), securities of affiliates of
Japanese companies, wherever organized or traded, and securities of issuers not
organized under the laws of Japan but deriving 50% or more of their revenues
from Japan. These securities may include debt securities (Japanese government
debt securities and debt securities of Japanese companies) when the Fund's
adviser believes that the potential for capital appreciation from investment in
debt securities equals or exceeds that available from investment in equity
securities.

Investment strategies

     The Fund currently intends to focus its investments in select Japanese
companies, whether large or small, that have an active market for their shares
and that show a potential for greater-than-average growth. These companies may
be situated in the post-industrial sectors of the economy, sensitive to consumer
demand, technology-driven, and globally competitive, including companies that
are sharing in the rapid growth of Japan's Asia-Pacific neighbors. The Fund
anticipates that most equity securities of Japanese companies in which it
invests, either directly or indirectly by means of American Depositary Receipts
or convertible debentures, will be listed on securities exchanges in Japan. The
Fund may also invest    up to 30% of its net assets     in equity securities of
Japanese companies which are traded in an over-the-counter market.    These are
generally securities of relatively small or little-known companies that the


                                       4
<PAGE>

Fund's investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser")
believes have above-average earnings growth potential. When evaluating an
individual company for the purpose of stock selection, the Fund's Adviser takes
into consideration, among other factors, the size of the company; the depth and
quality of management; a company's product line, business strategy or
competitive position in its industry; marketing and technical strengths;
research and development efforts; financial strength, including degree of
leverage; cost structure; revenue and earnings growth potential; price-earnings
ratios and other stock valuation measures.    

     The Fund may invest up to 20% of its assets in cash or in short-term
government or other short-term prime obligations in order to have funds readily
available for general corporate purposes, including the payment of operating
expenses, dividends and redemptions, or the investment in securities through
exercise of rights or otherwise, or in repurchase agreements in order to earn
income for periods as short as overnight. Where the    Adviser     determines
that market or economic conditions so warrant, the Fund may, for temporary
defensive purposes, invest more than 20% of its assets in cash or such
securities. For instance, there may be periods when changes in market or other
economic conditions, or in political conditions, will make advisable a reduction
in equity positions and increased commitments in cash or corporate debt
securities, whether or not Japanese, or in the obligations of the Government of
the United States or of Japan or of other governments.

Why invest in the Fund?

     The Japan Fund, Inc. is the oldest and largest U.S. mutual fund investing
primarily in Japan. With the second largest GNP in the world and its stock
exchanges comprising over 25% of the world's equity market, Japan represents a
significant part of global investment opportunities. Japan is not only the
producer of high-quality automobiles, computers, televisions, VCRs and stereos,
but is also home to some of the world's largest securities firms, utility
companies and banks. Japan's long-term record of growth is outstanding, and the
Fund believes that its economy and that of its neighbors in which some Japanese
companies participate offer further substantial growth opportunities in the long
term.

     Over the past 30 years Japan has experienced significant economic
development. During the era of high economic growth in the 1960s and early 1970s
the expansion was based on the development of heavy industries such as steel and
shipbuilding. In the 1970s Japan moved into assembly industries which employ
high levels of technology and consume relatively low quantities of resources,
and since then Japan has become a major producer of electrical and electronic
products and automobiles.

     While it would be highly unlikely that Japan's economy will continue to
grow at the same phenomenal rates seen in the 1960s, 1970s and 1980s, it should
continue to offer investors many attractive investment opportunities. Japan is
now in a major transition toward becoming a domestic-led economy, driven in
large part by one of the world's highest average per capita incomes, above-
average savings rates, and a rise in leisure spending. In addition to a growing
domestic market, the economy should also benefit from a continuing
high-technology focus, above-average capital spending, and established ties to
markets in the high-growth economies of Asia and the Pacific. As a result,
select Japanese securities continue to offer above-average growth potential for
investors willing to assume the risks associated with investing in Japan.

     Investors undertaking direct foreign investments in Japan often encounter
complications and extra costs. They may find it difficult to make purchases and


                                       5
<PAGE>

sales, to obtain current information, to hold securities in safekeeping and to
convert the value of their investments from yen into dollars. The Fund manages
these problems for the investor. With a single investment, the investor has a
diversified portfolio which is managed by experienced professionals. The
management of the Fund has extensive experience dealing in the Japanese market
and with Japanese brokers and custodian banks. The management has the benefit of
established information sources and believes the Fund affords an efficient and
cost-effective method of investing in Japan.

Additional information about investment policies and strategies

Investment restrictions

The Fund may not, without shareholder approval:

*    borrow money except as a temporary measure for extraordinary or emergency
     purposes or except in connection with reverse repurchase agreements
     provided that the Fund maintains asset coverage of 300% for all borrowings;
     or

*    make loans to other persons, except (a) loans of portfolio securities, and
     (b) to the extent the entry into repurchase agreements and the purchase of
     debt securities in accordance with its investment objective and investment
     policies may be deemed to be loans.

     In addition, as a matter of nonfundamental policy, the Fund may not invest
more than 10% of its net assets        in securities which are not readily
marketable,    restricted securities and     repurchase agreements maturing in
more than seven days. The Fund may not invest more than 5% of its total assets
in restricted securities.

     Please refer to the Statement of Additional Information for a listing of
the Fund's other investment restrictions.

Debt securities

     The debt securities in which the Fund may invest for cash management
purposes are short-term government or other short-term prime obligations (i.e.,
high-quality debt obligations maturing not more than one year from the date of
issuance). All other debt securities in which the Fund invests are rated no
lower than BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors Service,
Inc. ("Moody's") or, if unrated, are of equivalent quality as determined by the
Fund's adviser. The Fund intends to continue these practices with respect to
investment in debt securities in the future.

Repurchase agreements

     As a means of earning income for periods as short as overnight, the Fund
may enter into repurchase agreements with selected banks and broker/dealers.
Under a repurchase agreement, the Fund acquires securities, subject to the
seller's agreement to repurchase    them     at a specified time and price.

Convertible securities

     The Fund may invest in convertible securities which are securities that may
be converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. Convertible securities may offer higher
income than the common stocks into which they are convertible. The convertible
securities in which the Fund may invest include bonds, notes, debentures,
preferred stocks and other securities convertible into common stocks and may be
fixed-income or zero coupon debt securities. Prior to their conversion,
convertible securities may have characteristics similar to nonconvertible debt
securities.

Strategic Transactions    and derivatives    

     The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest


                                       6
<PAGE>

rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of
   fixed-income securities     in the Fund's portfolio or to enhance potential
gain.    These strategies may be executed through the use of derivative
contracts.     Such strategies are generally accepted as    a part of     modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.

     In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").

     Strategic Transactions may be used    without limit     to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of
   fixed-income securities     in the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. Some Strategic Transactions may also be used to
enhance potential gain although no more than 5% of the Fund's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these strategic transactions may be used at any time    and in any
combination    , and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes. Please refer to "Risk
factors--Strategic Transactions    and derivatives    " for more information.

Risk factors

     Investors should consider the following factors inherent in investment in
Japan.

Trade issues

     Because of the concentration of Japanese exports in highly visible products
such as automobiles, machine tools and semiconductors, and the large trade
surpluses ensuing therefrom, Japan is in a difficult phase in its relations with
its trading partners, particularly the United States, where the trade imbalance
is the greatest. Japan's trade surplus increased to $   146     billion in
   1994     from $   141     billion in    1993    .

Currency factors

     Over a long period of years, the yen has generally appreciated in relation
to the dollar. The yen's appreciation has added to the returns of dollars
invested through the Fund in Japan. A decline in the value of the yen would have
the opposite effect, adversely affecting the value of the Fund in dollar terms.


                                       7
<PAGE>

The Japanese Stock Market

     Like other stock markets, the Japanese stock market can be volatile. For
example, the Japanese stock market, as measured by the Tokyo Price Index
(TOPIX), increased by over 500% during the ten-year period ended December 31,
1989, reaching its high of 2884.80 on December 18, 1989, and it has declined by
over    45    % since that time, falling to 1   559.09     on December 30,
   1994    . This decline has had an adverse effect on the availability of
credit and on the value of the substantial stock holdings of Japanese
companies   ,     in particular, Japanese banks, insurance companies and other
financial institutions. This in turn has contributed to the recent weakness in
Japan's economy. A continuation or recurrence of a Japanese stock market decline
could have an adverse impact throughout Japan's economy.

     In the first quarter of 1994, some economic indicators such as housing
starts and sales of electronic appliances signaled a long-awaited economic
recovery. The TOPIX rose 8.61% in yen terms in the last quarter of 1993 as
prospects for an earnings recovery began to be discounted, despite a surge in
ten-year government bond yields from 3% in 1993 to 4% by the end of the first
quarter of 1994. While the timing and the speed of an economic recovery is still
uncertain, the Fund has added positions in areas where sales trends are
beginning to bottom out such as electronics, precision and machinery.

     The common stocks of many Japanese companies continue to trade at high
price-earnings ratios even after the recent market decline. Differences in
accounting methods make it difficult to compare the earnings of Japanese
companies with those of companies in other countries, especially the U.S. In
general, however, reported net income in Japan is understated relative to U.S.
accounting standards and this is one reason why price-earnings ratios of the
stocks of Japanese companies have tended historically to be higher than those
for U.S. stocks. In addition, Japanese companies have tended historically to
have higher growth rates than U.S. companies and Japanese interest rates have
generally been lower than in the U.S., both of which factors tend to result in
lower discount rates and higher price-earnings ratios in Japan than in the U.S.

Investment in foreign securities

     Investments in foreign securities involve special considerations due to
more limited information, higher brokerage costs, different accounting
standards, thinner trading markets    as compared to domestic markets     and
the likely impact of foreign taxes on the income from debt securities. They may
also entail certain other risks, such as the possibility of one or more of the
following: imposition of dividend or interest withholding or confiscatory taxes;
currency blockages or transfer restrictions; expropriation, nationalization or
other adverse political or economic developments; less government supervision
and regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Purchases of foreign
securities are usually made in foreign currencies and, as a result, the Fund may
incur currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar.

Further, it may be more difficult for the Fund's agents to keep currently
informed about corporate actions which may affect the prices of portfolio
securities. Communications between the United States and foreign countries may
be less reliable than within the United States, thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. The Fund's ability and decisions to purchase and sell
portfolio securities may be affected by laws or regulations relating to the
convertibility of currencies and repatriation of assets. The management of the


                                       8
<PAGE>

Fund seeks to mitigate the risks associated with these considerations through
diversification and professional management.

Other factors

     The Fund is also susceptible to a relatively turbulent political
environment which affects issuers located in Japan and the surrounding Pacific
Basin region. For example, in 1992, a major power broker in the Liberal
Democratic Party ("LDP") was forced to step down for allegedly dealing with
gangsters. This resignation threw factional political alignments into disarray
and hastened the passage of power temporarily to a new generation of LDP
politicians. Public disapproval of official improprieties created a move toward
reform of the political system. In 1993, a seven-party alliance was formed to
endorse a non-LDP coalition government. Three substantial economic stimulus
programs were put into place in 1993, and in 1994 a personal income tax cut of
considerable magnitude and a major political reform bill were announced.

     The following are descriptions of some additional investment risks the Fund
may entail, depending upon the composition of its portfolio at any given time.

     Investing in small company securities. The securities of small companies
are often traded over-the-counter and may not be traded in the volumes typical
on a national securities exchange. Consequently, in order to sell this type of
holding, the Fund may need to discount the securities from recent prices or
dispose of the securities over a long period of time. The prices of this type of
security may be more volatile than those of larger companies which are often
traded on a national securities exchange.

   
     The investment risk associated with these companies is higher than that
normally associated with larger, older companies due to the greater business
risks of small size, including limited product lines, distribution channels and
financial and managerial resources. Further, there is typically less publicly
available information concerning smaller companies than for larger, more
established ones.    

     Debt securities. Securities rated BBB by S&P or Baa by Moody's are neither
highly protected nor poorly secured. These securities normally pay higher yields
but involve potentially greater price variability than higher-quality
securities. These securities are regarded as having adequate capacity to repay
principal and pay interest, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to do so. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics.

     Repurchase agreements. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of securities under a
repurchase agreement before repurchase of the securities, the Fund may encounter
delay and incur costs including a decline in value of the securities before
being able to sell the securities.

     Convertible securities. While convertible securities generally offer lower
yields than nonconvertible debt securities of similar quality, their price may
increase if the value of the underlying common stock increases. Conversely,
their price may decrease, but to a lesser extent, if the value of the underlying
common stock decreases. Convertible securities entail less credit risk than the
issuer's common stock.

     Strategic Transactions    and derivatives    . Strategic Transactions,
   including derivative contracts    , have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the Fund management's view as to certain market movements is incorrect,
the risk that the use of such Strategic Transactions could result in losses
greater than if they had not been used. Use of put and call options may result
in losses to the Fund, force the sale or purchase of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or


                                       9
<PAGE>

lower than (in the case of call options) current market values, limit the amount
of appreciation the Fund can realize on its investments or cause the Fund to
hold a security it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors including
the imposition of exchange controls, suspension of settlements, or the inability
to deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.

Investment results

     The Fund is designed for long-term investors who can accept international
stock-market risk. The value of the Fund's portfolio securities fluctuates with
market and economic conditions, causing Fund shares to fluctuate in value. In
addition, the Fund's investments are denominated in yen, the value of which
continually changes in relation to the dollar. This varying relationship will
also affect the value of the Fund's shares. Depending on when you sell your
shares, their value may be higher or lower than when you purchased them. In
return for accepting stock-market risk, you may earn a greater return on your
investment than from a money-market or income fund.

     The first table on page    11     shows percent change in the Fund's net
asset value per share for the past ten years. The second table on page    11    
presents the total returns earned by an assumed investment of $10,000 in the
Fund over the one-, five- and ten-year periods ended December 31,    1994    .
The chart and related table beginning on page    12     show the history of a
$10,000 investment in the Fund's shares made at the initial public offering
price in 1962, assuming reinvestment of capital gains and income distributions.


                                       10
<PAGE>

     Except with respect to information pertaining to the period August 14,
1987, to December 31, 1994, the following tables present investment results of
the Fund when it operated as a closed-end investment company and are included
for informational purposes only. Investors should note that the investment
results of the Fund when operated as an open-end investment company as described
herein may vary from the results set forth below.

                             Annual capital changes


                      Net Asset                    Capital Gains    Capital 
       December 31,   Value/Share     Dividends    Distributions    Change
          1984           12.60            _             _              _        
          1985           15.53          $0.07        $1.36           38.07%
          1986           20.28           0.02         4.67           77.30
          1987           16.97           0.20         9.08           31.86
          1988           16.24           0.02         3.88           19.28
          1989           14.27           0.08         3.59           11.09
          1990           10.76           0.09         1.10          -17.81
          1991           10.69             _          0.41            3.11
          1992           8.90              _            _           -16.74
          1993           10.33           0.28         0.39           20.47
          1994           10.50             _          0.85            9.87

                         Growth of a $10,000 Investment

   Years Ended         Value of Initial          Cumulative       Average Annual
December 31, 1994     $10,000 Investment        Total Return       Total Return

     
     
     One Year               $11,003                10.03%            10.03%
     Five Years               9,768                -2.32             -0.47
     Ten Years               42,701                15.62             15.62 
    

*    "Capital Change" measures the return from capital, including reinvestment
     of any capital gains distributions, and does not include the reinvestment
     of income dividends.

*    "Growth of a $10,000 Investment" assumes dividends and capital gains
     distributions, if any, were reinvested.

*    These results are not intended to indicate future investment
     performance.


                                       11
<PAGE>


                           THE JAPAN FUND, INC.
                           INVESTMENT PERFORMANCE
             History of a $10,000 Investment in Stock Assuming
          Reinvestment of Capital Gains and Income Distributions


   
                    Income         Capital Gains         Net Asset
                   Dividends       Distributions         Value of
                   Reinvested       Reinvested       Initial Investment
                         0           10000                10000
                      9240               0                 9240
                      8016             376                 8671
                      8033             377                 9073
                       532           13465                11328
                       569           14979                12120
                      1099           15437                11633
                      4339           25690                16327
                     11406           57081                33912
                      9500           36430                19176
                     19769           56425                24168
                     35741           97493                39744
                     31357           77138                28032
                     33149           73741                22056
                     49813          104143                27048
                     65599          133458                31440
                     66110          130772                27720
                    109337          211121                38976
                     90296          169675                27192
                    122689          225249                30840
                    148419          270555                33024
                    153181          275642                28800
                    198646          355661                33360
                    195911          349335                30240
                    274986          485179                37272
                    504968          861411                48672
                    689290         1145732                40728
                    831796         1368049                38976
                    933110         1527089                34248
                    769292         1277244                25824
                    794208         1316999                25656
                    661221         1096472                21360
                    797519         1355675                24792
    


Key Assumptions

*    The data have been adjusted to reflect a three-for-one stock split in April
     1970.

*    Investment income distributions prior to 1978 are assumed to have been
     reinvested at the mean market price on the ex-dividend date. Investment
     income distributions subsequent to 1977 and all capital gains distributions
     are assumed to have been reinvested at the lower of the mean market price
     or net asset value on the ex-dividend date of the respective distribution.

*    The two capital stock rights offerings of the Fund, in July 1963 and May
     1975, have been treated as capital gain distributions, the value of which
     was determined by reference to the individual right's market value on the
     date of issuance. It is assumed that all rights were sold in the open
     market and the resultant proceeds were reinvested in the Fund at the mean
     market price on the date of the right's issuance without giving effect to
     transaction costs.

*    No adjustments have been made for income taxes.

*    Initial $10,000 investment was made at initial public offering price.



                                       12
<PAGE>

                        Net Asset                          Income       Total 
        End of       Value Initial    Capital Gains      Dividends    Net Asset
         Year          Investment      Distribution     Reinvested      Asset
                                                   
   
         4/62*        $   10,000                                      $   10,000
         1962              9,240      $        0      $        0           9,240
         1963              8,016             376             279           8,671
         1964              8,033             377             663           9,073
         1965             11,328             532           1,605          13,465
         1966             12,120             569           2,290          14,979
         1967             11,633           1,098           2,707          15,438
         1968             16,327           4,339           5,023          25,689
         1969             33,912          11,406          11,764          57,082
         1970             19,176           9,500           7,754          36,430
         1971             24,168          19,769          12,488          56,425
         1972             39,744          35,741          22,008          97,493
         1973             28,032          31,357          17,749          77,138
         1974             22,056          33,149          18,536          73,741
         1975             27,048          49,813          27,282         104,143
         1976             31,440          65,599          36,419         133,458
         1977             27,720          66,110          36,942         130,772
         1978             38,976         109,337          62,808         211,121
         1979             27,192          90,296          52,187         169,675
         1980             30,840         122,689          71,720         225,249
         1981             33,024         148,419          89,112         270,555
         1982             28,800         153,181          93,661         275,642
         1983             33,360         198,646         123,655         355,661
         1984             30,240         195,911         123,184         349,335
         1985             37,272         274,986         172,921         485,179
         1986             48,672         504,968         307,771         861,411
         1987**           40,728         689,290         415,714       1,145,732
         1988             38,976         831,796         497,276       1,368,048
         1989             34,248         933,110         559,731       1,527,089
         1990             25,824         769,292         482,128       1,277,244
         1991             25,656         794,208         497,135       1,316,999
         1992             21,360         661,221         413,891       1,096,472
         1993             24,792         797,519         533,365       1,355,676
         1994               --              --              --              --
    


During the period from the Fund's initial public offering until August 14, 1987,
the market  price of the Fund's  stock was  sometimes  above net asset value and
sometimes below;  accordingly,  the data set forth above should not be construed
as an indication of the record of a  shareholder's  investment in the Fund based
on market prices.  Nor should it be construed as a representation  of the future
performance of the Fund's net asset value. In addition, the data set forth above
reflect the considerable enhancement of the Fund's assets in 1985, 1986 and 1987
resulting  from the sharp  appreciation  in the value of the yen versus the U.S.
dollar.

*    Inception of The Japan Fund, Inc.

**   The Japan Fund, Inc. converted to an open-end investment company as of
     August 14, 1987.




                                       13
<PAGE>

Distribution and performance information

Dividends and capital gain distributions

     The Fund intends to distribute any dividends from        net investment
income    and net realized capital gains     (after utilization of capital loss
carryforwards   ,    ) if any, in        December to avoid federal excise
tax.        An additional distribution may be made within three months of the
Fund's fiscal year end, if necessary. Any dividends or capital gain
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. According to your preference, you may receive
distributions in cash or have them reinvested in additional shares of the Fund.
If your investment is in the form of a retirement plan, all dividends and
capital gain distributions will be reinvested in your account.

     All dividends from investment income are taxable to shareholders as
ordinary income. Differences between dividend distributions reported to
shareholders for tax purposes and actual distributions received by shareholders
as either cash or additional shares may reflect the Fund's payment of
withholding taxes imposed by Japan on dividends and interest under the tax
convention between the United States and Japan. Such payments to Japan are
considered distributions to shareholders for tax purposes. Subject to applicable
limitations, such amounts may be claimed as a foreign tax credit by shareholders
or may be deducted by shareholders in computing their federal taxable income.
For further information, please refer to the section "Taxes" in the Fund's
Statement of Additional Information. Long-term capital gain distributions, if
any, are taxable as long-term capital gain regardless of the length of time you
have owned your shares. Distributions of short-term capital gain are taxable as
ordinary income.

     The Fund sends you detailed tax information about the amount and type of
its distributions each year.

Performance information

     From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. Total return is the change in value of
an investment in the Fund for a specified period. Average annual total return
refers to the average annual compound rate of return of an investment in the
Fund assuming that the investment has been held for one year, five years and ten
years, as of a stated ending date. Cumulative total return represents cumulative
change in value of an investment in the Fund for various periods. Capital change
measures return from capital, including reinvestment of any capital gain
distributions but not reinvestment of dividends. Performance will vary based
upon, among other things, changes in market conditions and expenses.

Fund organization

     The Fund, which was incorporated under the laws of the State of Maryland in
1961, is an open-end, diversified management investment company registered under
the Investment Company Act of 1940 (the "1940 Act"). The Fund's activities are
supervised by its Board of Directors. At the time of any election, shareholders
have one vote for each share held. The Fund is not required to and has no
current intention to hold annual shareholder meetings, although special meetings
may be called for purposes such as electing or removing Directors, changing
fundamental policies or approving an investment advisory contract. Shareholders
will be assisted in communicating with other shareholders in connection with
removing a Director as if Section 16(c) of the        1940    Act     were
applicable. From the date of the Fund's initial public offering in 1962 until


                                       14
<PAGE>

August 14, 1987, the Fund operated as a closed-end, diversified management
investment company.

       Investment adviser       

     In making investment decisions,    the Fund retains     Scudder, Stevens &
Clark, Inc.    to     provide        management services and investment advice.
The Adviser, one of the nation's most experienced investment management firms,
makes investment decisions and manages the daily business affairs of the Fund in
accordance with the Fund's investment objective and policies and guidelines
established by the Fund's Board of Directors.

     The address of Scudder, Stevens & Clark, Inc. is 345 Park Avenue, New
York, New York 10154.

        The Nikko International Capital Management Co., Ltd.    
("NICAM")   ,     an indirectly controlled affiliate of The Nikko Securities
Co., Ltd., one of Japan's leading securities companies, provides information and
investment advice to the Adviser for the benefit of the Fund.

     NICAM is engaged in the investment counseling and management business and
provides economic research, business information and securities analysis to a
variety of Japanese and international clients, including investors interested in
Japanese and other Far Eastern securities, and companies interested in
international direct investments and joint ventures or in raising funds in
international capital markets. The address of NICAM is 17-9,
Nihonbashi-Hakozakicho, Chuo-ku, Tokyo 103, Japan.

        The Adviser     received investment advisory and management fees for
services rendered to the Fund which totalled    0.73    % of the Fund's net
assets during the fiscal year ended December 31,    1994    .    The investment
advisory and management fees are graduated so that increases in the Fund's net
assets may result in a lower average fee rate and decreases in a Fund's net
assets may result in a higher average fee rate.    

     NICAM received        fees from    the Adviser     for services rendered
for the benefit of the Fund which totalled    15    % of the Fund's net assets
during    the fiscal year ended December 31, 1994. This fee paid to NICAM was
also graduated, and at a special meeting on December 21, 1993, shareholders
approved a new Research Agreement between the Adviser and NICAM, and ratified
their approval on July 22, 1994, which restructured the fee payable to NICAM to
0.10% of average daily net assets, payable monthly during the fiscal year
1995.     On December 31, 1995, the research contract with NICAM will terminate.

     The Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.

Transfer agent, dividend-paying and shareholder service agent

     Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts
02107-2291, a wholly-owned subsidiary of Scudder, Stevens & Clark, Inc., is the
transfer and dividend-paying agent.

     The Japan Fund Service Center, Two International Place, Boston,
Massachusetts 02110-4103, is a special division of Scudder Service Corporation.
The Japan Fund Service Center is the shareholder service agent for the Fund and
also provides subaccounting and recordkeeping services for shareholder accounts
in certain retirement and employee benefit plans. For telephone numbers and
addresses, please refer to the section "How to contact The Japan Fund."

Distributor

     Scudder Investor Services, Inc., a wholly-owned subsidiary of the
Adviser, is the Fund's principal underwriter. Scudder Investor Services,
Inc. confirms, as agent, all purchases of shares of the Fund.


                                       15
<PAGE>

Custodian and sub-custodian

     Brown Brothers Harriman & Co. is the Fund's custodian, and Sumitomo
Trust & Banking Co. (Tokyo Office) is the Fund's sub-custodian.

Purchases and redemptions

Note:     All addresses and telephone numbers can be found under "How to
contact The Japan Fund."

Opening an account ($1,000 minimum)

     By check

     Checks should be made payable to "The Japan Fund, Inc." in the amount of
$1,000 or more (retirement plan minimums are less_see appropriate plan
literature) and mailed with a completed and signed application to "The Japan
Fund Service Center."

     By wire

     Under most circumstances, it is possible to open an account by wire. Please
call 1-800-53-JAPAN for an account number and further information.

     By exchange from a Scudder fund

     You can open a new Japan Fund account at no cost by exchanging shares with
a value of $1,000 or more from another fund in the Scudder Family of Funds. Your
new Japan Fund account will have the same registration and address as your
existing account. Please call 1-800-53-JAPAN for information on the transfer of
special account features.

     To exchange by mail or fax, send a letter to "The Scudder Funds" or fax to
1-800-821-6234. Include the name of the Scudder fund from which you are
exchanging, the account name(s) and address, the account number, the dollar
amount or number of shares to be exchanged into your Japan Fund account. Sign
your name(s) exactly as it appears on your account statement. Please also
provide your daytime phone number. The exchange requirements for corporations,
other organizations, trusts, fiduciaries, institutional investors and retirement
plans may differ from those of individual accounts. Please call 1-800-53-JAPAN
for more information.

Making additional investments

Note:     Scudder retirement plans have similar or lower minimums for
additional investments.

     By check ($100 minimum)

     Send a check to "The Japan Fund, Inc." for $100 or more with the tear-off
stub from your Japan Fund account statement or with a letter of instruction
including the Fund name and your account number.

     By wire ($100 minimum)

     Follow the instructions described under "Opening an account--By wire."

     By exchange from a Scudder fund ($100 minimum)

     Follow the instructions described under "Opening an account--By
exchange from a Scudder fund."

     You can also make exchanges among your Scudder Fund accounts on SAIL, the
Scudder Automated Information Line, if you have requested an authorization to do
so. Call 1-800-53-JAPAN for more details.

     Automatic Investment Plan ($50 minimum)

     You may arrange to make regular investments through automatic deductions
from your checking account. Please call 1-800-53-JAPAN for more information and
an application.

     By telephone order ($2,500 minimum)

     Existing shareholders may purchase shares at a certain day's price by
calling The Japan Fund Service Center before the close of the New York Stock
Exchange (the "Exchange") (normally 4 p.m. eastern time) on that day. Orders
must be for $2,500 or more and cannot be for an amount greater than four times
the value of your account at the time the order is placed.    A confirmation
with complete purchase information is sent shortly after your order is
received.     You


                                       16
<PAGE>


must include with your payment the order number given at the time the order is
placed. If payment by check or federal reserve wire is not received within seven
business days, the order will be cancelled and the shareholder will be
responsible for any loss to the Fund resulting from this cancellation. Telephone
orders are not available for shares held in Scudder IRA accounts and most other
Scudder Retirement Plans.

Non-certificated shares

     Due to the desire of Fund management to afford ease of redemption,
ownership in the Fund is on a non-certificated basis. If you currently hold
certificates for The Japan Fund, Inc. shares (either directly or through your
broker) and want to continue your investment in The Japan Fund, Inc., you may do
so either by continuing to hold such certificates or, for your convenience, by
surrendering them to the Fund's transfer agent who will hold them for your
account in non-certificated form. Surrendering your certificates for Japan Fund
shares to the Fund's transfer agent may be convenient for you because in doing
so (1) you will be relieved of safekeeping of the certificates (the transfer
agent will do it for you), (2) you will have the option to avail yourself of the
various shareholder services offered by the Scudder Family of Funds (e.g.,
exchange from one fund into another) and (3) you will receive regular reports of
your share total, including additional shares added to your account as a result
of the reinvestment of dividends and capital gains distributions.

     Converting your certificated Fund shares into non-certificated form is not
a taxable event, nor does such conversion alter your tax cost of shares or your
ownership interest and rights in the Fund.

     If you want additional information on surrendering your certificated shares
and establishing an open account, please write or call The Japan Fund Service
Center.

Selling fund shares (redemptions)

     Shares are redeemable at the option of the shareholder at net asset value
next determined after receipt of a redemption request in good order.

     IF YOU HOLD CERTIFICATES FOR JAPAN FUND SHARES, YOU MUST SURRENDER SUCH
CERTIFICATES TO THE FUND'S TRANSFER AGENT PRIOR TO REDEMPTION. Call or write The
Japan Fund Service Center for information on redemption of certificated shares.

     If you hold Japan Fund shares in non-certificated form, you may redeem your
shares according to the following instructions.

     By telephone

     This is the quickest and easiest way to sell Japan Fund shares. You may
redeem any amount to your pre-designated bank account, and up to $50,000 to your
address of record. If you elected telephone redemption to your bank on your
application, you can call to request that federal funds be sent to your
authorized bank account. If you did not elect telephone redemption to your bank
on your application, call 1-800-53-JAPAN for more information.

     Redemption    proceeds     will be wired to your bank unless otherwise
requested. If your bank cannot receive federal reserve wires, redemption
   proceeds     will be mailed to your bank. There will be a $5 charge for all
wire redemptions.

     You can also make redemptions from your Japan Fund account on SAIL, the
Scudder Automated Information Line, if you have requested an authorization to do
so. Call 1-800-53-JAPAN for more details.

     Telephone redemption is not available for shares held in Scudder IRA
accounts and most other Scudder retirement plan accounts.

     In the event you are unable to reach the Fund by telephone, you should
write to the Fund following the instructions described below under "By mail or
fax."


                                       17
<PAGE>
     By mail or fax

     To redeem shares by mail or fax, send a letter to "The Japan Fund Service
Center" or fax to 1-800-821-6234 and include the account name(s) and address,
the account number, and the dollar amount or number of shares you wish to
redeem. Sign your name(s) exactly as it appears on your account statement.
Please also provide your daytime phone number.

     Signature guarantees

     For your protection and to prevent fraudulent redemptions, on written
redemption requests in excess of $50,000 we require an original signature and an
original signature guarantee for each person in whose name the account is
registered. (The Fund reserves the right, however, to require a signature
guarantee for all redemptions.) You can obtain a signature guarantee from most
banks, credit unions or savings associations, or from broker/dealers, municipal
securities broker/dealers, government securities broker/dealers, national
securities exchanges, registered securities associations, or clearing agencies
deemed eligible by the Securities and Exchange Commission. Signature guarantees
by notaries public are not acceptable. Redemption requirements for corporations,
other organizations, trusts, fiduciaries, agents, institutional investors and
retirement plans may be different from those for regular accounts. For more
information call 1-800-53-JAPAN.

     Telephone transactions

Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be wired
to a predesignated bank account. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine.

     Automatic Withdrawal Plan

     If the value of your account is $10,000 or more, you may arrange to receive
automatic periodic cash payments. Please call or write The Japan Fund Service
Center for more information and an application.

Redemption-in-kind

     The Fund has filed an election pursuant to Rule 18f-1 under the        1940
   Act     with the Securities and Exchange Commission pursuant to which the
Fund would be obligated, in the event its Board of Directors determines to make
redemption payments in portfolio securities, to satisfy redemption requests by
any one shareholder of record during any 90-day period solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund at the beginning of
the period.

     Accordingly, in the event the Fund's management makes such a determination,
the Fund may honor any request for redemption or repurchase order by making
payment in readily marketable securities chosen by the Fund and valued as they
are for purposes of computing the Fund's net asset value, subject to the Fund's
obligation to pay cash as described above. The tax consequences to a redeeming
shareholder are the same whether the shareholder receives cash or securities in
payment for his shares.

     If redemption payment is made in portfolio securities, the redeeming
shareholder will incur brokerage commissions and Japanese sales taxes in
converting those securities into cash. In addition, the conversion of securities


                                       18
<PAGE>

into cash may expose the shareholder to stock-market risk and currency exchange
risk.

     If you receive portfolio securities upon redemption of your Fund shares,
you may request that such securities either (1) be delivered to you or your
designated agent or (2) be liquidated on your behalf and the proceeds of such
liquidation (net of any brokerage commissions and Japanese sales taxes) remitted
to you.

     Please write or call The Japan Fund Service Center for further information.

Transaction information

Purchases by check

     Checks are invested in full and fractional shares. If you purchase shares
with a check that does not clear, your purchase will be cancelled and you will
be subject to any losses or fees incurred in the transaction. Checks must be
drawn on or payable through a U.S. bank. If you purchase shares by check and
redeem them within seven business days of purchase, the Fund may hold redemption
proceeds until the purchase check has cleared which may take up to seven
business days or more. If you purchase shares by federal funds wire, you may
avoid this delay. Redemption requests by telephone, including exchanges, prior
to the expiration of the seven-day period will not be accepted.

Share price

     Purchases and redemptions, including exchanges, are made at net asset
value. The Fund's custodian, Brown Brothers Harriman & Co., determines net asset
value per share as of the close of regular trading on the Exchange, normally 4
p.m. eastern time, on each day the Exchange is open for trading. Net asset value
per share is calculated by dividing the market value of total Fund assets, less
all liabilities, by the total number of shares outstanding.

     Market value of Fund assets is determined using the last reported sale
price on the stock exchange on which the trading volume for Fund assets is
highest or, if such price is not available or is deemed out-of-date by the Board
of Directors, using the best information available to the Fund's custodian.
Where quotes on Fund assets are unavailable, such assets will be valued at their
fair value in good faith in accordance with procedures established by the Board
of Directors. In addition, money market investments with a remaining maturity of
less than 60 days will be valued by the amortized cost method.

     The net asset value of the Fund is quoted daily in the financial pages of
leading newspapers under the heading "Japan Fund."

Processing time

     All purchase and redemption requests received in good order by the Fund's
transfer agent in Boston by the close of regular trading on the Exchange are
executed at the net asset value per share calculated at the close of regular
trading that day.

     Purchase and redemption requests received after the close of regular
trading on the Exchange will be executed the following business day.

     If you wish to make a purchase of $500,000 or more, you should notify The
Japan Fund Service Center by calling 1-800-53-JAPAN.

     The Fund will normally send your redemption proceeds within one business
day following the redemption request, but may take up to seven days (or longer
in the case of shares recently purchased by check).

Short-term trading

     Purchases and sales should be made for long-term investment purposes only.
The Fund and Scudder Investor Services, Inc. each reserves the right to restrict
purchases of Fund shares (including exchanges) when a pattern of frequent
purchases and sales made in response to short-term fluctuations in the Fund's
share price appears evident.


                                       19
<PAGE>

Tax information

     It is the Fund's intent to comply with provisions of the Internal Revenue
Code applicable to regulated investment companies. Accordingly, the Fund intends
to distribute to shareholders substantially all of its taxable income less
earnings and profits (as defined for U.S. tax purposes) attributed to shares
redeemed. Under the United States-Japan tax treaty, Japan imposes a withholding
tax of 15% of dividends and 10% on interest.

     A redemption of shares, including an exchange into a Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.

Tax identification number

     Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gain distributions and redemption and
exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. The Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
The Fund also reserves the right, following 30 days' notice to shareholders, to
redeem all shares in accounts without a certified Social Security or tax
identification number. A shareholder may avoid involuntary redemption by
providing the Fund with a tax identification number during the 30-day notice
period.

Minimum balances

     Shareholders should maintain a share balance worth at least $1,000. Scudder
retirement plans have similar or lower minimum share balance requirements. The
Fund reserves the right, following 60 days' written notice to shareholders, to
redeem all shares in sub-minimum accounts, including accounts of new investors,
where a reduction in value has occurred due to a redemption or exchange out of
the account. Reductions in value that result solely from market activity will
not trigger an involuntary redemption. The Fund will mail the proceeds of the
redeemed account to the shareholder. The shareholder may restore the share
balance to $1,000 or more during the 60-day notice period and must maintain it
at no lower than that minimum to avoid involuntary redemption.

     Shareholders of record prior to August 14, 1987, will not be subject to the
$1,000 minimum share balance requirement.

Shareholder services

Fund statements

     You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.

Shareholder reports

     In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.

     To reduce the volume of mail you receive, only one copy of most Fund
reports, such as the Fund's Annual Report, may be mailed to your household (same
surname, same address). Please contact The Japan Fund Service Center at
1-800-53-JAPAN if you wish to receive additional shareholder reports.

Shareholder inquiries

     Knowledgeable Japan Fund Service Specialists are committed to providing you
with ongoing, responsive service. They will answer questions about the Fund's
objective and investment characteristics.


                                       20
<PAGE>

Investment flexibility

     If you join the Scudder Family of Funds, you can exchange your Japan Fund
shares for shares of any of the Scudder funds and likewise exchange shares of
any of the Scudder funds for shares of The Japan Fund, Inc. any time at net
asset value by telephone or letter, free of charge. The money market, income,
   growth    , tax-free, and growth    and income     funds in the Scudder
Family of Funds have different investment objectives to meet varying goals.
Maintaining accounts in more than one fund in the Scudder Family of Funds
enables you to design an investment program for your particular needs. Telephone
redemption and telephone exchange are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent.

Experienced professional management

     Your investment in the Fund is actively managed under the guidelines
established by the Fund's Board of Directors. Professional management is an
important advantage for investors who do not have the time or expertise to
invest directly in individual securities.

A team approach to investing

     The Japan Fund, Inc. is managed by a team of Scudder investment
professionals, who each play an important role in the Fund's management process.
Team members work        together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by    Scudder's    
large staff of economists, research analysts, traders and other investment
specialists who work in Scudder's offices across the United States and abroad.
Scudder believes its team approach benefits Fund investors by bringing together
many disciplines and leveraging Scudder's extensive resources.

        Lead     Portfolio Manager Seung Kwak    has had responsibility for the
Fund's investment strategy and daily operations since 1994 and has been a member
of the portfolio management team since 1989. Mr. Kwak     has directed our
Tokyo-based research effort since he joined Scudder in 1988. Elizabeth J. Allan,
       Portfolio Manager,    helps set the Fund's general investment strategies,
and was responsible for the Fund's investment strategy and daily operations from
1991 to 1994.     Ms. Allan    has contributed her expertise to the management
of the portfolio since     she joined Scudder in 1987    and     has numerous
years of Pacific Basin research and investing experience.    Eileen O. Gerspach,
Portfolio Manager, helps set the Fund's general investment strategies. Ms.
Gerspach, who joined the team in May 1995, has worked in the investment industry
since 1984 and has eight years of experience as a portfolio manager.    

SAIL(tm)-- Scudder Automated Information Line

     For touchtone access to account information, prices and yields, or to
perform transactions in your existing Scudder fund accounts, shareholders can
call Scudder's Automated Information Line (SAIL) at 1-800-343-2890. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact The Japan Fund"
for the address.

Low minimum investment

     The minimum initial investment for the Fund and for any of the Scudder
funds is $1,000. Scudder retirement plans have similar or lower minimum initial
investment requirements. You may add $100 or more to your account at any time.

Dividend reinvestment plan

     You may have dividends and distributions automatically reinvested in
additional Fund shares. Please call 1-800-53-JAPAN to request this feature.


                                       21
<PAGE>

Tax-advantaged retirement plans

     The Japan Fund, Inc. may be a good choice to help you meet your retirement
goals. Scudder Investor Services, Inc., underwriter of The Japan Fund, Inc.,
offers a variety of tax-advantaged retirement plans for individuals, businesses
and non-profit organizations. These flexible plans are designed for use with the
Scudder funds (except Scudder tax-free funds, which are inappropriate for such
plans) as pure no-load,, investment options to meet a broad range of investment
objectives. Using Scudder's retirement plans can help shareholders save on
current taxes while building their retirement savings.

*    Scudder No-Fee IRAs. Tax-deferred retirement plans for anyone with earned
     income. The maximum annual contribution is $2,000 per person. Many people
     can deduct all or part of their contributions from their taxable income,
     and all investment earnings accrue on a tax deferred basis. The Scudder
     No-Fee IRA charges no annual custodial fee.

*    401(k) Plans. 401(k) plans allow employers and employees to make
     tax-deductible retirement contributions. Scudder offers a full service
     program that includes recordkeeping, prototype plan, employee
     communications, and trustee services, as well as investment options.

*    Profit Sharing and Money Purchase Pension Plans. These plans allow
     corporations, partnerships and people who are self-employed to make annual,
     tax-deductible contributions of up to $30,000 for each person covered by
     the plans. Plans may be adopted individually, or paired to maximize
     contributions. These are sometimes known as Keogh plans.

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

*    SEP-IRAs. Easily administered retirement plans for small businesses and
     self-employed individuals. The maximum annual contribution to SEP-IRA
     accounts is adjusted each year for inflation.

   
*    Scudder Horizon Plan. A no-load variable annuity that lets you build
     assets by deferring taxes on your investment earnings. You can start
     with $2,500 or more.    

     Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian
of these plans and is paid an annual fee for some of the above retirement plans.
For information about establishing a Scudder No-Fee IRA,    SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan    , please
call 1-800-225-2470.

    For information about 401(k)s or 403(b)s, please call 1-800-323-6105. To
effect transactions in existing IRA, SEP-IRA, Profit Sharing or Pension Plan
accounts, call 1-800-225-5163.

     The variable annuity contract is provided by Charter National Life
Insurance Company (in New York State, Intramerica Life Insurance Company
+++S 1802(tm)). The contract is offered by Scudder Insurance Agency, Inc.
(in New York State, Nevada and Montana, Scudder Insurance Agency of New
York, Inc.). CNL, Inc. is the Principal Underwriter. Scudder Horizon Plan
is not available in all states.    


                                       22
<PAGE>

The Scudder Family of Funds

     As a Japan Fund shareholder, you can receive information on the Scudder
Family of Funds if you wish to do so. This service is available wholly at the
option of the Japan Fund shareholder. The Scudder Family of Funds offers many
conveniences and services: free telephone exchanges and redemptions at any time
at net asset value, Scudder Funds Centers across the U.S., maintained by Scudder
Investor Services, Inc., for those shareholders who like to conduct business in
person and the Scudder Funds newsletter which reports periodically on the stock
and bond markets, and new Scudder investment products.

     If you are interested, please contact a specialist at The Japan Fund
Service Center by calling 1-800-53-JAPAN.


                                       23
<PAGE>

How to contact The Japan Fund

For investment information or questions about your account:

                       The Japan Fund Service Center
                          Two International Place
                           Boston, MA 02110-4103
                              1-800-53-JAPAN
                   (8 a.m.-    8     p.m. eastern time)

     Before you phone, please be sure to have your account and Social Security
numbers in hand. Use the above address or phone number to ask about The Japan
Fund's investment characteristics or objective, operating procedures, to request
additional or interim account statements, or to get forms for privileges,
options, or services.

For making a transaction in an account:

                       The Japan Fund Service Center
                               P.O. Box 2291
                           Boston, MA 02107-2291
                              1-800-53-JAPAN
                   (8 a.m.-    8     p.m. eastern time)

     Use this phone number for telephone exchange or redemption. Before you
phone, please be sure to have your account and Social Security numbers in hand.
Use this address for checks, redemptions, exchange or transfer requests, or
account maintenance instructions such as a change in address, reinvestment
option, bank account or Social Security number.

For account updates and price information:

     If you would like an account update or current price information for The
Japan Fund, please call our 24-hour tape recording:

                      1-800-343-2890  #81 (SAIL Code)

For investment information on any of the funds in the Scudder Family of Funds:

     If you have questions about the investment characteristics or objectives of
any of the funds in the Scudder Family of Funds, please call or write:

                      Scudder Investor    Relations    
                          Two International Place
                           Boston, MA 02110-4103
                              1-800-225-2470
                       (8 a.m.- 8 p.m. eastern time)

Directors and officers

Robert G. Stone, Jr., Chairman of the Board and Director

Douglas Loudon, President

William L. Givens, Director

William H. Gleysteen, Jr., Director

John F. Loughran, Director

William V. Rapp, Director

Henry Rosovsky, Director

O. Robert Theurkauf, Director

Shoji Umemura, Director

Hiroshi Yamanaka, Director

Elizabeth J. Allan, Vice President

William E. Holzer, Vice President

Thomas W. Joseph, Vice President

Seung K. Kwak, Vice President

Edward J. O'Connell, Vice President

Miyuki Wakatsuki, Vice President

Gina Provenzano, Vice President and Treasurer

Kathryn L. Quirk, Vice President and Secretary

Thomas F. McDonough, Assistant Secretary

Pamela A. McGrath, Assistant Treasurer

Honorary Directors

Tristan E. Beplat

Allan Comrie

Jonathan Mason

James W. Morley

<PAGE>
                              THE JAPAN FUND, INC.


                  A Pure No-Load(TM) (No Sales Charges) Mutual
                       Fund Which Seeks Long-Term Capital
                     Appreciation By Investing Primarily in
                          Equity Securities of Japanese
                                    Companies




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



                       STATEMENT OF ADDITIONAL INFORMATION

                               May 1,    1995    



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


         This Statement of Additional Information is not a prospectus and should
be read in conjunction  with the prospectus of The Japan Fund, Inc. dated May 1,
   1995    ,  as  amended  from time to time,  a copy of which  may be  obtained
without charge by writing to Scudder Investor Services,  Inc., Two International
Place, Boston, MA 02110-4103 care of The Japan Fund Service Center.




<PAGE>
<TABLE>
<CAPTION>

                                                          TABLE OF CONTENTS
                                                                                                                   Page
<S>                                                                                                                 <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS.......................................................................1
         Investment Objective and Policies............................................................................1
         Investment Restrictions.....................................................................................11
         Other Investment Policies...................................................................................11

JAPAN AND THE JAPANESE ECONOMY.......................................................................................13
         Economic Trends.............................................................................................14
         Industrial Production.......................................................................................15
         Energy......................................................................................................16
         Labor.......................................................................................................17
         Prices......................................................................................................17
         Foreign Trade...............................................................................................18

SECURITIES MARKETS IN JAPAN..........................................................................................20

PURCHASES AND EXCHANGES..............................................................................................23
         Additional Information About Opening An Account.............................................................23
         Additional Information About Making Subsequent Investments..................................................23
         Checks......................................................................................................24
         Wire Transfer of Federal Funds..............................................................................24
         Share Price.................................................................................................24
         Share Certificates..........................................................................................24
         Other Information...........................................................................................24
         Exchanges...................................................................................................25

REDEMPTIONS..........................................................................................................26
         Redemption by Telephone.....................................................................................26
         Redemption by Mail or Fax...................................................................................26
         Redemption-in-Kind..........................................................................................27
         Other Information...........................................................................................27

FEATURES AND SERVICES OFFERED BY THE FUND............................................................................28
         The Pure No-Load(TM) Concept................................................................................28
            Distribution     Plan   s    ............................................................................29
         Diversification.............................................................................................29
         Scudder Funds Centers.......................................................................................29
         Reports to Shareholders.....................................................................................30

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

SPECIAL PLAN ACCOUNTS................................................................................................33
         Scudder Retirement Plans:  Profit-Sharing and Money Purchase Pension Plans for Corporations and
              Self-Employed Individuals..............................................................................33
         Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........33
         Scudder IRA:  Individual Retirement Account.................................................................34
         Scudder 403(b) Plan.........................................................................................35
         Automatic Withdrawal Plan...................................................................................35
         Group or Salary Deduction Plan..............................................................................35
         Automatic Investment Plan...................................................................................35
         Uniform Transfers/Gifts to Minors Act.......................................................................36
         Scudder Trust Company.......................................................................................36

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................36


                                        i
<PAGE>



PERFORMANCE AND OTHER INFORMATION....................................................................................36
         Average Annual Total Return.................................................................................36
         Cumulative Total Return.....................................................................................37
         Total Return................................................................................................37
         Capital Change..............................................................................................37
         Comparison of Fund Performance..............................................................................38

FUND ORGANIZATION....................................................................................................42

INVESTMENT ADVISORY ARRANGEMENTS.....................................................................................42
            Personal Investments by Employees of the Adviser.........................................................45    

DIRECTORS AND OFFICERS...............................................................................................45

REMUNERATION.........................................................................................................47

DISTRIBUTOR..........................................................................................................48

TAXES................................................................................................................49
         United States Federal Income Taxation.......................................................................49
         Japanese Taxation...........................................................................................53

BROKERAGE AND PORTFOLIO TURNOVER.....................................................................................53

NET ASSET VALUE......................................................................................................54

ADDITIONAL INFORMATION...............................................................................................55
         Experts.....................................................................................................55
         Public Official Documents...................................................................................55
         Other Information...........................................................................................55
         FINANCIAL STATEMENTS........................................................................................55
</TABLE>


                                       ii
<PAGE>




                 INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS

       (See "Investment Objective and Policies" in the Fund's prospectus.)

Investment Objective and Policies

         The Japan Fund, Inc. (the "Fund"), is a pure no-load(TM),  diversified,
open-end management  investment company which continually offers and redeems its
shares. It is a company of the type commonly known as a mutual fund.

         The Fund's  investment  objective  is long-term  capital  appreciation,
which it seeks to achieve by investing primarily in equity securities (including
American Depositary Receipts) of Japanese companies, as described below.

         The Fund deems its investment  objective a matter of fundamental policy
and elects to treat it as such pursuant to Sections  8(b)(3) and 13(a)(3) of the
Investment Company Act of 1940 (the "1940 Act").

         Under  normal  conditions,  the Fund  will  invest  at least 80% of its
assets in Japanese  securities,  that is, securities issued by entities that are
organized  under  the  laws  of  Japan  ("Japanese  companies"),  securities  of
affiliates of Japanese  companies,  wherever organized or traded, and securities
of issuers not  organized  under the laws of Japan but  deriving  50% or more of
their  revenues  from  Japan.  In so doing,  the Fund's  investment  in Japanese
securities  will be primarily in common stocks of Japanese  companies.  However,
the Fund may also invest in other equity securities issued by Japanese entities,
such as warrants and convertible  debentures,  and in debt securities  (Japanese
government debt  securities and debt securities of Japanese  companies) when the
Fund's  adviser  believes  that the  potential  for  capital  appreciation  from
investment in debt  securities  equals or exceeds that available from investment
in equity securities.

         The Fund may  invest up to 20% of its  assets in cash or in  short-term
government or other short-term prime  obligations in order to have funds readily
available  for general  corporate  purposes,  including the payment of operating
expenses,  dividends and  redemptions,  or the investment in securities  through
exercise of rights or otherwise,  or in  repurchase  agreements in order to earn
income for periods as short as overnight. Where the Fund's management determines
that  market or economic  conditions  so warrant,  the Fund may,  for  temporary
defensive  purposes,  invest  more  than  20% of its  assets  in  cash  or  such
securities.  For instance,  there may be periods when changes in market or other
economic conditions, or in political conditions, will make advisable a reduction
in  equity  positions  and  increased  commitments  in  cash or  corporate  debt
securities,  whether or not Japanese, or in the obligations of the Government of
the United States or of Japan or of other governments.

         The  Fund   purchases   and   holds   securities   which   the   Fund's
   investment      adviser,  Scudder,  Stevens & Clark,  Inc.  (the  "Adviser"),
believes to have potential for long-term capital appreciation; investment income
is a secondary consideration in the selection of portfolio securities. It is not
the policy of the Fund to trade in  securities or to realize gain solely for the
purpose of making a distribution to its shareholders.

         It is not the  policy  of the Fund to make  investments  which  involve
promotion or business  management  or which would  subject the Fund to unlimited
liability or for the purpose of exercising control over management.

            The  Fund may also  invest  up to 30% of its net  assets  in  equity
securities of Japanese companies which are traded in an over-the-counter market.
These are generally  securities of relatively  small or  little-known  companies
that the Fund's investment adviser believes have  above-average  earnings growth
potential.  Securities that are     traded over-the-counter may not be traded in
the volumes typical on a national securities exchange. Consequently, in order to
sell this type of holding,  the Fund may need to discount  the  securities  from
recent  prices or  dispose of the  securities  over a long  period of time.  The
prices  of this  type of  security  may be more  volatile  than  those of larger
companies which are often traded on a national securities exchange.

         The Fund may make contracts,  incur  liabilities and borrow money,  and
issue bonds, notes and obligations, as permitted by the laws of Maryland, by the
1940 Act and by the Fund's Articles of Incorporation.

         It is the Fund's policy not to underwrite  the sale of, or  participate
in any underwriting or selling group in connection with the public  distribution
of, any securities;  provided,  however, that this policy shall not be construed


<PAGE>

to prevent or limit in any manner the Fund's  right to purchase  securities  for
its investment  portfolio,  whether or not such purchase might be deemed to make
the Fund an  underwriter or a participant  in any such  underwriting  or selling
group.

         It is the policy of the Fund not to engage in the  purchase and sale of
real  estate,  other than real  estate  deemed by the Board of  Directors  to be
necessary  and  convenient  for the operation of the Fund's  affairs;  provided,
however,  that this  policy  shall not be  construed  to prevent or limit in any
manner the Fund's right to purchase,  acquire and invest in  securities  of real
estate companies or other companies owning or investing in real estate.

         It is the Fund's policy not to make loans,  other than by way of making
investments in corporate debt securities or government obligations or commercial
paper as described above.

Specialized Investment Techniques

         Foreign  Currencies.  Because investments in foreign securities usually
will  involve  currencies  of foreign  countries,  and because the Fund may hold
foreign  currencies  and forward  contracts,  futures  contracts  and options on
futures contracts on foreign currencies,  the value of the assets of the Fund as
measured in U.S. dollars may be affected  favorably or unfavorably by changes in
foreign currency exchange rates and exchange control  regulations,  and the Fund
may incur costs in  connection  with  conversions  between  various  currencies.
Although the Fund values its assets daily in terms of U.S. dollars,  it does not
intend to convert its  holdings  of foreign  currencies  into U.S.  dollars on a
daily basis.  It will do so from time to time, and investors  should be aware of
the costs of  currency  conversion.  Although  foreign  exchange  dealers do not
charge a fee for  conversion,  they do realize a profit based on the  difference
(the "spread")  between the prices at which they are buying and selling  various
currencies.  Thus, a dealer may offer to sell a foreign  currency to the Fund at
one rate,  while  offering a lesser rate of  exchange  should the Fund desire to
resell that currency to the dealer.  The Fund will conduct its foreign  currency
exchange  transactions  either  on a spot  (i.e.,  cash)  basis at the spot rate
prevailing in the foreign  currency  exchange  market,  or through entering into
forward or futures contracts to purchase or sell foreign currencies.

         Depositary  Receipts.  The Fund may invest  indirectly in securities of
emerging country issuers through  sponsored or unsponsored  American  Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), International Depositary
Receipts ("IDRs") and other types of Depositary  Receipts (which,  together with
ADRs,  GDRs and IDRs are  hereinafter  referred  to as  "Depositary  Receipts").
Depositary  Receipts may not  necessarily be denominated in the same currency as
the underlying  securities  into which they may be converted.  In addition,  the
issuers of the stock of  unsponsored  Depositary  Receipts are not  obligated to
disclose material information in the United States and, therefore, there may not
be a correlation between such information and the market value of the Depositary
Receipts.  ADRs are Depositary Receipts typically issued by a United States bank
or trust company which evidence  ownership of underlying  securities issued by a
foreign  corporation.  GDRs,  IDRs and other types of  Depositary  Receipts  are
typically issued by foreign banks or trust companies,  although they also may be
issued by United  States banks or trust  companies,  and  evidence  ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally,  Depositary  Receipts in registered  form are designed for use in the
United  States  securities  markets and  Depositary  Receipts in bearer form are
designed for use in securities  markets outside the United States.  For purposes
of the Fund's  investment  policies,  the Fund's  investments in ADRs,  GDRs and
other  types of  Depositary  Receipts  will be deemed to be  investments  in the
underlying securities.  Depositary Receipts other than those denominated in U.S.
dollars  will be  subject  to  foreign  currency  exchange  rate  risk.  Certain
Depositary  Receipts  may not be  listed on an  exchange  and  therefore  may be
illiquid securities.

         Debt Securities. When the Adviser believes that it is appropriate to do
so in order to achieve the Fund's  objective of long-term  capital  growth,  the
Fund may invest up to 20% of its total assets in debt securities of both foreign
and domestic  issuers.  Portfolio  debt  investments  will be selected for their
capital  appreciation  potential  on the basis of,  among other  things,  yield,
credit  quality,  and the  fundamental  outlooks for currency and interest  rate
trends,  taking into  account the ability to hedge a degree of currency or local
bond price risk.  The Fund may purchase  bonds,  rated Aaa, Aa,         A     or
Baa     by Moody's Investors Service, Inc. ("Moody's) or AAA, AA,        A    or
BBB     by Standard & Poor's ("S&P") or, if unrated,  judged to be of equivalent
quality as determined by the Adviser.  Should the rating of a portfolio security
be downgraded,  the Adviser will determine whether it is in the best interest of
the Fund to  retain  or  dispose  of such  security.  See the  Appendix  to this
Statement of  Additional  Information  for a more  complete  description  of the
ratings assigned by ratings organizations and their respective characteristics.


                                       2
<PAGE>

         Convertible  Securities.  The Fund may invest in convertible securities
which are bonds, notes, debentures, preferred stocks, and other securities which
are convertible  into common stocks.  Investments in convertible  securities can
provide income through interest and dividend  payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.

         The  convertible  securities  in  which  the  Fund  may  invest  may be
converted  or  exchanged  at  a  stated  or  determinable  exchange  ratio  into
underlying  shares of  common  stock.  The  exchange  ratio  for any  particular
convertible  security  may be  adjusted  from time to time due to stock  splits,
dividends, spin-offs, other corporate distributions, or scheduled changes in the
exchange ratio.  Convertible debt securities and convertible  preferred  stocks,
until converted,  have general  characteristics  similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market  value of  convertible  securities  tends to  decline as  interest  rates
increase  and,  conversely,  tends to  increase as interest  rates  decline.  In
addition,  because of the  conversion or exchange  feature,  the market value of
convertible  securities  typically changes as the market value of the underlying
common stocks changes,  and,  therefore,  also tends to follow  movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis and so may not experience
market value  declines to the same extent as the underlying  common stock.  When
the market price of the  underlying  common stock  increases,  the prices of the
convertible  securities  tend  to  rise  as a  reflection  of the  value  of the
underlying common stock, although typically not as much as the underlying common
stock.  While  no  securities  investments  are  without  risk,  investments  in
convertible  securities  generally  entail less risk than  investments in common
stock of the same issuer.

         As fixed income  securities,  convertible  securities  are  investments
which provide for a stream of income (or in the case of zero coupon  securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all  fixed  income  securities,  there  can be no  assurance  of  income or
principal payments because the issuers of the convertible securities may default
on their obligations.  Convertible  securities generally offer lower yields than
non-convertible  securities of similar  quality  because of their  conversion or
exchange features.

         Convertible  securities generally are subordinated to other similar but
non-convertible  securities of the same issuer,  although  convertible bonds, as
corporate debt  obligations,  enjoy  seniority in right of payment to all equity
securities,  and  convertible  preferred stock is senior to common stock, of the
same issuer.  However,  because of the subordination feature,  convertible bonds
and  convertible  preferred  stock  typically  have lower  ratings  than similar
non-convertible securities.

         Convertible  securities may be issued as fixed income  obligations that
pay current  income or as zero coupon  notes and bonds,  including  Liquid Yield
Option Notes (LYONs).  Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire  income,  which  consists  of  accretion  of  discount,  comes  from  the
difference  between the purchase price and their value at maturity.  Zero coupon
convertible  securities  offer  the  opportunity  for  capital  appreciation  as
increases (or decreases) in market value of such  securities  closely follow the
movements  in the market  value of the  underlying  common  stock.  Zero  coupon
convertible  securities  generally  are  expected to be less  volatile  than the
underlying common stocks as they usually are issued with shorter  maturities (15
years  or  less)  and  are  issued  with  options  and/or  redemption   features
exercisable by the holder of the  obligation  entitling the holder to redeem the
obligation and receive a defined cash payment.

Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the  Federal  Reserve  System and any foreign  bank or any  domestic or
foreign  broker-dealer which is recognized as a reporting government  securities
dealer if the  creditworthiness of the bank or broker-dealer has been determined
by the Fund's  management  to be at least equal to that of issuers of commercial
paper rated within the two highest grades assigned by Moody's or S&P or at least
as high as that of other obligations the Fund may purchase.

         A  repurchase  agreement,  which  provides a means for the Fund to earn
income on funds for periods as short as overnight, is an arrangement under which
the purchaser (i.e., the Fund) acquires a U.S. Government security  ("Government
Obligation")  and the seller  agrees,  at the time of sale,  to  repurchase  the
Government Obligation at a specified time and price. The repurchase price may be
higher than the purchase price,  the difference being income to the Fund, or the
purchase price and  repurchase  prices may be the same with interest owed to the
Fund at a stated rate  together  with the  repurchase  price on  repurchase.  In
either case,  the income to the Fund is unrelated to the  Government  Obligation
subject to the repurchase agreement.


                                       3
<PAGE>

         For purposes of the 1940 Act, a repurchase  agreement is deemed to be a
loan from the Fund to the  seller of the  Government  Obligation  subject to the
repurchase  agreement.  It is not  clear  whether  a court  would  consider  the
Government Obligation purchased by the Fund subject to a repurchase agreement as
being  owned by the Fund or as  being  collateral  for a loan by the Fund to the
seller. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Government Obligation before repurchase of the
Government Obligation under a repurchase agreement, the Fund may encounter delay
and incur costs before being able to sell the security.  Delays may involve loss
of  interest  or decline  in price of the  Government  Obligation.  If the court
characterizes  the  transaction  as a loan  and the  Fund  has not  perfected  a
security  interest  in the  Government  Obligation,  the Fund may be required to
return the  Government  Obligation  to the seller's  estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
the risk of losing  some or all of the  principal  and  income  involved  in the
transaction.  As with any unsecured debt instrument  purchased for the Fund, the
Fund's  management  seeks  to  minimize  the  risk  of loss  through  repurchase
agreements by analyzing the  creditworthiness  of the obligor,  in this case the
seller of the Government Obligation.

         Apart from the risk of bankruptcy or insolvency  proceedings,  there is
also the risk that the seller may fail to repurchase the security.  However,  if
the  market  value  of the  Government  Obligation  subject  to  the  repurchase
agreement becomes less than the repurchase price (including interest),  the Fund
will  direct  the seller of the  Government  Obligation  to  deliver  additional
securities so that the market value of all securities  subject to the repurchase
agreement will equal or exceed the repurchase price.

         A repurchase agreement with foreign banks may be available with respect
to  government  securities  of the  particular  foreign  jurisdiction,  and such
repurchase  agreements involve risks similar to repurchase  agreements with U.S.
entities.

Investments in Other Investment Companies.  The Fund may invest in securities of
closed-end investment companies.  To the extent that the Fund does so invest, it
will,  by  virtue  of its  investment  therein,  pay a pro rata  portion  of any
investment  advisory fees payable to the advisers of such closed-end  investment
companies.  An investment by the Fund in any such closed-end  investment company
would thereby result in Fund  shareholders  indirectly paying an advisory fee in
addition to that payable to the Fund's adviser.

Strategic Transactions    and Derivatives    . The Fund may, but is not required
to,  utilize  various other  investment  strategies as described  below to hedge
various market risks (such as interest rates, currency exchange rates, and broad
or specific equity or fixed-income  market  movements),  to manage the effective
maturity or duration of the fixed-income  securities in the Fund's portfolio, or
to enhance potential gain.     These  strategies may be executed through the use
of derivative contracts.     Such strategies are generally accepted as    a part
of     modern  portfolio  management  and are regularly  utilized by many mutual
funds and other institutional  investors.  Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory  changes
occur.

         In the course of pursuing  these  investment  strategies,  the Fund may
purchase and sell  exchange-listed and  over-the-counter put and call options on
securities,  equity and  fixed-income  indices and other financial  instruments,
purchase and sell financial  futures  contracts and options thereon,  enter into
various interest rate transactions such as swaps,  caps, floors or collars,  and
enter into various currency  transactions  such as currency  forward  contracts,
currency futures contracts,  currency swaps or options on currencies or currency
futures  (collectively,  all the above  are  called  "Strategic  Transactions").
Strategic  Transactions  may be used    without  limit     to attempt to protect
against  possible  changes in the market  value of  securities  held in or to be
purchased for the Fund's portfolio resulting from securities markets or currency
exchange rate fluctuations,  to protect the Fund's unrealized gains in the value
of its portfolio  securities,  to  facilitate  the sale of such  securities  for
investment  purposes,  to manage  the  effective  maturity  or  duration  of the
fixed-income  securities in the Fund's portfolio,  or to establish a position in
the  derivatives  markets as a temporary  substitute  for  purchasing or selling
particular  securities.  Some Strategic Transactions may also be used to enhance
potential  gain  although no more than 5% of the Fund's assets will be committed
to Strategic  Transactions entered into for non-hedging purposes.  Any or all of
these   investment   techniques   may  be  used  at  any  time      and  in  any
combination,      and there is no  particular  strategy that dictates the use of
one technique  rather than another,  as use of any  Strategic  Transaction  is a
function of numerous variables  including market conditions.  The ability of the
Fund to utilize these  Strategic  Transactions  successfully  will depend on the
Adviser's  ability  to  predict  pertinent  market  movements,  which  cannot be
assured.  The Fund will  comply with  applicable  regulatory  requirements  when


                                       4
<PAGE>

implementing   these   strategies,   techniques   and   instruments.   Strategic
Transactions  involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide  hedging,  risk  management or portfolio
management purposes and not for speculative purposes.

         Strategic  Transactions,     including  derivative  contracts,     have
risks associated with them including  possible default by the other party to the
transaction,  illiquidity  and, to the extent the  Adviser's  view as to certain
market  movements  is  incorrect,  the  risk  that  the  use of  such  Strategic
Transactions  could result in losses greater than if they had not been used. Use
of put and call  options  may  result in  losses to the Fund,  force the sale or
purchase of portfolio  securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market  values,  limit the amount of  appreciation  the Fund can  realize on its
investments  or cause the Fund to hold a security it might  otherwise  sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of  options  and  futures  transactions  entails  certain  other  risks.  In
particular,  the  variable  degree of  correlation  between  price  movements of
futures contracts and price movements in the related  portfolio  position of the
Fund  creates  the  possibility  that losses on the  hedging  instrument  may be
greater than gains in the value of the Fund's position. In addition, futures and
options   markets   may  not  be  liquid  in  all   circumstances   and  certain
over-the-counter  options may have no markets.  As a result, in certain markets,
the  Fund  might  not be able  to  close  out a  transaction  without  incurring
substantial  losses,  if at  all.  Although  the  use  of  futures  and  options
transactions  for  hedging  should  tend to  minimize  the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any  potential  gain  which  might  result  from an  increase  in  value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential  financial risk than would purchases of
options,  where the  exposure  is  limited to the cost of the  initial  premium.
Losses resulting from the use of Strategic  Transactions  would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.

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

         A put option  gives the  purchaser  of the  option,  upon  payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security,  commodity, index, currency or other instrument at the exercise price.
For  instance,  the  Fund's  purchase  of a put  option on a  security  might be
designed  to protect  its  holdings in the  underlying  instrument  (or, in some
cases, a similar  instrument)  against a substantial decline in the market value
by giving  the Fund the right to sell such  instrument  at the  option  exercise
price.  A call  option,  upon payment of a premium,  gives the  purchaser of the
option the right to buy, and the seller the  obligation to sell,  the underlying
instrument  at the  exercise  price.  The Fund's  purchase of a call option on a
security,  financial  future,  index,  currency  or  other  instrument  might be
intended to protect the Fund against an increase in the price of the  underlying
instrument  that it  intends  to  purchase  in the future by fixing the price at
which it may purchase such instrument.  An American style put or call option may
be exercised at any time during the option period while a European  style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options").  Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the  performance  of the  obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.

         With  certain  exceptions,  OCC  issued  and  exchange  listed  options
generally  settle by physical  delivery of the underlying  security or currency,
although in the future cash settlement may become  available.  Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is  "in-the-money"  (i.e.,  where the value of the underlying  instrument
exceeds,  in the case of a call  option,  or is less than,  in the case of a put
option,  the exercise  price of the option) at the time the option is exercised.
Frequently,  rather than taking or making delivery of the underlying  instrument
through  the process of  exercising  the  option,  listed  options are closed by
entering into  offsetting  purchase or sale  transactions  that do not result in
ownership of the new option.


                                       5
<PAGE>

         The Fund's  ability to close out its  position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent,  in part, upon the
liquidity of the option market.  Among the possible reasons for the absence of a
liquid option market on an exchange are: (i)  insufficient  trading  interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading  halts,  suspensions  or other  restrictions  imposed  with  respect  to
particular  classes  or series of  options or  underlying  securities  including
reaching daily price limits;  (iv)  interruption of the normal operations of the
OCC or an exchange;  (v)  inadequacy of the  facilities of an exchange or OCC to
handle current  trading  volume;  or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant  market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.

         The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the  option  markets  close  before the  markets  for the  underlying  financial
instruments,  significant  price  and  rate  movements  can  take  place  in the
underlying markets that cannot be reflected in the option markets.

         OTC options are purchased from or sold to securities dealers, financial
institutions  or  other  parties  ("Counterparties")  through  direct  bilateral
agreement with the Counterparty.  In contrast to exchange listed options,  which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement,  term, exercise price,
premium,  guarantees and security,  are set by  negotiation of the parties.  The
Fund will only sell OTC  options  (other  than OTC  currency  options)  that are
subject to a buy-back provision  permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula  price within  seven days.  The
Fund  expects  generally  to enter into OTC  options  that have cash  settlement
provisions, although it is not required to do so.

         Unless the  parties  provide  for it,  there is no central  clearing or
guaranty function in an OTC option.  As a result,  if the Counterparty  fails to
make or take delivery of the security,  currency or other instrument  underlying
an OTC  option  it has  entered  into  with  the  Fund or  fails  to make a cash
settlement  payment due in  accordance  with the terms of that option,  the Fund
will lose any premium it paid for the option as well as any anticipated  benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each  such   Counterparty  or  any  guarantor  or  credit   enhancement  of  the
Counterparty's  credit to  determine  the  likelihood  that the terms of the OTC
option will be satisfied.  The Fund will engage in OTC option  transactions only
with U.S.  government  securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other  financial  institutions  which have  received (or the  guarantors  of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1  from  Moody's  or an  equivalent  rating  from  any  nationally  recognized
statistical  rating  organization  ("NRSRO")  or,  in the  case of OTC  currency
transactions,  determined to be of equivalent credit quality by the Adviser. The
staff of the SEC currently takes the position that OTC options  purchased by the
Fund, and portfolio  securities  "covering" the amount of the Fund's  obligation
pursuant  to an OTC  option  sold by it  (the  cost of the  sell-back  plus  the
in-the-money  amount,  if any)  are  illiquid,  and are  subject  to the  Fund's
limitation on investing no more than 10% of its assets in illiquid securities.

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

         The Fund may  purchase and sell call  options on  securities  including
U.S. Treasury and agency securities,  mortgage-backed securities, corporate debt
securities,  equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities  exchanges and in the
over-the-counter  markets,  and on securities  indices,  currencies  and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures  contract  subject to the call) or must meet the asset
segregation  requirements  described  below as long as the call is  outstanding.
Even though the Fund will receive the option  premium to help protect it against
loss,  a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize  appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.


                                       6
<PAGE>

         The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities,  mortgage-backed  securities,  foreign sovereign
debt,  corporate  debt  securities,  equity  securities  (including  convertible
securities)  and  Eurodollar  instruments  (whether  or not it holds  the  above
securities in its portfolio), and on securities indices,  currencies and futures
contracts other than futures on individual  corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's  assets  would be required to be  segregated  to cover its  potential
obligations  under such put options other than those with respect to futures and
options  thereon.  In selling put options,  there is a risk that the Fund may be
required to buy the  underlying  security at a  disadvantageous  price above the
market price.

General  Characteristics  of Futures.  The Fund may enter into financial futures
contracts  or purchase or sell put and call  options on such  futures as a hedge
against  anticipated  interest  rate,  currency or equity  market  changes,  for
duration  management  and for risk  management  purposes.  Futures are generally
bought and sold on the commodities  exchanges where they are listed with payment
of  initial  and  variation  margin as  described  below.  The sale of a futures
contract  creates a firm  obligation by the Fund,  as seller,  to deliver to the
buyer the specific type of financial  instrument called for in the contract at a
specific  future time for a specified  price (or,  with respect to index futures
and Eurodollar instruments,  the net cash amount).  Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives  the  purchaser  the  right in  return  for the  premium  paid to assume a
position  in a  futures  contract  and  obligates  the  seller to  deliver  such
position.

         The Fund's use of  financial  futures and options  thereon  will in all
cases be consistent with applicable  regulatory  requirements  and in particular
the rules and regulations of the Commodity  Futures Trading  Commission and will
be entered into only for bona fide hedging,  risk management (including duration
management) or other portfolio  management  purposes.  Typically,  maintaining a
futures  contract or selling an option thereon requires the Fund to deposit with
a financial  intermediary  as security for its  obligations an amount of cash or
other specified  assets (initial  margin) which initially is typically 1% to 10%
of the face amount of the  contract  (but may be higher in some  circumstances).
Additional  cash or assets  (variation  margin) may be required to be  deposited
thereafter  on a  daily  basis  as the  mark to  market  value  of the  contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option  without any further  obligation on the part of the Fund.
If the Fund  exercises  an option on a futures  contract it will be obligated to
post  initial  margin  (and  potential  subsequent  variation  margin)  for  the
resulting futures position just as it would for any position.  Futures contracts
and  options  thereon  are  generally  settled by  entering  into an  offsetting
transaction  but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.

         The Fund  will not enter  into a futures  contract  or  related  option
(except for closing  transactions) if,  immediately  thereafter,  the sum of the
amount of its initial margin and premiums on open futures  contracts and options
thereon  would exceed 5% of the Fund's total  assets  (taken at current  value);
however,  in the  case of an  option  that is  in-the-money  at the  time of the
purchase,  the  in-the-money  amount  may  be  excluded  in  calculating  the 5%
limitation.  The segregation  requirements with respect to futures contracts and
options thereon are described below.

Options on Securities  Indices and Other  Financial  Indices.  The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through  the sale or  purchase  of options  on  individual  securities  or other
instruments.  Options on  securities  indices  and other  financial  indices are
similar to options on a security or other  instrument  except that,  rather than
settling by physical delivery of the underlying instrument,  they settle by cash
settlement,  i.e.,  an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds,  in the case of a call, or is less than,
in the case of a put, the exercise  price of the option  (except if, in the case
of an OTC option, physical delivery is specified).  This amount of cash is equal
to the excess of the closing  price of the index over the exercise  price of the
option,  which  also may be  multiplied  by a formula  value.  The seller of the
option is  obligated,  in return for the premium  received,  to make delivery of
this  amount.  The  gain or loss on an  option  on an  index  depends  on  price
movements in the instruments making up the market,  market segment,  industry or
other  composite  on which the  underlying  index is based,  rather  than  price
movements in  individual  securities,  as is the case with respect to options on
securities.

Currency  Transactions.  The Fund  may  engage  in  currency  transactions  with
Counterparties in order to hedge the value of portfolio holdings  denominated in
particular   currencies  against   fluctuations  in  relative  value.   Currency
transactions  include  forward  currency  contracts,  exchange  listed  currency


                                       7
<PAGE>

futures,  exchange  listed and OTC options on currencies,  and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract  agreed upon
by the parties,  at a price set at the time of the contract.  A currency swap is
an agreement to exchange cash flows based on the notional  difference  among two
or more  currencies  and operates  similarly to an interest rate swap,  which is
described   below.   The  Fund  may  enter  into  currency   transactions   with
Counterparties  which have received (or the guarantors of the obligations  which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that  have  an  equivalent  rating  from  a  NRSRO  or are  determined  to be of
equivalent credit quality by the Adviser.

         The Fund's  dealings in forward  currency  contracts and other currency
transactions  such as  futures,  options,  options on futures  and swaps will be
limited  to  hedging   involving  either  specific   transactions  or  portfolio
positions.  Transaction  hedging is entering  into a currency  transaction  with
respect to specific  assets or  liabilities  of the Fund,  which will  generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt  of income  therefrom.  Position  hedging  is  entering  into a currency
transaction  with  respect  to  portfolio  security  positions   denominated  or
generally quoted in that currency.

         The Fund will not enter into a transaction to hedge  currency  exposure
to an  extent  greater,  after  netting  all  transactions  intended  wholly  or
partially to offset other transactions,  than the aggregate market value (at the
time of entering into the  transaction)  of the securities held in its portfolio
that are denominated or generally  quoted in or currently  convertible into such
currency, other than with respect to proxy hedging as described below.

         The Fund may also cross-hedge  currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other  currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.

         To reduce the effect of currency  fluctuations on the value of existing
or  anticipated  holdings of portfolio  securities,  the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging  entails  entering into a commitment or option to sell a currency  whose
changes in value are  generally  considered  to be  correlated  to a currency or
currencies in which some or all of the Fund's  portfolio  securities  are or are
expected to be  denominated,  in exchange  for U.S.  dollars.  The amount of the
contract  would not  exceed the value of the Fund's  securities  denominated  in
correlated  currencies.  For example, if the Adviser considers that the Austrian
schilling is  correlated to the German  deutschemark  (the  "D-mark"),  the Fund
holds  securities  denominated in schillings  and the Adviser  believes that the
value of schillings will decline against the U.S. dollar,  the Adviser may enter
into a contract to sell D-marks and buy dollars.  Currency hedging involves some
of the  same  risks  and  considerations  as  other  transactions  with  similar
instruments.  Currency  transactions  can  result  in  losses to the Fund if the
currency being hedged  fluctuates in value to a degree or in a direction that is
not anticipated.  Further,  there is the risk that the perceived linkage between
various  currencies  may  not be  present  or  may  not be  present  during  the
particular  time that the Fund is engaging in proxy hedging.  If the Fund enters
into a  currency  hedging  transaction,  the Fund  will  comply  with the  asset
segregation requirements described below.

Risks of  Currency  Transactions.  Currency  transactions  are  subject to risks
different from those of other portfolio  transactions.  Because currency control
is of great  importance  to the  issuing  governments  and  influences  economic
planning and policy, purchases and sales of currency and related instruments can
be  negatively  affected  by  government  exchange  controls,   blockages,   and
manipulations or exchange restrictions imposed by governments.  These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations  and could also cause hedges it has entered into to be
rendered  useless,  resulting  in full  currency  exposure as well as  incurring
transaction  costs.  Buyers and sellers of  currency  futures are subject to the
same risks that apply to the use of futures generally.  Further, settlement of a
currency  futures  contract for the purchase of most  currencies must occur at a
bank  based in the  issuing  nation.  Trading  options  on  currency  futures is
relatively  new,  and the ability to establish  and close out  positions on such
options is subject to the maintenance of a liquid market which may not always be
available.  Currency  exchange rates may fluctuate based on factors extrinsic to
that country's economy.

Combined Transactions. The Fund may enter into multiple transactions,  including
multiple options transactions,  multiple futures transactions, multiple currency
transactions  (including forward currency  contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate


                                       8
<PAGE>

transactions   ("component"   transactions),   instead  of  a  single  Strategic
Transaction,  as part of a single or combined  strategy  when, in the opinion of
the  Adviser,  it is in the best  interests  of the  Fund to do so.  A  combined
transaction  will usually  contain  elements of risk that are present in each of
its component transactions.  Although combined transactions are normally entered
into based on the Adviser's  judgment that the combined  strategies  will reduce
risk or otherwise  more  effectively  achieve the desired  portfolio  management
goal, it is possible that the  combination  will instead  increase such risks or
hinder achievement of the portfolio management objective.

Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest  rate,  currency and index swaps and the purchase or
sale of related caps,  floors and collars.  The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio,  to protect  against  currency  fluctuations,  as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates  purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell  interest  rate caps or floors  where it does not own  securities  or other
instruments  providing  the  income  stream  the Fund may be  obligated  to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate  payments  for fixed rate  payments  with  respect to a notional  amount of
principal.  A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value  differential among
them and an index swap is an agreement  to swap cash flows on a notional  amount
based on changes in the values of the reference  indices.  The purchase of a cap
entitles the purchaser to receive  payments on a notional  principal amount from
the party  selling  such cap to the  extent  that a  specified  index  exceeds a
predetermined  interest  rate or amount.  The  purchase of a floor  entitles the
purchaser  to receive  payments  on a notional  principal  amount from the party
selling  such  floor  to the  extent  that  a  specified  index  falls  below  a
predetermined  interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a  predetermined  range of interest
rates or values.

         The Fund will usually  enter into swaps on a net basis,  i.e.,  the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument,  with the Fund receiving or paying, as the case may
be,  only the net amount of the two  payments.  Inasmuch as these  swaps,  caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute  senior securities under
the 1940 Act and,  accordingly,  will not  treat  them as being  subject  to its
borrowing  restrictions.  The Fund will not enter into any swap,  cap,  floor or
collar  transaction  unless, at the time of entering into such transaction,  the
unsecured  long-term  debt  of  the  Counterparty,   combined  with  any  credit
enhancements,  is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO.  If  there is a  default  by the  Counterparty,  the Fund may have
contractual remedies pursuant to the agreements related to the transaction.  The
swap market has grown substantially in recent years with a large number of banks
and investment  banking firms acting both as principals and as agents  utilizing
standardized  swap  documentation.  As a  result,  the swap  market  has  become
relatively  liquid.  Caps,  floors and collars are more recent  innovations  for
which  standardized   documentation  has  not  yet  been  fully  developed  and,
accordingly, they are less liquid than swaps.

Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S.  dollar-denominated futures contracts or options
thereon  which are  linked  to the  London  Interbank  Offered  Rate  ("LIBOR"),
although  foreign  currency-denominated  instruments  are available from time to
time.  Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use  Eurodollar  futures  contracts  and options  thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.

Risks of Strategic  Transactions  Outside the U.S.  When  conducted  outside the
U.S., Strategic  Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees,  and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities,  currencies and other instruments.  The value of such positions also
could be adversely affected by: (i) other complex foreign  political,  legal and
economic factors,  (ii) lesser availability than in the U.S. of data on which to
make trading decisions,  (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during  non-business hours in the U.S., (iv)
the  imposition of different  exercise and  settlement  terms and procedures and
margin  requirements  than  in the  U.S.,  and  (v)  lower  trading  volume  and
liquidity.

Use of Segregated and Other Special Accounts.  Many Strategic  Transactions,  in
addition to other  requirements,  require  that the Fund  segregate  liquid high
grade assets with its custodian to the extent Fund obligations are not otherwise


                                       9
<PAGE>

"covered" through ownership of the underlying security,  financial instrument or
currency.  In general,  either the full amount of any  obligation by the Fund to
pay or  deliver  securities  or  assets  must be  covered  at all  times  by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory  restrictions,  an amount of cash or liquid high grade  securities at
least equal to the current amount of the obligation  must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer  necessary to segregate
them.  For example,  a call option  written by the Fund will require the Fund to
hold the  securities  subject to the call (or  securities  convertible  into the
needed  securities  without  additional  consideration)  or to segregate  liquid
high-grade  securities  sufficient to purchase and deliver the securities if the
call is  exercised.  A call option sold by the Fund on an index will require the
Fund to own portfolio  securities which correlate with the index or to segregate
liquid  high  grade  assets  equal to the  excess  of the index  value  over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high grade assets equal to the exercise price.

         Except when the Fund enters into a forward contract for the purchase or
sale of a security  denominated  in a  particular  currency,  which  requires no
segregation,  a  currency  contract  which  obligates  the  Fund  to buy or sell
currency will  generally  require the Fund to hold an amount of that currency or
liquid securities  denominated in that currency equal to the Fund's  obligations
or to  segregate  liquid  high  grade  assets  equal to the amount of the Fund's
obligation.

         OTC options  entered into by the Fund,  including  those on securities,
currency,  financial  instruments or indices and OCC issued and exchange  listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations,  as there is no requirement for payment or delivery
of amounts in excess of the net  amount.  These  amounts  will equal 100% of the
exercise  price  in the  case  of a non  cash-settled  put,  the  same as an OCC
guaranteed  listed option sold by the Fund, or the in-the-money  amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund  sells a call  option on an index at a time when the  in-the-money
amount exceeds the exercise  price,  the Fund will  segregate,  until the option
expires  or is  closed  out,  cash or cash  equivalents  equal  in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally  settle with physical  delivery,  and the Fund will segregate an
amount of assets  equal to the full value of the option.  OTC  options  settling
with physical delivery,  or with an election of either physical delivery or cash
settlement  will be treated the same as other  options  settling  with  physical
delivery.

         In the case of a futures  contract or an option thereon,  the Fund must
deposit  initial  margin and  possible  daily  variation  margin in  addition to
segregating  assets  sufficient  to meet its  obligation  to purchase or provide
securities  or  currencies,  or to pay the amount owed at the  expiration  of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.

         With  respect  to swaps,  the Fund will  accrue  the net  amount of the
excess,  if any, of its obligations over its  entitlements  with respect to each
swap on a daily basis and will  segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess.  Caps, floors and collars
require  segregation of assets with a value equal to the Fund's net  obligation,
if any.

         Strategic  Transactions  may be covered by other means when  consistent
with  applicable  regulatory  policies.  The Fund may also enter into offsetting
transactions so that its combined position,  coupled with any segregated assets,
equals  its  net  outstanding   obligation  in  related  options  and  Strategic
Transactions.  For example,  the Fund could  purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund.  Moreover,  instead of  segregating  assets if the Fund held a
futures or forward contract,  it could purchase a put option on the same futures
or forward  contract with a strike price as high or higher than the price of the
contract held. Other Strategic  Transactions may also be offset in combinations.
If the  offsetting  transaction  terminates  at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.

         The Fund's activities  involving Strategic  Transactions may be limited
by  the   requirements  of  Subchapter  M  of  the  Internal  Revenue  Code  for
qualification as a regulated investment company. (See "TAXES.")


                                       10
<PAGE>

Investment Restrictions

         The Fund may not,  without the approval of holders of a majority of its
outstanding voting securities (as defined by the 1940 Act):

         (a)      Purchase or sell physical commodities or contracts relating to
                  physical commodities;

         (b)      With respect to 75% of its total assets taken at market value,
                  purchase more than 10% of the outstanding voting securities of
                  any one  issuer,  or  invest  more than 5% of the value of its
                  total  assets  in the  securities  of any one  issuer,  except
                  obligations issued or guaranteed by the U.S.  Government,  its
                  agencies or  instrumentalities  and except securities of other
                  investment companies;

         (c)      Borrow money except as a temporary  measure for  extraordinary
                  or  emergency  purposes or except in  connection  with reverse
                  repurchase  agreements  provided that the Fund maintains asset
                  coverage of 300% for all borrowings;

         (d)      Act as an underwriter of securities  issued by others,  except
                  to the  extent  that  it  may  be  deemed  an  underwriter  in
                  connection with the disposition of portfolio securities of the
                  Fund;

         (e)      Make loans to other  persons,  except  (a) loans of  portfolio
                  securities,  and (b) to the extent  the entry into  repurchase
                  agreements  and the purchase of debt  securities in accordance
                  with its investment  objective and investment  policies may be
                  deemed to be loans;

         (f)      Purchase or sell real estate  (except that the Fund may invest
                  in (i)  securities  of companies  which deal in real estate or
                  mortgages,  and (ii)  securities  secured  by real  estate  or
                  interests  therein,  and  that the Fund  reserves  freedom  of
                  action to hold and to sell real estate acquired as a result of
                  the Fund's ownership of securities).

         In addition, the Fund's Articles of Incorporation, which can be amended
only with the approval of holders of a majority of its outstanding stock, do not
authorize  the  issuance  of senior  securities  or debt  securities  other than
securities to evidence  borrowings as permitted by  investment  restriction  (c)
above.

         It is also the Fund's  policy not to  concentrate  its  investments  in
particular  industries and not in any event to invest more than 25% of its total
assets in any one  industry.  An  exception to this policy in the case of rights
offerings of Japanese  corporations  permits the Fund to purchase the securities
of any issuer pursuant to the exercise of rights  distributed to the Fund by the
issuer, even though after such purchase more than 25% of the total assets of the
Fund would be invested in securities of issuers in the same  industry,  with the
limitation  that no such  purchase  may be made if as a result the Fund would no
longer be a diversified investment company as defined by the 1940 Act.

Other Investment Policies

         In addition, the Board of Directors of the Fund has voluntarily adopted
certain  policies  and  restrictions  which are  observed  in the conduct of the
Fund's  affairs and which may be changed by the Board of  Directors  without the
approval of  shareholders.  Pursuant to these policies and  restrictions,  which
represent the intentions of the Board based upon current circumstances, the Fund
will not:

         (a)      Purchase  any  securities  of the  Government  of Japan or any
                  instrumentality  thereof, if as a result, the aggregate amount
                  of such  securities held by the Fund would be more than 25% of
                  the total assets of the Fund;

         (b)      Purchase  the  securities  of any  issuer  which  has  been in
                  continuous  operation for less than three years (including the
                  operations  of  predecessor  companies) if as a result of such
                  purchase  more than 5% of the  Fund's  total  assets  would be
                  invested in the securities of all such issuers;


                                       11
<PAGE>

         (c)      Purchase the securities of other  investment  companies except
                  through  open  market  purchases  involving  no  more  than  a
                  customary  broker's  commission or in connection with a merger
                  or consolidation;

         (d)      Purchase  or retain  the  securities  of any issuer if certain
                  persons,  who are  affiliated  with the Fund or an  investment
                  adviser  (as  defined by the  Investment  Company Act of 1940)
                  thereof and individually  own  beneficially  more than 1/2% of
                  the  outstanding  securities of any class of such issuer,  own
                  beneficially in the aggregate more than 5% of such securities;

         (e)      Purchase  securities on margin (except such short-term credits
                  as may be  necessary  for  clearance of  transactions  and the
                  maintenance of margin with respect to futures contracts), make
                  short  sales  (unless  by  virtue  of its  ownership  of other
                  securities, it has the right to obtain securities sold and, if
                  the  right  is  conditional,  the  sale is made  upon the same
                  conditions)  or  participate  on a joint or joint and  several
                  basis in any trading account in any securities;

         (f)      Mortgage or pledge any of its assets;

         (g)      Purchase  or sell  interest  in oil,  gas,  or  other  mineral
                  exploration or development  programs,  or leases  (although it
                  may invest in  securities  of  issuers  which own or invest in
                  such interests);

         (h)      Invest  more than 5% of the Fund's net assets in  warrants  or
                  more than 2% of its net assets in warrants that are not listed
                  on the New York or American Stock  Exchanges or on an exchange
                  with  comparable  listing   requirements  (for  this  purpose,
                  warrants  attached  to  securities  will be  deemed to have no
                  value);

         (i)      Purchase securities of other open-end investment  companies or
                  invest  more  than 5% of its  total  assets  (taken  at market
                  value) in the securities of closed-end  investment  companies,
                  provided  that no purchases of the  securities  of  closed-end
                  investment  companies  shall be made except by purchase in the
                  open  market  where no  commission  or profit to a sponsor  or
                  broker/dealer   results  other  than  the  customary  broker's
                  commission  (except when such  purchase,  although not made in
                  the   open   market,   is  part  of  a  plan  of   merger   or
                  consolidation);

         (j)      Purchase restricted  securities (for these purposes restricted
                  security   means  a  security  with  a  legal  or  contractual
                  restriction  on  resale in the  principal  market in which the
                  security is traded),  including repurchase agreements maturing
                  in more than seven days and  securities  which are not readily
                  marketable,  if as a result  more than 10% of the value of the
                  Fund's net assets  (valued at current  market  value) would be
                  invested in such securities;

         (k)      Purchase  securities if, as a result thereof,  more than 5% of
                  the  value of the  Fund's  net  assets  would be  invested  in
                  restricted  securities (for these purposes restricted security
                  means a security with a legal or  contractual  restriction  on
                  resale  in the  principal  market  in which  the  security  is
                  traded);

         (l)      Buy options on securities or financial instruments, unless the
                  aggregate  premiums  paid on all such options held by the Fund
                  at any time do not exceed 20% of its net  assets;  or sell put
                  options on securities, if, as a result, the aggregate value of
                  the  obligations  underlying such put options would exceed 50%
                  of the Fund's net assets;

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

         (n)      Purchase unmarketable interests in real estate;

         (o)      Invest   more  than  5%  of  its  net  assets  in   repurchase
                  agreements;



                                       12
<PAGE>

         (p)      Invest  more  than     30    %  of its net  assets  in  equity
                  securities which are traded in an over-the-counter market; or

         (q)      Borrow  money  except  from banks as a  temporary  measure for
                  extraordinary  or  emergency  purposes.   The  Fund  will  not
                  purchase securities while outstanding  borrowings exceed 5% of
                  the Fund's total assets.  Under the Investment  Company Act of
                  1940,  asset  coverage  of  300%  of any  borrowings  must  be
                  maintained.

         As  a  matter  of  non-fundamental  policy,  the  Fund  may  invest  in
securities of issuers having their  principal place of business in developing or
newly  industrializing  countries,  but has no present  intention to invest more
than 5% of its net assets in such securities.

         The 1940 Act imposes  certain  additional  restrictions  affecting  the
Fund's investments.

         For  purposes  of  determining  whether  a  percentage  restriction  on
investment  or  utilization  of  assets  as set forth  above  under  "Investment
Objective  and  Policies,"   "Investment   Restrictions"  or  "Other  Investment
Policies"  has been adhered to at the time an investment is made, a later change
in  percentage  resulting  from  changes  in the value or the total  cost of the
Fund's assets will not be considered a violation of such restriction.

                         JAPAN AND THE JAPANESE ECONOMY*

         Because of distance,  as well as differences in language,  history, and
culture, Japan remains relatively unfamiliar to many investors.  The archipelago
of Japan  stretches for 1300 miles in the western Pacific Ocean and comprises an
area of  approximately  146,000 square miles.  The four main islands,  Hokkaido,
Honshu, Kyushu and Shikoku, cover the same approximate range of latitude and the
same  general  range of climate as the east coast of the United  States north of
Florida. The archipelago has in the past experienced earthquakes and tidal waves
of varying  degrees of  severity,  and the risks of such  phenomena,  and damage
resulting therefrom, continue to exist.

         Japan  has a  total  population  of  approximately  125  million.  Life
expectancy  is one of the  highest in the world.  Literacy  in Japan  approaches
100%. Nearly 90% of Japanese  students graduate from high school.  Approximately
37% go on to college or university. Approximately 45% of the total population of
Japan is  concentrated  in the  metropolitan  areas of Tokyo,  Osaka and Nagoya,
cities with some of the world's highest population densities.

         Over the post war period  Japan has  experienced  significant  economic
development. Today Japan is the second largest industrial nation in the world in
terms of GDP, with the United  States being the largest.  During the era of high
economic  growth in the 1960s and  early  1970s the  expansion  was based on the
development of heavy  industries such as steel and  shipbuilding.  In the 1970s,
Japan moved into assembly  industries  that employ high levels of technology and
consume  relatively  low  quantities of  resources,  and since then has become a
major producer of automobiles  and  electrical  and  electronic  products.  More
recently Japanese  manufacturers  have moved capacity abroad to lower labor cost
areas while focusing on high technology goods and improving services in the home
market.  The recent  deregulation in retailing,  together with rising demand for
services, has created new business  opportunities in consumer products,  such as
travel, leisure pursuits,  fashions,  computer software,  mobile communications,
fast food restaurants and specialized retailing.

         Since the early 1980s Japan has generally  experienced  very low levels
of inflation.  This  achievement has been made possible by gains in productivity
that  exceeded  wage  increases on balance and, at times,  a strong yen that has
reduced the cost of imported raw materials.

         Japan's  economy is a market economy in which industry and commerce are
predominantly privately owned and operated.  However, the Government is involved
in establishing and meeting  objectives for developing the economy and improving
the standard of living of the Japanese people.  In order to achieve its economic

- --------------------
*        Where  figures in tables  under this caption have been rounded off, the
         totals may not necessarily agree with the sum of figures.


                                       13
<PAGE>

objectives,  the Government has generally  relied on providing the  prerequisite
business environment and administrative guidance. The agencies of the Government
primarily concerned with economic policy and its implementation are the Economic
Planning Agency, The Ministry of Finance (MOF) and the Ministry of International
Trade and Industry (MITI). The Bank of Japan, Japan's central bank, also acts in
this field.

         After a period of political turmoil immediately after World War II, the
Liberal  Democratic  Party (LDP) came to power and  continued  to rule until the
summer of 1993. The party represented  producers--business  and agriculture--not
consumers.  Voting  representation,  heavily skewed in favor of rural areas,  as
well  as  hefty  corporate   "contributions"  to  politicians  perpetuated  this
arrangement. As Japan matured, however, policy deviated farther and farther from
the interests of most urban salary earners, who had come to comprise the bulk of
the  population.  More and more  "contributions"  were needed to keep the LDP in
power,  until finally a spate of bribery and payback  scandals brought the party
down.  Prime  Minister  Morihiro  Hosokawa  came to the fore  last  summer  on a
platform  of  political  reform,   deregulation,   and   decentralization.   His
government, however, was a coalition of seven parties with diverse interests and
whose  experience  in  the  seat  of  power  was  limited.  While  the  formerly
unassailable  power of the bureaucrats at MITI and MOF has begun to crack, these
powerful  interest  groups have  succeeded in blocking many of the  government's
proposed   reforms.   Mr.  Hosokawa   abruptly  resigned  on  April  8th.  After
considerable bargaining among various members of the coalition, foreign minister
Tsutomu Hata, a former member of the LDP and a founder of the present  coalition
was named prime  minister by the  Parliament on April 25th.  While the political
situation is uncertain,  the electoral reforms and the deregulation Mr. Hosokawa
succeeded in getting  through  Parliament have attracted much public support and
are unlikely to be overturned.

Economic Trends

         During the ten and five-year periods ended December 1993, Japan's gross
domestic  product in constant  prices  increased at an average  annual  compound
growth rate of 3.7% and 3.0%, respectively. In May 1989, the Bank of Japan began
to tighten  monetary  policy in response to the rapid growth of the economy that
reached 6.2% in 1988 and to the asset inflation  evidenced in the rapidly rising
stock market and real estate  prices.  The discount rate was raised,  in stages,
from 2.5% to 5.5% by July 1991. The economy began to decelerate  slowly.  Growth
in 1989 was 4.7%, in 1990,  4.8% and in 1991,  4.3%. The  deceleration in growth
gained momentum in early 1992 and three successive  quarters of falling GDP were
registered.  For the year as a whole growth was 1.2%.  The pattern of growth has
continued to be uneven in 1993 and for the year as a whole GDP  increased  0.1%,
resulting in the worst recession of the post war period.  Although the recession
has been painful,  positive  fundamental changes are taking place. The old Japan
of  single  party   government,   industrial  policy  directed  by  all-powerful
bureaucratic  and an economic  juggernaut  built on  exporting  and market share
expansion is crumbling. In its place are the beginnings of a more representative
government,  a more deregulated  economy and a business philosophy oriented more
to profitability than to market share.


                                       14
<PAGE>

         The following  table sets forth the relative  increase in Japan's gross
domestic product as discussed on page 15 for calendar years 1988-1993.

<TABLE>
<CAPTION>
                                       GROSS DOMESTIC PRODUCT (trillions of yen)

                                     1988       1989       1990       1991       1992       1993

<S>                                  <C>        <C>        <C>        <C>        <C>        <C>  
GDP At Current Prices                371.3      396.2      424.6      451.3      463.8      468.8
   Consumption                       249.3      264.8      282.4      296.3      308.0      315.5
      Private                        215.1      228.5      243.6      255.1      264.8      270.5
      Public                          34.2       36.3       38.8       41.2       43.3       45.0

Fixed Investment                     111.0      122.8      136.8      143.4      143.0      141.3
      Private                         86.0       96.9      108.6      113.1      107.9      100.8
      Public                          25.0       25.9       28.1       30.3       35.1       40.5

Change in Inventories                  2.6        3.1        2.3        3.3        1.6        1.0

Net Exports of Goods and Services      8.4        5.6        3.0        8.3       11.2       10.9
   Exports of Goods and Services      37.5       42.4       45.9       46.8       47.4       44.2
   Imports of Goods & Services        29.1       36.8       42.9       38.5       36.2       33.3

GDP at Constant (1985) Prices        363.6      380.7      399.0      416.0      420.8      421.2
GDP Deflator (1985=100)              102.2      104.1      106.4      108.5      110.2      111.3

Percentage Increase of GDP
      At Current Prices                 .6%       6.7%       7.2%       6.3%       2.8%       1.1%
      At Constant Prices               6.2%       4.7%       4.8%       4.3%       1.1%       0.1%
      Deflator                         0.4%       1.9%       2.2%       2.0%       1.6%       1.0%

Percentage of GDP at
   Current Prices
Consumption                           67.1%      66.8%      66.5%      65.7%      66.4%      67.3%
Gross Investment                      30.6       31.8       32.8       32.5       31.2       30.4%
Exports of Goods & Services           10.1       10.7       10.8       10.4       10.2        9.4%
Imports of Goods & Services           -7.8       -9.3      -10.1       -8.5       -7.8       -7.1%
                                     -----      -----      -----      -----      -----      -----

Total GDP                            100.0%     100.0%     100.0%     100.0%     100.0%     100.0%

Source:  Economic Planning Agency, Quarterly Report on National Accounts (March 1994).
</TABLE>


Industrial Production

         The  following  table sets forth  indices of  industrial  production of
Japan and other  selected  industrial  countries  for the six years  ending with
calendar year 1993 (with 1985 as 100):



                                       15
<PAGE>

<TABLE>
<CAPTION>
                                           INDICES OF INDUSTRIAL PRODUCTION

                                          1988       1989       1990       1991       1992       1993
                                          ----       ----       ----       ----       ----       ----
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>  
Japan                                     113.1      119.7      124.5      126.5      119.0      113.6
United States                             110.5      113.3      114.5      112.3      114.0      116.5
Federal Republic of Germany               105.9      110.9      117.0      120.8      118.6      110.6
United Kingdom                            111.6      114.0      113.7      109.2      108.7      NA
France                                    107.4      111.3      112.9      113.2      113.1      NA
Italy                                     114.1      118.7      118.0      115.4      114.6      NA
Canada                                    109.6      109.7      106.0      101.3      101.7      107.9

Source:  IMF, International Financial Statistics (Feb. 1994).
</TABLE>

         The following table sets forth the proportion of gross domestic product
contributed by major industrial sectors of the economy for 1987 through 1992:

<TABLE>
<CAPTION>
                                     GROSS DOMESTIC PRODUCT* BY INDUSTRIAL SECTORS

                                        1987        1988        1989        1990        1991        1992

<S>                                      <C>         <C>         <C>         <C>         <C>         <C> 
Agriculture, Forestry and Fisheries      2.8%        2.6%        2.6%        2.5%        2.3%        2.3%
Mining                                   0.3         0.3         0.3         0.3         0.3         0.3
Construction                             7.9         9.2         9.5         9.8         8.8         8.8
Manufacturing                           29.0        28.7        28.9        28.9        32.1        31.1
Electricity, Gas and Water               3.2         3.1         2.9         2.8         3.3         3.3
Wholesale and Retail Trade              13.3        12.9        12.7        12.8        13.8        14.0
Finance and Insurance                    5.7         5.7         5.9         5.5         5.9         5.8
Real Estate Transportation,             10.4        10.9        11.0        10.9         9.8         9.9
  Communication and Other
  Public Utilities                       6.2         6.5         6.6         6.5         6.4         6.2
Services                                14.7        14.8        15.3        15.9        14.1        14.1
Government Services                      8.2         7.9         7.8         7.7         6.5         6.4
Private Non-Profit Institutions          2.0         2.0         2.0         1.9         1.8         1.8
Import Duty                              0.3         0.3         0.5         0.6         0.8         0.9
Imputed Interest                        (4.5)       (4.5)       (5.1)       (5.3)       (5.7)       (5.9)
Statistical Discrepancy                  0.3         0.5         0.4         0.5         0.1         0.9
                                        -----       -----       -----       -----       -----       -----

      Total                            100.0%      100.0%      100.0%      100.0%      100.0%      100.0%
                                       -----       -----       -----       -----       -----       ----- 
</TABLE>

     *   Gross domestic  product  measures the value of final goods and services
         produced by a country's domestic economy. It is equal to gross national
         product, minus the income that residents receive from abroad for factor
         services  rendered abroad,  plus similar payments made to non-residents
         who contribute to the domestic income.

Source:  Economic Planning Agency, Annual Report on National Accounts (1994).

Energy

         Japan  has  historically  depended  on  oil  for  most  of  its  energy
requirements. Virtually all of its oil is imported, the majority from the Middle
East. Oil price changes used to have a major impact on the domestic economy, but
now their influence is relatively diminished.

         Japan has worked to reduce its dependence on oil by encouraging  energy
conservation and use of alternative fuels. In addition to conservation  efforts,
a restructuring  of industry,  with emphasis  shifting from basic  industries to


                                       16
<PAGE>

processing and assembly type  industries,  has also contributed to the reduction
of oil consumption. Despite Japan's sustained economic growth, crude oil imports
have not increased materially since 1979.

Labor

         In 1993  approximately 66 million persons,  or approximately 53% of the
Japanese population,  were employed,  of which approximately 6% were employed in
agriculture,   forestry  and  fisheries,   34%  in  mining,   construction   and
manufacturing and 33% in trade, finance,  transportation and communication,  and
27% in other service-related  industries (including the government).  Since 1980
an  increasing  proportion  of the paid  workforce  is female and an  increasing
number of people have been employed in service industries.

         Except for 1992 and 1993,  productivity gains over the recent five-year
period  have  exceeded  or been close to the rise in wages with the result  that
unit  labor  costs  have  declined  or risen  only  slightly.  In 1992 and 1993,
however,  there were sharp  declines  in  productivity  that were due in part to
Japan's labor policies,  which tend to result in a decline of productivity  when
production falls since labor is not let go as rapidly as in other industrialized
countries. As a result, unit labor costs rose sharply in 1992 and 1993.

                                     MANUFACTURING

                 Wages              Productivity          Unit Labor Costs
                             (annual percentage change)

1988              3.5                   11.5                   -7.2
1989              4.1                    6.2                   -2.0
1990              4.7                    4.2                    0.5
1991              3.6                    2.3                    1.3
1992              2.1                   -5.1                    7.6
1993              2.1                   -1.5                    3.7

Source:  Ministry of Labor,  Monthly Labor Statistics (Mar. 1994);  Productivity
         Research Institute, Quarterly Journal of Productivity Statistics

Prices

         In 1993 the wholesale  price index fell by 3.6% and the consumer  price
index rose by 1.3%.  The  virtual  absence of  inflation  was due in part to the
decline in economic  activity or in part to the deflationary  impact of a strong
yen.

         The tables below set forth the wholesale and consumer price indices for
Japan and other selected  industrial  countries for which comparable  statistics
are available:

<TABLE>
<CAPTION>
                                          COMPARATIVE WHOLESALE PRICE INDICES
                                                     (1985 = 100)
                                                     ------------
                                                 1988         1989          1990         1991         1992         1993

<S>                                              <C>          <C>           <C>          <C>          <C>          <C> 
Japan                                            86.6         88.8          90.6         90.8         89.5         86.1
United States                                   103.7        108.8         112.7        112.7        112.9        113.6
Federal Republic of Germany                      96.2         99.3         101.0        103.4        104.8        104.7
United Kingdom                                  108.7        113.9         121.0        127.5        131.5        136.7
France                                          102.9        108.5         107.2        105.8        104.1        101.1
Italy                                           106.5        113.3         121.7        128.1        130.8           NA

Source:  OECD, Main Economic Indicators (February,  1994); Nikkei Database.  IMF, Int'l Financial statistics (February,
         1994)
</TABLE>



                                       17
<PAGE>

<TABLE>
<CAPTION>
                                          COMPARATIVE CONSUMER PRICE INDICES
                                                     (1985 = 100)
                                                     ------------
                                                 1988         1989          1990         1991         1992         1993

<S>                                             <C>          <C>           <C>          <C>          <C>          <C>  
Japan                                           101.4        103.7         106.9        110.4        112.3        113.7
United States                                   109.4        114.6         121.5        126.7        130.4        134.3
Federal Republic of Germany                     101.4        104.2         107.0        110.7        115.2        119.9
United Kingdom                                  111.9        121.9         133.3        141.1        146.3        148.7
France                                          108.8        112.6         116.4        120.1        123.0        125.6
Italy                                           116.5        123.8         131.3        140.1        147.4        153.7

Source:  OECD, Main Economic Indicators (February,  1994); Nikkei Database.  IMF, Int'l Financial Statistics (February,
         1994)
</TABLE>

Balance of Payments

         During the 1980s,  Japan recorded  increased trade surpluses and became
the world's major creditor  nation.  In 1993, Japan registered a surplus of $131
billion in its current account.  This surplus was  predominantly due to a record
surplus of $141 billion in its trade account.

         Also  in  1993,  Japan  registered  a  deficit  of $78  billion  in its
long-term capital account.

Foreign Trade

         Overseas  trade is  important to Japan's  economy even though  offshore
production has eroded its importance.  Japan has few natural  resources and must
export to pay for its imports of these basic  requirements.  During the two-year
period ended December 31, 1993,  exports and imports  represented  approximately
8.7% and 5.2%, respectively,  of Japan's current gross domestic product. Roughly
three quarters of Japan's  exports are machinery and equipment  including  motor
vehicles,  machine tools and electronic  equipment.  Japan's  principal  imports
consist of raw materials, foodstuff and fuels, such as oil and coal.

         Japan's  principal  export markets are the United States,  Canada,  the
United Kingdom, the Federal Republic of Germany,  Australia, Korea, Taiwan, Hong
Kong and the People's  Republic of China.  The principal  sources of its imports
are the United States, South East Asia and the Middle East.

         The following table shows (i) indices in yen terms of the value, volume
and unit value (a measure of average prices) of Japanese exports and imports and
(ii) the Japanese terms of trade (the ratio of export to import  prices),  which
is an  indicator  of a  country's  comparative  advantage  in trade.  The recent
improvement  in the  terms of trade  has been  the  result  of a higher  yen and
generally  declining world commodity prices.  While a higher yen might have been
expected to raise the unit value or price of exports,  Japanese  exporters  kept
their export prices low in order to maintain market share.

<TABLE>
<CAPTION>
                                         FOREIGN TRADE OF JAPAN
                                              (1990 = 100)

                  Value Index                  Volume Index                Unit Value Index         
                  -----------                  ------------                ----------------           Terms
            Exports         Imports       Exports        Imports        Exports        Imports       of Trade

<S>           <C>            <C>            <C>            <C>            <C>            <C>           <C>  
1988          81.9           70.9           91.1           87.7           89.9           80.9          111.1
1989          91.2           85.6           95.0           94.6           96.1           90.5          106.2
1990         100.0          100.0          100.0          100.0          100.0          100.0          100.0
1991         102.0           94.2          102.5          104.0           99.7           90.6          110.0
1992         103.8           87.2          104.0          103.6           99.7           84.2          118.4
1993          97.0           79.2          102.3          107.9           94.8           73.5          129.0

Source:  Ministry of Finance, The Summary Report on Trade of Japan (Mar. 1994)
</TABLE>


                                       18
<PAGE>

         Because of the  concentration  of  Japanese  exports in highly  visible
products such as  automobiles,  machine tools and  semiconductors  and the large
trade surpluses  ensuing  therefrom,  Japan has entered a difficult phase in its
relations with its trading partners,  particularly the United States,  where the
trade imbalance is the greatest. The recent weakness in the Japanese economy has
held back import growth at the same time that manufacturers find foreign markets
attractive  relative to poor domestic  demand.  Trade  sanctions may continue to
impact Japan adversely in both the short- and long-term.

         The following  table sets forth the  composition of Japan's exports and
imports by major commodity groups:

<TABLE>
<CAPTION>
                                           COMPOSITION OF JAPAN'S EXPORTS AND IMPORTS

Japan's Exports                       1985       1986       1987       1988       1989       1990       1991       1992       1993
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C> 
Textile Products                       3.6%       3.3%       3.0%       2.6%       2.5%       2.5%       2.5%       2.5%       2.3%
Metals & Metal Products               10.6        8.7        7.9        8.2        7.8        6.8        6.7        6.3        6.4
Machinery & Equipment:
     Ships                             3.4        2.3        1.9        1.5        1.6        1.9        2.1        2.3        2.8
     Motor Vehicles                   19.5       20.4       19.6       18.4       17.6       17.8       17.4       17.8       16.2
     TV & Radio Receivers              3.0        2.1        1.7        1.5        1.4        1.6        1.7        1.6        1.4
     Motorcycles                       1.2        1.0        0.8        0.7        0.7        0.8        0.9        1.1        1.2
     Scientific, medical &
     optical instruments               3.9        4.1        4.1        4.1        4.1        4.0        4.1        4.0        3.9
     Other                            40.8       44.1       46.5       48.1       49.3       48.9       49.0       48.8       50.6
          Total                       71.8       74.1       74.6       74.3       74.7       75.0       75.2       75.6       75.6
Chemicals                              4.3        4.5        5.1        5.3        5.4        5.5        5.6        5.6        5.6
Foods & Beverages                      0.8        0.7        0.7        0.6        0.6        0.6        0.6        0.6        0.6
Other Exports                          8.9        8.7        8.7        9.0        9.0        9.6        9.4        9.4        9.6
          Total                      100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%
                                     -----      -----      -----      -----      -----      -----      -----      -----      ----- 

Japan's Imports                       1985       1986       1987       1988       1989       1990       1991       1992       1993
Foods & Beverages                     12.0%      15.0%      15.0%      15.5%      14.7%      13.5%      14.6%      16.0%      16.4%
Textile Materials                      1.7        1.5        1.8        1.8        1.6        1.1        1.0        0.9        0.6
Chemicals                              6.2        7.7        7.9        7.9        7.6        6.9        7.4        7.4        7.5
Mineral Fuels:
     Petroleum                        26.7       15.9       13.8       10.1       10.2       13.2       12.7       12.9       11.6
     Coal                              4.0        3.9        3.1        2.9        2.8        2.6        2.7        2.6        2.5
     Other                            12.3       10.0        9.3        7.5        7.4        8.1        7.7        7.1        6.2
          Total                       43.1       29.9       26.2       20.5       20.4       23.9       23.1       22.6       20.3
Metal Ores & Scrap                     4.7        4.5        4.1        4.5        4.4        3.9        3.7        3.3        2.4
Machinery & Equipment                  9.6       11.5       12.8       14.2       15.4       17.4       18.1       18.4       19.4
Other Imports                         22.7       29.9       32.2       35.9       35.9       33.3       32.1       31.4       32.9
          Total                      100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%
                                     -----      -----      -----      -----      -----      -----      -----      -----      ----- 

Source:  Ministry of Finance, The Summary Report - Trade of Japan (March 1994).
</TABLE>


                                       19
<PAGE>

         The following  table  indicates the geographic  distribution of Japan's
trade in recent years.

<TABLE>
<CAPTION>
                                GEOGRAPHIC DISTRIBUTION OF JAPAN'S EXPORTS AND IMPORTS

Japan's Exports                       1985       1986       1987       1988       1989       1990       1991       1992       1993

<S>                                   <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>  
    Developed Areas
        U.S.A                         37.1%      38.4%      36.5%      33.8%      33.9%      31.5%      29.1%      28.2%      29.1%
        EC                            11.4       14.7       16.4       17.7       17.4       18.7       18.8       18.4       15.7
        Australia                      3.1        2.5        2.2        2.5        2.8        2.4        2.1        2.1        2.1
        Canada                         2.6        2.6        2.4        2.4        2.5        2.4        2.3        2.1        1.8
        Others                         4.1        4.4        4.8        4.7        4.2        4.3        3.9        3.6        3.4
                                      -----      -----      -----      -----      -----      -----      -----      -----      -----
                                      58.3       62.7       62.3       61.1       60.8       59.3       56.2       54.4       52.2
    Total
    Developing Areas
        S.E. Asia                     19.0%      11.4%      23.1%      25.3%      26.7%      28.8%      30.6%      30.7%      32.5%
        Middle East                    6.9        4.7        4.0        3.6        3.1        3.4        3.9        4.5        3.7
        Latin America                  4.8        4.5        3.8        3.5        3.4        3.6        4.1        4.6        4.7
        Africa                         1.4        1.0        1.3        1.0        1.0        1.2        1.1        1.2        1.2
        Others                         0.3        8.8        0.3        0.3        0.4        0.3        0.3        0.3        0.2
                                      -----      -----      -----      -----      -----      -----      -----      -----      -----
                                      32.5       30.6       32.5       33.7       34.6       37.3       40.0       41.3       42.3
    Total
    Communist Areas
        Former Soviet Union            1.6%       1.5%       1.1%       1.2%       1.1%       0.9%       0.7%       0.3%       0.4%
        China                          7.1        4.7        3.6        3.6        3.1        2.1        2.7        3.5        4.7
        Others                         0.5        0.5        0.5        0.4        0.4        0.4        0.4        0.5        0.5
                                      -----      -----      -----      -----      -----      -----      -----      -----      -----
            Total                      9.3        6.8        5.2        5.2        4.6        3.4        3.8        4.3        5.6
    Total                            100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%
                                     -----      -----      -----      -----      -----      -----      -----      -----      ----- 

Japan's Imports                       1985       1986       1987       1988       1989       1990       1991       1992       1993
    Developed Areas
        U.S.A                         20.0%      22.8%      21.1%      22.4%      22.9       22.4%      22.5%      22.4%      23.0%
        EC                             6.8       10.9       11.8       12.8       13.3       15.0       13.4       13.4       12.5
        Australia                      5.7        5.5        5.3        5.5        5.5        5.3        5.5        5.3        5.1
        Canada                         3.7        3.8        4.1        4.4        4.1        3.6        3.3        3.3        3.4
        Others                         4.8        5.8        5.6        5.5        5.1        4.7        4.7        4.5        4.2
                                      -----      -----      -----      -----      -----      -----      -----      -----      -----
    Total                             41.0       48.9       47.9       50.6       50.9       51.0       49.4       48.9       48.2
    Developing Areas
        S.E. Asia                     23.3%      23.3%      25.8%      25.5%      25.1%      23.3%      24.8%      24.7%      25.2%
        Middle East                   23.1       15.0       13.5       10.5       10.9       13.2       12.4       12.5       11.4
        Latin America                  4.8        4.9        4.3        4.4        4.2        4.2        4.2        3.7        3.5
        Africa                         0.8        1.1        1.0        1.1        1.0        0.8        0.8        0.7        0.8
        Others                         0.3        0.4        0.4        0.5        0.5        0.3        0.3        0.4        0.4
                                      -----      -----      -----      -----      -----      -----      -----      -----      -----
            Total                     52.4       44.6       45.0       42.0       41.7       41.8       42.5       42.0       41.3
    Communist Areas
        Former Soviet Union            1.1%       1.6%       1.6%       1.5%       1.4%       1.4%       1.4%       1.0%       1.1%
        China                          5.0        4.4        5.0        5.3        5.3        5.1        6.0        7.3        8.5
        Others                         0.4        0.5        0.5        0.6        0.7        0.7        0.7        0.8        0.9
                                      -----      -----      -----      -----      -----      -----      -----      -----      -----
            Total                      6.5        6.5        7.1        7.4        7.4        7.2        8.1        9.1       10.5
    Total                            100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%     100.0%
                                     -----      -----      -----      -----      -----      -----      -----      -----      ----- 

Source:  Ministry of Finance, The Summary Report--Trade of Japan (March 1994).
</TABLE>


                           SECURITIES MARKETS IN JAPAN

         There are eight stock  exchanges  in Japan.  Of these,  the Tokyo Stock
Exchange,  the Osaka  Stock  Exchange  and the  Nagoya  Stock  Exchange  are the
largest.  The  three  main  markets  have two  sections  of  stocks;  generally,


                                       20
<PAGE>

companies with smaller  capitalization  are listed on the second section.     In
addition,  The  Japan  Over-The-Counter  Trading  Co.  acts as the  intermediary
between  securities  companies  wishing to trade shares on the  over-the-counter
(OTC) market. The primary role of the OTC market is to facilitate the raising of
funds from the investing public by unlisted,  small and medium-sized  companies.
Equity securities of Japanese companies which are traded in an  over-the-counter
market  are   generally   securities  of   relatively   small  or   little-known
companies.    

         There are two widely  followed price indices.  The Nikkei Stock Average
(NSA) is an  arithmetic  average of 225  selected  stocks  computed by a private
corporation. In addition, the Tokyo Stock Exchange publishes the TOPIX, formerly
the TSE Index, which is an index of all first section stocks. The second section
has its own index.     Nihon  Keizai  Shimbun,  Inc., the publisher of a leading
Japanese economic newspaper, publishes the OTC Index.    

         The following  table shows the high,  low and close of the Nikkei Stock
Average,        TOPIX    and the Nikkei OTC Index     for the years 1986 through
1993.
   
<TABLE>
<CAPTION>
   Calendar                    NSA*                           TSE/TOPIX*                         OTC**
     Year         High         Low        Close       High       Low       Close       High       Low       Close
     ----         ----         ---        -----       ----       ---       -----       ----       ---       -----

     <S>         <C>         <C>         <C>         <C>        <C>        <C>        <C>         <C>       <C>    
     1986        18936.24    12881.50    18701.30    1583.35    1025.85    1556.37    1163.18     811.69    1056.43
     1987        26646.43    18544.05    21564.00    2258.56    1557.46    1725.83    1270.27    1046.26    1107.03
     1988        30159.00    21217.04    30159.00    2357.03    1690.44    2357.03    1402.61    1099.52    1313.11
     1989        38915.87    30183.79    38915.87    2884.80    2364.33    2881.37    2597.52    1315.40    2597.52
     1990        38712.88    20221.86    23848.71    2867.70    1523.43    1733.83    4149.20    2154.20    2175.48
     1991        27146.91    21456.76    22983.77    2028.85    1638.06    1714.68    3333.78    1918.06    1946.14
     1992        23801.18    14309.41    16924.95    1763.43    1102.50    1307.66    2022.41    1099.32    1227.93
     1993        21148.11    16078.71    17417.24    1698.67    1250.06    1439.31    1728.13    1200.84    1447.60
    
Sources:    *    Tokyo Stock Exchange, Annual Securities Statistics (1994); Monthly Statistics Report (Dec. 1986, 1987, 1988,
      1989, 1990, 1991, 1993).
            **Annual Statistics of OTC Stocks (1993), issued by Japan Securities Dealers Association.    
</TABLE>

         In the five years  ending  December  1989,  the Tokyo Stock Price Index
(TOPIX)  more than  tripled,  rising  from  913.37 to  2881.37.  The Index  then
declined 39.8% in 1990, 1.1% in 1991 and 23.7% in 1992, reaching, at that point,
1307.66. In 1993 the Index rose 10.1% to 1439.31. Beginning in 1991, a number of
trading  improprieties,  including  allegations that some of the major brokerage
firms engaged in unauthorized  reimbursements  to large corporate  customers for
stock  market  losses,  have been  reported  in the press.  The decline in stock
prices has raised the cost of capital for  industry and has reduced the value of
stock  holdings  by  banks  and  corporations.  These  effects  have,  in  turn,
contributed to the recent weakness in Japan's economy and could continue to have
an adverse impact in the future.

         The following  table presents  certain  statistics  with respect to the
trading  of equity  securities  on the Tokyo  Stock  Exchange  (first and second
sections combined)    and the OTC market     for the past six years.

[TABLE WAS SPLIT IN HALF TO ACCOMODATE WIDTH]
   
<TABLE>
<CAPTION>
                                        1988                        1989                       1990        
                                   TSE*        OTC**          TSE*       OTC**           TSE*        OTC**   
<S>                             <C>           <C>          <C>          <C>             <C>         <C>   
Market                                                                              
Capitalization                  476,849.8     4,068        611,151.9    12,231          379,231     11,824
(in billions of yen)                                                                
                                                                                    
Daily Average                                                                       
Trading Volume                  1,035,300     1,062          893,974     2,125          500,400      4,331
(000 shares)                                                                        
                                                                                    
Number of                           1,571       196            1,597       263            1,627        342
Listed Companies                                                                    
                                                                                    
                                                                                    
                                                                                    
                                       1991                         1992                       1993 
                                   TSE*        OTC**          TSE*       OTC**           TSE*        OTC**   
Market                                                                              
Capitalization                  377,924.4    12,880          289,483     7,943          324,357     11,228
(in billions of yen)                                                                
                                                                                    
Daily Average                                                                       
Trading Volume                    380,512     4,206          268,857     1,767          353,394      4,374
(000 shares)                                                                        
                                                                                    
Number of                           1,641       430            1,651       436            1,667        477
Listed Companies                                                               
    
Source:  *Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1994).
            **Fleming Research, OTC Earning Digest (1994).    
</TABLE>

   
         Compared  to the  United  States,  the common  stocks of many  Japanese
companies trade at a higher price-earnings ratio.  Historically,  investments in
the OTC market have been more volatile than the TSE.
    


                                       21
<PAGE>

         In recent years, the proportion of trading by  institutional  investors
had tended to increase at the expense of individuals. In the last three years of
stock price  declines,  however,  the share of trading  represented by financial
institutions and business  corporations has fallen while the share of trading by
foreigners has risen substantially as can be seen in the following table:

<TABLE>
<CAPTION>
                   Financial         Business
                 Institutions      Corporations      Individuals       Foreigners         Other

     <S>             <C>               <C>              <C>               <C>              <C> 
     1988            36.5              16.8             32.3              10.1             4.3%
     1989            39.2              14.6             30.3              11.3             4.6
     1990            37.4              12.3             31.2              14.1             5.0
     1991            34.6               9.8             31.0              19.8             4.8
     1992            31.9               7.4             28.2              27.4             5.1
     1993            34.6               7.4             28.0              25.2             4.8

Source:  Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1994).
</TABLE>

         The following table shows the price/earning  ratios and rates of return
for TOPIX for each of the past seven years. Because of differences in accounting
methods used in Japan and the United States,  the  price/earning  ratios are not
directly comparable. The Japanese price/earnings ratio declined sharply in 1990,
1991 and 1992 as a result of the decline in stock prices. It rose in 1993 due in
part to a recovery in stock prices but also to a decline in  earnings.  In 1993,
the return on the TOPIX  registered a positive 7% in contrast to losses shown in
the previous three years.

                AVERAGE PRICE/EARNINGS RATIOS AND RATES OF RETURN

                                Average
                          Price/Earnings Ratio   Rate of Return

       1988                       58.4                37.0
       1989                       70.6                22.7
       1990                       39.8               -39.3
       1991                       37.8               -19.5
       1992                       36.7               -28.9
       1993                       64.9                7.0

     * Rates of return in yen  calculated on basis of closing prices and average
dividends for each year.

Sources: Tokyo Stock Exchange,  Annual Securities Statistics (1991, 1992, 1993);
Monthly Statistics Report (Dec. 1988, 1989, 1990, 1991, 1992, 1993).

         Following is a statistical  comparison between the Tokyo Stock Exchange
(both sections) and the New York Stock Exchange for the six years ending 1993:

<TABLE>
<CAPTION>
                             1988             1989            1990             1991            1992             1993
                          TSE      NYSE    TSE     NYSE    TSE      NYSE    TSE     NYSE    TSE      NYSE    TSE     NYSE
                          ---      ----    ---     ----    ---      ----    ---     ----    ---      ----    ---     ----
<S>                      <C>       <C>    <C>      <C>    <C>       <C>    <C>      <C>    <C>       <C>    <C>      <C> 
Number of Companies      1571      1681   1597     1720   1627      1769   1641     1885   1651      2063   1667     2362
Aggregate Market Value
  in Billions of         3789      2456   4260     3030   2822      2820   3028     3321   2331      4035   2898     4545
Dollars*
  as Percentage of GNP    130        51    151       59    101        52     83       65     62        67     69       71

Turnover Ratio (%)         98        55     73       52     38        47     28       41     20        40     26       50

* Calculated on the basis of the yen conversion rate published by the IMF.

Sources:   Tokyo  Stock  Exchange,   Monthly   Securities   Statistics  (Jan.  1994);  IMF,   International   Financial
Statistic    Monthly Statistics Report (Feb. 1994).
</TABLE>


                                       22
<PAGE>

         As of December 31, 1993, the market value of all listed Japanese equity
securities,  as compiled by the Tokyo Stock Exchange,  was $2885.4 billion.  The
following table,  compiled by Morgan Stanley Capital  International,  sets forth
the size of the Japanese  equity market in  comparison  with that of other major
equity  markets for the years ending  December 31, 1989,  1990,  1991,  1992 and
1993.

<TABLE>
<CAPTION>
                                             EQUITY STOCK MARKETS OF THE WORLD
                                                   (dollars in billions)

                         December 1989       December 1990        December 1991         December 1992        December 1993
                           $       %         $          %         $          %         $          %           $         % 
                           -       -         -          -         -          -         -          -           -         - 
<S>                   <C>        <C>     <C>          <C>      <C>         <C>      <C>         <C>         <C>       <C>  
United States         $ 3,027    29.85%  $2,183.5     33.32%   3,702.4     37.57%   4,022.8     43.16%      4467.0    38.4%
Japan                   4,102    40.45    2,805.5     33.22    2,996.0     30.43    2,331.5     25.02       2885.4    24.8
United Kingdom            823     8.12      882.4     10.45      953.7      9.68      914.9      9.82       1189.9    10.2
Canada                    290     2.86      222.4      2.63      232.2      2.36      219.7      2.36        296.6     2.5
Federal Republic of       362     3.57      341.7      4.05      369.1      3.75      325.7      3.49        442.6     3.8
Germany                                                                                                    
Australia                 138     1.36      105.9      1.25      137.0      1.39      133.2      1.43        196.2     1.7
Switzerland               190     1.87      162.8      1.93      199.0      2.02      195.2      2.09        243.8     2.1
France                    339     3.34      296.5      3.51      346.9      3.52      333.0      3.57        453.4     3.9
Netherlands               116     1.14      114.3      1.35      129.4      1.31      129.8      1.39        171.2     1.5
Hong Kong                  77     0.76       83.5      0.99      119.0      1.21      161.9      1.74        383.2     3.3
Other                     666     6.68      615.8      7.29      671.0      6.81      878.1      9.42        908.6     7.8
                          ---     ----      -----      ----      -----      ----      -----      ----        -----     ---
Total                 $10,141   100.00%  $8,444.3    100.00%  $9,855.7    100.00%  $9,320.1    100.00%    $11,637.9  100.00%
                      -------   ------   --------    ------   --------    ------   --------    ------     ---------  ------ 

Source:  Morgan Stanley Capital International (Quarterly 1990:1, 1991:1, 1992:1, 1993:1, 1994:1).
</TABLE>

                             PURCHASES AND EXCHANGES

  (See "Purchases and Redemptions" and "Transaction Information" in the Fund's
                                  prospectus.)

Additional Information About Opening An Account

         Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate  families,  officers and employees
of the Adviser or of any affiliated  organization and their immediate  families,
members of the National  Association of Securities  Dealers,  Inc.  ("NASD") and
banks may, if they  prefer,  subscribe  initially  for at least  $1,000  through
Scudder Investor Services, Inc. by letter, fax, or telephone.

         The minimum  initial  purchase amount is less than $1,000 under certain
special plan accounts.

Additional Information About Making Subsequent Investments

         Subsequent  purchase  orders  for  $2,500 or more and for an amount not
greater than four times the value of the shareholder's  account may be placed by
telephone by established  shareholders (except by Scudder Individual  Retirement
Account  (IRA),  Scudder  profit  sharing,  Scudder  401(k) and  Scudder  403(b)
planholders), members of the NASD and banks. Orders placed in this manner may be
directed to The Japan Fund Service Center or to any Scudder Funds Center office.
A two-part invoice of the purchase will be mailed out promptly following receipt
of a request to buy.  Payment  should be  attached  to a copy of the invoice for
proper  identification.  Federal  regulations  require  that payment be received
within seven (7) business days. If payment is not received within that time, the
shares may be canceled. In the event of such cancellation or cancellation at the
purchaser's  request, the purchaser will be responsible for any loss incurred by
the Fund or the principal  underwriter  by reason of such  cancellation.  If the
purchaser is a shareholder,  the Fund shall have the authority,  as agent of the
shareholder,  to  redeem  shares in the  account  to  reimburse  the Fund or the
principal  underwriter  for the loss incurred.  Net losses on such  transactions
which are not  recovered  from the  purchaser  will be absorbed by the principal
underwriter.  Any net profit on the  liquidation of unpaid shares will accrue to
the Fund.


                                       23
<PAGE>

Checks

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

         If shares are  purchased by a check which  proves to be  uncollectible,
the Fund reserves the right to cancel the purchase immediately and the purchaser
will  be  responsible  for  any  loss  incurred  by the  Fund  or the  principal
underwriter by reason of such  cancellation.  If the purchaser is a shareholder,
the Fund shall have the authority, as agent of the shareholder, to redeem shares
in the account to reimburse the Fund or the principal  underwriter  for the loss
incurred.  Investors  whose orders have been canceled may be prohibited  from or
restricted in placing future orders in The Japan Fund,  Inc. or any of the other
funds in the Scudder Family of Funds.

Wire Transfer of Federal Funds

         To obtain  the net asset  value  determined  as of the close of regular
trading  (normally  4 p.m.  eastern  time) on the New York Stock  Exchange  (the
"Exchange")  on a selected  day,  your bank must forward  federal  funds by wire
transfer and provide the required  account  information so as to be available to
the Fund prior to such close.

         The bank sending an  investor's  federal  funds by bank wire may charge
for the service.  Presently  Scudder  Investor  Services,  Inc.,  pays a fee for
receipt by the custodian of "wired funds," but the right to charge investors for
this service is reserved.

         Boston  banks are closed on certain  holidays  that the Exchange may be
open.  These  holidays  are  Martin  Luther  King,  Jr.  Day (the 3rd  Monday in
January),  Columbus Day (the 2nd Monday in October) and  Veterans' Day (November
11).  Investors are not able to purchase  shares by wiring federal funds on such
holidays  because  State Street Bank is not open to receive such funds on behalf
of the Fund.

Share Price

         Purchases  will be filled  without  sales charge at the net asset value
next computed after receipt of the Application in good order.  Purchases made by
check are  executed  on the next  business  day after the check is  received  in
Boston by the Fund's transfer  agent.  Net asset value normally will be computed
as of the close of regular  trading on the Exchange on each day during which the
Exchange is open for trading. Orders received after the close of regular trading
on the Exchange  will  receive the next day's net asset value.  If the order has
been placed by a member of the NASD, other than Scudder Investor Services, Inc.,
it is the  responsibility of the broker, and not the Fund, to place the order by
the close of the Exchange.

Share Certificates

         Due to the  desire of Fund  management  to afford  ease of  redemption,
ownership in the Fund is on a non-certified  basis.  Share certificates now in a
shareholder's   possession  may  be  sent  to  the  Fund's  transfer  agent  for
cancellation  and credit to such  shareholder's  account  on a  non-certificated
basis.

Other Information

         If transactions are arranged and settlement is made through a member of
the NASD,  other than Scudder Investor  Services,  Inc., that member may, at its
discretion, charge a fee for that service.

         The Board of Directors and Scudder Investor Services,  Inc., the Fund's
principal  underwriter,  each has the right to limit the amount of purchases by,
and to  refuse  to sell to,  any  person.  The Board of  Directors  and  Scudder
Investor Services,  Inc. each may suspend or terminate the offering of shares of
a Fund at any time.

         The Tax Identification Number section of the Fund's application must be
completed when opening an account.  Applications  and purchase  orders without a
certified tax  identification  number and certain other  certified  information,
except those from exempt organizations, may be returned to the investor.



                                       24
<PAGE>

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

Exchanges

         The  procedure  for  exchanging  shares from The Japan Fund,  Inc. into
shares of another  Scudder fund,  when the new account is  established  with the
same registration,  telephone option, dividend option and address as the present
account, is set forth under "Purchases and Redemptions -- Opening An Account" in
the Fund's prospectus.  If an exchange involves  establishing a new account,  at
least $1000 must be exchanged. If the exchange is made into an existing account,
at least $100 must be exchanged.  If the account receiving the exchange proceeds
is to be different in any respect,  the exchange  request must be in writing and
must contain a signature  guarantee as described under "Purchases and Redemption
- -- Selling Fund Shares -- Signature guarantees" in the Fund's prospectus.

         Exchange  orders  received  before the close of regular  trading on the
Exchange on any business day will ordinarily be executed at respective net asset
values  determined  on that day.  Exchange  orders  received  after the close of
regular trading will be executed on the following business day.  Notwithstanding
the  foregoing,  if a  shareholder  requests to  exchange  his or her Japan Fund
shares  for  shares in  another  fund in the  Scudder  Family  of Funds,  and in
connection  therewith  receives Fund  portfolio  securities in payment for those
Fund shares (see  "REDEMPTIONS"  below),  there will be a delay in  repurchasing
shares  in such  other  fund  owing  to the  time  required  to  liquidate  such
securities  on the  shareholder's  behalf  and to  remit  the  proceeds  of such
liquidation  to the Fund's  transfer  agent.  Accordingly,  an exchange order in
those  instances (1) may not be executed for up to seven business days after the
exchange  request is  received in good order and (2) will be executed at the net
asset  value  next  determined  after  the  transfer  agent's  receipt  of  such
liquidation proceeds.

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

         There is no charge to the shareholder for any exchange described above.
An exchange into another fund in the Scudder  Family of Funds is a redemption of
shares,  and  therefore  may  result in tax  consequences  (gain or loss) to the
shareholder  and the  proceeds  of such an  exchange  may be  subject  to backup
withholding. (see "Taxes.")

         Investors currently receive the exchange privilege,  including exchange
by  telephone,  automatically  without  having  to elect  it.  The Fund  employs
procedures,  including recording  telephone calls,  testing a caller's identity,
and sending  written  confirmation of telephone  transactions,  designed to give
reasonable  assurance that  instructions  communicated by telephone are genuine,
and to  discourage  fraud.  To the  extent  that the Fund does not  follow  such
procedures,  it may be liable  for  losses  due to  unauthorized  or  fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably  believes to be genuine.  The Funds
and the  Transfer  Agent each  reserves  the right to suspend or  terminate  the
privilege of exchanging by telephone or fax at any time.

         The funds in the Scudder Family of Funds into which  investors may make
an exchange are listed under "THE SCUDDER FAMILY OF FUNDS" herein. Before making
an exchange,  shareholders  should  obtain a prospectus of the Scudder fund into
which the exchange is being contemplated from Scudder Investor Services, Inc.


                                       25
<PAGE>

                                   REDEMPTIONS

  (See "Purchases and Redemptions" and "Transaction Information" in the Fund's
                                  prospectus.)

Redemption by Telephone

         Shareholders currently receive the right automatically,  without having
to elect it, to redeem by telephone up to $50,000 to their address of record. In
order to request redemptions by telephone,  shareholders must have completed and
returned to the Transfer Agent the  application,  including the designation of a
bank account to which the redemption proceeds are to be sent.

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

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

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

         If a request for redemption to a shareholder's  bank account is made by
telephone or fax,  payment will be made by Federal Reserve bank wire to the bank
account  designated  on the  application,  unless  a  request  is made  that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.

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

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

         Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the  shareholder) of shares  purchased by check will not be
accepted for seven (7) business days following their purchase.

Redemption by Mail or Fax

         Any existing share certificates representing shares being redeemed must
accompany a request for  redemption  and be duly  endorsed or  accompanied  by a
proper stock  assignment form with  signature(s)  guaranteed as explained in the
Fund's prospectus.

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


                                       26
<PAGE>

         It is suggested that shareholders holding certificated shares or shares
registered  in other than  individual  names contact the Fund's  transfer  agent
prior to  redemptions  to ensure  that all  necessary  documents  accompany  the
request. When shares are held in the name of a corporation,  trust, fiduciary or
partnership,  the  transfer  agent  requires,  in addition  to the stock  power,
certified evidence of authority to sign. These procedures are for the protection
of  shareholders  and should be followed to ensure  prompt  payment.  Redemption
requests must not be conditional as to date or price of the redemption. Proceeds
of a redemption  will be sent within  seven (7) days after  receipt of a request
for redemption  that complies with the above  requirements.  Delays of more than
seven (7) days of payment for shares  tendered for  repurchase or redemption may
result but only until the purchase check has cleared.

         The  requirements  for the IRA redemptions are different from those for
regular accounts. For more information call 1-800-53-JAPAN.

Redemption-in-Kind

         In  the  event  the  Fund's  management   determines  that  substantial
distributions  of cash  would have an  adverse  effect on the  Fund's  remaining
shareholders, the Fund reserves the right to honor any request for redemption or
repurchase  order by making  payment in whole or in part in  readily  marketable
securities  chosen by the Fund and valued as they are for  purposes of computing
the Fund's net asset  value.  The Fund has elected,  however,  to be governed by
Rule 18f-1  under the  Investment  Company  Act of 1940 as a result of which the
Fund is obligated to redeem shares,  with respect to any one shareholder  during
any 90-day period,  solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of the period.  The tax consequences to
a redeeming  shareholder are the same whether the  shareholder  receives cash or
securities in payment for his shares.

         If redemption  payment is made in portfolio  securities,  the redeeming
shareholder  will  incur  brokerage  commissions  and  Japanese  sales  taxes in
converting those securities into cash. In addition, the conversion of securities
into cash may expose the shareholder to stock-market  risk and currency exchange
risk.

         If a shareholder  receives portfolio  securities upon redemption of his
Fund shares,  he may request that such securities either (1) be delivered to him
or his  designated  agent or (2) be liquidated on his behalf and the proceeds of
such  liquidation  (net of any brokerage  commissions  and Japanese sales taxes)
remitted to him.

Other Information

         All redemption  requests must be directed to the Fund's transfer agent.
Redemption  requests  that are  delivered  to the Fund rather than to the Fund's
transfer  agent will be forwarded to the transfer  agent,  and  processed at the
next calculated NAV after receipt by the transfer agent.

         The value of shares  redeemed or  repurchased  may be more or less than
the  shareholder's  cost  depending  on the  net  asset  value  at the  time  of
redemption  or  repurchase.  The Fund does not impose a redemption or repurchase
charge.  Redemption  of shares,  including an exchange  into another fund in the
Scudder Family of Funds,  may result in tax  consequences  (gain or loss) to the
shareholder  and the  proceeds  of such  redemptions  may be  subject  to backup
withholding. (See "TAXES.")

         Shareholders  who wish to redeem  shares  from  Special  Plan  Accounts
should  contact  the  employer,  trustee  or  custodian  of  the  Plan  for  the
requirements.

         If transactions  at any time reduce a shareholder's  account balance to
below $1000 in value,  the Fund will  notify the  shareholder  that,  unless the
account balance is brought up to at least $1000, the Fund will redeem all shares
in the Fund and close the  account  by making  payment to the  shareholder.  The
shareholder  has sixty days to bring the account  balance up to $1000 before any
action  will be taken by the Fund.  Shareholders  of record  prior to August 14,
1987,  are not subject to the $1000  minimum share  balance  requirement.  (This
policy  applies to  accounts of new  shareholders  but does not apply to certain
Special Plan Accounts).


                                       27
<PAGE>

                    FEATURES AND SERVICES OFFERED BY THE FUND

                    (See "Shareholder benefits" in the Fund's
                                  prospectus.)

The Pure No-Load(TM) Concept

         Investors  are  encouraged  to be aware of the  full  ramifications  of
mutual fund fee structures,  and of how Scudder distinguishes its funds from the
vast  majority of mutual  funds  available  today.  The primary  distinction  is
between load and no-load funds.

         Load funds  generally are defined as mutual funds that charge a fee for
the sale and  distribution  of fund  shares.  There  are  three  types of loads:
front-end  loads,  back-end loads,  and asset-based  12b-1 fees.  12b-1 fees are
distribution-related  fees charged  against  fund assets and are  distinct  from
service fees,  which are charged for personal  services  and/or  maintenance  of
shareholder  accounts.  Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.

         A front-end  load is a sales  charge,  which can be as high as 8.50% of
the amount  invested.  A back-end  load is a contingent  deferred  sales charge,
which can be as high as 8.50% of either the amount  invested  or  redeemed.  The
maximum  front-end or back-end  load  varies,  and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers  investors  various
sales-related services such as dividend  reinvestment.  The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.

         A no-load  fund does not charge a front-end or back-end  load,  but can
charge a small  12b-1 fee and/or  service  fee against  fund  assets.  Under the
National Association of Securities Dealers Rules of Fair Practice, a mutual fund
can call itself a "no-load"  fund only if the 12b-1 fee and/or  service fee does
not exceed 0.25% of a fund's average annual net assets.

         Because  Scudder  funds do not pay any  asset-based  sales  charges  or
service fees,  Scudder  developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual funds. Scudder pioneered the
no-load  concept when it created the nation's  first  no-load fund in 1928,  and
later developed the nation's first family of no-load mutual funds.

         The  following  chart  shows  the  potential   long-term  advantage  of
investing  $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50%  front-end load, a load fund that collects
only a 0.75% 12b-1 and/or  service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The  hypothetical  figures in the chart show the value
of an  account  assuming  a constant  10% rate of return  over the time  periods
indicated and reinvestment of dividends and distributions.


              Scudder                        Load Fund with    No-Load Fund with
  YEARS   Pure No-Load(TM)     8.50% Load     0.75%  12b-1       0.25% 12b-1 
  -----         Fund             Fund             Fee                Fee
                ----             ----             ---                ---
   10         $25,937           $23,733         $24,222            $25,354

   15          41,772            38,222          37,698             40,371

   20          67,275            61,557          58,672             64,282

         Investors  are  encouraged  to review  the fee  tables on page 2 of the
Fund's  prospectus  for  more  specific  information  about  the  rates at which
management fees and other expenses are assessed.



                                       28
<PAGE>

   Distribution     Plan   s    

         Investors have complete freedom of choice as to whether to receive cash
or to reinvest any dividends from net investment  income, or distributions  from
realized  capital  gains  in  additional   shares  of  the  Fund.  A  change  of
instructions  for the method of payment  may be given to the  transfer  agent at
least five days prior to a dividend record date. Please call  1-800-53-JAPAN for
more information.

         Reinvestment  is usually  made on the day  following  the record  date.
Investors  may  leave  standing  instructions  with the  Fund's  transfer  agent
designating  their option for either  reinvestment  or cash  distribution of any
income  dividends  or  capital  gains  distributions.  If no  election  is made,
dividends and distributions will be invested in additional shares of the Fund.

   
         Investors  may also  have  dividends  and  distributions  automatically
deposited to their  predesignated  bank account through the  DistributionsDirect
Program.  Shareholders  who  elect  to  participate  in the  DistributionsDirect
Program,  and whose  predesignated  checking  account of record is with a member
bank of the Automated  Clearing  House Network (ACH) can have income and capital
gain  distributions  automatically  deposited  to their  personal  bank  account
usually  within  three  business  days after the Fund pays its  distribution.  A
DistributionsDirect  request  form can be  obtained  by calling  1-800-53-JAPAN.
Confirmation  statements will be mailed to  shareholders  as  notification  that
distributions have been deposited.     

Diversification

         A  shareholder's   investment   represents  an  interest  in  a  large,
diversified  portfolio of carefully  selected  securities.  Diversification  may
protect you against the possible risks  associated with  concentrating  in fewer
securities or in a specific market sector.

Scudder Funds Centers

         Investors  may visit any of the Centers,  listed  below,  maintained by
Scudder Investor Services,  Inc. The Centers are designed to provide individuals
with services during any business day.  Investors may pick up literature or find
assistance with opening an account,  adding funds or special options to existing
accounts,  making exchanges within the Scudder Family of Funds, redeeming shares
or opening  retirement plans.  Checks should not be mailed to the Centers.  (See
"PURCHASES AND EXCHANGES--Share Price".)

<TABLE>
<S>                                      <C>                                    <C>
Boca Raton                               Scottsdale                             San Francisco
4400 North Federal Highway #130          4141 North Scottsdale Road             180 Montgomery Street
Boca Raton, Florida 33431                Suite 105                              San Francisco, CA  94104
407-395-0040                             Scottsdale, AZ  85251                  415-788-3212
                                         602-423-1100
Boston                                                                          San Diego
166 Federal Street                       Los Angeles                            Sorrento Court
Boston, Massachusetts  02110             333 South Hope Street, 37th Fl.        9450 Scranton Avenue
800-225-2470                             Los Angeles, California  90071         Suite 101
                                         213-628-1144                           San Diego, CA 92121
   Chicago                                                                      619-658-8093
   The Rookery Building                  New York
   209 South LaSalle Street              345 Park Avenue, 26th Floor
   Chicago, IL  60604                    New York, New York 10154
   312-629-1929                          212-326-6200

Cincinnati                               Portland
600 Vine Street                          One S.W. Columbia Street
Suite 2000                               Suite 930
Cincinnati, Ohio  45202-2430             Portland, Oregon 97258
513-621-4200                             503-224-3999
</TABLE>


                                       29
<PAGE>

Reports to Shareholders

         The  Fund  issues  to  its  shareholders      unaudited      semiannual
financial   statements     and  annual  financial   statements       audited  by
independent accountants,  including a list of investments held and statements of
assets and  liabilities,  operations,  changes  in net assets and  supplementary
information.  The Fund presently intends to distribute to shareholders  informal
quarterly reports during the intervening quarters, containing a statement of the
investments  of the  Fund.  The  distribution  will  be  accompanied  by a brief
indication of the source of the distribution.

                           THE SCUDDER FAMILY OF FUNDS

              (See "Investment products and services" in the Fund's
                                  prospectus.)

         The Scudder  Family of Funds is America's  first family of mutual funds
and the nation's oldest family of no-load mutual funds.  To assist  investors in
choosing a Scudder fund,  descriptions of the Scudder funds' objectives  follow.
Initial  purchases  in each  Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.

MONEY MARKET

         Scudder Cash Investment  Trust ("SCIT") seeks to maintain the stability
         of capital,  and  consistent  therewith,  to maintain the  liquidity of
         capital  and  to  provide  current  income  through   investment  in  a
         supervised  portfolio of short-term  debt  securities.  SCIT intends to
         seek to  maintain  a  constant  net  asset  value of $1.00  per  share,
         although in certain circumstances this may not be possible.

         Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
         stability of capital and consistent therewith to provide current income
         through  investment in a supervised  portfolio of U.S.  Government  and
         U.S. Government guaranteed obligations with maturities of not more than
            762  calendar  days.      The Fund  intends  to seek to  maintain  a
         constant  net  asset  value of $1.00 per  share,  although  in  certain
         circumstances this may not be possible.

INCOME

         Scudder  Emerging  Markets  Income Fund seeks to provide  high  current
         income  and,   secondarily,   long-term  capital  appreciation  through
         investments  primarily  in  high-yielding  debt  securities  issued  in
         emerging markets.

         Scudder GNMA Fund seeks to provide  investors  with high current income
         from a portfolio of high-quality GNMA securities.

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

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

         Scudder  Short Term Bond Fund seeks to provide a higher and more stable
         level of income than is normally provided by money market  investments,
         and  more  price  stability  than  investments  in  intermediate-   and
         long-term bonds.

         Scudder  Short Term Global  Income Fund seeks to provide  high  current
         income from a portfolio  of  high-grade  money market  instruments  and
         short-term bonds denominated in foreign currencies and the U.S. dollar.


                                       30
<PAGE>

         Scudder  Zero Coupon  2000 Fund seeks to provide as high an  investment
         return over a selected period as is consistent with the minimization of
         reinvestment  risks  through  investments   primarily  in  zero  coupon
         securities.

TAX FREE MONEY MARKET

         Scudder Tax Free Money Fund ("STFMF") is designed to provide  investors
         with  income  exempt  from  regular  federal  income tax while  seeking
         stability  of  principal.  STFMF seeks to maintain a constant net asset
         value of $1.00 per share,  although in certain  circumstances  this may
         not be possible.

         Scudder  California  Tax  Free  Money  Fund*  is  designed  to  provide
         California  taxpayers  income exempt from California  state and regular
         federal  income  taxes,   and  seeks   stability  of  capital  and  the
         maintenance of a constant net asset value of $1.00 per share,  although
         in certain circumstances this may not be possible.

         Scudder  New York Tax Free Money  Fund* is designed to provide New York
         taxpayers  income exempt from New York state, New York City and regular
         federal  income  taxes,   and  seeks   stability  of  capital  and  the
         maintenance of a constant net asset value of $1.00 per share,  although
         in certain circumstances this may not be possible.

TAX FREE

         Scudder  High Yield Tax Free Fund seeks to provide high income which is
         exempt from regular federal income tax by investing in investment-grade
         municipal securities.

         Scudder  Limited Term Tax Free Fund seeks to provide as high a level of
         income exempt from regular  federal income tax as is consistent  with a
         high degree of principal stability.

         Scudder Managed Municipal Bonds seeks to provide income which is exempt
         from  regular  federal  income tax  primarily  through  investments  in
         long-term municipal securities with an emphasis on high quality.

         Scudder  Medium  Term Tax Free Fund  seeks to  provide a high  level of
         income free from regular  federal  income taxes and to limit  principal
         fluctuation  by  investing  in  high-grade   municipal   securities  of
         intermediate maturities.

         Scudder  California  Tax Free Fund* seeks to provide income exempt from
         both   California   and  regular   federal  income  taxes  through  the
         professional  and  efficient  management  of a portfolio  consisting of
         California state, municipal and local government obligations.

         Scudder  Massachusetts  Limited Term Tax Free Fund* seeks to provide as
         high a level of income exempt from  Massachusetts  personal and regular
         federal  income tax as is  consistent  with a high degree of  principal
         stability.

         Scudder  Massachusetts  Tax Free Fund* seeks to provide  income  exempt
         from both  Massachusetts  and regular  federal income taxes through the
         professional  and  efficient  management  of a portfolio  consisting of
         Massachusetts state, municipal and local government obligations.

         Scudder New York Tax Free Fund seeks to provide  income exempt from New
         York state,  New York City and regular federal income taxes through the
         professional  and  efficient  management  of a portfolio  consisting of
         investments  in  New  York  state,   municipal  and  local   government
         obligations.

         Scudder  Ohio Tax Free Fund* seeks to provide  income  exempt from both
         Ohio and regular  federal  income taxes  through the  professional  and
         efficient management of a portfolio consisting of Ohio state, municipal
         and local government obligations.

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


                                       31
<PAGE>

         Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
         both  Pennsylvania and regular federal income taxes through a portfolio
         consisting  of  Pennsylvania  state,  municipal  and  local  government
         obligations.

GROWTH AND INCOME

         Scudder  Balanced Fund seeks to provide a balance of growth and income,
         as  well as  long-term  preservation  of  capital,  from a  diversified
         portfolio of equity and fixed income securities.

         Scudder  Growth and Income  Fund seeks to provide  long-term  growth of
         capital,  current  income,  and  growth of income  through a  portfolio
         invested  primarily  in common  stocks and  convertible  securities  by
         companies  which offer the prospect of growth of earnings  while paying
         current dividends.

GROWTH

         Scudder  Capital  Growth  Fund seeks to  maximize  long-term  growth of
         capital  through a broad and flexible  investment  program  emphasizing
         common stocks.

         Scudder  Development Fund seeks to achieve  long-term growth of capital
         primarily  through  investments in marketable  securities,  principally
         common stocks,  of relatively small or little-known  companies which in
         the opinion of  management  have  promise of  expanding  their size and
         profitability  or of gaining  increased  market  recognition  for their
         securities, or both.

         Scudder Global Fund seeks long-term growth of capital primarily through
         a diversified  portfolio of marketable equity securities  selected on a
         worldwide basis. It may also invest in debt securities of U.S.
         and foreign issuers. Income is an incidental consideration.

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

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

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

         Scudder  International  Fund seeks long-term  growth of capital through
         investment  principally in a diversified portfolio of marketable equity
         securities  selected  primarily  to permit  participation  in  non-U.S.
         companies and economies with  prospects for growth.  It also invests in
         fixed-income  securities of foreign  governments and companies,  with a
         view toward total investment return.

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

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

         Scudder  Quality  Growth  Fund  seeks to  provide  long-term  growth of
         capital  through  investment  primarily  in the  equity  securities  of
         seasoned, financially strong U.S. growth companies.

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


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


                                       32
<PAGE>

         The Japan Fund, Inc. seeks capital  appreciation  through investment in
         Japanese securities, primarily in common stocks of Japanese companies.


         The net asset values of The Japan Fund,  Inc. can be found daily in the
"Mutual Funds"  section of The Wall Street Journal and other leading  newspapers
throughout  the country  under  "Japan."  Most of the other Scudder Funds can be
found  under  "Scudder  Funds."  Investors  will  notice the net asset value and
offering  price are the same,  reflecting  the fact that no sales  commission or
"load" is  charged  on the sale of  shares  of the  Scudder  Funds.  The  latest
seven-day  yields  for the  money-market  funds can be found  every  Monday  and
Thursday in the  "Money-Market  Funds" section of The Wall Street Journal.  This
information  also may be obtained by calling the Scudder  Automated  Information
Line (SAIL) at 1-800-343-2890.

         The  Japan  Fund,  Inc.  and the  Scudder  Family of Funds  offer  many
conveniences and services, including: active professional investment management;
broad and diversified  investment  portfolios;  pure no-load funds with no sales
charges or Rule 12b-1 distribution fees;  individual attention from a Japan Fund
Service Specialist or Scudder Service  Representative;  free telephone exchanges
into Scudder money market, tax free, income, and growth funds; shares redeemable
at net asset value at any time.

                              SPECIAL PLAN ACCOUNTS

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

         Detailed  information  on any Japan  Fund or Scudder  investment  plan,
including  the  applicable   charges,   minimum   investment   requirements  and
disclosures made pursuant to Internal Revenue Service (the "IRS")  requirements,
may be obtained by contacting Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470.
It is advisable for an investor  considering the funding of the investment plans
described  below to consult with an attorney or other  investment or tax adviser
with respect to the suitability requirements and tax aspects thereof.

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

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

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

         Shares of the Fund may be  purchased as the  investment  medium under a
plan in the form of a Scudder  Profit-Sharing  Plan  (including a version of the
Plan which  includes a  cash-or-deferred  feature) or a Scudder  Money  Purchase
Pension Plan (jointly referred to as the Scudder  Retirement Plans) adopted by a
corporation,  a self-employed individual or a group of self-employed individuals
(including  sole   proprietorships   and  partnerships),   or  other  qualifying
organization.  Each of these forms was approved by the IRS as a  prototype.  The
IRS's  approval  of an  employer's  plan under  Section  401(a) of the  Internal
Revenue Code will be greatly  facilitated if it is in such approved form.  Under
certain  circumstances,  the IRS will assume that a plan,  adopted in this form,
after special notice to any employees,  meets the requirements of Section 401(a)
of the Internal Revenue Code.

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

         Shares of the Fund may be  purchased as the  investment  medium under a
plan  in  the  form  of a  Scudder  401(k)  Plan  adopted  by a  corporation,  a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships),  or other qualifying organization.  This plan has
been approved as a prototype by the IRS.


                                       33
<PAGE>

Scudder IRA:  Individual Retirement Account

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

         A  single   individual   who  is  not  an  active   participant  in  an
employer-maintained  retirement  plan, a simplified  employee pension plan, or a
tax-deferred  annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active  participant  in a qualified  plan,  are eligible to make tax  deductible
contributions of up to $2000 to an IRA prior to the year such individual attains
age 70 1/2. In addition,  certain  individuals  who are active  participants  in
qualified  plans (or who have  spouses  who are  active  participants)  are also
eligible to make  tax-deductible  contributions to an IRA; the annual amount, if
any, of the  contribution  which such an  individual  will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation  prohibits an individual
from   contributing   what  would   otherwise  be  the  maximum   tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.

         An eligible  individual  may  contribute as much as $2,000 of qualified
income (earned income or, under certain  circumstances,  alimony) to an IRA each
year (up to $2,250 for  married  couples  if one spouse has earned  income of no
more than $250).  All income and capital gains derived from IRA  investments are
reinvested  and  compound  tax-deferred  until  distributed.  Such  tax-deferred
compounding can lead to substantial retirement savings.

         The table below shows how much individuals  would accumulate in a fully
tax-deductible  IRA by age 65  (before  any  distributions)  if they  contribute
$2,000 at the beginning of each year,  assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)

<TABLE>
<CAPTION>
                                                Value of IRA at Age 65
                                    Assuming $2,000 Deductible Annual Contribution

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

            <S>                     <C>                        <C>                     <C>       
            25                      $253,680                   $973,704                $4,091,908
            35                       139,522                    361,887                   999,914
            45                        69,439                    126,005                   235,620
            55                        26,414                     35,062                    46,699
</TABLE>

         This next table shows how much individuals  would accumulate in non-IRA
accounts  by age 65 if they start  with  $2,000 in pretax  earned  income at the
beginning of each year (which is $1,380 after taxes are paid),  assuming average
annual returns of 5, 10 and 15%. (At withdrawal,  a portion of the  accumulation
in this table will be taxable.)

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

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

            <S>                     <C>                        <C>                     <C>       
            25                      $119,318                   $287,021                  $741,431
            35                        73,094                    136,868                   267,697
            45                        40,166                     59,821                    90,764
            55                        16,709                     20,286                    24,681
</TABLE>


                                       34
<PAGE>

Scudder 403(b) Plan

         Shares of the Fund may also be purchased as the  underlying  investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal  Revenue  Code.  In  general,  employees  of  tax-exempt  organizations
described in Section  501(c)(3) of the Internal Revenue Code (such as hospitals,
churches,  religious,  scientific,  or literary  organizations  and  educational
institutions)  or a public school system are eligible to participate in a 403(b)
plan.

Automatic Withdrawal Plan

         Non-retirement  plan shareholders who currently own or purchase $10,000
or more of shares of the Fund may establish an Automatic  Withdrawal  Plan.  The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Payments are mailed at the
end of each month.  The check amounts may be based on the  redemption of a fixed
dollar  amount,  fixed  share  amount,  percent  of account  value or  declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be  reinvested in additional  shares.  Shares are then  liquidated as
necessary  to provide for  withdrawal  payments.  Since the  withdrawals  are in
amounts  selected by the investor and have no  relationship  to yield or income,
payments  received cannot be considered as yield or income on the investment and
the  resulting  liquidations  may  deplete or  possibly  extinguish  the initial
investment. Requests for increases in withdrawal amounts or to change payee must
be submitted in writing, signed exactly as the account is registered and contain
signature  guarantee(s) as described under  "Transaction  information--Redeeming
shares--Signature  guarantees" in the Fund's prospectus.  Any such requests must
be received by the Fund's  transfer agent by the 15th of the month in which such
change is to take effect. An Automatic  Withdrawal Plan may be terminated at any
time by the  shareholder,  the Corporation or its agent on written  notice,  and
will be  terminated  when all  shares  of the Fund  under  the  Plan  have  been
liquidated  or upon  receipt  by the  Corporation  of  notice  of  death  of the
shareholder.

         An  Automatic  Withdrawal  Plan request form can be obtained by calling
1-800-53-JAPAN.

Group or Salary Deduction Plan

         An  investor  may  join  a  Group  or  Salary   Deduction   Plan  where
satisfactory  arrangements have been made with Scudder Investor  Services,  Inc.
for forwarding regular  investments  through a single source. The minimum annual
investment  is $240  per  investor  which  may be made  in  monthly,  quarterly,
semiannual or annual payments.  The minimum monthly deposit per investor is $20.
Except for directors or custodian fees for certain  retirement plans, at present
there is no separate charge for  maintaining  group or salary  deduction  plans;
however,  the  Corporation  and its  agents  reserve  the right to  establish  a
maintenance  charge in the future  depending  on the  services  required  by the
investor.

         The Corporation  reserves the right, after notice has been given to the
shareholder,  to redeem and close a shareholder's  account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per  individual  or in the  event  of a  redemption  which  occurs  prior to the
accumulation  of that amount or which  reduces  the  account  value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after  notification.  An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.

Automatic Investment Plan

         Shareholders may arrange to make periodic investments through automatic
deductions  from  checking  accounts  by  completing  the  appropriate  form and
providing the necessary  documentation  to establish  this service.  The minimum
investment is $50.

         The Automatic  Investment  Plan involves an investment  strategy called
dollar cost averaging.  Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular  intervals.  By investing the same
dollar  amount each  period,  when the shares are priced low the  investor  will
purchase more shares than when the share price is higher.  Over a period of time
this  investment  approach may allow the investor to reduce the average price of
the shares purchased. However, this investment approach does not assure a profit


                                       35
<PAGE>

or protect against loss. This type of regular investment program may be suitable
for various  investment  goals such as, but not limited to, college  planning or
saving for a home.

Uniform Transfers/Gifts to Minors Act

         Grandparents, parents or other donors may set up custodian accounts for
minors.  The minimum  initial  investment  is $1,000  unless the donor agrees to
continue to make  regular  share  purchases  for the account  through  Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.

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

Scudder Trust Company

         Annual service fees are paid by the Fund to Scudder Trust  Company,  an
affiliate of the Adviser,  for certain retirement plan accounts and are included
in the fees paid to the Transfer Agent.

                    DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

      (See "Distribution and Performance Information--Dividends and Capital
                 Gains Distributions" in the Fund's prospectus.)

         The Fund intends to follow the practice of  distributing  substantially
all of net investment company taxable income as well as the entire excess of net
realized long-term capital gains over net realized short-term capital losses.

         The Fund intends to distribute    any     dividends from net investment
income         and  net realized  capital  gains     (    after  utilization  of
capital  loss  carryforwards,   )      if any, in December     to avoid  federal
excise  tax.             An  additional  distribution  may be made within  three
months of the Fund's  fiscal year end, if  necessary.  Any     dividends      or
capital  gains  distributions  declared in October,  November or December with a
record  date in such a month  and paid  during  the  following  January  will be
treated by  shareholders  for  federal  income tax  purposes  as if  received on
December 31 of the  calendar  year  declared.  If a  shareholder  has elected to
reinvest any dividends and/or other  distributions,  such  distributions will be
made in additional shares of the Fund and  confirmations  will be mailed to each
shareholder. If a shareholder has chosen to receive cash, a check will be sent.

                        PERFORMANCE AND OTHER INFORMATION

           (See "Distribution and performance information--Performance
                    information" in the Fund's prospectus.)

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

Average Annual Total Return is the average  annual  compound rate of return for,
where applicable,  the periods of one year, five years, and ten years, all ended
on the  last day of a recent  calendar  quarter.  Average  annual  total  return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains  distributions  during the  respective  periods were
reinvested in Fund shares.  Average annual total return is calculated by finding
the average annual  compound rates of return of a hypothetical  investment  over
such  periods,  that would compare the initial  amount to the ending  redeemable
value of such investment  according to the following formula and (average annual
total return is then expressed as a percentage):


                                       36
<PAGE>

                               T = (ERV/P)^1/n - 1

         Where:

P         =        a hypothetical initial payment of $1,000
T         =        average annual total return
n         =        number of years
ERV       =        ending  redeemable  value:  ERV is the value, at the end of
                   the applicable period, of a hypothetical  $1,000 payment made
                   at the beginning of the applicable period.

          Average Annual Total Return for periods ended 12/31/   94    

               One Year          Five Years        Ten Years
               --------          ----------        ---------
                 10.03%            -0.47%           15.62%    

Cumulative Total Return is the compound rate of return on a hypothetical initial
investment of $1000 for a specified  period.  Cumulative total return quotations
reflect  the  change in the  price of the  Fund's  shares  and  assume  that all
dividends  and capital  gains  distributions  were  reinvested  in Fund  shares.
Cumulative total return is calculated by finding the compound rates of return of
hypothetical  investment  over such period,  according to the following  formula
(cumulative total return is then expressed as a percentage):

                                 C = (ERV/P) - 1

         Where:

C         =        cumulative total return
P         =        a hypothetical initial investment of $1,000
ERV       =        ending  redeemable  value:  ERV is the value, at the end of
                   the applicable  period,  of a hypothetical  $1,000 investment
                   made at the beginning of the applicable period.

            Cumulative Total Return for periods ended 12/31/   94    

               One Year          Five Years        Ten Years
               --------          ----------        ---------
                 10.03%            -2.32%           327.01%    

Total Return is the rate of return on an  investment  for a specified  period of
time calculated in the same manner as cumulative total return.

Capital Change measures the return from invested  capital  including  reinvested
capital gains distributions. Capital change does not include the reinvestment of
income dividends.

         The investment results of the Fund will tend to fluctuate over time, so
that  current  distributions,  total  returns and capital  change  should not be
considered  representations of what an investment may earn in any future period.
Actual  distributions  will tend to reflect  changes in market yields,  and will
also depend upon the level of the Fund's expenses, realized investment gains and
losses, and the results of the Fund's investment policies. Thus, at any point in
time, current  distributions or total returns may be either higher or lower than
past results,  and there is no assurance that any historical  performance record
will continue. 
       


                                       37
<PAGE>

         Quotations of the Fund's  performance are based on historical  earnings
and are not intended to indicate  future  performance of the Fund. An investor's
shares  when  redeemed  may be worth  more or less  than  their  original  cost.
Performance of the Fund will vary based on changes in market  conditions and the
level of the Fund's expenses.

         Comparison of non-standard  performance data of various  investments is
valid only if such performance is calculated in the same manner. Since there are
different  methods of calculating  performance,  investors  should  consider the
effect of the methods used to calculate  performance when comparing  performance
of the Fund with performance  quoted with respect to other investment  companies
or types of investments.

Comparison of Fund Performance

         A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there  are  different  methods  of  calculating  performance,  investors  should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.

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

   
         Because  some or all of the Fund's  investments  are  denominated  in a
foreign  currency,  the strength or weakness of the U.S.  dollar as against this
currency may account for part of the Fund's investment  performance.  Historical
information on the value of the dollar versus this foreign  currency may be used
from  time  to time in  advertisements  concerning  the  Fund.  Such  historical
information  is not indicative of future  fluctuations  in the value of the U.S.
dollar against this currency. In addition,  marketing materials may cite country
and economic  statistics and historical stock market  performance for any of the
countries  in  which  the Fund  invests,  including,  but not  limited  to,  the
following:  population growth,  gross domestic product,  inflation rate, average
stock market price-earnings ratios and the total value of stock markets. Sources
for such  statistics  may  include  official  publications  of  various  foreign
governments and exchanges.     

         From time to time, in advertising and marketing literature, this Fund's
performance  may be compared to the  performance of broad groups of mutual funds
with similar investment goals, as tracked by independent  organizations such as,
Investment  Company  Data,  Inc.  ("ICD"),   Lipper  Analytical  Services,  Inc.
("Lipper"), CDA Investment Technologies,  Inc. ("CDA"), Morningstar, Inc., Value
Line  Mutual  Fund  Survey  and  other  independent  organizations.  When  these
organizations'  tracking  results  are used,  the Fund will be  compared  to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the  appropriate  volatility  grouping,  where  volatility  is a measure of a
fund's risk.  For instance,  a Scudder  growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund  category;  and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.    In addition, the Fund's performance may also be
compared to the performance of broad groups of comparable mutual funds.  Indices
with which the Funds  performance may be compared  include,  but are not limited
to, the following:     

   
                  The Europe/Australia/Far East (EAFE) Index
                  Morgan Stanley Capital International World Index
                  J.P. Morgan Global Traded Bond Index
                  Salomon Brothers World Government Bond Index
                  NASDAQ Composite Index
                  Wilshire 5000 Stock Index

         The following  graph  illustrates  the historical  risks and returns of
selected  indices which track the performance of various  combinations of United
States and  international  securities for the ten year period ended December 31,
1994;  results for other  periods may vary.  The graph uses ten year  annualized
international  returns  represented by the Morgan Stanley Capital  International


                                       38
<PAGE>

Europe,  Australia  and Far East  (EAFE)  Index and ten year  annualized  United
States  returns  represented  by the S&P 500  Index.  Risk  is  measured  by the
standard   deviation  in  overall  portfolio   performance  within  each  index.
Performance of an index is historical, and does not represent the performance of
the Fund, and is not a guarantee of future results.

LINE CHART -      EFFICIENT FRONTIER
                  MSCI EAFE vs. S&P 500 (12/31/84-12/31/94)

CHART DATA:

          Total                    Standard
          Return                  Deviation
          ------                  ---------
          17.95                     18.46           100% Int'l MSCI EAFE
          17.14                     18.05           10 US/90 Int'l
          16.41                     17.64           20/80
          15.8                      17.23           30 U.S./70 Int'l
          15.3                      16.82           40/60
          14.93                     16.41           50 U.S./50Int'l
          14.7                      16              60/40
          14.62                     15.59           70 U.S./30 Int'l
          14.69                     15.18           80/20
          14.91                     14.77           90 U.S./10 Int'l
          15.27                     14.36           100% U.S. S&P 500

MSCI EAFE vs. S&P 500 (12/31/84 - 12/31/94)

          18.46                     17.95
          18.05                     17.14
          17.64                     16.41
          17.23                     15.8
          16.82                     15.3
          16.41                     14.93
          16                        14.7
          15.59                     14.62
          15.18                     14.69
          14.77                     14.91
          14.36                     15.27

Source:  Lipper Analytical Services, Inc. (Data as of 12/31/94)
    

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

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

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

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

         Because bank products  guarantee  the principal  value of an investment
and money  market funds seek  stability  of  principal,  these  investments  are
considered  to be less risky than  investments  in either bond or equity  funds,
which may involve the loss of principal.  However,  all  long-term  investments,
including investments in bank products,  may be subject to inflation risk, which


                                       39
<PAGE>

is the risk of erosion of the value of an investment  as prices  increase over a
long time period.  The  risks/returns  associated  with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity,  credit quality of the securities  held, and interest rate  movements.
For equity funds,  factors include a fund's overall  investment  objective,  the
types of equity securities held and the financial position of the issuers of the
securities.  The  risks/returns  associated with an investment in  international
bond or equity funds also will depend upon currency exchange rate fluctuation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       40
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

USA Today,    a leading national daily newspaper.    

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


                                       41
<PAGE>

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

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

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

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

                                FUND ORGANIZATION

                     (See "Fund organization" in the Fund's
                                  prospectus.)

         The Fund was  incorporated  under the laws of the State of  Maryland in
1961.

         The authorized capital stock of the Fund consists of 600,000,000 shares
of a par value of $.33 1/3 each--all of one class and all having equal rights as
to  voting,  redemption,  dividends  and  liquidation.  All  shares  issued  and
outstanding are fully paid and non-assessable,  transferable,  and redeemable at
net asset value at the option of the  shareholder.  Shares have no preemptive or
conversion rights.

         The shares of the Fund have non-cumulative  voting rights,  which means
that the  holders of more than 50% of the  shares  voting  for the  election  of
directors  can elect 100% of the directors if they choose to do so, and, in such
event,  the holders of the remaining  less than 50% of the shares voting for the
election  of  directors  will not be able to elect any  person or persons to the
Board of Directors.

         To the knowledge of the Fund, no person is a control person of the Fund
within the meaning  ascribed to such term under the  Securities  Act of 1933, as
amended.

         As of    April 1, 1995,     all Directors and officers of the Fund as a
group  owned  beneficially  (as that term is  defined  in  Section  13(d) of the
Securities Exchange Act of 1934) less than 1% of the Fund.

         As  of     April  1,  1995,          ____________       shares  in  the
aggregate,    _____%     of the outstanding shares of the Fund, were held in the
name of Charles Schwab & Co., 101 Montgomery Street, San Francisco, CA 94104 who
may be  deemed  to be the  beneficial  owner of  certain  of these  shares,  but
disclaims any beneficial ownership therein.

         To the best of the Fund's  knowledge,  as of    April 1,  1995,      no
person owned  beneficially more than 5% of the Fund's  outstanding shares except
as stated above.

                        INVESTMENT ADVISORY ARRANGEMENTS

                     (See "Fund organization" in the Fund's
                                  prospectus.)

         At a special  meeting held on December 21,  1993,  shareholders  of the
Fund approved     and  ratified their approval at a special meeting held on July
22,  1994      into  effect     an      Investment  Management  Agreement,  with
Scudder,  Stevens  &  Clark,  Inc.  succeeding  Asia  Management  as the  Fund's
investment adviser.  The shareholders also approved a Research Agreement between
Scudder,  Stevens & Clark, Inc. and The Nikko  International  Capital Management
Co., Ltd. ("NICAM"). These two        agreements have the effect of reducing the
total advisory fees paid by the Fund.

   
         Scudder,  Stevens  &  Clark,  Inc.  is  one  of  the  most  experienced
investment  management  firms in the  United  States.  It was  established  as a
partnership in 1919 and pioneered the practice of providing  investment  counsel
to individual  clients on a fee basis.  In 1928 it introduced  the first no-load
mutual  fund  to the  public.  In  1953,  the  Adviser  introduced  the  Scudder


                                       42
<PAGE>

International  Fund,  the first  mutual  fund  available  in the U.S.  investing
internationally in securities of issuers in several foreign countries.

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

         The Adviser also provides  investment  advisory  services to the mutual
funds  which  comprise  the  AARP  Investment  Program  from  Scudder.  The AARP
Investment  Program  from  Scudder has assets over $11 billion and  includes the
AARP Growth Trust,  AARP Income Trust,  AARP Tax Free Income Trust and AARP Cash
Investment Funds.

         The  Adviser  maintains a large  research  department,  which  conducts
continuous   studies  of  the  factors  that  affect  the  position  of  various
industries,  companies and individual securities. The Adviser receives published
reports and statistical  compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities.  Scudder's  international  investment
management  team  travels  the world,  researching  hundreds  of  companies.  In
selecting  the  securities  in which the Fund may invest,  the  conclusions  and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.

         Certain  investments may be appropriate for the Fund and also for other
clients  advised by the  Adviser.  Investment  decisions  for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings,  availability
of cash for investment and the size of their investments generally.  Frequently,
a particular  security may be bought or sold for only one client or in different
amounts  and at  different  times for more  than one but less than all  clients.
Likewise,  a particular  security may be bought for one or more clients when one
or more other clients are selling the security. In addition,  purchases or sales
of the same  security  may be made for two or more  clients on the same day.  In
such event,  such  transactions  will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases,  this  procedure
could have an adverse effect on the price or amount of the securities  purchased
or sold by the Fund.  Purchase and sale orders for the Fund may be combined with
those of other  clients of the  Adviser in the  interest of  achieving  the most
favorable net results to the Fund.     

            The      Investment  Management  Agreement  between the Fund and the
Adviser  dated and effective  January 1, 1994,  (the  "Agreement"),     was last
approved by the  Directors on January 26, 1995 and will continue in effect until
February 28, 1996 and from year to year  thereafter  only if its  continuance is
approved  annually  by the vote of a  majority  of those  Directors  who are not
parties  to  such  Agreement  or  interested  persons  of  the  Adviser  or  the
Corporation,  cast in person at a meeting  called  for the  purpose of voting on
such  approval,  and  either by a vote of the  Corporation's  Directors  or of a
majority of the outstanding  voting securities of the Fund. The Agreement may be
terminated at any time without payment of penalty by either party on sixty days'
written notice, and automatically terminates in the event of its assignment.    

   
         Under the  Agreement,  the  Adviser  regularly  provides  the Fund with
continuing  investment  management for the Fund's portfolio  consistent with the
Fund's  investment  objectives,  policies and  restrictions  and determines what
securities  shall be  purchased,  held or sold and what  portion  of the  Fund's
assets shall be held uninvested,  subject to the Fund's Articles,  By-Laws,  the
1940  Act,  the  Internal  Revenue  Code of 1986  and to the  Fund's  investment


                                       43
<PAGE>

objective, policies and restrictions, and subject, further, to such policies and
instructions  as the  Board of  Directors  of the  Fund  may  from  time to time
establish.

         Under the Agreement,  the Adviser  renders  significant  administrative
services  (not  otherwise  provided by third  parties)  necessary for the Fund's
operations  as an open-end  investment  company  including,  but not limited to,
preparing  reports and notices to the Directors and  shareholders;  supervising,
negotiating  contractual  arrangements with, and monitoring various  third-party
service  providers  to the Fund  (such as the  Fund's  transfer  agent,  pricing
agents,  custodian,  accountants and others);  preparing and making filings with
the Commission and other regulatory  agencies;  assisting in the preparation and
filing of the Fund's federal, state and local tax returns;  preparing and filing
the Fund's  federal  excise tax  returns;  assisting  with  investor  and public
relations matters; monitoring the valuation of securities and the calculation of
net asset  value;  monitoring  the  registration  of  shares  of the Fund  under
applicable  federal and state securities laws;  maintaining the Fund's books and
records to the extent not otherwise  maintained  by a third party;  assisting in
establishing  accounting  policies of the Fund;  assisting in the  resolution of
accounting and legal issues;  establishing  and monitoring the Fund's  operating
budget;  processing the payment of the Fund's bills;  assisting the Fund in, and
otherwise  arranging  for,  the  payment  of  distributions  and  dividends  and
otherwise  assisting  the Fund in the  conduct of its  business,  subject to the
direction and control of the Directors.

         The  Adviser  pays the  compensation  and  expenses  of all  Directors,
officers and executive  employees (except expenses incurred  attending Board and
committee  meetings outside New York, New York or Boston,  Massachusetts) of the
Corporation affiliated with the Adviser and makes available,  without expense to
the Fund, the services of such Directors,  officers and employees of the Adviser
as may duly be elected officers of the Corporation,  subject to their individual
consent to serve and to any limitations  imposed by law, and provides the Fund's
office space and facilities.     

         For its services  under the Agreement,  the Adviser  receives a monthly
fee,  payable in  dollars,  equal on an annual  basis to 0.85 of 1% of the first
$100 million of average daily net assets, 0.75 of 1% on assets in excess of $100
million up to and including $300 million, 0.70 of 1% on assets in excess of $300
million up to and including $600 million,  and 0.65 of 1% of assets in excess of
$600  million.  For purposes of computing the monthly fee, the average daily net
assets of the Fund is  determined  as of the close of business on each  business
day of each month throughout the year. For the years ended December 31, 1993 and
1992       ,  the Fund paid Asia Management  aggregate fees pursuant to its then
effective  investment  advisory  and  management  agreement  of  $4,147,194  and
$2,928,192,           respectively,    of   which   $1,087,289   and   $778,321,
       respectively,  were paid to NICAM (or its  predecessor,  Nikko Research).
   For the year ended December 31, 1994,  the Fund paid the Adviser  $4,773,356,
of which $975,256 was paid to NICAM.    

   
         Under  the  Agreement  the  Fund is  responsible  for all of its  other
expenses  including:   organizational  costs,  fees  and  expenses  incurred  in
connection  with  membership  in  investment  company  organizations;   brokers'
commissions;  legal,  auditing and accounting  expenses;  taxes and governmental
fees; the fees and expenses of the Transfer  Agent;  the cost of preparing share
certificates or any other expenses of issue, sale,  underwriting,  distribution,
redemption or repurchase of shares; the expenses of and the fees for registering
or qualifying securities for sale; the fees and expenses of Directors,  officers
and employees of the Fund who are not affiliated  with the Adviser;  the cost of
printing and distributing reports and notices to stockholders;  and the fees and
disbursements  of custodians.  The Fund may arrange to have third parties assume
all or part of the expenses of sale,  underwriting and distribution of shares of
the  Fund.  The  Fund is also  responsible  for its  expenses  of  shareholders'
meetings,  the cost of responding to shareholders'  inquiries,  and its expenses
incurred in connection  with  litigation,  proceedings  and claims and the legal
obligation  it may have to indemnify its officers and Directors of the Fund with
respect  thereto.  The custodian  agreement  provides  that the custodian  shall
compute the net asset value.

         The Agreement expressly provides that the Adviser shall not be required
to pay a pricing agent of any Fund for portfolio pricing services, if any.
    

         Pursuant to certain  state laws,  the Adviser is required to  reimburse
the Fund for annual  expenses  to the  extent  required  by the  lowest  expense
limitations  imposed by the states in which the Fund is at the time offering its
shares for sale,  although  no payments  are  required to be made by the Adviser
pursuant to this reimbursement provision in excess of the annual fee paid by the
Fund to the  Adviser.  The  Adviser  has  been  advised  that  the  lowest  such
limitation is presently 2 1/2% of average daily net assets up to $30,000,000, 2%
of the next  $70,000,000  of such net  assets  and 1 1/2% of such net  assets in
excess of that amount.  Certain expenses such as brokerage  commissions,  taxes,
extraordinary  expenses  and interest are  excluded  from such  limitations.  If


                                       44
<PAGE>

reimbursement is required,  it will be made as promptly as practicable after the
end of the Fund's  fiscal  year.  However,  no fee  payment  will be made to the
Adviser during any fiscal year which will cause year-to-date  expenses to exceed
the cumulative pro-rata expense limitation at the time of such payment.

         Pursuant to the  Research  Agreement  between the Adviser and The Nikko
International Capital Management Co., Ltd. ("NICAM") dated and effective January
1,   1994,   NICAM   provides   the   Adviser   with   information,   investment
recommendations,  advice and  assistance  for use by the Adviser in advising the
Fund.  (Prior to May 1, 1987, these services were provided to Asia Management by
The Nikko Research Center,  Ltd.) NICAM is free, under the terms of the Research
Agreement,  to render similar  services to others,  including  other  investment
companies.  For its services under the Research  Agreement,  NICAM receives from
Scudder, Stevens & Clark, Inc. an annual fee of 0.15 of 1% up to $700 million of
average  daily net  assets,  0.14 of 1% of  assets  in  excess of $700  million,
payable  monthly  during  fiscal  year 1994 and 0.10 of 1% of average  daily net
assets,  payable  monthly  during  fiscal year 1995.  On December 31, 1995,  the
research  contract  with NICAM will  terminate.  For purposes of  computing  the
monthly fee, the value of the average daily net assets of the Fund is determined
as of the close of business on the last  business day of each month.  The Fund's
expenses are paid out of gross  investment  income.  Shareholders  pay no direct
charges or fees for investment services.

   
Personal Investments by Employees of the Adviser

         Employees  of the Adviser are  permitted  to make  personal  securities
transactions,  subject  to  requirements  and  restrictions  set  forth  in  the
Adviser's  Code  of  Ethics.   The  Code  of  Ethics  contains   provisions  and
requirements  designed to identify  and address  certain  conflicts  of interest
between personal investment  activities and the interests of investment advisory
clients  such as the  Funds.  Among  other  things,  the Code of  Ethics,  which
generally  complies  with  standards   recommended  by  the  Investment  Company
Institute's  Advisory Group on Personal  Investing,  prohibits  certain types of
transactions  absent prior approval,  imposes time periods during which personal
transactions may not be made in certain securities,  and requires the submission
of  duplicate  broker   confirmations   and  monthly   reporting  of  securities
transactions.  Additional  restrictions  apply to portfolio  managers,  traders,
research  analysts  and others  involved  in the  investment  advisory  process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
    

<TABLE>
<CAPTION>
                                                DIRECTORS AND OFFICERS

Name and Address                                Position with Fund             Principal Occupation***
- ----------------                                ------------------             -----------------------
<S>                                             <C>                            <C>
Robert G. Stone, Jr.                            Chairman of the Board and      Chairman of the Board
Kirby Corporation                               Director                       and Director, Kirby Corporation
405 Lexington Ave - 39th Fl.                                                   (marine transportation, diesel
New York, NY 10174                                                             repair and property and casualty
                                                                               insurance in Puerto Rico)

Douglas M. Loudon#                              President                      Managing Director,
                                                                               Scudder, Stevens & Clark, Inc.

William L. Givens                               Director                       President,
Twain Associates, Inc.                                                         Twain Associates
21 Custom House Street
Suite 470
Boston, MA 02110

William H. Gleysteen, Jr.                       Director                       President,
The Japan Society                                                              The Japan Society, Inc.
333 East 47th Street
New York, NY  10017


                                       45
<PAGE>

Name and Address                                Position with Fund             Principal Occupation***
- ----------------                                ------------------             -----------------------

John F. Loughran                                Director                       Senior Adviser for Asia Pacific to
711 Silvergate Avenue                                                          J.P. Morgan & Co., Inc.
Point Loma
San Diego, CA 92106

William V. Rapp                                 Director                       Managing Director,
Rue Associates                                                                 Rue Associates
85 River Road
Scarborough, NY  10510

Henry Rosovsky*                                 Director                       Professor,
Harvard University                                                             Harvard University
Littauer 218
Cambridge, MA  02138

O. Robert Theurkauf*#                           Director                       Advisory Managing Director, Scudder,
                                                                               Stevens & Clark, Inc.

Shoji Umemura*                                  Director                       Chairman,
The Nikko Securities Co., Ltd.                                                 The Nikko Securities Co., Ltd.
3-1-1, Marunouchi, Chiyoda-ku
Tokyo, Japan

Hiroshi Yamanaka                                Director                       Adviser to the Board, The Meiji
Meiji Mutual Life                                                              Mutual Life Insurance Company
Insurance Company
2-1-1, Marunouchi, Chiyoda-ku
Tokyo, Japan

Tristan E. Beplat                               Honorary Director              Director, Daiwa Bank & Trust Co.,
One Haslet Avenue                                                              Yasuda Fire and Marine Insurance
Princeton, NJ  08540                                                           Company of America

Allan Comrie                                    Honorary Director              Director,
40 Sheridan Drive                                                              Petroleum & Resources Corp.,  The
New Canaan, CT  06840                                                          Adams Express Co.

Jonathan Mason                                  Honorary Director              Retired First Vice President
39 Tuckahoe Lane                                                               Prudential-Bache Securities, Inc.
Southampton, NY 11968

James W. Morley                                 Honorary Director              Professor of Political Science
145 Piermont Road                                                              Emeritus
Closter, NJ 07624                                                              Columbia University

Elizabeth J. Allan#                             Vice President                 Principal,
                                                                               Scudder, Stevens & Clark, Inc.

William E. Holzer#                              Vice President                 Managing Director,
                                                                               Scudder, Stevens & Clark, Inc.


                                       46
<PAGE>

Name and Address                                Position with Fund             Principal Occupation***
- ----------------                                ------------------             -----------------------

Thomas W. Joseph**+                             Vice President                 Principal,
                                                                               Scudder, Stevens & Clark, Inc.

Seung K. Kwak#                                  Vice President                 Managing Director,
                                                                               Scudder, Stevens & Clark, Inc.

Edward J. O'Connell#                            Vice President                 Principal,
                                                                               Scudder, Stevens & Clark, Inc.

Miyuki Wakatsuki                                Vice President                 General Manager, Japan Fund Office,
17-9, Nihonbashi-Hakozakicho                                                   Nikko International Capital
Chuo-Ku                                                                        Management Co., Ltd.
Tokyo 103, Japan

Gina Provenzano#                                Vice President and Treasurer   Associate,
                                                                               Scudder, Stevens & Clark, Inc.

Kathryn L. Quirk#                               Vice President and Secretary   Managing Director,
                                                                               Scudder, Stevens & Clark, Inc.

Thomas F. McDonough+                            Assistant Secretary            Principal,
                                                                               Scudder, Stevens & Clark, Inc.

Pamela A. McGrath+                              Assistant Treasurer            Principal,
                                                                               Scudder, Stevens & Clark, Inc.

*        An "interested person" of the Fund as defined by the Investment Company Act of 1940, as amended.
**       Mr. Joseph is a vice president, director, treasurer and assistant clerk of Scudder Investor Services, Inc.,
         the Fund's principal underwriter.
***      Unless  otherwise  stated,  all the  directors and officers of the Fund
         have been associated with their respective companies for more than five
         years, but not necessarily in the same capacity.
#        Address = 345 Park Avenue, New York, New York 10154-0010.
+        Address = Two International Place, Boston, Massachusetts 02110-4103
</TABLE>

         The  Executive  Committee  of the  Fund's  Board  of  Directors,  which
currently consists of Messrs. Stone,  Loughran,  Theurkauf and Rosovsky, has and
may  exercise  any or all  of the  powers  of  the  Board  of  Directors  in the
management  of the  business  and  affairs  of the Fund when the Board is not in
session, except as provided by law and except the power to increase or decrease,
or fill vacancies on, the Board.

                                  REMUNERATION

         Several of the  officers  and  Directors of the Fund may be officers of
Scudder,  Stevens & Clark,  Inc. or of The Nikko  Securities  Co., Ltd. The Fund
pays  direct  remuneration  only  to  those  officers  of the  Fund  who are not
affiliated  with  Scudder or their  affiliates.  Currently,  the Chairman of the
Board is the only officer who is not so affiliated. Each of the Directors who is
not affiliated with Scudder,  Stevens & Clark, Inc. or The Nikko Securities Co.,
Ltd. will be paid by the Fund. Each of these unaffiliated  Directors receives an
annual Director's fee of $6,000 and fees of $1,000 for attending each meeting of
the Board and $750 for attending each committee meeting, or meeting held for the
purpose of  considering  arrangements  between the Fund and  Scudder,  Stevens &
Clark,  Inc., or any of its other affiliates.  Each  unaffiliated  Director also
receives  $750  per  committee  meeting  attended.  The  Chairman  of the  Board
currently receives additional  compensation of $10,000 annually.  As of July 30,
1992,  Honorary  Directors of the Fund  received  $1,000 for each Board  meeting
attended.  For the year  ended  December  31,     1994    ,  such fees  totalled
   $143,619    .


                                       47
<PAGE>

   
The following Compensation Table, provides in tabular form, the following data.

Column (1) All directors who receive compensation from the Corporation.
Column (2) Aggregate  compensation received by a director from all series of the
Corporation.  
Columns (3) and (4)  Pension or  retirement  benefits  accrued or proposed to be
paid by the Corporation.
Column (5) Total  compensation  received by a director from the Corporation plus
compensation  received  from all funds  managed by Scudder  for which a director
serves.  The  total  number  of  funds  from  which  a  director  receives  such
compensation is also provided in column (5).

<TABLE>
<CAPTION>
                                                  Compensation Table
                                         for the year ended December 31, 1994
============================ ============================== ================== ================= ====================
            (1)                           (2)                      (3)               (4)                 (5)

                                                               Pension or                        Total Compensation
                                                               Retirement         Estimated        From The Japan
                                                            Benefits Accrued   Annual Benefits     Fund, Inc. and
      Name of Person,         Aggregate Compensation from    As Part of Fund   Upon Retirement    Fund Complex Paid
         Position                The Japan Fund, Inc.           Expenses                             to Director
============================ ============================== ================== ================= ====================
<S>                                    <C>                       <C>               <C>                <C>      
Robert G. Stone, Jr.,                  $ 22,000                  $ 6,289           $ 6,000            $ 146,727
Director                                                                                             (15 Funds)

William Givens,                        $ 12,750                  $ 3,665           $ 6,000            $ 22,415
 Director                                                                                             (1 Fund)

William H. Gleysteen, Jr.,             $ 16,500                  $ 3,804           $ 3,000            $ 117,017
Director                                                                                             (12 Funds)

John F. Loughran,                      $ 16,500                  $ 3,500           $ 6,000            $ 26,000
 Director                                                                                             (1 Fund)

William V. Rapp,                       $ 17,250                  $ 1,822           $ 6,000            $ 25,072
Director                                                                                              (1 Fund)

Henry Rosovsky,                        $ 14,750                  $ 2,273           $ 6,000            $ 23,023
Director                                                                                              (1 Fund)

Hiroshi Yamanaka,                       $ 9,000                  $ 7,726           $ 6,000            $ 22,726
Director                                                                                              (1 Fund)

Tristan E. Beplat,                      $ 2,000                    N/A               N/A               $ 2,000
Honorary Director                                                                                     (1 Fund)

Allan Comrie,                           $ 5,196                  $ 5,376           $ 5,184            $ 15,756
Honorary Director                                                                                     (1 Fund)

Jonathan Mason,                         $ 6,000                  $ 7,388           $ 6,000            $ 19,388
Honorary Director                                                                                     (1 Fund)

James W. Morley,                        $ 8,596                  $ 6,624           $ 6,000            $ 21,220
Honorary Director                                                                                     (1 Fund)
</TABLE>
    

                                   DISTRIBUTOR

         Under  the terms of the  Underwriting  Agreement  dated  and  effective
August 14,  1987,  between the Fund and Scudder  Investor  Services,  Inc.  (the
"Distributor"),  a Massachusetts corporation, which is a wholly-owned subsidiary
of Scudder,  Stevens & Clark,  Inc., the Fund is responsible for: the payment of
all fees and expenses in  connection  with the  preparation  and filing with the
Securities and Exchange Commission of its registration  statement and prospectus
and any amendments and supplements  thereto;  the registration and qualification
of shares for sale in the various  states,  including  registering the Fund as a
broker or dealer;  the fees and  expenses  of  preparing,  printing  and mailing


                                       48
<PAGE>

prospectuses  (see  below for  expenses  relating  to  prospectuses  paid by the
Distributor),   notices,  proxy  statements,  reports  or  other  communications
(including  newsletters)  to  shareholders of the Fund; the cost of printing and
mailing  confirmations of purchases of shares and the prospectuses  accompanying
such confirmations;  any issue taxes or any initial transfer taxes; a portion of
shareholder toll-free telephone charges and expenses of service representatives,
the cost of wiring funds for share purchases and redemptions (unless paid by the
shareholder who initiates the transaction);  the cost of printing and postage of
business reply envelopes;  and a portion of the cost of computer  terminals used
by both the Fund and the Distributor.

         The Distributor will pay for printing and distributing  prospectuses or
reports  prepared for its use in  connection  with the offering of the shares to
the  public  and  preparing,  printing  and  mailing  any  other  literature  or
advertising in connection with the offering of shares of the Fund to the public.
The  Distributor  will  pay  all  fees  and  expenses  in  connection  with  its
qualification  and  registration  as a broker or dealer under  federal and state
laws,  a portion of the cost of  toll-free  telephone  service  and  expenses of
service representatives, a portion of the cost of computer terminals, and of any
activity which is primarily intended to result in the sale of the Fund's shares.

         Scudder  Investor  Services,  Inc. also acts as distributor for Scudder
California  Tax Free  Fund,  Scudder  California  Tax Free Money  Fund,  Scudder
Capital Growth Fund,  Scudder Cash Investment Trust,  Scudder  Development Fund,
Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA
Fund,  Scudder  Institutional  Fund,  Inc.,  Scudder  International  Fund, Inc.,
Scudder  Investment Trust,  Scudder Municipal Trust,  Scudder  Massachusetts Tax
Free Fund,  Scudder  New York Tax Free Money Fund,  Scudder  Ohio Tax Free Fund,
Scudder  Pennsylvania Tax Free Fund,  Scudder Portfolio Trust,  Scudder Tax Free
Money Fund,  Scudder Tax Free Target  Fund,  Scudder U.S.  Treasury  Money Fund,
Scudder  Variable Life Investment  Fund,  AARP Growth Trust,  AARP Income Trust,
AARP Tax Free Income Trust and AARP Cash Investment  Funds.  Scudder,  Stevens &
Clark,  Inc., pays the expenses of the operations of Scudder Investor  Services,
Inc., with which it is affiliated.

NOTE:  Although the Fund does not  currently  have a 12b-1 Plan and  shareholder
approval  would be required in order to adopt one,  the  underwriting  agreement
provides  that the Fund will also pay those fees and  expenses  permitted  to be
paid or assumed by the Fund  pursuant  to a 12b-1 Plan,  if any,  adopted by the
Fund,  notwithstanding  any other provision to the contrary in the  underwriting
agreement,  and the Fund or a third party will pay those fees and  expenses  not
specifically allocated to the Distributor in the underwriting agreement.

         As agent,  the  Distributor  currently  offers the  Fund's  shares on a
continuous basis to investors in all states. The underwriting agreement provides
that the  Distributor  accepts  orders for shares at net asset value as no sales
commission or load is charged the  investor.  The  Distributor  has made no firm
commitment to acquire shares of the Fund.

                                      TAXES

      (See "Distribution and performance information--Dividends and Capital
      Gains Distributions" and "Transaction Information -- Tax Information,
              Tax Identification Number" in the Fund's prospectus.)

United States Federal Income Taxation

         The following is a general  discussion of certain U.S.  federal  income
tax consequences  relating to the status of the Fund and to the tax treatment of
distributions  by the  Fund to  shareholders.  This  discussion  is based on the
Internal  Revenue Code of 1986, as amended (the "Code"),  Treasury  Regulations,
Revenue Rulings and judicial  decisions as of the date hereof,  all of which may
be changed either  retroactively  or  prospectively.  This  discussion  does not
address  all aspects of U.S.  federal  income  taxation  that may be relevant to
shareholders  in light  of their  particular  circumstances  or to  shareholders
subject to special  treatment under U.S. federal income tax laws (e.g.,  certain
financial  institutions,  insurance  companies,  dealers in stock or securities,
tax-exempt  organizations,  persons who have entered  into hedging  transactions
with  respect  to shares of the Fund,  persons  who  borrow in order to  acquire
shares, and certain foreign taxpayers).

         Prospective  shareholders  should  consult  their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.


                                       49
<PAGE>

The Fund and its  Investments.  The Fund  intends to  qualify  for and elect the
special tax  treatment  applicable  to "regulated  investment  companies"  under
Sections 851-855 of the Code.

         To so qualify,  the Fund must, among other things:  (a) derive at least
90% of its gross income in each taxable year from dividends,  interest, payments
with respect to securities loans and gains from the sale or other disposition of
stock,  securities or foreign  currencies,  or other income (including,  but not
limited to,  gains from  options,  futures or forward  contracts)  derived  with
respect to its business of investing in such stock,  securities  or  currencies;
(b) derive less than 30% of its gross  income in each taxable year from the sale
or other disposition of (i) stock or securities held for less than three months,
(ii)  options,  futures or forward  contracts  (other than  options,  futures or
forward  contracts on foreign  currencies) held for less than three months,  and
(iii) foreign  currencies (or options,  futures or forward  contracts on foreign
currencies)  held  for  less  than  three  months  but  only if such  currencies
(options,  futures or forward  contracts) are not directly related to the Fund's
principal  business of investing in stock or  securities  (or options or futures
with respect to stock or securities); and (c) diversify its holdings so that, at
the end of each  quarter of the  Fund's  taxable  year,  (i) at least 50% of the
value of the  Fund's  total  assets  is  represented  by cash  and  cash  items,
securities of other regulated  investment  companies,  United States  Government
securities and other securities,  with such other securities limited, in respect
of any one issuer,  to an amount not greater  than 5% of the value of the Fund's
total assets and not greater than 10% of the  outstanding  voting  securities of
such issuer,  and (ii) not more than 25% of the value of the Fund's total assets
is  invested in the  securities  of any one issuer  (other  than  United  States
Government  securities or securities of other regulated  investment  companies).
The Fund  anticipates  that,  in  general,  its foreign  currency  gains will be
directly related to its principal business of investing in stock and securities.

         Qualification and election as a "regulated  investment company" involve
no supervision of investment policy or management by any government agency. As a
regulated  investment  company,  the Fund  generally will not be subject to U.S.
federal income tax on its net investment income and net long-term and short-term
capital gains, if any, that it distributes to its shareholders, provided that at
least 90% of its "investment  company taxable income" (determined without regard
to the deduction for dividends paid) is distributed or deemed  distributed.  The
Fund will generally be subject to tax at regular U.S.  federal  corporate income
tax rates on any income or gains which are not treated as distributed and, under
certain  circumstances,  in respect of investments in passive foreign investment
companies as described  below.  Furthermore,  the Fund will also be subject to a
U.S.  federal  corporate  income tax with respect to distributed  amounts in any
year that it fails to qualify as a regulated investment company or fails to meet
the applicable distribution requirement. Although all or a portion of the Fund's
taxable  income  (including  any net capital  gains) for a calendar  year may be
distributed in January of the following year, such a distribution may be treated
for U.S.  federal  income tax purposes as having been  received by  shareholders
during the  calendar  year.  In addition,  the Fund  intends to make  sufficient
distributions  in a timely manner in order to ensure that it will not be subject
to the 4% U.S. federal excise tax on certain  undistributed  income of regulated
investment companies.

         The Fund  generally  intends to  distribute  all of its net  investment
income,  net  short-term  capital gains and net  long-term  capital gains (which
consist  of net  long-term  capital  gains in excess of net  short-term  capital
losses) in a timely  manner.  If any net capital  gains are retained by the Fund
for reinvestment, requiring Federal income taxes to be paid thereon by the Fund,
the Fund will elect to treat such capital  gains as having been  distributed  to
shareholders.  As a result,  each  shareholder will report such capital gains as
long-term  capital gains, will be able to claim his share of U.S. federal income
taxes paid by the Fund on such gains as a credit or refund  against his own U.S.
federal  income tax  liability and will be entitled to increase the adjusted tax
basis of his Fund  shares by the  difference  between his pro rata share of such
gains and the related credit or refund.  If the Fund makes such an election,  it
may not be treated as having met the excise tax distribution requirement.

         The Fund may invest in shares of certain foreign corporations which may
be classified under the Code as passive foreign investment  companies ("PFICs").
If the Fund  receives a so-called  "excess  distribution"  with  respect to PFIC
stock,  the Fund  itself  may be  subject  to a tax on a portion  of the  excess
distribution.  Certain  distributions from a PFIC as well as gains from the sale
of the PFIC shares are treated as "excess  distributions." In general, under the
PFIC rules, an excess  distribution  is treated as having been realized  ratably
over the period  during  which the Fund held the PFIC  shares.  The Fund will be
subject  to tax on the  portion,  if  any,  of an  excess  distribution  that is
allocated  to prior Fund taxable  years and an interest  factor will be added to
the tax,  as if the tax had been  payable in such prior  taxable  years.  Excess
distributions  allocated  to the  current  taxable  year  are  characterized  as
ordinary  income even  though,  absent  application  of the PFIC rules,  certain
excess distributions might have been classified as capital gain.


                                       50
<PAGE>

         Proposed  regulations have been issued which may allow the Fund to make
an election to mark to market its shares of these foreign  investment  companies
in lieu of being subject to U.S.  federal  income  taxation.  At the end of each
taxable  year to which the election  applies,  the Fund would report as ordinary
income the amount by which the fair market value of the foreign  company's stock
exceeds the Fund's adjusted basis in these shares.  No mark to market losses may
be recognized. The effect of the election would be to treat excess distributions
and gain on dispositions as ordinary income which is not subject to a fund level
tax when distributed to shareholders as a dividend.  Alternatively, the Fund may
elect to include as income and gain its share of the  ordinary  earnings and net
capital gain of certain foreign  investment  companies in lieu of being taxed in
the manner described above.

         Exchange control  regulations may restrict  repatriations of investment
income and capital or the proceeds of securities sales by foreign investors such
as the Fund and may limit the Fund's ability to make sufficient distributions to
satisfy the 90% and excise tax distribution requirements.

         The Fund's  transactions  in  foreign  currencies,  forward  contracts,
options,  and futures  contracts  (including  options and futures  contracts  on
foreign  currencies)  will be subject to  special  provisions  of the Code that,
among other things, may affect the character of gains and losses realized by the
Fund  (i.e.,  may affect  whether  gains or losses  are  ordinary  or  capital),
accelerate  recognition of income to the Fund or defer Fund losses.  These rules
could  therefore  affect the character,  amount and timing of  distributions  to
shareholders.   These   provisions   also   (a)   will   require   the  Fund  to
"mark-to-market"  certain types of the positions in its portfolio  (i.e.,  treat
them as if they  were  sold),  and (b) may cause  the Fund to  recognize  income
without  receiving  cash with which to pay  dividends or make  distributions  in
amounts  necessary to satisfy the distribution  requirements for avoiding income
and excise taxes. The Fund intends to monitor these transactions and to make the
appropriate tax elections and will make the appropriate entries in its books and
records when it acquires any foreign currency, forward contract, option, futures
contract,  or hedged  investment  and will  generally  attempt to  mitigate  any
adverse  effects  of  these  rules in order to  minimize  or  eliminate  its tax
liabilities  and  to  prevent  disqualification  of  the  Fund  as  a  regulated
investment company.

Distributions. Distributions to shareholders of the Fund's net investment income
and  distributions  of net short-term  capital gains will be taxable as ordinary
income to shareholders.  Generally,  dividends paid by the Fund will not qualify
for the  dividends-received  deduction  available to  corporations,  because the
Fund's income generally will not consist of dividends paid by U.S. corporations.
Distributions  of the Fund's  net  capital  gains  (designated  as capital  gain
dividends  by the Fund) will be taxable to  shareholders  as  long-term  capital
gains,  regardless  of the  length  of  time  the  shares  have  been  held by a
shareholder  and  are  not  eligible  for  the   dividends-received   deduction.
Distributions  in excess of the Fund's  current  and  accumulated  earnings  and
profits  will,  as to each  shareholder,  be  treated  as a  tax-free  return of
capital,  to the extent of a  shareholder's  adjusted basis in his shares of the
Fund, and as a capital gain  thereafter (if the  shareholder  held his shares of
the Fund as capital assets).

         Shareholders   electing  to  receive   distributions  in  the  form  of
additional  shares  will be treated  for U.S.  federal  income tax  purposes  as
receiving a distribution in an amount equal to the fair market value, determined
as of the  distribution  date, of the shares received and will have a cost basis
in each share  received equal to the fair market value of a share of the Fund on
the distribution date.

         All  distributions  of net  investment  income and net  capital  gains,
whether  received in shares or in cash, must be reported by each  shareholder on
his U.S.  federal  income tax  return.  A  distribution  will be treated as paid
during a calendar  year if it is declared  by the Fund in  October,  November or
December of the year to holders of record in such a month and paid by January 31
of the following year. Such  distributions will be taxable to shareholders as if
received on December 31 of such prior year, rather than in the year in which the
distributions are actually received.

Sale or Redemption of Shares. A shareholder may recognize a taxable gain or loss
if the shareholder  sells or redeems his shares (which  includes  exchanging his
shares for shares of another  Scudder  Fund).  A shareholder  will  generally be
subject to taxation  based on the  difference  between his adjusted tax basis in
the shares sold or redeemed and the value of the cash or other property received
by him in payment therefor.

         A shareholder  who receives  securities  upon redeeming his shares will
have a tax basis in such  securities  equal to their  fair  market  value on the
redemption  date. A shareholder who subsequently  sells any securities  received


                                       51
<PAGE>

pursuant to a redemption will recognize  taxable gain or loss to the extent that
the  proceeds  from  such  sale are  greater  or less than his tax basis in such
securities.

         Any gain or loss arising from the sale or  redemption of shares will be
treated  as  capital  gain or loss  if the  shares  are  capital  assets  in the
shareholder's  hands and will generally be long-term capital gain or loss if the
shares are held for more than one year and  short-term  capital  gain or loss if
the  shares  are  held for one year or  less.  Any  loss  realized  on a sale or
redemption  will be disallowed to the extent the shares disposed of are replaced
within  a  period  beginning  30  days  before  and  ending  30 days  after  the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the  disallowed  loss.  Any loss arising from the sale or
redemption  of  shares  held for six  months or less  will be  treated  for U.S.
federal tax purposes as a long-term  capital loss to the extent of any amount of
capital gain dividends received by the shareholder with respect to such share.

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

Foreign Taxes. As set forth below under "Japanese Taxation," it is expected that
certain income of the Fund will be subject to Japanese withholding taxes. If the
Fund is liable for foreign  income taxes,  including  such Japanese  withholding
taxes,   the  Fund   expects   to  meet  the   requirements   of  the  Code  for
"passing-through"  to its  shareholders the foreign taxes paid, but there can be
no assurance  that the Fund will be able to do so. Under the Code,  if more than
50% of the value of the Fund's  total  assets at the close of the  taxable  year
consists  of stock or  securities  of  foreign  corporations,  the Fund  will be
eligible,  and may  file an  election  with  the  Internal  Revenue  Service  to
"pass-through"  to the Fund's  shareholders  the amount of foreign  income taxes
paid by the Fund.  Pursuant to this election a shareholder  will: (a) include in
gross  income  (in  addition  to  taxable  dividends   actually   received)  the
shareholder's  pro rata share of the foreign  income taxes paid by the Fund; (b)
treat the  shareholder's  pro rata share of such foreign  income taxes as having
been  paid by the  shareholder;  and (c)  subject  to  certain  limitations,  be
entitled  either to deduct  the  shareholder's  pro rata  share of such  foreign
income taxes in computing  the  shareholder's  taxable  income or to use it as a
foreign tax credit against U.S. income taxes. No deduction for foreign taxes may
be claimed by a shareholder  who does not itemize  deductions.  A  shareholder's
election  to deduct  rather  than credit such  foreign  taxes may  increase  the
shareholder's  alternative minimum tax liability,  if applicable.  Shortly after
any year for  which it makes  such an  election,  the Fund  will  report  to its
shareholders,  in writing, the amount per share of such foreign tax that must be
included  in each  shareholder's  gross  income  and the  amount  which  will be
available for deduction or credit.

         Generally,  a  credit  for  foreign  income  taxes  is  subject  to the
limitation that it may not exceed the shareholder's U.S. tax (before the credit)
attributable to the shareholder's  total foreign source taxable income. For this
purpose,  the portion of dividends and  distributions  paid by the Fund from its
foreign source income will be treated as foreign source income. The Fund's gains
and losses from the sale of  securities,  and  currency  gains and losses,  will
generally be treated as derived from U.S. sources. The limitation on the foreign
tax credit is applied separately to foreign source "passive income," such as the
portion of dividends  received from the Fund which  qualifies as foreign  source
income.  Because of these  limitations,  a shareholder  may be unable to claim a
credit  for the full  amount  of the  shareholder's  proportionate  share of the
foreign income taxes paid by the Fund.

         If the Fund  does not make the  election,  any  foreign  taxes  paid or
accrued  will  represent  an  expense  to the Fund  which  will  reduce  its net
investment income. Absent this election,  shareholders will not be able to claim
either a credit or  deduction  for their pro rata  portion of such taxes paid by
the Fund,  nor will  shareholders  be  required  to treat as part of the amounts
distributed to them their pro rata portion of such taxes paid.

Backup  Withholding.  The Fund will be required to withhold U.S.  federal income
tax at the rate of 31% of all taxable  distributions payable to shareholders who
fail to provide the Fund with their correct taxpayer identification number or to
make required certifications,  or who have been notified by the Internal Revenue
Service that they are subject to backup withholding.  Corporate shareholders and
other   shareholders   specified  in  the  Code  are  exempt  from  such  backup
withholding.  Backup  withholding is not an additional tax. Any amounts withheld
may be credited against a shareholder's U.S. federal income tax liability.


                                       52
<PAGE>

Foreign  Shareholders.  A "Foreign  Shareholder" is a person or entity that, for
U.S. federal income tax purposes,  is a nonresident alien individual,  a foreign
corporation,  a foreign  partnership,  or a  nonresident  fiduciary of a foreign
estate or trust. If a distribution  of the Fund's net investment  income and net
short-term capital gains to a Foreign  Shareholder is not effectively  connected
with a U.S. trade or business carried on by the investor, such distribution will
be  subject  to  withholding  tax at a 30%  rate  or such  lower  rate as may be
specified by an applicable income tax treaty.

         Foreign Shareholders may be subject to an increased U.S. federal income
tax on their income  resulting  from the Fund's  election  (described  above) to
"pass-through" amounts of foreign taxes paid by the Fund, but may not be able to
claim a credit or deduction with respect to the  withholding tax for the foreign
taxes treated as having been paid by them.

         A Foreign  Shareholder  generally  will not be subject to U.S.  federal
income tax with respect to gain on the sale or redemption of shares of the Fund,
distributions  from the Fund of net long-term capital gains, or amounts retained
by the Fund which are designated as undistributed  capital gains unless the gain
is  effectively  connected  with a trade or business of such  shareholder in the
United States.  In the case of a Foreign  Shareholder who is a nonresident alien
individual,  however,  gain arising from the sale or redemption of shares of the
fund,  distributions of net long-term  capital gains and amounts retained by the
Fund which are  designated as  undistributed  capital gains  ordinarily  will be
subject to U.S.  income tax at a rate of 30% if such  individual  is  physically
present in the U.S.  for 183 days or more  during the  taxable  year and, in the
case of gain arising from the sale or redemption of Fund shares, either the gain
is attributable to an office or other fixed place of business  maintained by the
shareholder  in the  United  States or the  shareholder  has a "tax home" in the
United States.

         The tax  consequences  to a Foreign  Shareholder  entitled to claim the
benefits  of an  applicable  tax treaty may be  different  from those  described
herein.  Foreign Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of investment in the Fund.

Notices.  Shareholders  will be  notified  annually  by the  Fund as to the U.S.
federal  income  tax  status  of  the  dividends,   distributions,   and  deemed
distributions  made by the Fund to its  shareholder.  Furthermore,  shareholders
will also receive,  if  appropriate,  various written notices after the close of
the Fund's taxable year regarding the U.S.  federal income tax status of certain
dividends,  distributions and deemed  distributions  that were paid (or that are
treated  as  having  been  paid)  by the  Fund to its  shareholders  during  the
preceding taxable year.

Japanese Taxation

         The  operations of the Fund as described  herein do not, in the opinion
of  Nagashima & Ohno,  Japanese  counsel for the Fund,  involve the  creation in
Japan of a  "permanent  establishment"  of the Fund by reason only of dealing in
Japanese   securities  (whether  or  not  such  dealings  are  effected  through
securities  firms or  banks  licensed  in  Japan)  provided  such  dealings  are
conducted  by the Fund from  outside  of Japan  pursuant  to the tax  convention
between the United  States and Japan (the  "Convention")  as currently in force.
Pursuant to the  Convention,  a Japanese  withholding tax at the maximum rate of
15% is, with  certain  exceptions,  imposed  upon  dividends  paid by a Japanese
corporation  to the  Fund.  Pursuant  to the  present  terms of the  Convention,
interest received by the Fund from sources within Japan is subject to a Japanese
withholding  tax at a maximum  rate of 10%. In the opinion of  Nagashima & Ohno,
pursuant  to  the  Convention,  capital  gains  of the  Fund  arising  from  its
investments as described herein are not taxable in Japan.

         Generally, the Fund will be subject to the Japan securities transaction
tax on its sale of certain  securities  in Japan.  The current rates of such tax
range from  0.03% to 0.30%  depending  upon the  particular  type of  securities
involved.  Transactions  involving equity  securities are currently taxed at the
highest rate.

                        BROKERAGE AND PORTFOLIO TURNOVER

         Total   brokerage   commissions   paid   by  the   Fund   amounted   to
   $________________ for 1994    , $2,278,248 for 1993    and     $1,325,290 for
1992       .  Of such amounts,  commissions  were paid by the Fund for brokerage
services  rendered by The Nikko  Securities  Co., Ltd.  ("Nikko  Securities") in
respect   of   portfolio   transactions   by  the   Fund  in  the   amounts   of
   $_________________   for  1994    ,   $19,432  for  1993     and      $0  for
1992       .  Such  amounts  represented  0.85%,  0%,  and  0.74%  of the  total
brokerage commissions paid by the Fund in such years, respectively. The advisory
fee paid to NICAM (or its  predecessor,  Nikko Research) was not reduced because


                                       53
<PAGE>

of such brokerage commissions.  During the years ended December 31,    1994,    
1993   and   1992,          there   were       $________________,       $0   and
$11,665       , respectively, in commissions paid or accrued by the Fund to J.P.
Morgan  Securities Asia, Ltd. Such amounts  represented     ______    %,  0% and
0.88       % of the total brokerage  commissions paid by the Fund in such years,
respectively.  The rate of total  portfolio  turnover  of the Fund for the years
   1994,      1993,  and  1992         was     ______    %,   81.7%  and  47.0%,
respectively.

         The Fund  always  seeks  to place  portfolio  transactions  with  those
brokers which,  in the opinion of the  management of the Fund,  provide the best
execution of Fund orders. The Fund considers the obtaining of the most favorable
price for Fund orders a major factor in best execution. Subject to this practice
of seeking the best execution,  the Fund, in allocating brokerage,  may consider
research  information  provided by brokers to the Fund or to the Adviser for use
in  advising  the Fund.  Orders for  portfolio  transactions  of the Fund may be
placed through Scudder Investor  Services,  Inc., which in turn places orders on
behalf of the Fund with other brokers and dealers.  Scudder  Investor  Services,
Inc. receives no commissions,  fees or other remuneration from the Fund for this
service.

                                 NET ASSET VALUE

         The net asset value of shares of the Fund    is      computed as of the
close of regular trading on the New York Stock Exchange (the "Exchange") on each
day the Exchange is open for trading.  The Exchange is scheduled to be closed on
the following holidays:  New Year's Day,  Presidents Day, Good Friday,  Memorial
Day,  Independence Day, Labor Day,  Thanksgiving and Christmas.  Net asset value
per share is  determined by dividing the value of the total assets of    the    
Fund, less all liabilities, by the total number of shares outstanding.

         An exchange-traded  equity security        is valued at its most recent
sale  price       .  Lacking any sales, the security is valued at the calculated
mean between the most recent bid quotation  and the most recent asked  quotation
(the "Calculated  Mean"       ).     Lacking a Calculated Mean    , the security
is valued at the most recent bid  quotation       .  An         equity  security
which is traded on the National  Association  of  Securities  Dealers  Automated
Quotation ("NASDAQ") system is valued at its most recent sale price.     Lacking
any     sales, the security is valued at the high or "inside" bid quotation. The
value of an equity  security  not  quoted on the  NASDAQ  System,  but traded in
another over-the-counter  market, is its most recent sale price.     Lacking    
any sales,  the  security is valued at the  Calculated  Mean.     Lacking  a    
Calculated Mean, the security is valued at the most recent bid quotation       .

         Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's  pricing  agent(s) which reflect  broker/dealer  supplied
valuations and electronic data processing techniques. Short-term securities with
remaining  maturities  of sixty  days or less are valued by the  amortized  cost
method,  which  the  Board  believes  approximates  market  value.  If it is not
possible  to value a  particular  debt  security  pursuant  to  these  valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide  marketmaker       .     If it is not possible to value a particular
debt security  pursuant to the above  methods,     the Adviser may calculate the
price of that debt security, subject to limitations established by the Board.

            An  exchange  traded       option   s      contract  on  securities,
currencies, futures and other financial instruments is valued at    its     most
recent sale price on    such     exchange       . Lacking any sales, the options
contract is valued at the  Calculated  Mean.  Lacking any  Calculated  Mean, the
options  contract  is valued at the most recent bid  quotation  in the case of a
purchased options contract,  or the most recent asked quotation in the case of a
written  options  contract.     An      option   s      contract on  securities,
currencies and other financial instruments traded  over-the-counter is valued at
the most recent bid quotation in the case of a purchased option   s     contract
and  at the  most  recent  asked  quotation  in the  case  of     a      written
option   s      contract.  Futures  contracts  are  valued  at the  most  recent
settlement  price.        Foreign currency exchange forward contracts are valued
at the  value  of the  underlying  currency  at the  prevailing         exchange
rate       .

         If a security is traded on more than one exchange,  or upon one or more
exchanges  and in the  over-the-counter  market,  quotations  are taken from the
market in which the security is traded most extensively.

         If, in the opinion of the Fund's Valuation Committee, the value of    a
portfolio      asset as determined in accordance with these  procedures does not
represent the fair market value of the    portfolio      asset, the value of the
portfolio  asset is taken to be an amount which, in the opinion of the Valuation
Committee,   represents  fair  market  value  on  the  basis  of  all  available
information.  The  value  of  other  portfolio  holdings  owned  by the  Fund is


                                       54
<PAGE>

determined in a manner which, in the discretion of the Valuation  Committee most
fairly reflects fair market value of the property on the valuation date.

         Following the  valuations of  securities or other  portfolio  assets in
terms of the currency in which the market  quotation  used is expressed  ("Local
Currency"),  the value of these  portfolio  assets in terms of U.S.  dollars  is
calculated by converting the Local Currency into U.S.  dollars at the prevailing
currency exchange rate on the valuation date.

                             ADDITIONAL INFORMATION

Experts

         The  financial  statements of the Fund included in the Annual Report to
shareholders  dated December 31, 1994,  attached to this Statement of Additional
Information, have been examined by Price Waterhouse, independent accountants, in
reliance upon the  accompanying  report of said firm, which report is given upon
their authority as experts in accounting and auditing.

Public Official Documents

         The  documents  referred to after the  tabular and textual  information
appearing  herein  under  the  caption  "JAPAN  AND THE  JAPANESE  ECONOMY"  and
"SECURITIES  MARKETS IN JAPAN" as being the source of the  statistical  or other
information  contained in such tables or text are in all cases  public  official
documents  of  Japan,  its  agencies,  The Bank of Japan or the  Japanese  Stock
Exchange,  with the  exception  of the public  official  documents of the United
Nations and of the International Monetary Fund.

Other Information

         Many of the  investment  changes  in the  Fund  will be made at  prices
different from those market prices  prevailing at the time they may be reflected
in a regular report to shareholders of the Fund. These transactions will reflect
investment  decisions  made by the  Fund's  investment  adviser  in light of the
objectives  and policies of the Fund,  and such  factors as its other  portfolio
holdings and tax  considerations  and should not be construed as recommendations
for similar action by other investors.

         The CUSIP number of The Japan Fund, Inc. is 471070-10-2.

         The Fund  employs  Brown  Brothers  Harriman  & Co.,  40 Water  Street,
Boston,  Massachusetts  02109,  as Custodian and Sumitomo  Trust and Banking Co.
(Tokyo Office) as Sub-Custodian.

         Scudder Service  Corporation  ("Service  Corporation"),  P.O. Box 2291,
Boston,  Massachusetts  02205-2291, a wholly-owned subsidiary of the Adviser, is
the transfer,  dividend-paying  and shareholder  service agent for the Fund. For
the year ended December 31,    1994    , the Fund was charged by Scudder Service
Corporation    $870,278    , of which    $70,123     was payable at December 31,
   1994    .

         The Fund's prospectus and this Statement of Additional Information omit
certain information  contained in the Registration  Statement which the Fund has
filed with the  Securities and Exchange  Commission  under the Securities Act of
1933, as amended, and reference is hereby made to the Registration Statement for
further  information with respect to the Fund and the securities offered hereby.
This  Registration  Statement is available  for  inspection by the public at the
Securities and Exchange Commission in Washington, D.C.

                              FINANCIAL STATEMENTS

         The financial  statements of The Japan Fund,  Inc., are attached hereto
on pages     9      through     23    ,  inclusive,  in the Annual Report to the
shareholders of the Fund dated December 31,    1994    ,  and are deemed to be a
part of this Statement of Additional Information.





                                       55

<PAGE>

THE JAPAN FUND, INC.

Annual Report

December 31, 1994

A pure no-load(tm) mutual fund

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

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


THE JAPAN FUND, INC.
Contents

Portfolio Management Discussion                                        3
                                                                        
Reviews the period's investing strategies, financial                    
markets, and economic conditions
                                                                        
Performance Update                                                     4
                                                                        
Portfolio Summary                                                      5
                                                                        
Investment Portfolio                                                   9
                                                                        
Itemized list of your Fund's portfolio holdings                         
                                                                        
Financial Statements                                                  13
                                                                        
Financial Highlights                                                  16
                                                                        
Notes to Financial Statements                                         17
                                                                        
Report of Independent Accountants                                     23
                                                                        
Tax Information                                                       24
                                                                        
Officers and Directors                                                26
                                                                        
How to Contact The Japan Fund                                 Back cover
<PAGE>



PORTFOLIO MANAGEMENT DISCUSSION

Dear Shareholders,

     As you are all aware, after the close of The Japan Fund's fiscal year,
a major earthquake hit the Kobe area. The economic and investment market
implications of this tragic event are significant, and we are enclosing a
special letter to discuss the ramifications.

     In a difficult year for the financial markets, positive investment
returns were especially welcome. We are pleased to report that The Japan
Fund provided a 10.03% total return for the 12 months ended December 31,
1994. The Fund's performance reflected an increase in share price from
$10.33 a year ago to $10.50 on December 31, 1994, and reinvested
distributions of $0.85 per share. By comparison, the Tokyo Stock Price
Index (TOPIX), your Fund's benchmark, posted a dollar-based total return of
21.96%, roughly half of which were gains resulting from appreciation of the
Japanese yen.

     Several factors hampered the Fund's performance relative to the
TOPIX-key among them was a comparatively small exposure to cyclical
industries, which led the Japanese market rally in 1994. The Fund also
maintained a heavy weighting relative to the TOPIX in consumer growth- and
service-oriented companies, both of which underperformed significantly in
1994 after rewarding the Fund with three years of healthy performance. In
addition, the Fund's reduced exposure to the yen inhibited returns during
the year. Concerned that the yen had become overvalued relative to the U.S.
dollar, we converted approximately 40% of the Fund's yen exposure back to
U.S. dollars, primarily through forward currency contracts. Designed to
help protect gains when the yen declines, our hedging strategy limited the
Fund's participation in the currency's appreciation last year.

1994-An Eventful Year

     A number of noteworthy developments marked the environment for
Japanese investments during the past year.

     First, the Japanese stock market rebounded sharply during the year's
first half, driven by purchases from non-Japanese investors who believed
economic recovery was on its way. The best-performing market segments
included economically sensitive industries such as machinery, paper, steel,
shipping, rubber, transportation, textiles, and chemicals. 

<PAGE>
The Japan Fund, Inc.
Performance Update as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
The Japan Fund, Inc. 
- ----------------------------------------
                     Total Return
  Period   Growth    -------------
   Ended     of               Average
12/31/94  $10,000  Cumulative  Annual
- --------- -------  ----------  -------
1 Year    $11,003    10.03%    10.03%
5 Year    $ 9,768    -2.32%    -0.47%
10 Year   $42,701   327.01%    15.62%

TOPIX
- --------------------------------------
                     Total Return
  Period   Growth    -------------
   Ended     of               Average
12/31/94  $10,000  Cumulative  Annual
- --------- -------  ----------  -------
1 Year    $12,196    21.96%    21.96%
5 Year    $ 8,109   -18.91%    -4.10%
10 Year   $46,085   360.85%    16.50%

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment. 
The data points from the graph are as follows:

Yearly periods ended December 31

The Japan Fund, Inc.
Year            Amount
- ----------------------
84              10000
85              13889
86              24659
87              32798
88              39162
89              43714
90              36562
91              37700
92              31387
93              38807
94              42701

TOPIX
Year            Amount
- ----------------------
84              10000
85              14501
86              27212
87              39954
88              53217
89              56831
90              36440
91              39500
92              30450
93              37785
94              46085

The Tokyo Stock Exchange Stock Price Index (TOPIX) is an
unmanaged capitalization weighted measure (adjusted in U.S.
dollars) of all shares listed on the first section of the 
Tokyo Stock Exchange. Index returns assume dividends reinvested 
net of withholding tax and, unlike Fund returns, do not 
reflect any fees or expenses.










- -----------------------------------------------------------------
Returns and Per Share Information
- -------------------------------------------------------------------

A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.

Yearly periods ended December 31
- ----------------------------------
<TABLE>
<S>                     <C>     <C>     <C>     <C>     <C>     <C>    <C>     <C>     <C>     <C>
                       1985    1986    1987    1988    1989    1990    1991    1992    1993    1994
                     -------------------------------------------------------------------------------   
Net Asset Value...   $15.53   $20.28  $16.97  $16.24  $14.27  $10.76  $10.69  $ 8.90  $10.33  $10.50 
Income Dividends..   $  .07   $  .02  $  .20  $  .02  $  .08  $  .09  $   --  $   --  $  .28  $   --
Capital Gains
Distributions.....   $ 1.36   $ 4.67  $ 9.08  $ 3.88  $ 3.59  $ 1.10  $  .41  $   --  $  .39  $  .85
Fund Total
Return (%)........    38.89    77.54   33.01   19.40   11.63  -16.36    3.11  -16.74   23.64   10.03
Index Total
Return (%)........    45.00    87.65   46.82   33.19    6.79  -35.88    8.39  -22.92   24.07   21.96
</TABLE>

All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.

Portfolio Summary as of December 31, 1994
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------

Common Stocks            97%        
Cash Equivalents          3%       
                        ----       
                        100%        
                        ====

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

- --------------------------------------------------------------------------
Sectors (Excludes 3% Cash Equivalents)
- --------------------------------------------------------------------------
Manufacturing           29%        
Consumer Discretionary  18%
Financial               12%
Durables                10%       
Metals & Minerals        9%
Service Industries       5%
Technology               5%
Consumer Staples         4%
Construction             2%
Other                    6%
                       ----
                       100%
                       ====

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






- --------------------------------------------------------------------------
Ten Largest Equity Holdings
- --------------------------------------------------------------------------
 1. Nichiei Co., Ltd.
        Finance company for small and medium-sized firms
 2. Canon Inc.
        Leading producer of visual image and information equipment
 3. Kyocera Corp.
        Leading ceramic package manufacturer
 4. Sumitomo Metal Industries, Ltd.
        Leading integrated crude steel producer
 5. Shohkoh Fund & Co., Ltd.
        Finance company for small and medium-sized firms
 6. SMC Corp.
        Leading maker of pneumatic equipment
 7. Hitachi Metals, Ltd.
        Major producer of high-quality specialty steels
 8. Nissen Co., Ltd.
        Mail order women's apparel distributor
 9. Keyence Corp.
        Specialized manufacturer of sensors
10. Japan Associated Finance Co.
        Venture capital company

For more complete details about the Fund's Investment Portfolio, 
see page 9.
A monthly investment portfolio summary is available upon request.
<PAGE>

After peaking in June, however, the Japanese market drifted lower as
foreign buying eased. At the same time, rising bond yields and skepticism about
the strength of the fledgling economic recovery kept domestic investors on the
sidelines.

     Second, as mentioned earlier, the yen appreciated significantly
throughout the year, from 111 yen to the U.S. dollar last January to a
record high of 96 in early November. The yen finished the year at 99 to the
dollar. The historically large inflow of foreign investments into Japanese
equities early in the year, combined with a continued avoidance of foreign
currency investments by Japanese institutions and Japan's large trade
surplus, appear to have supported the most recent round of yen
appreciation.

     Third, long-term interest rates in Japan rose from 3% last January to
4.7% in October (as measured by 10-year Japanese government bond yields).
Japan's strongly deflationary environment ordinarily would be favorable for
bonds. But investors sold Japanese bonds in response to global bond market
weakness and increasing evidence of an economic recovery in Japan.

Strategic Portfolio Changes

     During 1994, Japan's best performing stocks shifted from those with
defensive or secular growth characteristics to cyclicals offering favorable
prospects for turnaround and recovery. To take advantage of this change, we
took several major steps to reallocate the portfolio.

     As cyclical stocks rallied almost across the board, we strategically
increased the Fund's economically-sensitive holdings. To determine
selections, we sought companies that are competitive on a global scale. We
expect structural changes in distribution networks, the weakening of
traditional business relationships, and the yen's strength to create an
unfavorable environment for companies operating solely in the domestic
market. Additionally, we favored companies that have demonstrated
management initiative through restructuring and the reduction of fixed
costs, such as personnel and depreciation. Finally, in keeping with our
fundamental investment approach, we carefully selected stocks whose prices
were compelling given the underlying companies' estimated earnings over the
next three to four years.

     Putting our strategy to work, the Fund established a major position in
the steel industry, with stocks such as Nisshin Steel, Sumitomo Metal,
Hitachi Metal, and Kawasaki Steel. These companies are all undergoing
aggressive restructuring and are global leaders in their respective
businesses _ Nisshin in stainless steel, Sumitomo in stainless and seamless
pipes, and Hitachi in high-grade specialty steel.

     The Fund also increased its investments in the machinery sector,
another area that benefited strongly from global economic activity in 1994.
Recent investments include NSK, a global leader in ball bearings and
autoparts; Komori, one of the world's leading offset printing machinery
manufacturers; and Hitachi Construction Machinery, a global leader in
hydraulic excavators.

     To enable the portfolio to take advantage of strength in Japanese
over-the-counter (OTC) stocks, the Fund's upper limit for owning
small-company stocks was increased in September from 20% of the portfolio
to 30%. In dollar terms, Japanese OTC stocks surged 37.49% in 1994, far
outstripping the TOPIX. Several of these stocks were among the Fund's
largest holdings, including JAFCO, a pioneer and leader among Japanese
venture capital companies, Shohkoh Fund, a provider of short-term
noncollateralized loans to small- and medium-sized companies, and THK, the
world's leading manufacturer of linear motion mechanical components.

     As interest rates rose in 1994 on the expectation of economic
recovery, interest-rate-sensitive and other defensive stocks lost ground.
Affected industries included electric power and gas, metal products,
financials, construction, food, insurance, and pharmaceuticals. Stocks in
the retail and service industries, which were instrumental in supporting
the Fund's performance during the last four years, didn't fare much better.
We stuck with select holdings in these groups based on their attractive
longer-term business prospects. But we pared back significantly in areas we
believed were losing fundamental attractiveness _ housing, insurance, and
pharmaceuticals, for instance.

     Currently, opportunities are developing in Japan's CATV (cable
television) industry, an industry still in its infancy. Recent deregulation
is expected to induce consolidation, expand services, and accelerate market
penetration. Our holdings of Itochu and Sumitomo Corporations, the two
largest players in the Japanese CATV industry, reflect our belief that the
valuation of the CATV enterprises and their growth potential remain
under-appreciated by the Japanese marketplace. Other opportunities are
developing in the area of industrial garbage processing. Fund holdings of
dump truck makers such as ShinMaywa and Kyokuto Kaihatsu are benefiting not
only from a recovery in dump truck sales, but a longer-term growth trend in
garbage-processing equipment.

Outlook

     As always, we continue to emphasize a bottom-up stock selection
process based on extensive field research of individual companies. At the
same time, we also maintain a broad top-down perspective, which centers
around independent fundamental analysis.

     In this regard, we believe many of the building blocks are in place
for The Japan Fund to benefit from important developments in the Japanese
economy: greater competition from imports, deregulation in many industries
such as finance and telecommunications, and the growth of new industries
such as non-bank finance and multimedia. Further, evidence increasingly
suggests a modest economic recovery and growth in corporate earnings, while
inflation remains contained, setting a favorable backdrop for Japanese
equity investments in 1995. While the yen's future direction remains a
critical variable for the recovery, we continue to believe that the yen
will likely weaken as Japan's trade surplus contracts and investment
capital again begins flowing out of the country. Our strategy of hedging
against the risk of yen depreciation therefore remains in place.

     Thank you for your continued investment in The Japan Fund.

     Sincerely,

     /s/Douglas M. Loudon          /s/Robert G. Stone, Jr.
     Douglas M. Loudon             Robert G. Stone, Jr.
     President                     Chairman

The Japan Fund:
A Team Approach to Investing

     The Japan Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management
process. Team members work together to develop investment strategies and
select securities for the Fund. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists
who work in our offices across the United States and abroad. We believe our
team approach benefits Fund investors by bringing together many disciplines
and leveraging Scudder's extensive resources.

     Lead Portfolio Manager Seung Kwak assumed responsibility for the
Fund's investment strategy and daily operation in 1994 and has been a
member of the portfolio management team since 1989.  Mr. Kwak has directed
our Tokyo-based research effort since he joined Scudder in 1988. Elizabeth
J. Allan, Portfolio Manager, helps set the Fund's general investment
strategy. Ms. Allan has contributed her expertise to the management of the
Fund since she joined Scudder in 1987 and has numerous years of Pacific
Basin research and investing experience.

<PAGE>

<TABLE>

                                                             INVESTMENT PORTFOLIO  as of December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
                           % of           Principal                                               Market
                         Portfolio       Amount ($)                                             Value ($)
- ----------------------------------------------------------------------------------------------------------
<S>                          <C>                                                                <C>
                             3.1%      COMMERCIAL PAPER
                                       -------------------------------------------------------------------
                                         11,446,000  American Express Credit Corp., 1/3/95 .    11,442,293
                                          8,323,000  CIT Group Holdings Inc., 1/3/95 . . . .     8,320,203
                                                                                               -----------              
                                                     TOTAL COMMERCIAL PAPER (Cost $19,762,496)  19,762,496
                                                                                               -----------
                            96.9%      COMMON STOCKS
                                       -------------------------------------------------------------------
                                            Shares
                                       -------------------------------------------------------------------
CONSUMER DISCRETIONARY      17.8%

Department &
Chain Stores                 1.8%            37,000  Fast Retailing Co., Ltd.   . . . . . . .    4,047,165
                                            142,000  Ito-Yokado Co., Ltd.  . . . . . . . . .     7,595,183
                                                                                               -----------      
                                                                                                11,642,348
                                                                                               -----------
Home Furnishings             0.6%            92,000  Nitori Co., Ltd.   . . . . . . . . . . .    3,785,248
                                                                                               -----------      
Recreational Products        1.4%           129,000  Sankyo Co., Ltd.   . . . . . . . . . . .    8,673,357
                                                                                               -----------      
Restaurants                  4.0%           400,000  Aiya Co., Ltd.   . . . . . . . . . . . .    7,425,991
                                             68,600  Genki Sushi Co., Ltd . . . . . . . . . .    1,996,387
                                            230,000  Skylark Co., Ltd . . . . . . . . . . . .    4,385,349
                                            413,000  Ten Allied Co., Ltd  . . . . . . . . . .   11,604,616
                                                                                               -----------      
                                                                                                25,412,343
                                                                                               -----------
Specialty Retail            10.0%            49,000  Bunkyodo Co., Ltd.   . . . . . . . . . .    2,016,056
                                            238,600  Cox Co., Ltd . . . . . . . . . . . . . .    4,726,482
                                            143,750  Hasegawa Co., Ltd  . . . . . . . . . . .    2,510,035
                                            208,000  Kato Denki Co., Ltd  . . . . . . . . . .    5,635,725
                                            143,700  Ministop Co., Ltd  . . . . . . . . . . .    4,225,198
                                            558,000  Nissen Co., Ltd  . . . . . . . . . . . .   17,246,764
                                            281,200  Royal Ltd  . . . . . . . . . . . . . . .   11,005,319
                                            104,000  Shimamura Co., Ltd . . . . . . . . . . .    5,218,264
                                            116,900  Simree Co., Ltd  . . . . . . . . . . . .    1,560,231
                                             93,000  Tsutsumi Jewelry Co., Ltd  . . . . . . .    8,492,725
                                                                                               -----------      
                                                                                                62,636,799
                                                                                               -----------              



</TABLE>

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


<PAGE>
<TABLE>
THE JAPAN FUND, INC.
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
                              % of                                                                      Market
                             Portfolio     Shares                                                      Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S>                          <C>           <C>                                                        <C>
CONSUMER STAPLES              4.3%
Consumer Electronic &
Photographic Products         3.5%           340,000  Pioneer Electronics Corp.  . . . . . . . . .     8,188,660
                                             243,400  Sony Corp. (ADR)   . . . . . . . . . . . . .    13,660,825
                                                                                                      ----------
                                                                                                      21,849,485
                                                                                                      ----------
Food & Beverage               0.8%           273,000  Rock Field Co., Ltd.   . . . . . . . . . . .     5,369,594
                                                                                                      ----------
COMMUNICATIONS                2.1%
Telephone/Communications                       1,505  DDI Corp.  . . . . . . . . . . . . . . . . .    12,988,460
                                                                                                      ----------
FINANCIAL                    11.6%
Other Financial Companies                    105,000  Japan Associated Finance Co.   . . . . . . .    16,332,163
                                             501,876  Nichiei Co., Ltd.  . . . . . . . . . . . . .    32,232,879
                                              59,800  Sanyo Shinpan Finance Co., Ltd.  . . . . . .     5,766,964
                                              89,900  Shohkoh Fund & Co., Ltd.   . . . . . . . . .    18,584,446
                                                                                                      ----------
                                                                                                      72,916,452
                                                                                                      ----------
MEDIA                         2.1%
Broadcasting & Entertainment                 250,000  Horipro Inc. . . . . . . . . . . . . . . . .     6,171,601
                                             120,277  Sony Music Entertainment (Japan) Inc.  . . .     6,759,169
                                                                                                      ----------
                                                                                                      12,930,770
                                                                                                      ----------
SERVICE INDUSTRIES            5.2%
Miscellaneous Commercial
Services                                   1,463,000  Itochu Corp.   . . . . . . . . . . . . . . .    10,423,783
                                              95,000  Secom Co., Ltd.  . . . . . . . . . . . . . .     5,910,687
                                              26,000  Softbank Corp.   . . . . . . . . . . . . . .     5,740,090
                                           1,072,000  Sumitomo Corp.   . . . . . . . . . . . . . .    10,972,805
                                                                                                      ----------
                                                                                                      33,047,365
                                                                                                      ----------
DURABLES                      9.6%
Aerospace                     0.4%           234,000  JAMCO Corp.  . . . . . . . . . . . . . . . .     2,489,112
                                                                                                      ----------
Automobiles                   7.8%           654,000  Bridgestone Corp.  . . . . . . . . . . . . .    10,238,234
                                             428,000  Kyokuto Kaihatsu Kogyo Co., Ltd. . . . . . .    12,111,992
                                             262,000  Ogura Clutch Co., Ltd.   . . . . . . . . . .     3,891,219
                                             966,000  ShinMaywa Industries, Ltd.   . . . . . . . .     9,887,807
                                           1,074,000  Suzuki Motor Corp.   . . . . . . . . . . . .    12,609,935
                                                                                                      ----------
                                                                                                      48,739,187
                                                                                                      ----------
Construction/Agricultural
Equipment                     1.3%           636,000  Hitachi Construction Machinery Co., Ltd. . .     8,360,863
                                                                                                      ----------
</TABLE>

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

                                                                


<PAGE>

<TABLE>

                                                                                      INVESTMENT PORTFOLIO
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
                            % of                                                                   Market
                          Portfolio           Shares                                             Value ($)
- ----------------------------------------------------------------------------------------------------------
<S>                        <C>                                                                  <C>
Telecommunications
Equipment                   0.1%             31,000  Japan Radio Co., Ltd.  . . . . . . . . .      460,411
                                                                                               -----------      
MANUFACTURING              28.5%
Chemicals                   2.4%          1,437,000  Nippon Shokubai Corp., Ltd.  . . . . . .   13,987,858
                                             82,000  Showa Highpolymer Co., Ltd. . . . . . .       822,880
                                                                                                ----------
                                                                                                14,810,738
                                                                                                ----------
Diversified Manufacturing   1.3%            571,000  Sumitomo Electric Industries, Ltd.   . .    8,136,678
                                                                                                ----------
Electrical Products         6.9%          1,296,000  Hitachi Ltd.   . . . . . . . . . . . . .   12,862,459
                                            152,000  Mabuchi Motor Co., Ltd . . . . . . . . .   11,440,040
                                            639,000  Matsushita Electrical Industrial 
                                                       Co., Ltd . . . . . . . . . . . . . . .   10,516,407
                                          1,169,000  Toshiba Corp . . . . . . . . . . . . . .    8,481,555
                                                                                                ----------
                                                                                                43,300,461
                                                                                                ----------
Hand Tools                  0.0%              9,000  Asahi Diamond Industrial Co., Ltd.   . .      151,722
                                                                                                ----------
Industrial Specialty        0.4%             83,000  Oiles Corp.  . . . . . . . . . . . . . .    2,332,163
                                                                                                ----------
Machinery/Components/
Controls                   13.7%             51,000  Amano Corp.  . . . . . . . . . . . . . .      757,451
                                            147,500  Keyence Corp . . . . . . . . . . . . . .   16,726,041
                                            343,000  Komori Corp  . . . . . . . . . . . . . .    9,190,266
                                          1,181,000  NGK Spark Plug Co., Ltd  . . . . . . . .   15,525,439
                                          1,345,000  NSK Ltd  . . . . . . . . . . . . . . . .   10,662,820
                                            318,900  SMC Corp . . . . . . . . . . . . . . . .   18,145,138
                                            613,000  THK Co., Ltd . . . . . . . . . . . . . .   15,501,857
                                                                                                ----------
                                                                                                86,509,012
                                                                                                ----------
Office Equipment/Supplies   3.8%          1,414,000  Canon Inc.   . . . . . . . . . . . . . .   23,980,532
                                                                                                ----------
TECHNOLOGY                  4.6%
Computer Software           0.3%             35,000  PCA Corp.  . . . . . . . . . . . . . . .    2,142,499
Electronic Components/                                                                          ----------
Distributors                3.3%            279,000  Kyocera Corp.  . . . . . . . . . . . . .   20,690,517
Electronic Data                                                                                 ----------
Processing                  1.0%            622,000  Fujitsu Ltd.   . . . . . . . . . . . . .    6,304,265
ENERGY                      0.1%                                                                ----------
Engineering                                  36,000  JGC Corp.  . . . . . . . . . . . . . . .      614,150
METALS AND MINERALS         9.2%                                                                ----------
Steel & Metals                            1,419,000  Hitachi Metals, Ltd  . . . . . . . . . .   17,372,604
                                          1,588,000  Kawasaki Steel Corp  . . . . . . . . . .    6,645,218
                                          2,978,000  Nisshin Steel Co., Ltd . . . . . . . . .   15,002,067
                                          5,743,000  Sumitomo Metal Industries, Ltd . . . . .   18,615,043
                                                                                                ----------
                                                                                                57,634,932
                                                                                                ----------


</TABLE>

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


<PAGE>
<TABLE>
THE JAPAN FUND, INC.
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
                            % of                                                                          Market
                          Portfolio         Shares                                                       Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S>                        <C>             <C>                                                        <C>
CONSTRUCTION               1.8%                                                                       
Building Materials         0.1%             24,000  Toyo Exterior Co., Ltd. . . . . . . . . . . .         652,684
                                                                                                      -----------
Homebuilding               1.7%             88,000  Eyeful Home Technology Inc. . . . . . . . . .       2,693,427
                                           228,000  Hosoda Corp.  . . . . . . . . . . . . . . . .       3,363,372
                                           295,000  Sumitomo Forestry Co., Ltd. . . . . . . . . .       4,736,578
                                                                                                      -----------
                                                                                                       10,793,377
                                                                                                      -----------

                                                    TOTAL COMMON STOCKS (Cost $568,054,352) . . .     609,355,524
                                                                                                      -----------
- -------------------------------------------------------------------------------------------------------------------
                                                    TOTAL INVESTMENT PORTFOLIO -- 100.0%
                                                      (Cost $587,816,848)(a)  . . . . . . . . . .     629,118,020
                                                                                                      ===========

<FN>
(a)   The cost for federal income tax purposes was $608,072,384. At December 31, 1994, net unrealized 
      appreciation for all securities based on tax cost was $21,045,636. This consisted of aggregate 
      gross unrealized appreciation for all securities in which there was an excess of market value 
      over tax cost of $49,830,443 and aggregate gross unrealized depreciation for all securities in 
      which there was an excess of tax cost over market value of $28,784,807.

      At December 31, 1994, the outstanding written option was as follows (Note A):
</TABLE>

<TABLE>
<CAPTION>
                                                Principal
                                                 Amount
                                                 (JPY)          Expiration         Strike          Market
     Call Option                                 (000's)           Date            Price          Value ($)  
     -----------                             ----------------------------------------------------------------
     <S>                                        <C>               <C>            <C>              <C>
     Japanese Yen
      (Premium received $1,861,822) . . . .     4,177,500         2/24/95        JPY103.55        2,088,750
</TABLE>


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

                                      

<PAGE>
 

<TABLE>
                                                                            FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------

                      STATEMENT OF ASSETS AND LIABILITIES

DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------
<S>                                                           <C>                  <C>
ASSETS
Investments, at market (identified cost $587,816,848)
   (Note A) . . . . . . . . . . . . . . . . . . . . . . . .                         $629,118,020
Foreign currency holdings, at market (identified               
   cost $2,023,999)(Note A) . . . . . . . . . . . . . . . .                            2,005,360
Forward foreign currency exchange contracts to buy,
   at market (contract cost $1,695,564) (Notes A and E) . .                            1,697,904
Receivable on forward foreign currency exchange
   contracts to sell (Notes A and E)  . . . . . . . . . . .                          157,230,491
Receivable on investments sold  . . . . . . . . . . . . . .                            7,302,616
Receivable on fund shares sold  . . . . . . . . . . . . . .                            1,655,024
Dividends and interest receivables  . . . . . . . . . . . .                              225,286
Other assets  . . . . . . . . . . . . . . . . . . . . . . .                                5,551
                                                                                    ------------
   Total assets . . . . . . . . . . . . . . . . . . . . . .                         $799,240,252
LIABILITIES                                             
Payable for fund shares redeemed  . . . . . . . . . . . . .   $  16,198,586
Payable for investments purchased . . . . . . . . . . . . .       4,084,082
Due to custodian bank . . . . . . . . . . . . . . . . . . .       4,975,758
Accrued management fee (Note C) . . . . . . . . . . . . . .         366,607
Other accrued expenses (Note C) . . . . . . . . . . . . . .         507,846
Written option, at market (premium received                 
   $1,861,822) (Note A) . . . . . . . . . . . . . . . . . .       2,088,750
Payable on closed forward foreign currency
   exchange contracts  (Note A) . . . . . . . . . . . . . .      17,748,535
Payable for forward foreign currency exchange
   contracts to buy (Notes A and E) . . . . . . . . . . . .       1,695,564
Payable for forward foreign currency exchange
   contracts to sell, at market (contract
   cost $157,230,491) (Notes A and E) . . . . . . . . . . .     165,867,271
                                                              -------------       
      Total liabilities . . . . . . . . . . . . . . . . . .                          213,532,999
                                                                                    ------------
Net assets, at market value . . . . . . . . . . . . . . . .                         $585,707,253
                                                                                    ============
NET ASSETS
Net assets consist of:
   Accumulated distributions in excess of net
      investment income . . . . . . . . . . . . . . . . . .                         $(11,758,799)
   Unrealized appreciation (depreciation) on:
      Investments . . . . . . . . . . . . . . . . . . . . .                           41,301,172
      Options . . . . . . . . . . . . . . . . . . . . . . .                             (226,928)
      Foreign currency related transactions . . . . . . . .                           (8,668,944)
   Accumulated net realized gain  . . . . . . . . . . . . .                            5,671,452
   Capital stock  . . . . . . . . . . . . . . . . . . . . .                           18,593,152
   Additional paid-in capital . . . . . . . . . . . . . . .                          540,796,148
                                                                                    ------------   
Net assets, at market value . . . . . . . . . . . . . . . .                         $585,707,253
                                                                                    ============
NET ASSET VALUE, offering and redemption price per
   share ($585,707,253 -:-55,779,456 outstanding
   shares of capital stock, $.333 par value,
   600,000,000 shares authorized) . . . . . . . . . . . . .                               $10.50
                                                                                          ======           



</TABLE>

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

<PAGE>

<TABLE>
THE JAPAN FUND, INC.
- -----------------------------------------------------------------------------------
                            STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
- -----------------------------------------------------------------------------------
<S>                                                        <C>            <C>
INVESTMENT INCOME
Income:
Dividends (net of withholding taxes of $540,648)  . . . .                  $ 3,134,824
Interest (net of withholding taxes of $2,765) . . . . . .                    1,326,307
                                                                           -----------
                                                                             4,461,131
Expenses:
Management fee (Note C) . . . . . . . . . . . . . . . . .  $ 4,773,356
Shareholder and Transfer Agent services (Note C)  . . . .    1,072,511
Officers and directors fees and expenses (Notes C & D)  .      198,619
Custodian fees  . . . . . . . . . . . . . . . . . . . . .      470,400
Printing  . . . . . . . . . . . . . . . . . . . . . . . .      264,135
Auditing and accounting services  . . . . . . . . . . . .      106,150
Legal . . . . . . . . . . . . . . . . . . . . . . . . . .       38,446
Federal registration  . . . . . . . . . . . . . . . . . .       14,762
State registration  . . . . . . . . . . . . . . . . . . .       95,787
Other . . . . . . . . . . . . . . . . . . . . . . . . . .       26,761       7,060,927
                                                            --------------------------
Net investment loss . . . . . . . . . . . . . . . . . . .                   (2,599,796)
                                                                           -----------  
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
   INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
   Investments  . . . . . . . . . . . . . . . . . . . . .   58,018,296
   Options  . . . . . . . . . . . . . . . . . . . . . . .    1,759,997
   Foreign currency related transactions  . . . . . . . .  (17,752,808)     42,025,485
                                                            ----------                    
Net unrealized appreciation (depreciation) during
   the period on:
   Investments  . . . . . . . . . . . . . . . . . . . . .   11,153,602
   Options  . . . . . . . . . . . . . . . . . . . . . . .     (226,928)
   Foreign currency related transactions  . . . . . . . .   (8,662,240)      2,264,434
                                                            --------------------------
Net gain on investment transactions . . . . . . . . . . .                   44,289,919
                                                                           -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS                       $41,690,123
                                                                           ===========


</TABLE>

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

<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
                  STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                                                 ------------------------------
INCREASE (DECREASE) IN NET ASSETS                    1994            1993
- -------------------------------------------------------------------------------
<S>                                              <C>             <C>
Operations:
Net investment loss . . . . . . . . . . . . . .  $ (2,599,796)   $ (2,446,967)
Net realized gain from investment transactions.    42,025,485      51,954,231
Net unrealized appreciation on investment
   transactions during the period . . . . . . .     2,264,434      46,281,578
                                                 ------------    ------------
Net increase in net assets resulting from
   operations . . . . . . . . . . . . . . . . .    41,690,123      95,788,842
                                                 ------------    ------------
Distributions to shareholders:
In excess of net investment income ($.28 per
   share for December 31, 1993) . . . . . . . .            --     (12,112,180)
                                                 ------------    ------------
From net realized gains ($.80 and $.39 per
    share, respectively)  . . . . . . . . . . .   (42,020,462)    (16,848,042)
                                                 ------------    ------------
In excess of net realized gains ($.05 per
   share for December 31, 1994) . . . . . . . .    (2,360,903)             --
                                                 ------------    ------------
Fund share transactions:
Proceeds from shares sold . . . . . . . . . . .   521,023,226     292,059,002
Net asset value of shares issued to
   shareholders in reinvestment of
   distributions  . . . . . . . . . . . . . . .    37,569,251      23,722,426
Cost of shares redeemed . . . . . . . . . . . .  (441,092,468)   (320,398,596)
                                                 ------------    ------------
Net increase (decrease) in net assets from
   Fund share transactions  . . . . . . . . . .   117,500,009      (4,617,168)
                                                 ------------    ------------
INCREASE IN NET ASSETS  . . . . . . . . . . . .   114,808,767      62,211,452
Net assets at beginning of period . . . . . . .   470,898,486     408,687,034
                                                 ------------    ------------
NET ASSETS AT END OF PERIOD (including
   accumulated distributions in excess of net
   investment income of $(11,758,799) and
   $(10,656,633), respectively) . . . . . . . .  $585,707,253     470,898,486
                                                 ============    ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period . . .    45,596,062      45,899,642
                                                 ------------    ------------
Shares sold . . . . . . . . . . . . . . . . . .    44,011,661      25,773,439
Shares issued to shareholders in reinvestment
   of distributions . . . . . . . . . . . . . .     3,602,037       2,307,731
Shares redeemed . . . . . . . . . . . . . . . .   (37,430,304)    (28,384,750)
                                                 ------------    ------------
Net increase (decrease) in Fund shares. . . . .    10,183,394        (303,580)
                                                 ------------    ------------
Shares outstanding at end of period . . . . . .    55,779,456      45,596,062
                                                 ============    ============
</TABLE>


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

                                     

<PAGE>

<TABLE>
THE JAPAN FUND, INC.
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------

THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.

<CAPTION>
                                                                 Years Ended December 31,
                               --------------------------------------------------------------------------------------
                                 1994(a)    1993(a)    1992    1991    1990    1989    1988    1987     1986(a) 1985(a)
                               --------------------------------------------------------------------------------------
<S>                            <C>         <C>       <C>     <C>     <C>     <C>     <C>     <C>      <C>     <C>
Net asset value,
 beginning of period. . . .    $10.33      $8.90     $10.69  $10.76  $14.27  $16.24  $16.97  $20.28   $15.53  $12.60
                               ------      -----     ------  ------  ------  ------  ------  ------   ------  ------
Income from investment
 operations:
 Net investment
   income (loss)  . . . . .      (.05)      (.05)      (.05)   (.03)    .09     .04     .04     .16      .10     .08
 Net realized and
   unrealized gain
   (loss) on
   investments  . . . . . .      1.07       2.15      (1.74)    .37   (2.41)   1.66    3.13    5.81     9.34    4.28
                               ------      -----      ------  -----   ------  -----   -----   -----    -----   -----
Total from investment
 operations   . . . . . . .      1.02       2.10      (1.79)    .34   (2.32)   1.70    3.17    5.97     9.44    4.36
                               ------      -----      ------  -----   ------  -----   -----   -----    -----   ------
Less distributions from:
 Net investment
   income . . . . . . . . .        --         --         --      --    (.09)   (.08)   (.02)   (.20)    (.02)   (.07)
 In excess of net                                     
   investment income. . . .        --       (.28)        --      --      --      --      --      --       --      --
 Net realized gains on
   investment transactions.      (.80)      (.39)        --    (.41)  (1.10)  (3.59)  (3.88)  (9.08)   (4.67)  (1.36)
 In excess of net
   realized gains . . . . .      (.05)        --         --      --      --      --      --      --       --      --
                               -------    ------     ------   ------  ------ ------  ------  ------   ------  ------
Total distributions . . . .      (.85)      (.67)        --    (.41)  (1.19)  (3.67)  (3.90)  (9.28)   (4.69)  (1.43)
                               -------    ------     ------   ------  ------ ------  ------  ------   ------  ------
Net asset value,
 end of period  . . . . . .    $10.50     $10.33      $8.90   $10.69 $10.76  $14.27  $16.24  $16.97   $20.28  $15.53
                               =======    ======     ======   ====== ======= ======  ======  ======   ======  ======
TOTAL RETURN (%)  . . . . .     10.03      23.64     (16.74)    3.11 (16.36)  11.63   19.40   33.01    77.54   38.89
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
 period ($ millions). . . .       586        471        409     335     313     401     404     394      584     360
Ratio of operating
 expenses to average
 net assets (%)   . . . . .      1.08       1.25       1.42    1.26    1.05    1.02    1.01     .90      .70     .64
Ratio of net investment
 income (loss) to
 average net
 assets (%)   . . . . . . .      (.40)      (.47)      (.31)   (.15)    .72     .34     .28     .41      .51     .63
Portfolio turnover             
 rate (%)   . . . . . . . .      74.3       81.7       47.0    46.4    52.7    60.4    38.8    34.0     38.2    23.9
<FN>
(a)  Per share amounts have been calculated using weighted average shares outstanding.

</TABLE>


<PAGE>

                                                  NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

A. SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------

The Japan Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. The policies described below are followed consistently by the Fund in
the preparation of its financial statements in conformity with generally
accepted accounting principles.

SECURITY VALUATION. Portfolio securities which are traded on an exchange are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities traded in the over-the-counter market are valued at the most
recent sale price on such market. If no sale occurred in the over-the-counter
market, the security is then valued at the calculated mean between the most
recent bid and asked quotations.  If there are no such bid and asked
quotations, the most recent bid quotation shall be used.

Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.

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

OPTIONS. When the Fund writes (sells) an option, an amount equal to the premium
received is included in the Fund's Statement of Assets and Liabilities as an
asset and as an equivalent liability. The amount of the liability is
subsequently marked-to-market to reflect the current market value of the option
written. The current market value of an option is the last price on the
principal exchange on which such option is traded or, in the absence of a sale,
the mean between the last bid and offering prices. When a written option
expires on its stipulated expiration date or a Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of a
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying

<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------

security or currency and the liability related to such option is extinguished.
When a written call option is exercised, the Fund realizes a gain or loss from
the sale of the underlying security or currency and the proceeds from such sale
are increased by the premium received. When a written put option is exercised,
the amount of the premium originally received reduces the cost of the security
or currency which the Fund purchases upon exercise of the option.

The premium paid by the Fund for the purchase of an option is included in the
Fund's Statement of Assets and Liabilities as an investment and subsequently
marked-to-market to reflect the current market value of the option. If an
option which the Fund has purchased expires on the stipulated expiration date,
the Fund realizes a loss in the amount of the cost of the option. If the Fund
enters into a closing sale transaction, it realizes a gain or loss, depending
on whether the proceeds from the sale are greater or less than the cost of the
option.

If the Fund exercises a purchased put option, it realizes a gain or loss from
the sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. If the Fund exercises a purchased
call option, the cost of the security will be increased by the premium
originally paid.

FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:

(i)   market value of investment securities, other assets and
      liabilities at the daily rates of exchange, and

(ii)  purchases and sales of investment securities, dividend and
      interest income and certain expenses at the rates of exchange
      prevailing on the respective dates of such transactions.

The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes
in market prices of the investments. Such fluctuations are included with the
net realized and unrealized gains and losses from investments.

Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.

                                      


<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. In connection with portfolio
purchases and sales of securities denominated in a foreign currency, the Fund
may enter into forward foreign currency exchange contracts ("contracts").
Additionally, the Fund may enter into contracts to hedge certain other foreign
currency denominated assets. Contracts are recorded at market value. During the
period, to hedge a portion of the Fund's  Japanese yen exposure, the Fund
entered into yen forward exchange contracts. Certain risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts. Realized and unrealized gains and losses
arising from such transactions are included in net realized and unrealized gain
(loss) from foreign currency related transactions. Purchases and sales of
forward foreign currency contracts having the same settlement date and broker
are offset and any realized gain (loss) is recognized on the date of offset,
otherwise gain (loss) is recognized on the settlement date.

FEDERAL INCOME TAXES. No provision for United States income taxes has been made
since it is the Fund's policy to comply with provisions of the Internal Revenue
Code applicable to regulated investment companies. Accordingly, the Fund
distributes to shareholders substantially all of its taxable income less
earnings and profits (as defined for U.S. tax purposes) attributed to shares
redeemed. Under the United States-Japan tax treaty, Japan imposes a withholding
tax of 15% of the dividends and 10% on interest. There is currently no Japanese
tax on capital gains.

DISTRIBUTION OF INCOME AND GAINS. Distributions of net investment income are
made annually. During any particular year net realized gains from investment
transactions, in excess of available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders annually. An additional distribution may be made to the extent
necessary to avoid the payment of a four percent federal excise tax.

The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles.
These differences primarily relate to investments in forward contracts and
passive foreign investment companies. As a result, net


                                      


<PAGE>
THE JAPAN FUND, INC.
- ------------------------------------------------------------------------------

investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund. The Fund uses the identified cost method for
determining realized gain or loss on investments for both financial and federal
income tax reporting purposes.

OTHER. Investment security transactions are accounted for on a trade-date
basis. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis. Acquisition
discount and original issue discount are accreted for both tax and financial
reporting purposes.

B. PURCHASES AND SALES OF SECURITIES
- ------------------------------------------------------------------------------
For the year ended December 31, 1994, purchases and sales of investment
securities (excluding short-term investments) aggregated $552,205,784 and
$471,312,014, respectively.

Transactions in written options for the year ended December 31, 1994 are
summarized as follows:
<TABLE>
<CAPTION>
                                                   OPTIONS ON CURRENCIES
                                      -----------------------------------------
                                                                   PREMIUMS
                                           JAPANESE YEN           RECEIVED ($)
                                      -----------------------------------------
<S>                                     <C>                       <C>
Beginning of Period . .                              --                    --
Written . . . . . . . .                 Y12,885,650,000            $3,197,800
Closed  . . . . . . . .                  (1,000,000,000)             (445,678)
Expired . . . . . . . .                  (7,708,150,000)             (890,300)
                                        ---------------            ---------- 
End of Period . . . . .                 Y 4,177,500,000            $1,861,822
                                        ===============            ==========

</TABLE>

C. RELATED PARTIES
- -----------------------------------------------------------------------------
Under the Investment Management Agreement (the " Management Agreement") with
Scudder, Stevens & Clark, Inc. (the "Adviser"), the Adviser directs the
investments of the Fund in accordance with its investment objective, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides
certain administrative services in accordance with the Management Agreement.
The Fund agrees to pay the Adviser a fee equal to annual

<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

rate of 0.85% of the first $100,000,000 of the Fund's average daily net assets,
0.75% of the next $200,000,000 of such assets, 0.70% of the next $300,000,000
of such assets and 0.65% of such net assets in excess of $600,000,000 computed
and accrued daily and paid monthly. For the year ended December 31, 1994, the
fee pursuant to the Management Agreement amounted to $4,773,356, which was
equivalent to an annual effective rate of .73% of the Fund's average daily net
assets. The Management Agreement also provides that if the Fund's expenses,
exclusive of taxes, interest and extraordinary expenses, exceed specified
limits, such excess, up to the amount of the management fee, will be paid by
the Adviser.

Under the Research Agreement, (the "Research Agreement") between the Adviser
and The Nikko International Capital Management Co., Ltd. ("NICAM"), an
affiliate of The Nikko Securities Co., Ltd., NICAM provides information,
investment recommendations, advice and assistance for use by the Adviser in
advising the Fund. The Adviser agrees to pay NICAM a fee equal to an annual
rate of 0.15% of the first $700,000,000 of the Fund's average daily net assets
and 0.14% of such net assets in excess of $700,000,000 computed and accrued
daily and paid monthly. For the year ended December 31, 1994 the fee pursuant
to the Research Agreement amounted to $975,256.

Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend paying and shareholder service agent for the Fund.
For the year ended December 31, 1994, the amount charged to the Fund by SSC
aggregated $870,278, of which $70,123 is unpaid at December 31, 1994.

The Fund pays each of its Officers and Directors not affiliated with the
Advisor an annual fee plus specified amounts for attended board and committee
meetings. For the year ended December 31, 1994, the Officers and Directors fees
aggregated $143,619.

During the year ended December 31, 1994, there were $60,488 in commissions paid
or accrued by the Fund to The Nikko Securities Co., Ltd.

D. DIRECTORS' RETIREMENT BENEFITS
- ---------------------------------
Under a retirement program, which became effective January 1, 1992, independent
members of the Board of Directors who meet certain criteria become eligible to
participate in a defined benefit retirement program. Under this program monthly
payments will be made for a

                                      


<PAGE>
THE JAPAN FUND, INC.
- --------------------------------------------------------------------------------

period of 120 months by the Fund based on the individual's final year basic
Directors fees and length of service. For the year ended December 31, 1994,
Directors' retirement benefits amounted to $55,000. At December 31, 1994, the
Fund has accrued $137,703 for such benefits.


<TABLE>
<CAPTION>
E. COMMITMENTS
- --------------
As of December 31, 1994 the Fund had entered into the following forward foreign
currency exchange contracts resulting in net unrealized depreciation of
$8,634,440.

                                                                        NET UNREALIZED
                                                                         APPRECIATION
                                                      SETTLEMENT        (DEPRECIATION)
  CONTRACTS TO DELIVER        IN EXCHANGE FOR            DATE              (U.S.$)
- -----------------------    --------------------       ----------       --------------
<S>      <C>                <C>     <C>                <C>              <C>
USD            519,711      JPY     52,042,882          1/4/95               2,546
USD            320,031      JPY     31,881,482          1/5/95                 (96)
USD            855,822      JPY     85,271,783          1/6/95                (110)
JPY          9,321,743      USD         92,987          1/4/95                (558)
JPY          2,008,294      USD         20,005          1/5/95                (149)
JPY        463,997,831      USD      4,651,919          1/5/95              (4,355)
JPY        245,791,474      USD      2,465,580          1/6/95                (968)
JPY      7,936,500,000      USD     75,000,000         1/25/96          (8,970,620)
JPY      6,914,737,500      USD     75,000,000          7/5/96             339,870
                                                                        ----------
                                                                        (8,634,440)
                                                                        ========== 
</TABLE>


                                                                


<PAGE>
                                               REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF THE JAPAN FUND, INC.:

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Japan Fund, Inc. (the "Fund")
at December 31, 1994, the results of its operations, the changes in its net
assets and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles.  These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1994 by correspondence with the custodian and
brokers and the application of alternative procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP
Boston, Massachusetts

February 1, 1995

<PAGE>
THE JAPAN FUND, INC.
TAX INFORMATION
- -----------------------------------------------------------------------------

For its fiscal year ended December 31, 1994, the total amount of income
received by the Fund from sources within foreign countries and possessions of
the United States was $.01 per share (representing a total of $543,413). The
total amount of taxes paid by the Fund to such countries was $.01 per share
(representing a total of $543,413).

The Fund paid distributions of $.85 per share from net long-term capital gains
during its fiscal year ended December 31, 1994.  Pursuant to Section 852 of the
Internal Revenue Code, the Fund designates $57,023,588 as capital gains
dividends for its fiscal year ended December 31, 1994.
<PAGE>

OFFICERS AND DIRECTORS


Robert G. Stone, Jr.
     Chairman of the Board and Director
     Chairman of the Board, Kirby Corporation

Douglas M. Loudon
     President
     Managing Director, Scudder, Stevens & Clark, Inc.

Elizabeth J. Allan
    Vice President
    Principal, Scudder, Stevens & Clark, Inc.; Vice President, Scudder New
    Asia Fund, Inc.

William E. Holzer
    Vice President
    Managing Director, Scudder, Stevens & Clark, Inc.; President, Scudder
    Global Fund; Vice President, Scudder International Fund, Inc.

Thomas W. Joseph
    Vice President
    Principal, Scudder, Stevens & Clark, Inc.; Vice President, Treasurer &
    Director, Scudder Investor Services, Inc.; President, Scudder
    Insurance Agency, Inc.

Seung Kwak
    Vice President
    Managing Director, Scudder, Stevens & Clark, Inc.

Edward J. O'Connell
    Vice President
    Principal, Scudder, Stevens & Clark, Inc.

Miyuki Wakatsuki
    Vice President
    Manager, Nikko International Capital Management Co., Ltd.

Gina Provenzano
    Vice President and Treasurer
    Vice President, Scudder, Stevens & Clark, Inc.

Kathryn L. Quirk
    Vice President and Secretary
    Managing Director, Scudder, Stevens & Clark, Inc.

Thomas F. McDonough
    Assistant Secretary
    Principal, Scudder, Stevens & Clark, Inc.

Pamela A. McGrath
    Assistant Treasurer
    Principal, Scudder, Stevens & Clark, Inc.

William L. Givens
    Director
    President, Twain Associates

William H. Gleysteen, Jr.
    Director
    President, The Japan Society, Inc.

John F. Loughran
    Director
    Senior Adviser for Asia Pacific to J.P. Morgan & Co., Inc.

William V. Rapp
    Director
    Senior Research Fellow Columbia University; Visiting Lecturer,
    University of Victoria; Managing Director, Rue Associates

Henry Rosovsky
    Director
    Professor, Harvard University; Director, Corning Inc., Paine Webber
    Group

O. Robert Theurkauf
    Director
    Advisory Managing Director, Scudder, Stevens & Clark, Inc.

Shoji Umemura
    Director
    Chairman, The Nikko Securities Co., Ltd.; Vice Chairman, Japan
    Securities Dealers Association; Director, The Securities Analysts
    Association of Japan; Adviser, Japan Association of Corporate
    Executives; Executive Director, Federation of Economic Organizations,
    Japan Federation of Employers Association; Governor, Board of
    Governors, Tokyo Stock Exchange; Governor, Board of Governors,
    Association of Tokyo Stock Exchange Regular Members; Adviser, Tokyo
    Chamber of Commerce and Industry; Vice President, Japan-Korea Economic
    Association; Member, Board of Trustees, Waseda University; Chairman,
    Congregation, Waseda University

Hiroshi Yamanaka
    Director
    Adviser to the Board, The Meiji Mutual Life Insurance Company;
    Lifetime Executive Director, Japan Committee for Economic Development;
    Vice Chairman, The Security Analysts Association of Japan; Doctor of
    Commerce, Chuo University; Auditor, Bank of Tokyo, Ltd.; Director,
    Kirin Brewery Co., Ltd., Nikon Corp.; Governor, Board of Governors,
    Tokyo Stock Exchange



HONORARY DIRECTORS


Tristan E. Beplat
    Director, Daiwa Bank Trust Co., Yasuda Fire & Marine Insurance Co. of
    America, Pacific Forum, Farfield Maxwell, Ltd; Member, Advisory
    Council, East Asian Studies, Princeton University; Honorary Director,
    Japan Society, U.S.-Asia Institute, Radix Ventures, Inc.

Allan Comrie
    Former Director, The Japan Fund, Inc.

Jonathan Mason
    Former Chairman of the Board and Director, The Japan Fund, Inc.

James W. Morley
    Professor of Political Science Emeritus, Columbia University

You can call toll free (1-800-343-2890) anytime day or night and get access
to automated information regarding transactions in your account as well as
The Japan Fund's share price. By using your touch-tone telephone and
providing the necessary information (including your account number), you
can receive daily updates from this computerized system.

We remind all shareholders that the Fund offers a free dividend
reinvestment program. You can obtain additional information about this
feature and arrange to have all dividends and capital gain distributions
reinvested in additional Fund shares by calling The Japan Fund Service
Center at 1-800-53-JAPAN (1-800-535-2726). The Fund typically distributes
capital gains twice a year (December and March).

                            HOW TO CONTACT US:
                                     
                              1-800-53-JAPAN
                                     
            1-800-535-2726 (Outside the U.S. call 617-439-4640)
                                     
                 The Japan Fund Shareholder Service Center
                                     
                          Two International Place
                             Boston, MA 02110
                                     
             Scudder, Stevens & Clark, Inc. Investment Manager

<PAGE>
                              THE JAPAN FUND, INC.

                           PART C. OTHER INFORMATION

Item 24.          Financial Statements and Exhibits

                  a.       Financial Statements:

                           Included in Part A:
                                    Financial Highlights for the ten fiscal 
                                    years ended December 31, 1994

                           Included in Part B:
                                    Statement of Assets and  Liabilities,  as of
                                    December 31, 1994  
                                    Statement  of  Operations for the fiscal 
                                    year ended  December 31, 1994
                                    Statements  of Changes in Net Assets for the
                                    two fiscal  years  ended  December  31, 1994
                                    Financial  Highlights  for  the  ten  fiscal
                                    years  ended  December  31,  1994  
                                    Notes  to Financial  Statements  Report 
                                    of Independent Accountants

                           Statements,   schedules  and  historical  information
                           other than those listed above have been omitted since
                           they are either not applicable or are not required.

                   b.        Exhibits:

                             All references are to the Registrant's Registration
                             Statement on Form N-1A as filed with the Securities
                             and Exchange  Commission  on April 29,  1987.  File
                             nos.   33-13863  &  811-1090   (the   "Registration
                             Statement").
<TABLE>
<CAPTION>
                              <S>     <C>    <C>    

                             1.       (a)     Articles of Incorporation.
                                              (Incorporated by reference to Exhibit 1(a) to Pre-Effective
                                              Amendment No. 1 to the Registration Statement.)

                                      (b)     Articles of Amendment and Restatement of the Articles of
                                              Incorporation.
                                              (Incorporated by reference to Exhibit 1(b) to Post-Effective
                                              Amendment No. 5 to the Registration Statement.)

                             2.       (a)     Registrant's By-Laws.
                                              (Incorporated by reference to Exhibit 2(a) to Pre-Effective
                                              Amendment No. 1 to the Registration Statement.)

                                      (b)     Amendment to Registrant's By-Laws dated January 28, 1993.
                                              (Incorporated by reference to Exhibit 2(b) to Post-Effective
                                              Amendment No. 6 to the Registration Statement.)

                                      (c)     Amendment to Registrant's By-Laws dated July 23, 1993.
                                              (Incorporated by reference to Exhibit 2(c) to Post-Effective
                                              Amendment No. 7 to the Registration Statement.)

                             3.               Inapplicable.

                             4.               Specimen of shares representing shares of capital stock of $.33 1/3
                                              par value.
                                              (Incorporated by reference to Exhibit 4 to Post-Effective Amendment
                                              No. 2 to the Registration Statement.)

                                       1
<PAGE>
                             5.       (a)     Investment Management Agreement between the Registrant and Asia
                                              Management Corporation ("Asia Management") dated May 24, 1991.
                                              (Incorporated by reference to Exhibit 5(a) to Post-Effective
                                              Amendment No. 5 to the Registration Statement.)

                             5.       (b)     Advisory Agreement between Asia Management and The Nikko Research
                                              Center, Ltd. ("Nikko") dated July 1, 1986.
                                              (Incorporated by reference to Exhibit 5(b) to the Registration
                                              Statement.)

                                      (c)     Investment Management Agreement between Asia Management and The
                                              Nikko International Capital Management Co., Ltd. dated May 24, 1991.
                                              (Incorporated by reference to Exhibit 5(c) to Post-Effective
                                              Amendment No. 5 to the Registration Statement.)

                                      (d)     Agreement between Scudder, Stevens & Clark Ltd. and Asia Management
                                              dated July 24, 1984.
                                              (Incorporated   by   reference  to Exhibit  5(d) to the  Registration
                                              Statement.)

                                      (e)     Investment Management Agreement between the Registrant and Scudder,
                                              Stevens & Clark, Inc. dated January 1, 1994.
                                              (Incorporated by reference to Exhibit 5(e) to Post-Effective
                                              Amendment No. 7 to the Registration Statement.)

                                      (f)     Research Agreement between Scudder and The Nikko International
                                              Capital Management Co., Ltd. dated January 1, 1994.
                                              (Incorporated by reference to Exhibit 5(f) to Post-Effective
                                              Amendment No. 7 to the Registration Statement.)

                             6.               Underwriting Agreement between the Registrant and Scudder Investor
                                              Services, Inc., formerly Scudder Fund Distributors, Inc., dated
                                              August 14, 1987.
                                              (Incorporated by reference to Exhibit 6 to Post-Effective Amendment
                                              No. 2 to the Registration Statement.)

                             7.               Form of Directors' Retirement Plan.
                                              (Incorporated by reference to Exhibit 7 to Post-Effective Amendment
                                              No. 6 to the Registration Statement.)

                             8.       (a)     Custodian Agreement between the Registrant and Brown Brothers
                                              Harriman & Co. ("Brown Brothers").
                                              (Incorporated by reference to Exhibit 8(a) to the Registration
                                              Statement.)

                                      (b)     Sub-Custodian Agreement between the Registrant and Brown Brothers.
                                              (Incorporated by reference to Exhibit 8(b) to the Registration
                                              Statement.)


                                       2
<PAGE>

                             9.       (a)     Transfer Agency and Service Agreement and Fee Schedule between the
                                              Registrant and Scudder Service Corporation dated May 1, 1990.
                                              (Incorporated by reference to Exhibit 9(a) to Post-Effective
                                              Amendment No. 4 to the Registration Statement.)

                                      (b)     Shareholder Service Agreement and Fee Schedule between the
                                              Registrant and Scudder Service Corporation dated August 14, 1987.
                                              (Incorporated by reference to Exhibit 9(b) to Post-Effective
                                              Amendment No. 2 to the Registration Statement.)

                                      (c)     Application Form is filed herein.

                             10.              Inapplicable.

                             11.              Consent of Independent Accountants is filed herein.

                             12.              Article 6 Financial Data Schedule is filed herein.

                             13.              Inapplicable.

                             14.      (a)     Scudder Flexi-Plan for Corporations and Self-Employed Individuals.
                                              (Incorporated by reference to Exhibit 14(a) to Scudder Income Fund
                                              Post-Effective Amendment No. 46 to its Registration Statement on
                                              Form N-1A (File Nos. 2-13627 and 811-42).)

                                      (b)     Scudder Individual Retirement Plan.
                                              (Incorporated by reference to Exhibit 14(b) to Scudder Income Fund
                                              Post-Effective Amendment No. 46 to its Registration Statement on
                                              Form N-1A (File Nos.  2-13627 and 811-42).)

                                      (c)     Scudder Funds 403(b) Plan.
                                              (Incorporated by reference to Exhibit 14(c) to Scudder Income Fund
                                              Post-Effective Amendment No. 46 to its Registration Statement on
                                              Form N-1A (File Nos.  2-13627 and 811-42).)

                                      (d)     Scudder Employer - Select 403(b) Plan.
                                              (Incorporated by reference to Exhibit 14(e)(2) to Scudder Income
                                              Fund, Inc. Post-Effective Amendment No. 43 to its Registration
                                              Statement on Form N-1A (File Nos. 2-13627 and 811-42).)

                                      (e)     Scudder Cash or Deferred Profit Sharing Plan under Section 401(k).
                                              (Incorporated by reference to Exhibit 14(f) to Scudder Income Fund,
                                              Inc. Post-Effective Amendment No. 43 to its Registration Statement
                                              on Form N-1A (File Nos. 2-13627 and 811-42).)

                             15.              Inapplicable.

                             16.              Performance Information is incorporated by reference to
                                              Post-Effective Amendment No. 2.
</TABLE>

Item 25.          Persons Controlled by or under Common Control with Registrant

                  None


                                       3
<PAGE>

Item 26.          Number of Holders of Securities as of April 1, 1995
- --------          ---------------------------------------------------

                             (1)                                   (2)
                        Title of Class                   Number of Shareholders

                   Shares of capital stock                         41,816
                   ($.33 1/3 par value)

Item 27.          Indemnification.

                  A policy of insurance covering Scudder, Stevens & Clark, Inc.,
                  its subsidiaries  including Scudder Investor  Services,  Inc.,
                  and all of the  registered  investment  companies  advised  by
                  Scudder,  Stevens  &  Clark,  Inc.  insures  the  Registrant's
                  Directors and officers and others against liability arising by
                  reason of an alleged  breach of duty caused by any  negligent,
                  error or accidental omission in the scope of their duties.

                  Article  Eighth  of  Registrant's  Articles  of  Incorporation
                  provides as follows:

                           EIGHTH:  Each  director  and officer  (and his heirs,
                  executors  and  administrators)  shall be  indemnified  by the
                  Corporation  against reasonable costs and expenses incurred by
                  him in connection with any action, suit or proceeding to which
                  he is made a party by reason  of his  being or  having  been a
                  director or officer of the Corporation,  except in relation to
                  any action,  suit or  proceeding in which he has been adjudged
                  liable  because  of  willful  misfeasance,  bad  faith,  gross
                  negligence or reckless disregard of the duties involved in the
                  conduct of his office. In the absence of an adjudication which
                  expressly absolves the director or officer of liability to the
                  Corporation or its stockholders for willful  misfeasance,  bad
                  faith,  gross  negligence or reckless  disregard of the duties
                  involved in the  conduct of his  office,  or in the event of a
                  settlement,   each   director  and  officer  (and  his  heirs,
                  executors  and  administrators)  shall be  indemnified  by the
                  Corporation against payment made,  including  reasonable costs
                  and   expenses,   provided  that  such   indemnity   shall  be
                  conditioned  upon  receipt  by the  Corporation  of a  written
                  opinion  of  independent  counsel  selected  by the  Board  of
                  Directors,  or the  adoption by a majority of the entire Board
                  (in which  majority  there shall not be included  any director
                  who  shall  have or shall at any time  have had any  financial
                  interest  adverse to the  Corporation in such action,  suit or
                  proceeding  or the  subject  matter or outcome  thereof)  of a
                  resolution,  to the effect that the director or officer has no
                  liability by reason of willful  misfeasance,  bad faith, gross
                  negligence or reckless disregard of the duties involved in the
                  conduct of his office. The indemnity provided herein shall, in
                  the  event  of the  settlement  of any  such  action,  suit or
                  proceeding,  not  exceed  the  costs and  expenses  (including
                  attorneys'  fees) which would reasonably have been incurred if
                  such action,  suit or proceeding had been litigated to a final
                  conclusion.  Such a determination by independent counsel or by
                  the Board of  Directors  and the  payment  of  amounts  by the
                  Corporation   on  the  basis   thereof  shall  not  prevent  a
                  stockholder   from   challenging   such   indemnification   by
                  appropriate  legal proceeding on the grounds that the director
                  or officer  was liable  because  of willful  misfeasance,  bad
                  faith,  gross  negligence or reckless  disregard of the duties
                  involved in the conduct of his office.  The  foregoing  rights
                  and indemnification  shall not be exclusive of any other right
                  to which the officers and directors may be entitled  according
                  to law.

                           Reference   is  hereby   made  to  the   Underwriting
                  Agreement   between  the  registrant   and  Scudder   Investor
                  Services,  Inc.,  formerly  Scudder Fund  Distributors,  Inc.,
                  filed as Exhibit 6 to the Initial Registration Statement, with
                  respect to the indemnification provisions thereunder.

                           Insofar  as  indemnification  for  liability  arising
                  under  the   Securities  Act  of  1933  may  be  permitted  to
                  directors,  officers and controlling persons of the registrant
                  pursuant  to  the  foregoing  provisions,  or  otherwise,  the
                  registrant  has  been  advised  that  in  the  opinion  of the
                  Securities and Exchange  Commission  such  indemnification  is
                  against  public  policy  as  expressed  in  the  Act  and  is,
                  therefore,  unenforceable.  In  the  event  that a  claim  for
                  indemnification  against  such  liabilities  (other  than  the
                  payment by the  registrant  of expenses  incurred or paid by a
                  director,  officer or controlling  person of the registrant in


                                       4
<PAGE>

                
                  the successful  defense of any action,  suit or proceeding) is
                  asserted by such director,  officer or  controlling  person in
                  connection   with  the  securities   being   registered,   the
                  registrant  will,  unless in the  opinion of its  counsel  the
                  matter has been settled by controlling precedent,  submit to a
                  court of appropriate  jurisdiction  the question  whether such
                  indemnification by it is against public policy as expressed in
                  the Act and will be governed by the final adjudication of such
                  issue.

Item 28.          Business or Other Connections of Investment Adviser

                  The Adviser has stockholders and employees who are denominated
                  officers   but   do   not  as   such   have   corporation-wide
                  responsibilities. Such persons are not considered officers for
                  the purpose of this Item 28.
<TABLE>
<CAPTION>

                           Business and Other Connections of Board
           Name            of Directors of Registrant's Adviser      
          <S>              <C>   

Stephen R. Beckwith        Director, Scudder, Stevens & Clark, Inc. (investment adviser)**

Lynn S. Birdsong           Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Supervisory Director, The Latin America Income and Appreciation Fund N.V. (investment
                                 company) +
                           Supervisory Director, The Venezuela High Income Fund N.V. (investment company) xx
                           Supervisory Director, Scudder Mortgage Fund (investment company) +
                           Supervisory Director, Scudder Floating Rate Funds for Fannie Mae  Mortgage Securities I
                                 & II (investment company) +
                           Director, Scudder, Stevens & Clark (Luxembourg) S.A. (investment manager) #
                           Trustee, Scudder Funds Trust (investment company)*
                           President & Director, The Latin America Dollar Income Fund, Inc.  (investment company)**
                           President & Director, Scudder World Income Opportunities Fund, Inc.  (investment
                                 company)**
                           Director, Inverlatin Dollar Income Fund, Inc. (investment company) Georgetown, Grand
                                 Cayman, Cayman Islands
                           Director, ProMexico Fixed Income Dollar Fund, Inc. (investment company) Georgetown,
                                 Grand Cayman, Cayman Islands
                           Director, Canadian High Income Fund (investment company)#
                           Director, Hot Growth Companies Fund (investment company)#
                           Partner, George Birdsong Co., Rye, NY

Nicholas Bratt             Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           President & Director, Scudder New Europe Fund, Inc. (investment company)**
                           President & Director, The Brazil Fund, Inc. (investment company)**
                           President & Director, The First Iberian Fund, Inc. (investment company)**
                           President & Director, Scudder International Fund, Inc.  (investment company)**
                           President & Director, Scudder Global Fund, Inc. (Director only on Scudder Global Fund,
                                 a series of Scudder Global Fund, Inc.) (investment company)**
                           President & Director, The Korea Fund, Inc. (investment company)**
                           President & Director, Scudder New Asia Fund, Inc. (investment company)**
                           President, The Argentina Fund, Inc. (investment company)**
                           Vice President, Scudder, Stevens & Clark Corporation (Delaware) (investment adviser)**
                           Vice President, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
                           Vice President, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser)
                                 Toronto, Ontario, Canada
                           Vice President, Scudder, Stevens & Clark Overseas Corporation oo


                                       5
<PAGE>

Linda C. Coughlin          Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Director, Scudder Investor Services, Inc. (broker/dealer)**
                           President & Trustee, AARP Cash Investment Funds  (investment company)**
                           President & Trustee, AARP Growth Trust (investment company)**
                           President & Trustee, AARP Income Trust (investment company)**
                           President & Trustee, AARP Tax Free Income Trust  (investment company)**
                           Director, SFA, Inc. (advertising agency)*

Margaret D. Hadzima        Director, Scudder, Stevens & Clark, Inc. (investment adviser)*

Jerard K. Hartman          Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Vice President, Scudder California Tax Free Trust (investment company)*
                           Vice President, Scudder Equity Trust (investment company)*
                           Vice President, Scudder Cash Investment Trust (investment company)*
                           Vice President, Scudder Development Fund (investment company)*
                           Vice President, Scudder Global Fund, Inc. (investment company)**
                           Vice President, Scudder GNMA Fund (investment company)*
                           Vice President, Scudder Portfolio Trust (investment company)*
                           Vice President, Scudder International Fund, Inc. (investment company)**
                           Vice President, Scudder Investment Trust (investment company)*
                           Vice President, Scudder Municipal Trust (investment company)*
                           Vice President, Scudder Mutual Funds, Inc. (investment company)**
                           Vice President, Scudder New Asia Fund, Inc. (investment company)**
                           Vice President, Scudder New Europe Fund, Inc. (investment company)**
                           Vice President, Scudder State Tax Free Trust (investment company)*
                           Vice President, Scudder Funds Trust (investment company)*
                           Vice President, Scudder Tax Free Money Fund (investment company)*
                           Vice President, Scudder Tax Free Trust (investment company)*
                           Vice President, Scudder U.S. Treasury Money Fund (investment company)*
                           Vice President, Scudder Variable Life Investment Fund (investment company)*
                           Vice President, The Brazil Fund, Inc. (investment company)**
                           Vice President, The Korea Fund, Inc. (investment company)**
                           Vice President, The Argentina Fund, Inc. (investment company)**
                           Vice President & Director, Scudder, Stevens & Clark of Canada, Ltd. (Canadian
                            investment adviser) Toronto, Ontario, Canada
                           Vice President, The First Iberian Fund, Inc. (investment company)**
                           Vice President, The Latin America Dollar Income Fund, Inc. (investment company)**
                           Vice President, Scudder World Income Opportunities Fund, Inc. (investment company)**

Richard A. Holt            Director, Scudder, Stevens & Clark, Inc. (investment adviser)++
                           Vice President, Scudder Variable Life Investment Fund (investment company)*

Dudley H. Ladd             Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Senior Vice President & Director, Scudder Investor Services, Inc. (broker/dealer)*
                           Vice President & Trustee, Scudder Cash Investment Trust  (investment company)*
                           Trustee, Scudder Investment Trust (investment company)*
                           Trustee, Scudder Portfolio Trust (investment company)*
                           Trustee, Scudder Municipal Trust (investment company)*
                           Trustee, Scudder State Tax Free Trust (investment company)*
                           Vice President, Scudder U.S. Treasury Money Fund  (investment company)*
                           Vice President & Treasurer, SFA, Inc. (advertising agency)*

Douglas M. Loudon          Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Vice President & Trustee, Scudder Development Fund (investment company)*
                           Vice President & Trustee, Scudder Equity Trust (investment company)*


                                       6
<PAGE>
                           Vice President, Scudder Global Fund, Inc. (investment company)**
                           Vice President, Scudder Investment Trust (investment company)*
                           Vice President & Director, Scudder Mutual Funds, Inc. (investment company)**
                           Vice President, AARP Cash Investment Funds (investment company)**
                           Vice President, AARP Growth Trust (investment company)**
                           Vice President, AARP Income Trust (investment company)**
                           Vice President, AARP Tax Free Income Trust (investment company)**
                           Vice President, Scudder, Stevens & Clark Corporation (Delaware) (investment adviser)**
                           Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)*
                           Vice President, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser)
                                 Toronto, Ontario, Canada
                           Chairman, World Capital Fund (investment company) Luxembourg ##
                           Managing Director, Kankaku - Scudder Capital Asset Management Corporation (investment
                                 adviser)**
                           Chairman & Director,  Scudder, Stevens & Clark Japan, Inc.  (investment  adviser)###  
                           President,  The Japan Fund, Inc. (investment  company)** 
                           Trustee,  Scudder, Stevens & Clark  Supplemental  Retirement Income Plan
                           Trustee, Scudder, Stevens & Clark Profit Sharing Plan **  
                           Chairman  &  Director,  The  World  Capital  Fund (investment  company) Luxembourg 
                           Chairman & Director, Scudder,   Stevens   &  Clark   (Luxembourg),   S.A.,
                           Luxembourg#  
                           Chairman,   Canadian  High  Income  Fund (investment company) # 
                           Chairman, Hot Growth Companies Fund   (investment   company)  #  
                           Vice   President  & Director, Scudder Precious Metals, Inc. xxx 
                           Director, Berkshire   Farm  &  Services   for  Youth  Board  of
                           Governors & President, Investment Counsel Association
                           of America

John T. Packard            Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           President, Montgomery Street Income Securities, Inc. (investment company) o
                           Director, Scudder Realty Advisors, Inc. (realty investment adviser) x

Juris Padegs               Secretary & Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Chairman & Director, The Brazil Fund, Inc.  (investment company)**
                           Trustee, Scudder Development Fund (investment company)*
                           Vice President & Trustee, Scudder Equity Trust (investment company)*
                           Chairman & Director, The First Iberian Fund, Inc. (investment company)**
                           Trustee, Scudder Funds Trust (investment company)*
                           Vice President & Assistant Secretary, Scudder Global Fund, Inc. (investment company)**
                           Trustee, Scudder Investment Trust (investment company)*
                           Vice President, Assistant Secretary & Director, Scudder International Fund, Inc.
                                 (investment company)**
                           Vice President, The Latin America Dollar Income Fund, Inc. (investment company)**
                           Trustee, Scudder Municipal Trust (investment company)*
                           Vice President & Assistant Secretary, Scudder Mutual Funds, Inc. (investment company)**
                           Vice President & Director, Scudder New Europe Fund, Inc. (investment company)**
                           Trustee, Scudder State Tax Free Trust (investment company)*
                           Vice President, Assistant Secretary & Director, Scudder New Asia Fund, Inc. (investment
                                 company)**
                           Vice President & Trustee, Scudder Tax Free Money Fund (investment company)*
                           Trustee, Scudder Tax Free Trust (investment company)*
                           Chairman & Director, The Korea Fund, Inc. (investment company)**
                           Vice President & Director, The Argentina Fund, Inc. (investment company)**
                           Secretary, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser),
                                 Toronto, Ontario, Canada


                                       7
<PAGE>
                           Vice President & Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
                           Assistant Secretary, SFA, Inc. (advertising agency)*
                           Vice President & Director, Scudder Investor Services, Inc. (broker/dealer)**
                           Assistant Treasurer & Director, Kankaku - Scudder Capital Asset Management (investment
                                 adviser)**
                           Chairman & Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
                           Chairman & Director, Scudder, Stevens & Clark Corporation (Delaware) (investment
                                 adviser)**
                           Chairman & Supervisory Director, Sovereign High Yield Investment Company N.V.
                                 (investment company) +
                           Director, President Investment Trust Corporation (Joint Venture)***
                           Vice President, Scudder World Income Opportunities Fund, Inc. (investment company)**
                           Director, Vice President & Assistant Secretary, Scudder Precious Metals, Inc. xxx
                           Vice President & Director, Scudder Service Corporation (in-house transfer agent)*
                           Chairman, Scudder, Stevens & Clark Overseas Corporationoo
                           Director, Scudder Trust (Cayman) Ltd. (trust services company)xxx
                           Director, ICI Mutual Insurance Company, Inc., Washington, D.C.
                           Director, Baltic International USA
                           Director, Baltic International Airlines (a limited liability company) Riga, Latvia

Daniel Pierce              Chairman & Director, Scudder New Europe Fund, Inc. (investment company)**
                           Trustee, California Tax Free Trust (investment company)*
                           President & Trustee, Scudder Development Fund (investment company)**
                           President & Trustee, Scudder Equity Trust (investment company)**
                           Director, The First Iberian Fund, Inc. (investment company)**
                           President & Trustee, Scudder GNMA Fund (investment company)*
                           President & Trustee, Scudder Portfolio Trust (investment company)*
                           President & Trustee, Scudder Funds Trust (investment company)*
                           President & Director, Scudder Institutional Fund, Inc. (investment company)**
                           President & Director, Scudder Fund, Inc. (investment company)**
                           Director, Scudder International Fund, Inc. (investment company)**
                           President & Trustee, Scudder Investment Trust (investment company)*
                           Vice President & Trustee, Scudder Municipal Trust (investment company)*
                           President & Director, Scudder Mutual Funds, Inc. (investment company)**
                           Director, Scudder New Asia Fund, Inc. (investment company)**
                           Trustee, Scudder State Tax Free Trust (investment company)*
                           Vice President & Trustee, Scudder Variable Life Investment Fund (investment company)*
                           Director, The Brazil Fund, Inc. (until 7/94) (investment company)**
                           Vice President & Assistant Treasurer, Montgomery Street Income Securities, Inc.
                                 (investment company)o
                           Vice President & Director, Scudder Global Fund, Inc.  (investment company)**
                           Vice President, Director & Assistant Treasurer, Scudder Investor Services, Inc.
                                 (broker/dealer)*
                           President & Director, Scudder Service Corporation (in-house transfer agent)*
                           Chairman & President, Scudder, Stevens & Clark of Canada, Ltd. (Canadian investment
                                 adviser), Toronto, Ontario, Canada
                           Chairman, Assistant Treasurer & Director, Scudder, Stevens & Clark, Inc. (investment
                                 adviser)**
                           President & Director, Scudder Precious Metals, Inc. xxx
                           Chairman &  Director,  Scudder  Global  Opportunities Funds  (investment   company)  Luxembourg   
                           Chairman, Scudder,  Stevens & Clark, Ltd.  (investment adviser) London,  England  
                           Director,  Scudder Fund  Accounting Corporation   (in-house   fund   accounting   agent)*
                           Director, Scudder Realty Holdings Corporation (a real estate  holding  company)*  


                                       8
<PAGE>
                           Director,  Scudder  Latin America  Investment  Trust PLC (investment  company)@
                           Incorporator,   Scudder   Trust   Company   (a  trust company)+++   
                           Director,   Fiduciary   Trust   Company (banking  &  trust  company)  Boston,   MA  
                           Director, Fiduciary  Company  Incorporated   (banking  &  trust company) Boston,  MA 
                           Trustee,  New England  Aquarium, Boston, MA

Cornelia M. Small          Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Vice President, Scudder Global Fund, Inc. (investment company)**
                           Vice President, AARP Cash Investment Funds (investment company)*
                           Vice President, AARP Growth Trust (investment company)*
                           Vice President, AARP Income Trust (investment company)*
                           Vice President, AARP Tax Free Income Trust (investment company)*

Edmond D. Villani          President & Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Trustee, Scudder Development Fund (investment company)*
                           Chairman & Director, Scudder Global Fund, Inc. (investment company)**
                           Chairman & Director, Scudder International Fund, Inc. (investment company)**
                           Chairman & Director, Scudder New Asia Fund, Inc. (investment company)**
                           Chairman & Director, The Argentina Fund, Inc. (investment company)**
                           Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
                           Supervisory Director, Scudder Mortgage Fund (investment company) +
                           Chairman & Director, The Latin America Dollar Income Fund, Inc. (investment company)**
                           Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
                           Chairman & Director, Scudder World Income Opportunities Fund, Inc.  (investment
                                 company)**
                           Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities I
                                 & II (investment company)+
                           Director, The Brazil Fund, Inc. (investment company)**
                           Director, Indosuez High Yield Bond Fund (investment company) Luxembourg
                           President & Director, Scudder, Stevens & Clark Overseas Corporationoo
                           President & Director, Scudder, Stevens & Clark Corporation (Delaware) (investment
                                 adviser)**
                           Director, IBJ Global Investment Manager S.A., (Luxembourg investment management
                                company) Luxembourg, Grand-Duchy of Luxembourg
<FN>

         *        Two International Place, Boston, MA
         x        333 South Hope Street, Los Angeles, CA
         **       345 Park Avenue, New York, NY
         ++       Two Prudential Plaza, 180 N. Stetson Avenue, Chicago, IL
         +++      5 Industrial Way, Salem, NH
         o        101 California Street, San Francisco, CA
         #        11, rue Aldringen, L-1118 Luxembourg, Grand-Duchy of Luxembourg
         +        John B. Gorsiraweg 6, Willemstad Curacao, Netherlands Antilles
         xx       De Ruyterkade 62, P.O. Box 812, Willemstad Curacao, Netherlands Antilles
         ##       2 Boulevard Royal, Luxembourg
         ***      B1 2F3F 248 Section 3, Nan King East Road, Taipei, Taiwan
         xxx      Grand Cayman, Cayman Islands, British West Indies
         oo       20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
         ###      1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
         @        c/o Sinclair Hendersen Limited, 23 Cathedral Yard, Exeter, Devon
</FN>
</TABLE>

Item 29.          Principal Underwriters.

         (a)      Scudder California Tax Free Trust
                  Scudder Cash Investment Trust


                                       9
<PAGE>
                  Scudder Development Fund
                  Scudder Equity Trust
                  Scudder Fund, Inc.
                  Scudder Funds Trust
                  Scudder Global Fund, Inc.
                  Scudder GNMA Fund
                  Scudder Institutional Fund, Inc.
                  Scudder International Fund, Inc.
                  Scudder Investment Trust
                  Scudder Municipal Trust
                  Scudder Mutual Funds, Inc.
                  Scudder Portfolio Trust
                  Scudder State Tax Free Trust
                  Scudder Tax Free Money Fund
                  Scudder Tax Free Trust
                  Scudder U.S. Treasury Money Fund
                  Scudder Variable Life Investment Fund
                  AARP Cash Investment Funds
                  AARP Growth Trust
                  AARP Income Trust
                  AARP Tax Free Income Trust
                  The Japan Fund, Inc.

<TABLE>
<CAPTION>
         (b)

         (1)                               (2)                                     (3)
 
         Name and Principal                Position and Offices with               Positions and
         Business Address                  Scudder Investor Services, Inc.         Offices with Registrant
         <S>                               <C>                                     <C>

         Charles S. Boit                   Assistant Treasurer                     None
         Two International Place
         Boston, MA  02110

         E. Michael Brown                  Assistant Treasurer                     None
         Two International Place
         Boston, MA  02110

         Linda Coughlin                    Director                                None
         345 Park Avenue
         New York, NY  10154

         Richard W. Desmond                Vice President                          None
         345 Park Avenue
         New York, NY  10154

         Coleen Downs Dinneen              Assistant Clerk                         None
         Two International Place
         Boston, MA  02110

         Paul J. Elmlinger                 Vice President                          None
         345 Park Avenue
         New York, NY  10154



                                       10
<PAGE>



         Name and Principal                Position and Offices with               Positions and
         Business Address                  Scudder Investor Services, Inc.         Offices with Registrant

         Cuyler W. Findlay                 Senior Vice President and               None
         345 Park Avenue                   Director
         New York, NY 10154

         Thomas W. Joseph                  Vice President, Director,               Vice President
         Two International Place           Treasurer and Assistant Clerk
         Boston, MA 02110

         Dudley H. Ladd                    Senior Vice President and               None
         Two International Place           Director
         Boston, MA 02110

         David S. Lee                      President, Assistant                    None
         Two International Place           Treasurer and Director
         Boston, MA 02110

         Douglas M. Loudon                 Senior Vice President                   President
         345 Park Avenue
         New York, NY  10154

         Thomas F. McDonough               Clerk                                   Assistant Secretary
         Two International Place
         Boston, MA 02110

         Thomas H. O'Brien                 Assistant Treasurer                     None
         345 Park Avenue
         New York, NY  10154

         Edward J. O'Connell               Assistant Treasurer                     Vice President
         345 Park Avenue
         New York, NY 10154

         Juris Padegs                      Vice President and Director             None
         345 Park Avenue
         New York, NY 10154

         Daniel Pierce                     Vice President, Director                None
         Two International Place           and Assistant Treasurer
         Boston, MA 02110

         Robert E. Pruyne                  Assistant Treasurer                     None
         Two International Place
         Boston, MA 02110

         Kathryn L. Quirk                  Vice President                          Vice President & Secretary
         345 Park Avenue
         New York, NY  10154

         David B. Watts                    Assistant Treasurer                     None
         Two International Place
         Boston, MA 02110


                                       11
<PAGE>


         The  Underwriter  has  employees  who are  denominated  officers  of an
         operational   area.   Such   persons   do  not  have   corporation-wide
         responsibilities  and are not  considered  officers  for the purpose of
         this Item 29.

</TABLE>
<TABLE>
<CAPTION>
         (c)

                     (1)                     (2)                 (3)                 (4)                 (5)
                                       Net Underwriting    Compensation on
              Name of Principal         Discounts and        Redemptions          Brokerage      Other Compensation
                 Underwriter             Commissions       and Repurchases       Commissions
                    <S>                      <C>                 <C>                 <C>                 <C>   

               Scudder Investor              None                None                None               None
                Services, Inc.
</TABLE>


Item 30.          Location of Accounts and Records.

                  Certain  accounts,  books and other  documents  required to be
                  maintained  by  Section  31(a) of the  1940 Act and the  Rules
                  promulgated thereunder are maintained by the Registrant at its
                  offices,  345  Park  Avenue,  New  York,  NY  10154  with  the
                  exception of the accounts,  books and other documents relating
                  to  the  duties  of  the  registrant's  custodian,  which  are
                  maintained  by  the  registrant's  custodian,  Brown  Brothers
                  Harriman & Co., 40 Water Street, Boston,  Massachusetts 02109.
                  Records  relating to the duties of the  Registrant's  transfer
                  agent are  maintained  by  Scudder  Service  Corporation,  Two
                  International Place, Boston, Massachusetts 02110-4103.

Item 31.          Management Services.

                  Inapplicable.

Item 32.          Undertakings.

                  Inapplicable.


                                       12


<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and the State of New York,
on the 26th day of January, 1995.

                                   THE JAPAN FUND, INC.


                                   By /s/Douglas M. Loudon
                                         Douglas M. Loudon
                                         President


     Pursuant to the requirements of the Securities Act of 1933, this amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. By so signing, each of the
undersigned in his/her capacity as a director or officer, or both, as the case
may be of the Registrant, does hereby appoint Robert G. Stone, Jr., Douglas M.
Loudon and Kathryn L. Quirk and each of them, severally, or if more than one
acts, a majority of them, his/her true and lawful attorney and agent to execute
in his/her name, place and stead (in such capacity) any and all amendments to
the Registration Statement and any post-effective amendments thereto and all
instruments necessary or desirable in connection therewith, to attest the seal
of the Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have power to act with or
without the other and have full power and authority to do and perform in the
name and on behalf of each of the undersigned, in any and all capacities, every
act whatsoever necessary or advisable to be done in the premises as fully and to
all intents and purposes as each of the undersigned might or could do in person,
hereby ratifying and approving the act of said attorneys and agents and each of
them.

SIGNATURE                      TITLE                           DATE

/s/Robert G. Stone, Jr.        Chairman of the Board and       January 26, 1995
Robert G. Stone, Jr.           Director 



/s/Douglas M. Loudon           President (Principal            January 26, 1995
Douglas M. Loudon              Executive Officer)


/s/Gina Provenzano             Vice President and              January 26, 1995
Gina Provenzano                Treasurer (Principal Financial
                               and Accounting Officer) 


/s/William L. Givens           Director                        January 26, 1995
William L. Givens

<PAGE>
SIGNATURE                      TITLE                           DATE

/s/John F. Loughran            Director                        January 26, 1995
John F. Loughran


/s/William H. Gleysteen, Jr.   Director                        January 26, 1995
William H. Gleysteen, Jr.


/s/William V. Rapp             Director                        January 26, 1995
William V. Rapp


/s/Henry Rosovsky              Director                        January 26, 1995
Henry Rosovsky 


/s/O. Robert Theurkauf         Director                        January 26, 1995
O. Robert Theurkauf


/s/Shoji Umemura               Director                        January 26, 1995
Shoji Umemura


Hiroshi Yamanaka               Director                        January 26, 1995



                                       2

<PAGE>

                                                       File No. 2-13628
                                                       File No. 811-43






                    SECURITIES AND EXCHANGE COMMISSION
                                     
                          Washington, D. C. 20549
                                     
                                     
                                 EXHIBITS
                                     
                                    TO
                                     
                                 FORM N-1A
                                     
                                     
                      POST-EFFECTIVE AMENDMENT NO. 8
                                     
                         TO REGISTRATION STATEMENT
                                     
                                   UNDER
                                     
                        THE SECURITIES ACT OF 1933
                                     
                                    AND
                                     
                             AMENDMENT NO. 19
                                     
                         TO REGISTRATION STATEMENT
                                     
                                   UNDER
                                     
                    THE INVESTMENT COMPANY ACT OF 1940
                                     
                                     
                         THE JAPAN FUND, INC.
                                     
<PAGE>
                                     
                         THE JAPAN FUND, INC.
                                     
                               EXHIBIT INDEX
                                     
                                     
                               Exhibit 9(c)
                                     
                                Exhibit 11
                                     
                                Exhibit 12
                                     
           



The Japan Fund
                                                       Mail this application to:

                                                       The Japan Fund
                                                       P.O. Box 2291
                                                       Boston, MA 02107-2291

STEP 1  SELECT YOUR INVESTMENT OPTION
<TABLE>
<S>                                                    <C>                                      <C>
Invest in The Japan Fund with an                       Name of Fund                             Investment Amount
initial investment of $1,000 or more.                  The Japan Fund
Be sure to read the prospectus before             /  / By check (Payable to "The Japan          $___________________
you invest. You may request an                         Fund").
additional prospectus or an IRA                        or                               /  /    Reinvest dividends and
application by calling 1-800-535-2726.            /  / By wire. Call 1-800-535-2726             capital gains
                                                       for instructions.                        or
                                                                                        /  /    Mail dividends and
                                                                                                capital gains

</TABLE>


STEP 2 REGISTER YOUR ACCOUNT (Choose one)
<TABLE>
<C>                                        <C>                                <C>
/  / Individual Account                    Name                               Social Security Number - Required
                                           ___________________________        ___ ___ ___-___ ___-___ ___ ___ ___

/  / Joint Account                         Name                               Social Security Number - Required
      Joint ownership means joint          ___________________________        ___ ___ ___-___ ___-___ ___ ___ ___
      tenants with rights of               ___________________________        ___ ___ ___-___ ___-___ ___ ___ ___
      survivorship, and not tenants
      in common, unless otherwise
      specified.

/  / Custodial Account (Gift to            Custodian's Name (only one)        Minor's Social Security Number - Required
      Minors)                                                                 ___ ___ ___-___ ___-___ ___ ___ ___
      One application is required          ___________________________
      for each minor.                                                         Minor's State of Residence
                                           Minor's Name                       __________________________________
                                           ___________________________

/  / Trust, Corporation, Business,         Trust/Corporate Name               Trustee's Name
      or Other                             ___________________________        ___________________________
      We require a corporate               ___________________________        ___________________________
      resolution form for
      corporations requesting              Trust Date                         Tax ID or Social Security Number - Required
      telephone redemption. Call           ___________________________        ___________________________
      1-800-535-2726.

</TABLE>

STEP 3 PROVIDE YOUR ADDRESS AND OTHER INFORMATION

<TABLE>
<C>                                                                           <C>
Address                                                                       /  /U.S. Citizen /  /Resident Alien
                                                                                          /  /Nonresident Alien
____________________________________________                                  If nonresident alien, country of residence
____________________________________________                                  for tax purposes __________________________
____________________________________________
                                                                              Occupation ________________________
Daytime Phone (___)_________________________
                                                                              Employer __________________________
</TABLE>

<PAGE>

STEP 4 SIGN  YOUR  NAME  (Be sure to read the  certification  and  authorization
section)

<TABLE>
<C>                                              <C>                                 <C>
Please be sure to sign your name(s)exactly as    Signature                           Date
in Step 2 above. Check one:                      ____________________________        ____________________________
/  /Owner /  /Trustee /  /Custodian              Signature                           Date
/  /Other _________________________              ____________________________        ____________________________
                                                       Joint Owner/Trustee
</TABLE>

STEP 5 ESTABLISH YOUR ACCOUNT FEATURES

<TABLE>
<C>                                        <C>
You may choose one or all of the following A. /  / Automatic Investment Plan (AIP):
options by checking the appropriate box    With AIP you can add to your Japan Fund automatically and regularly. Just
and providing the information requested.   tell us how much, and what day you'd like to invest.  Based on these
Please attach a voided check below for     instructions, we will automatically deduct money from your checking account
these services.                            to purchase additional shares for you.  Your bank must be a member of
                                           Automated Clearing House (ACH).

                                           Investments are to be drawn in the amount of $______ (minimum

                                           $50) around the _______ day of each month, beginning in _______
                                                                                                    month
                                           199__. This money should be invested in my Japan Fund account.

                                           B. /  / Telephone Redemption to Your Bank:
                                           You may call to redeem your shares and have the proceeds sent to your bank
                                           account.

                                           C. /  / Deposit of Dividends and Capital Gains to Your Bank
                                           If you elected to receive your dividends and capital gains in cash, we can
                                           have the proceeds mailed to your bank account.

                                           D. As a Japan Fund shareholder, you may choose to receive updated information
                                           about The Japan Fund, as well as information about the Scudder Family of
                                           Funds, a diverse family of pure no-load(tm) mutual funds.  Please check the
                                           appropriate box.

                                             /  / In addition to information about my Japan Fund investment, I'd also
                                                   like to receive information on the Scudder Family of Funds and gain
                                                   access to new investment product, service and information updates.

                                             /  / I prefer to limit the information I receive to The Japan Fund only.
</TABLE>

(GRAPHIC OF A CHECK IS LOCATED HERE TO INDICATE WHERE A VOIDED CHECK IS SUPPOSED
TO BE ATTACHED)

AUTOMATIC BENEFITS

<TABLE>
<C>                                        <C>
A.    Scudder Automated Information Line   With SAIL you can access information on your Scudder Fund account 24 hours a
      (SAIL(tm))                           day, including yields, prices, total returns, account balances, and
                                           transaction information. You can also use SAIL to make exchanges and
                                           redemptions. Call 1-800-343-2890 and follow the instructions.  The SAIL fund
                                           code for The Japan Fund is 81*.

B.    Telephone Exchange and Redemption    You may exchange among your Scudder Funds or have the proceeds (up to
                                           $50,000) sent directly to your address of record (the address on your
                                           account). Call 1-800-535-2726 from 8:00 a.m. to 6:00 p.m., Monday through
                                           Friday, and a Japan Fund specialist will be happy to help you.
</TABLE>

<PAGE>

CERTIFICATION AND AUTHORIZATION

By signing  this  Application,  I (we)  certify  that I have full right,  power,
authority  and legal  capacity to purchase  shares of the Fund and affirm that I
have received a current  prospectus,  understand the  investment  objectives and
policies stated therein, and agree to be bound by its terms and the terms of the
Fund's  statement of additional  information as each may be amended from time to
time.

If the  telephone  redemption or the telephone  exchange  option is utilized,  I
appoint Scudder Service  Corporation  ("SSC"), my agent, to redeem shares of The
Japan  Fund  when  instructed  by  telephone,  and,  if  applicable,  to  invest
(exchange) the proceeds in any other Scudder fund. This power will continue if I
am  disabled  or  incapacitated.  I  understand  that a  request  for  telephone
redemption and/or telephone exchange may be made by anyone, but with a telephone
redemption,  the  proceeds  will be sent only to my address  of  record,  or, if
elected above, to my bank, and with a telephone exchange, the proceeds will only
be invested in another Scudder fund with the same registration as the account(s)
redeemed. I authorize SSC to act on telephone  instructions,  and if elected, to
make bank wire or ACH transfers  between my Scudder fund  account(s) and my bank
account.

I agree that neither SSC, nor its affiliated companies,  nor The Japan Fund, nor
any Scudder fund,  nor any of their  directors,  officers or employees  shall be
required to examine the  genuineness  of any  signature,  or oral, or electronic
instructions to redeem or exchange shares, or the authority or competence of the
person(s) giving such instructions, nor shall any of them have any liability for
acting upon any  instructions  believed  to be  genuine.  I also agree that this
Application applies to any Scudder fund into which I may exchange.  If I want to
end this  agreement,  I will give SSC at least ten days'  notice in writing.  If
SSC, The Japan Fund, or the Scudder Funds wants to end this agreement, they will
give at least ten days' notice in writing.

I certify under  penalties of perjury that (1) the social security number or tax
identification  number  shown  above is correct  and may be used for any account
opened for me by The Japan Fund or the Scudder Family of Funds, and (2) I am not
subject to backup  withholding  because (a) I am an "exempt  foreign  person" as
defined below,  or, (b) the Internal Revenue Service ("IRS") has not notified me
that I am  subject  to backup  withholding  as a result of failure to report all
interest  or  dividends,  or (c)  the IRS has  notified  me that I am no  longer
subject to backup withholding. An "exempt foreign person" is a person who is not
a citizen or resident of the United States (or, if married to a U.S.  citizen or
resident,  has  not  elected  to be  treated  as a  U.S.  resident)  nor a  U.S.
corporation,  partnership,  estate  or  trust,  and  who is  not  and  does  not
reasonably  expect to be engaged in a U.S.  trade or  business  with  respect to
which any gain derived  during the calendar year by the account now  established
is  effectively  connected,  and,  in the  case  of an  individual,  has not and
reasonably  expects  not to be present in the United  States of 183 days or more
during  the  current  calendar  year.  Check  here if you are  subject to backup
withholding. /  /


                   DID YOU REMEMBER TO...

                   /  / fill in the amount invested?

                   /  / enclose your check made out to the "The Japan
                          Fund"?

                   /  / include your social security number in Step 2?

                   /  / sign the application in Step 4 exactly as
                          registered?


                       CONSENT OF INDEPENDENT ACCOUNTANTS




     We hereby  consent to the use in the  Statement of  Additional  Information
constituting  part of this  Post-Effective  Amendment No. 8 to the  registration
statement  on Form N-lA  (the  "Registration  Statement")  of our  report  dated
February 1, 1995, relating to the financial  statements and financial highlights
of The  Japan  Fund,  Inc.,  which  appears  in  such  Statement  of  Additional
Information,  and to the  incorporation  by  reference  of our  report  into the
Prospectus,  which  constitutes  part of this  Registration  Statement.  We also
consent to the  reference to us under the heading  "Experts" in the Statement of
Additional  Information and to the reference to us under the heading  "Financial
Highlights" in the Prospectus.

/s/Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 14, 1995

<TABLE> <S> <C>

<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from The
Japan Fund, Inc. Annual Report for the fiscal year ended December 31, 1994
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
       
<S>                           <C>
<PERIOD-TYPE>                 YEAR
<FISCAL-YEAR-END>                     DEC-31-1994
<PERIOD-START>                         JAN-1-1994
<PERIOD-END>                          DEC-31-1994
<INVESTMENTS-AT-COST>                 587,816,848
<INVESTMENTS-AT-VALUE>                629,118,020
<RECEIVABLES>                           9,182,926
<ASSETS-OTHER>                          2,010,911
<OTHER-ITEMS-ASSETS>                  158,928,395
<TOTAL-ASSETS>                        799,240,252
<PAYABLE-FOR-SECURITIES>                4,084,082
<SENIOR-LONG-TERM-DEBT>                         0
<OTHER-ITEMS-LIABILITIES>             209,448,917
<TOTAL-LIABILITIES>                   213,532,999
<SENIOR-EQUITY>                                 0
<PAID-IN-CAPITAL-COMMON>              559,389,300
<SHARES-COMMON-STOCK>                  55,779,456
<SHARES-COMMON-PRIOR>                  45,596,062
<ACCUMULATED-NII-CURRENT>                       0
<OVERDISTRIBUTION-NII>               (11,758,799)
<ACCUMULATED-NET-GAINS>                 5,671,452
<OVERDISTRIBUTION-GAINS>                        0
<ACCUM-APPREC-OR-DEPREC>               32,405,300
<NET-ASSETS>                          585,707,253
<DIVIDEND-INCOME>                       3,134,824
<INTEREST-INCOME>                       1,326,307
<OTHER-INCOME>                                  0
<EXPENSES-NET>                          7,060,927
<NET-INVESTMENT-INCOME>               (2,599,796)
<REALIZED-GAINS-CURRENT>               42,025,485
<APPREC-INCREASE-CURRENT>             (2,264,434)
<NET-CHANGE-FROM-OPS>                  41,690,123
<EQUALIZATION>                                  0
<DISTRIBUTIONS-OF-INCOME>                       0
<DISTRIBUTIONS-OF-GAINS>             (44,381,365)
<DISTRIBUTIONS-OTHER>                           0
<NUMBER-OF-SHARES-SOLD>                44,011,661
<NUMBER-OF-SHARES-REDEEMED>            37,430,304
<SHARES-REINVESTED>                     3,602,037
<NET-CHANGE-IN-ASSETS>                114,808,767
<ACCUMULATED-NII-PRIOR>              (10,656,633)
<ACCUMULATED-GAINS-PRIOR>                 (5,023)
<OVERDISTRIB-NII-PRIOR>                         0
<OVERDIST-NET-GAINS-PRIOR>                      0
<GROSS-ADVISORY-FEES>                   4,773,356
<INTEREST-EXPENSE>                              0
<GROSS-EXPENSE>                         7,060,927
<AVERAGE-NET-ASSETS>                  651,042,335
<PER-SHARE-NAV-BEGIN>                       10.33
<PER-SHARE-NII>                             (.05)
<PER-SHARE-GAIN-APPREC>                      1.07
<PER-SHARE-DIVIDEND>                            0
<PER-SHARE-DISTRIBUTIONS>                     .85
<RETURNS-OF-CAPITAL>                            0
<PER-SHARE-NAV-END>                         10.50
<EXPENSE-RATIO>                              1.08
<AVG-DEBT-OUTSTANDING>                          0
<AVG-DEBT-PER-SHARE>                            0
        

</TABLE>


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