JAPAN FUND INC, 485APOS, 1998-03-02

JAPAN FUND INC
485APOS, 1998-03-02

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Filed with the Securities and Exchange Commission on March 2, 1998.

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. 12
------

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 23
----

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

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

Registrant's Telephone Number, including Area Code: (617) 295-2567
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Thomas F. McDonough
Scudder, Stevens & Clark, Inc.
Two International Place, Boston, MA 02110
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(Name and Address of Agent for Service)

It is proposed that this filing will become effective

immediately upon filing pursuant to paragraph (b)
---

on May 1, 1998 pursuant to paragraph (b)
---

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

X on May 1, 1998 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
<PAGE>

THE JAPAN FUND, INC.
CROSS-REFERENCE SHEET

Items Required By Form N-1A
---------------------------

PART A
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No. Item Caption Prospectus Caption
-- ------------ ------------------

1. Cover Page COVER PAGE

2. Synopsis EXPENSE INFORMATION

3. Condensed Financial FINANCIAL HIGHLIGHTS
Information

4. General Description INVESTMENT OBJECTIVE, POLICIES AND
of Registrant STRATEGIES
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 NOT APPLICABLE
Discussion of Fund
Performance

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

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

8. Redemption or PURCHASES AND REDEMPTIONS
Repurchase TRANSACTION INFORMATION

9. Pending Legal NOT APPLICABLE
Proceedings

Cross Reference - Page 1
<PAGE>

PART B
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Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------

10. Cover Page COVER PAGE

11. Table of Contents TABLE OF CONTENTS

12. General Information JAPAN AND THE JAPANESE ECONOMY
and History

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

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

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

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

17. Brokerage Allocation BROKERAGE AND PORTFOLIO TURNOVER

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

19. Purchase, Redemption PURCHASES AND EXCHANGES REDEMPTIONS
and Pricing of FEATURES AND SERVICES OFFERED BY THE
Securities Being 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

Cross Reference - Page 2
<PAGE>
This prospectus sets forth concisely the information about The Japan Fund,
Inc., an open-end, diversified 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, 1998, 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 and is available along with other related materials on the
Securities and Exchange Commission's Internet Web site (http://www.sec.gov).

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? ............................................ 4
Additional information about investment policies
and strategies ................................................... 6
Risk factors ....................................................... 8
Investment results ................................................. 10
Distribution and performance information ........................... 14
Fund organization .................................................. 14
Purchases and redemptions .......................................... 16
Transaction information ............................................ 20
Shareholder services ............................................... 21
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, 1998

[Logo]

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

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

Scudder Kemper Investments, Inc.
Investment Adviser

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Expense information

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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 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 load") NONE
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, 1997.

Investment management fees __%
12b-1 fees NONE
Other expenses __%
Total Fund operating expenses __%

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
------ ------- ------- --------
$ $ $ $

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."
--------------------------------------------------------------------------

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Financial highlights
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The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.

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, 1997, which 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 Fund's Statement of Additional
Information. The financial highlights should be read in conjunction with the
financial statements and notes thereto included in the Annual Report.

(To be updated by Scudder)

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Shareholder benefits

o broad and diversified investment portfolio

o active professional management by Scudder Kemper Investments, Inc.

o no sales charges or Rule 12b-1 distribution charges; a pure no-load(TM)
fund

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

o 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

o optional participation in the Scudder Family of Funds, a group of pure
no-load(TM) mutual funds managed by Scudder Kemper Investments, Inc.

o $2,500 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.

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 investment adviser, Scudder Kemper Investments, Inc. (the
"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

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little-known companies that the Adviser believes have above-average earnings
growth potential. When evaluating an individual company for the purpose of stock
selection, the 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. It is impossible to predict how long
such alternative strategies will be utilized.

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 15% 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

5
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and 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
Fund's Adviser has extensive experience dealing in the Japanese market and with
Japanese brokers and custodian banks. In addition, the Adviser 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 has certain investment restrictions which are designed to reduce
the Fund's investment risk. Fundamental investment restrictions may not be
changed without a vote of shareholders; non-fundamental investment restrictions
may be changed by a vote of the Trust's Board of Directors. A complete listing
of investment restrictions is contained under "Investment Restrictions" in the
Fund's Statement of Additional Information.

As a matter of fundamental policy, the Fund may not borrow money, except
as permitted under Federal law. Further, as a matter of non-fundamental policy,
the Fund may not borrow money in an amount greater than 5% of total assets,
except for temporary or emergency purposes, although the Fund may engage up to
5% of total assets in reverse repurchase agreements or dollar rolls.

As a matter of fundamental policy, the Fund may not make loans except
through the lending of portfolio securities, the purchase of debt securities,
interests in indebtedness or through repurchase agreements. The Fund has adopted
a non-fundamental policy restricting the lending of portfolio securities to no
more than 5% of total assets.

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
Adviser. The Fund intends to continue these practices with respect to investment
in debt securities in the future.

Common stocks

Under normal circumstances, the Fund invests primarily in common stocks.
Common stock is issued by companies to raise cash for business purposes and
represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer the greatest potential for
gain on investment, compared to other classes of financial assets such as bonds
or cash equivalents.

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

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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.

Illiquid securities

The Fund may invest in securities for which there is not an active trading
market, or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities, but carry the
risk that the Fund may not be able to dispose of them at an advantageous time or
price.

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 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.

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 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

7
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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 to create leveraged exposure in the Fund. 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 declined to $__ billion
in 1997 from $___ billion in 1996.

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.

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 Stock 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 fluctuated
in a downward trend since then and on December 30, 1996 was 49% below the peak.
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.

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

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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 Fund is also
susceptible to a relatively turbulent political environment which affects
issuers located in Japan and the surrounding Pacific Basin region. The
management of the Fund seeks to mitigate the risks associated with these
considerations through diversification and professional management.

The following are descriptions of some additional investment risks
associated with the Fund, 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. Prices for 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.

Illiquid securities. The absence of a trading market can make it difficult
to ascertain a market value for these investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.

Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible

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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 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, 1997. 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.

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The tables on this and the following pages present investment results of
the Fund, including the period from January 1, 1986 to August 13, 1987 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 for the period when the Fund operated as a
closed-end investment company.

ANNUAL CAPITAL CHANGES?
-----------------------

[Table To Be Updated]

Net Asset Capital Gains
December 31, Value/Share Dividends Distributions Capital Change
------------ ----------- --------- ------------- --------------
1986 $20.28
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 10.03
1995 9.44 -- 0.11 -9.07
1996 8.33 0.08 -- -11.76

GROWTH OF A $10,000 INVESTMENT
------------------------------

Years Ended Value of Initial Cumulative Average Annual
December 31, 1996 $10,000 Investment Total Return Total Return
----------------- ------------------ ------------ -------------
One Year $8,908 -10.92% -10.92%
Five Years 9,175 -8.25 -1.71
Ten Years 14,027 40.27 3.44

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

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

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

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Investment results (cont'd)

[Mountain Chart Omitted. To be Updated.]

Key Assumptions

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

o 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.

o No adjustments have been made for income taxes.

o 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.

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

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[Table to be Updated]

Net Asset Value Capital Gains Income Total
Initial Distribution Dividends Net Asset
End of Year Investment Reinvested Reinvested Value
----------- ---------- ------------ ---------- -----
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 25,223 879,600 586,882 1,491,705
1995 22,655 799,859 533,958 1,356,472
1996 19,991 705,808 482,531 1,208,330

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.

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Distribution and performance information

Dividends and capital gain distributions

The Fund intends to distribute dividends from its net investment income
and net realized capital gains after utilization of capital loss carryforwards,
if any, in December to prevent application of a federal excise tax. An
additional distribution may be made 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 net 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 to individual shareholders at a maximum 20% or 28% rate
(depending on the Fund's holding period for the assets giving rise to the 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 the investment has been held for one year, five years and ten
years, as of a stated ending date. Cumulative total return represents the
cumulative change in value of an investment in the Fund for various periods. All
types of total return calculations assume that all dividends and capital gains
distributions during the period were reinvested in shares of the Fund. 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

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

Investment adviser

In making investment decisions, the Fund retains Scudder Kemper
Investments, Inc., formerly known as 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.

Scudder, Stevens & Clark, Inc. ("Scudder"), and Zurich Insurance Company
("Zurich"), an international insurance and financial services organization, have
formed a new global investment organization by combining Scudder's business with
that of Zurich's subsidiary, Zurich Kemper Investments, Inc. and Scudder has
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owns approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.

The address of Scudder Kemper Investments, Inc. is 345 Park Avenue, New
York, New York 10154.

The Adviser received investment advisory and management fees for services
rendered to the Fund which totalled ____% of the Fund's average daily net assets
during the fiscal year ended December 31, 1997. 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.

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

Custodian, fund accounting agent and subcustodian

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

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Purchases and redemptions

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

Opening an account ($2,500 minimum)

By check

Checks should be made payable to "The Japan Fund, Inc." in the amount of
$2,500 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 $2,500 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
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 three
business days, the order is subject to cancellation and the

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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.

By "QuickBuy"

If you elected "QuickBuy" for your account, you can call toll-free to
purchase shares. The money will be automatically transferred from your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "QuickBuy,"
call 1-800-225-5163 for more information.

To purchase additional shares, call 1-800-225-5163. Purchases may not be
for more than $250,000. Proceeds in the amount of your purchase will be
transferred from your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "QuickBuy" requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day.

If you purchase shares by "QuickBuy" and redeem them within seven days of
the purchase, the Fund may hold the redemption proceeds for a period of up to
seven business days. If you purchase shares and there are insufficient funds in
your bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA accounts.

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 shares of the Fund (either directly or through your broker) and
want to continue your investment in the Fund, 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.

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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 $100,000 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."

By "QuickSell"

If you elected "QuickSell" for your account, you can call toll-free
to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "QuickSell,"
call 1-800-225-5163 for more information.

To redeem shares, call 1-800-225-5163. Redemptions must be for at least
$250. Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "QuickSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.

"QuickSell" transactions are not available for Scudder IRA accounts and
most other retirement plan accounts.

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.

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Signature guarantees

For your protection and to prevent fraudulent redemptions, on written
redemption requests in excess of $100,000 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 $100,000 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
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

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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. If you purchase shares by federal
funds wire, you may avoid this delay. Redemption requests by telephone 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 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).

Purchase restrictions

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) for any reason including when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in the Fund's share price appears evident.

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

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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 $2,500.
Scudder retirement plans have similar or lower minimum share balance
requirements. A shareholder may open an account with at least $1,000, if an
automatic investment plan of $100/month is established. Shareholders who
maintain a non-fiduciary account balance of less than $2,500 in the Fund without
establishing an automatic investment plan, will be assessed an annual $10.00 per
fund charge with the fee paid to the Fund. The $10.00 charge will not apply to
shareholders with a combined household account balance in any of the Scudder
Funds of $25,000 or more. The Fund reserves the right, following 60 days'
written notice to shareholders, to redeem all shares in accounts below $250,
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. Retirement
accounts and certain other accounts will not be assessed the $10.00 charge or be
subject to automatic liquidation. Please refer to "Exchanges and Redemptions --
Other Information" in the Fund's Statement of Additional Information for more
information.

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.

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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 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 the Adviser's large staff of economists,
research analysts, traders and other investment specialists who work in offices
across the United States and abroad. Scudder believes its team approach benefits
Fund investors by bringing together many disciplines and leveraging its
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.

SAIL(TM)--Scudder Automated Information Line

For personalized account information, including fund prices, yields and
account balances, to perform transactions in existing Scudder fund accounts, or
to obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. 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 $2,500. 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.

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

22
<PAGE>

================================================================================
designed for use with the Scudder funds (except Scudder tax-free funds, which
are inappropriate for such plans) as pure no-load(TM) 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.

o Scudder No-Fee IRAs. These retirement plans allow a maximum annual
contribution of up to $2,000 per person for anyone with earned income (up
to $2,000 per individual for married couples filing jointly, even if only
one spouse has earned income). 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 you no
annual custodial fee.

o Scudder Roth No-Fee IRAs. Similar to the traditional IRA in many
respects, these retirement plans provide a unique opportunity for
qualifying individuals to accumulate investment earnings tax free. Unlike
a traditional IRA, with a Roth IRA, if you meet the distribution
requirements, you can withdraw your money without paying any taxes on the
earnings. No tax deduction is allowed for contributions to a Roth IRA. The
Scudder Roth IRA charges you no annual custodial fee.

o 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.

o 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.

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

o 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. The Scudder SEP-IRA charges
you no annual custodial fee.

o 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 for
some 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 and most 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]). 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.

Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.

23
<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.

24
<PAGE>

================================================================================
How to contact The Japan Fund

For investment information or questions about your 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)

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

Henry Rosovsky, Chairman of the Board and Director
Lynn Birdsong, President
William L. Givens, Director
William H. Gleysteen, Jr., Director
John F. Loughran, Director
Yoshihiko Miyauchi, Director
William V. Rapp, Director
O. Robert Theurkauf, Director
Hiroshi Yamanaka, Director
Elizabeth J. Allan, Vice President
William E. Holzer, Vice President
Thomas W. Joseph, Vice President
Seung K. Kwak, Vice President
Miyuki Wakatsuki, Vice President
Gina Provenzano, Vice President and Treasurer
Kathryn L. Quirk, Vice President and Secretary
Thomas F. McDonough, Assistant Secretary
John R. Hebble, Assistant Treasurer

Honorary Directors

Allan Comrie
Jonathan Mason
James W. Morley
Robert G. Stone, Jr.
Shoji Umemura

<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, 1998

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

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,
1998, 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 OF CONTENTS
Page

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS................................1
Investment Objective and Policies........................................1
Master/feeder structure..................................................2
Specialized Investment Techniques........................................2
Investment Restrictions.................................................11

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

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

PURCHASES AND EXCHANGES.......................................................23
Additional Information About Opening An Account.........................23
Additional Information About Making Subsequent Investments..............23
Additional Information About Making Subsequent Investments by QuickBuy..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 QuickSell.................................................26
Redemption by Mail or Fax...............................................27
Redemption-in-Kind......................................................27
Other Information.......................................................28

FEATURES AND SERVICES OFFERED BY THE FUND.....................................28
The Pure No-Load(TM) Concept............................................28
Dividends and Capital Gains Distributions Options.......................29
Diversification.........................................................30
Scudder Investors Centers...............................................30
Reports to Shareholders.................................................30

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

SPECIAL PLAN ACCOUNTS.........................................................35
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension
Plans for Corporations and Self-Employed Individuals.................35
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations
and Self-Employed Individuals........................................35
Scudder IRA: Individual Retirement Account.............................35
Scudder Roth IRA: Individual Retirement Account........................36
Scudder 403(b) Plan.....................................................37
Automatic Withdrawal Plan...............................................37
Group or Salary Deduction Plan..........................................37
Automatic Investment Plan...............................................38
Uniform Transfers/Gifts to Minors Act...................................38

i
<PAGE>

TABLE OF CONTENTS (continued)

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................38

PERFORMANCE AND OTHER INFORMATION.............................................38
Comparison of Fund Performance..........................................40

FUND ORGANIZATION.............................................................44

INVESTMENT ADVISORY ARRANGEMENTS..............................................44
Personal Investments by Employees of the Adviser........................47

DIRECTORS AND OFFICERS........................................................47

REMUNERATION..................................................................49

DISTRIBUTOR...................................................................50

TAXES.........................................................................51
United States Federal Income Taxation...................................51
Japanese Taxation.......................................................55

BROKERAGE AND PORTFOLIO TURNOVER..............................................55

NET ASSET VALUE...............................................................56

ADDITIONAL INFORMATION........................................................57
Experts.................................................................57
Public Official Documents...............................................57
Other Information.......................................................57

FINANCIAL STATEMENTS..........................................................57

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 investment adviser, Scudder Kemper Investments, Inc. (the "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 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 to
<PAGE>

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.

Master/feeder structure

The Board of Directors has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder structure as described below.

A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.

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

2
<PAGE>

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.

Illiquid Securities. The Fund may occasionally purchase securities other
than in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities," "not readily
marketable," or "illiquid" restricted securities, i.e., which cannot be sold to
the public without registration under the Securities Act of 1933 (the "1933
Act") or the availability of an exemption from registration (such as Rules 144
or 144A) or because they are subject to other legal or contractual delays in or
restrictions on resale.

The absence of a trading market can make it difficult to ascertain a
market value for illiquid securities. Disposing of illiquid securities may
involve time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable price. The
Fund may have to bear the extra expense of registering such securities for
resale and the risk of substantial delay in effecting such registration. Also
market quotations are less readily available. The judgment of the Adviser may at
times play a greater role in valuing these securities than in the case of
illiquid securities.

Generally speaking, restricted securities may be sold in the U.S. only to
qualified institutional buyers, or in a privately negotiated transaction to a
limited number of purchasers, or in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration, or in a public offering for which a registration
statement is in effect under the 1933 Act. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public, and in such event the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer, or the
prospectus forming a part of it, is materially inaccurate or misleading.

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

3
<PAGE>

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.

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

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<PAGE>

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 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 to create leveraged exposure in the Fund.

Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the 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

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<PAGE>

futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized.

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

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

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

The 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

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<PAGE>

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.

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.

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<PAGE>

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
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.

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<PAGE>

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
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

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<PAGE>

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
"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

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<PAGE>

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.")

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):

The Fund may not, as a fundamental policy:

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

(b) issue senior securities, except as permitted under the 1940 Act and
as interpreted or modified by regulatory authority having
jurisdiction, from time to time;

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

11
<PAGE>

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

(f) make loans to other persons except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in
indebtedness in accordance with the Fund's investment objective and
policies may be deemed to be loans; or

(g) concentrate its investments in a particular industry, as that term
is used in the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.

If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond that specified limit resulting from a
change in values or net assets will not be considered a violation.

The Fund may not, as a nonfundamental policy:

(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by engaging
in reverse repurchase agreements, dollar rolls, or other investments
or transactions described in the Fund's registration statement which
may be deemed to be borrowings;

(2) enter into either of reverse repurchase agreements or dollar rolls
in an amount greater than 5% of its total assets;

(3) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the Fund may
obtain such short-term credits as may be necessary for the clearance
of securities transactions;

(4) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of
the obligations underlying such put options would exceed 50% of its
total assets;

(5) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf
of the Fund and the premiums paid for such 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;

(6) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of the
value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to have
no value); and

(7) lend portfolio securities in an amount greater than 30% of its total
assets.

If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation.

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.

12
<PAGE>

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
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.

Economic Trends

During the ten and five-year periods ended December 1997, Japan's gross
domestic product in constant prices increased at an average annual compound
growth rate of ____% and ____%, 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 resulting in the worst recession of the post-war period.
Several fiscal stimulus packages have failed to initiate a robust recovery.
Growth of 1.1% in 1992 was followed by an increase of only 0.3% in 1993, 0.6% in
1994 and 1.4% in 1995. Early in 1995, the economy received a further shock with
the devastating earthquake in the Kobe area. But even more serious in its impact
on the economy was the sharp rise of the yen in early 1995. The yen reached 81
yen to the dollar in mid-April, a rise of 24% from the beginning of the year,
imparting a deflationary bias to the economy and threatening the fragile
recovery. Subsequent action by the government and the Bank of Japan resulted in
a decline of the yen. By April 15, 1997, the yen was 126 to the dollar, a
depreciation of 36%

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

13
<PAGE>

from its high in 1995. Further Government stimulus and easy money policies
together with the depreciation of the yen have resulted in increasing activity
during 1996. Gross domestic product rose ____% in 1997.

TO BE UPDATED

The following table sets forth the composition of Japan's gross domestic
product in yen and in percentage terms. In addition, the gross domestic product
in constant yen and the gross domestic deflator are shown.

Gross Domestic Product
(In trillions of yen)

1991 1992 1993 1994 1995 1996

GDP at Current Prices 458.3 471.1 475.4 479.3 482.9 500.4
Consumption 303.2 315.6 323.5 331.9 338.7 348.4
Private 261.9 272.3 278.7 286.2 290.5 299.4
Public 41.4 43.3 44.8 45.7 47.6 49.0

Fixed Investment 144.0 143.5 140.4 137.3 136.8 148.2
Private 113.5 108.2 99.7 95.4 95.4 102.8
Public 30.5 35.3 40.7 41.3 41.4 45.4

Change in Inventories 3.5 1.5 0.6 0.0 0.9 1.1

Net Exports of Goods and 7.6 10.5 10.9 10.0 7.2 2.7
Services
Exports of Goods and 46.7 47.4 44.2 44.4 45.4 49.6
Services
Imports of Goods and -39.1 -32.9 -33.3 -34.4 -38.2 -46.9
Services

GDP at Constant (1990) 447.0 450.9 452.3 455.2 458.4 477.9
Prices
GDP Deflator (1990=100) 102.7 104.5 105.1 105.3 104.9 104.7

Percentage Increase of
GDP
At Current Prices 6.6% 2.8% 0.9% 0.8% 0.3% 3.6%
At Constant Prices 3.8% 1.0% 0.3% 0.6% 0.9% 3.6%
Deflator 2.7% 1.7% 0.6% 0.2% -0.5% 0.0%

Percentage Distribution
of GDP
Consumption 66.2% 67.0% 68.0% 69.2% 69.9% 69.6%
Fixed Investment 31.4% 30.5% 29.5% 28.6% 28.4% 29.6%
Change in Inventories 0.8% 0.3% 0.1% 0.0% 0.2% 0.2%
Exports of Goods and 10.2% 10.1% 9.3% 9.3% 9.4% 9.9%
Services
Imports of Goods and -8.4% -7.8% -7.0% -7.2% -7.9% -9.4%
Services ----- ----- ----- ----- ----- -----

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

Source: Economic Planning Agency, Quarterly Report on National Accounts (March
1997).

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 1996 (with 1990 as 100):

14
<PAGE>

INDICES OF INDUSTRIAL PRODUCTION
1990=100

1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----

Japan 101.8 95.6 91.2 91.8 94.9 97.7
United States 98.1 99.6 101.7 107.9 111.8 114.8
Germany 103.2 101.9 95.6 99.7 101.2 100.1
United Kingdom 96.3 96.3 98.3 103.3 105.9 107.2
France 98.7 98.6 93.9 99.2 99.0 99.7
Italy 99.1 97.8 95.7 102.2 107.9 105.9
Canada 95.8 96.9 101.2 104.0 112.9 114.0

Source: IMF, International Financial Statistics (April 1996).

The following table sets forth the proportion of gross domestic product
contributed by major industrial sectors of the economy for 1989 through 1994:

GROSS DOMESTIC PRODUCT* BY INDUSTRIAL SECTORS
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995

<S> <C> <C> <C> <C> <C> <C> <C>
Agriculture, Forestry and 2.6% 2.5% 2.4% 2.3% 2.1% 2.1% 1.9%
Fisheries
Mining 0.2 0.3 0.2 0.2 0.2 0.2 0.2
Construction 9.8 10.1 10.2 10.3 10.8 10.8 10.3
Manufacturing 28.2 28.2 28.1 27.1 25.5 24.5 24.7
Electricity, Gas and Water 2.8 2.6 2.6 2.7 2.7 2.8 2.8
Wholesale and Retail Trade 13.4 13.6 13.7 13.1 12.9 12.7 12.7
Finance and Insurance 6.4 5.9 5.5 5.2 4.7 5.2 4.8
Real Estate 10.9 10.9 10.9 11.5 12.2 12.7 12.9
Transportation,
Communication and Other
Public Utilities 6.9 6.6 6.5 6.4 6.4 6.4 6.5
Services 14.4 14.8 15.1 16.0 16.7 16.8 17.0
Government Services 7.7 7.6 7.5 7.6 7.7 7.9 8.1
Private Non-Profit 2.0 2.0 2.0 2.0 2.1 2.2 2.3
Institutions
Import Duty 0.6 0.6 0.6 0.6 0.6 0.6 0.6
Imputed Interest (5.6) (5.8) (5.5) (5.3) (4.8) (4.9) (4.7)
Statistical Discrepancy (0.2) (0.0) 0.1 0.1 0.1 0.1 (0.1)
----- ----- --- --- --- --- -----

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

* Gross domestic product measures the value of original 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 economy.

Source: Economic Planning Agency, Annual Report on National Accounts (1997).

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.

15
<PAGE>

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
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 1996 approximately 65 million persons, or approximately 52% of the
Japanese population, were employed, of which approximately 6% were employed in
agriculture, forestry and fisheries, 33% in mining, construction and
manufacturing and 33% in trade, finance, transportation and communication, and
29% in other service-related industries (including the government). Since 1980
an increasing proportion of the paid work force 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 in 1992 and 1993 with the rise in
1992 being very pronounced. With increases in productivity in 1994, 1995 and
1996 that exceeded the rise in wages, unit labor costs declined 0.9% in 1994,
1.3% in 1995 and 2.6% in 1996.

MANUFACTURING
Wages Productivity Unit Labor Costs
(annual percentage change)

1990 5.3 4.0 1.2
1991 3.4 2.5 0.9
1992 1.2 -5.4 6.9
1993 0.1 -1.4 1.6
1994 2.0 2.9 -0.9
1995 3.3 4.7 -1.3
1996 2.5 5.2 -2.6

Source: Ministry of Labor, Monthly Labor Statistics (Mar. 1997); Productivity
Research Institute, Quarterly Journal of Productivity Statistics (Wages
are for manufacturers who employ 30 or more persons.)

Prices

In 1996 the wholesale price index rose by 0.7% and the consumer price
index rose by 0.1%.

16
<PAGE>

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

COMPARATIVE WHOLESALE PRICE INDICES
(1990 = 100)
<TABLE>
<CAPTION>

1991 1992 1993 1994 1995 1996

<S> <C> <C> <C> <C> <C> <C>
Japan 100.2 98.7 95.0 93.0 92.2 92.8
United States 100.2 100.8 102.3 103.6 107.3 109.8
Germany 102.4 103.8 103.7 104.4 106.2 106.0
United Kingdom 105.4 108.7 113.0 115.8 120.6 123.9
France* 98.7 97.1 94.4 95.4 101.1 98.5
Italy 105.2 107.4 112.9 117.2 129.3 134.0
Canada 99.0 99.5 102.7 108.5 117.3 117.8
</TABLE>

* Intermediate Industrial Goods

Source: IMF, Int'l Financial statistics (April 1997)
OECD, Main Economic Indicators (February 1997)

COMPARATIVE CONSUMER PRICE INDICES
(1990 = 100)
<TABLE>
<CAPTION>

1991 1992 1993 1994 1995 1996

<S> <C> <C> <C> <C> <C> <C>
Japan 103.3 105.1 106.4 107.1 107.0 107.2
United States 104.2 107.4 110.6 113.4 116.6 120.0
Germany 103.5 107.6 112.0 115.4 117.4 120.7
United Kingdom 103.2 109.8 111.5 114.3 118.2 121.1
France 103.2 105.7 107.9 109.7 111.6 113.9
Italy 106.3 111.7 116.8 121.4 127.9 132.5
Canada 105.6 107.2 109.2 109.4 111.8 113.5
</TABLE>

Source: IMF, Int'l Financial Statistics (April 1997)

Balance of Payments

During the 1980s, Japan recorded increased trade surpluses and became the
world's major creditor nation. In 1996, Japan registered a surplus of $66
billion in its current account. This surplus was predominantly due to a surplus
of $84 billion in its trade account.

In 1996, Japan registered an outflow of $30 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 year ended
December 31, 1996, exports and imports represented approximately 8.9% and 7.6%,
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, 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.

17
<PAGE>

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.

FOREIGN TRADE OF JAPAN
(1990 = 100)
Value Index Volume Index Unit Value Index Terms
----------- ------------ ----------------
Exports Imports Exports Imports Exports Imports of Trade
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
1994 97.7 83.0 104.0 122.4 93.9 67.8 138.5
1995 100.2 93.2 108.0 137.7 92.8 67.7 137.1
1996 107.9 112.0 107.2 140.8 100.7 79.7 126.3

Source: Ministry of Finance, The Summary Report on Trade of Japan (Dec. 1996)

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

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

Japan's Exports 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Textile Products 2.5% 2.5% 2.5% 2.3% 2.1% 2.0% 2.1%
Metals & Metal Products 6.8 6.7 6.3 6.4 6.1 6.5 6.2
Machinery & Equipment:
Ships 1.9 2.1 2.3 2.8 2.9 2.4 2.2
Motor Vehicles 17.8 17.4 17.8 16.2 14.4 12.0 12.3
TV & Radio Receivers 1.6 1.7 1.6 1.4 1.2 1.0 0.9
Motorcycles 0.8 0.9 1.1 1.2 1.0 0.9 1.0
Scientific, medical &
optical instruments 4.0 4.1 4.0 3.9 4.0 4.2 4.2
Other 48.9 49.0 48.8 50.5 52.5 54.2 53.5
Total 75.0 75.2 75.6 76.0 76.0 74.7 74.1
Chemicals 5.5 5.6 5.6 5.6 6.0 6.8 7.0
Foods & Beverages 0.6 0.6 0.6 0.6 0.5 0.5 0.5
Other Exports 9.6 9.4 9.4 9.6 9.3 9.5 10.1
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------

Japan's Imports 1990 1991 1992 1993 1994 1995 1996
Foods & Beverages 13.5% 14.6% 16.0% 16.4% 17.0% 15.2% 14.5%
Textile Materials 1.1 1.0 0.9 0.6 0.7 0.5 0.3
Chemicals 6.9 7.4 7.4 7.5 7.4 7.3 6.7
Mineral Fuels:
Petroleum 13.2 12.7 12.9 11.6 10.1 8.9 9.6
Coal 2.6 2.7 2.6 2.5 2.1 2.0 2.0
Other 8.1 7.7 7.1 6.2 5.2 5.0 5.7
Total 23.9 23.1 22.6 20.3 17.4 15.9 17.3
Metal Ores & Scrap 3.9 3.7 3.3 2.4 2.7 2.3 2.0
Machinery & Equipment 17.4 18.1 18.4 19.4 21.7 26.3 27.5
Other Imports 33.3 32.1 31.4 32.9 38.1 33.5 31.7
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------
</TABLE>

Source: Ministry of Finance, The Summary Report - Trade of Japan (Dec. 1996).

18
<PAGE>

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

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

Japan's Exports 1990 1991 1992 1993 1994 1995 1996

Developed Areas
<S> <C> <C> <C> <C> <C> <C> <C>
U.S.A. 31.5% 29.1% 28.2% 29.2% 29.7% 27.3% 27.2%
EC 18.7 18.8 18.4 15.7 14.5 15.9 15.3
Australia 2.4 2.1 2.1 2.1 2.2 1.8 1.8
Canada 2.4 2.3 2.1 1.7 1.5 1.3 1.2
Others 4.3 3.9 3.6 3.0 2.8 1.7 1.8
--- --- --- --- --- --- ---
Total 59.3 56.2 54.4 51.7 50.7 48.0 47.3
Developing Areas
S.E. Asia 28.8% 30.6% 30.7% 32.5% 35.0% 38.3% 38.3%
Middle East 3.4 3.9 4.5 3.7 2.8 2.3 2.7
Latin America 3.6 4.1 4.6 4.7 4.7 4.4 4.4
Africa 1.2 1.1 1.2 1.2 1.0 0.9 0.7
Others 0.3 0.3 0.3 0.4 0.4 0.5 0.5
--- --- --- --- --- --- ---
Subtotal 37.3 40.0 41.3 42.5 43.9 46.4 41.6

Former Soviet Union 0.9% 0.7% 0.3% 0.4% 0.3% 0.3% 0.2%
China 2.1 2.7 3.5 4.8 4.7 5.0 5.3
Others 0.4 0.4 0.5 0.5 0.4 0.3 0.7
--- --- --- --- --- --- ---
Subtotal 3.4 3.8 4.3 5.7 5.4 5.6 6.2
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------

Japan's Imports 1990 1991 1992 1993 1994 1995 1996
Developed Areas
U.S.A. 22.4% 22.5% 22.4% 23.0% 22.8% 22.4% 22.7%
EC 15.0 13.4 13.4 12.5 12.9 14.5 14.1
Australia 5.3 5.5 5.3 5.1 5.0 4.3 4.1
Canada 3.6 3.3 3.3 3.4 3.2 3.2 2.9
Others 4.7 4.7 4.5 4.1 4.3 3.2 2.9
--- --- --- --- --- --- ---
Total 51.0 49.4 48.9 48.1 48.2 47.6 46.7
Developing Areas
S.E. Asia 23.3% 24.8% 24.7% 25.2% 24.7% 25.3% 25.1%
Middle East 13.2 12.4 12.5 11.3 10.2 9.4 10.1
Latin America 4.2 4.2 3.7 3.5 3.5 3.5 3.3
Africa 0.8 0.8 0.7 0.8 0.6 0.6 0.6
Others 0.3 0.3 0.4 1.1 1.2 1.7 1.2
--- --- --- --- --- --- ---
Subtotal 41.8 42.5 42.0 41.9 40.2 40.0 40.3

Former Soviet Union 1.4% 1.4% 1.0% 1.2% 1.3% 1.4% 1.1%
China 5.1 6.0 7.3 8.5 10.0 10.7 11.6
Others 0.7 0.7 0.8 0.8 0.9 0.3 0.3
--- --- --- --- --- --- ---
Subtotal 7.2 8.1 9.1 10.5 12.2 12.4 13.0
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------
</TABLE>

Source: Ministry of Finance, The Summary Report--Trade of Japan
(December 1996).

19
<PAGE>

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,
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 1987 through 1996.

Calendar NSA* TSE/TOPIX* OTC**
Year High Low Close High Low Close High Low Close
---- ---- --- ----- ---- --- ----- ---- --- -----

Sources: *Tokyo Stock Exchange, Annual Securities Statistics (1996); Monthly
Statistics Report (Dec. 1987, 1988, 1989, 1990, 1991, 1993, 1994,
1995).

**Annual Statistics of OTC Stocks (1996), issued by Japan Securities
Dealers Association.

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, in 1994, 8.3% to 1559.09 and
in 1995, 12% to 1577.70. In 1996, the Index declined 6.8% to 1470.94. 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.

20
<PAGE>

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.

1991 1992 1993 1994 1995 1996
TSE OTC TSE OTC TSE OTC TSE OTC TSE OTC TSE OTC
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Market Capitalization
(in billions of yen) 377,924.4 12,880 289,483 7,943 324,357 11,228 358,392 14,558 365,716 14,535 347,578 14,904

Daily Average
Trading Volume 380,512 4,206 268,857 1,767 353,394 4,374 342,163 8,994 369,613 9,763 405,549 10,310
(000 shares)

Number of 1,641 430 1,651 436 1,667 477 1,689 564 1,714 678 1,766 779
Listed Companies
</TABLE>

Source: Tokyo Stock Exchange, Monthly Securities Statistics (Jan. 1996).

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.

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:

Financial Business
Institutions Corporations Individuals Foreigners Other
<S> <C> <C> <C> <C> <C>
1989 38.6% 15.4% 31.8% 11.3% 3.2%
1990 37.4 13.2 31.2 14.1 4.1
1991 34.6 10.7 31.0 19.8 3.9
1992 31.9 8.5 28.2 27.4 4.0
1993 34.6 8.7 28.0 25.2 3.1
1994 34.2 7.3 23.3 32.2 3.0
1995 30.3 7.3 25.8 33.7 2.9
1996 31.6 5.9 23.3 36.4 2.8
</TABLE>

Source: Tokyo Stock Exchange, Annual Securities Statistics (1996).

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 1995, the return on the TOPIX registered 2.0%.

AVERAGE PRICE/EARNINGS RATIOS AND RATES OF RETURN

Average
Price/Earnings Ratio Rate of Return
1989 70.6 22.7
1990 39.8 -39.3
1991 37.8 -0.5
1992 36.7 -22.9
1993 64.9 10.9
1994 79.5 9.0
1995 86.5 2.0

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

21
<PAGE>

Sources: Tokyo Stock Exchange, Annual Securities Statistics (1991, 1992,
1993, 1994, 1995, 1996); Monthly Statistics Report (Dec. 1989,
1990, 1991, 1992, 1993, 1994, 1995, 1996).

Following is a statistical comparison between the Tokyo Stock Exchange
(both sections) and the New York Stock Exchange for the six years ending
1996:

1991 1992 1993 1994 1995 1996

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 1641 1885 1651 2063 1667 2362 1689 2570 1714 2675 1766 2970
Aggregate Market Value
in Billions of Dollars* 3028 3321 2331 4035 2898 4545 3590 4448 3557 6000 2996 7300
as Percentage of GDP 82 58 61 67 68 72 75 66 76 83 69 96

Turnover Ratio (%) 28 41 20 40 26 50 25 51 27 59 29 63
</TABLE>

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

Sources: Tokyo Stock Exchange, Annual Securities Statistics (1996).

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, 1991, 1992,
1993, 1994 and 1995.

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

December 1991 December 1992 December 1993 December 1994 December 1995
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- -- --

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States 3,702.4 37.57 4,022.8 43.16 4467.0 38.4 4626.3 36.6 6338.0 41.9
Japan 2,996.0 30.43 2,331.5 25.02 2885.4 24.8 3624.5 28.7 3582.7 23.7
United Kingdom 953.7 9.68 914.9 9.82 1189.9 10.2 1145.0 9.1 1354.3 9.0
Canada 232.2 2.36 219.7 2.36 296.6 2.5 288.0 2.3 333.4 2.2
Federal 369.1 3.75 325.7 3.49 442.6 3.8 476.9 3.8 579.5 3.8
Republic of
Germany
Australia 137.0 1.39 133.2 1.43 196.2 1.7 212.4 1.7 245.4 1.6
Switzerland 199.0 2.02 195.2 2.09 243.8 2.1 284.0 2.2 401.6 2.7
France 346.9 3.52 333.0 3.57 453.4 3.9 444.3 3.5 504.5 3.3
Netherlands 129.4 1.31 129.8 1.39 171.2 1.5 224.4 1.8 304.3 2.0
Hong Kong 119.0 1.21 161.9 1.74 383.2 3.3 241.2 1.9 274.4 1.8
Other 671.0 6.81 878.1 9.42 908.6 7.8 1072.8 8.5 1197.2 7.9
----- ---- ----- ---- ----- --- ------ --- ------ ---

Total $9,855.7 100.00% $9,320.1 100.00% $11,637.9 100.00% $12,639.8 100.00% $15,115.3 100.00%
-------- ------- -------- ------- --------- ------- --------- ------- --------- -------
</TABLE>

Source: Morgan Stanley Capital Internation (Quarterly 1992:1, 1993:1,
1994:1, 1995:, 1996:1

22
<PAGE>

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 $2,500 through
Scudder Investor Services, Inc. by letter, fax, or telephone.

The minimum initial purchase amount is less than $2,500 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.

Additional Information About Making Subsequent Investments by QuickBuy

Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before 4 p.m. eastern time. Proceeds in the
amount of your purchase will be transferred from your bank checking account two
or three business days following your call. For requests received by the close
of regular trading on the Exchange, shares will be purchased at the net asset
value per share calculated at the close of trading on the day of your call.
QuickBuy requests received after the close of regular trading on the Exchange
will begin their processing and be purchased at the net asset value calculated
the following business day. If you purchase shares by QuickBuy and redeem them
within seven days of the purchase, the Fund may hold the redemption proceeds for
a period of up to seven business days. If you purchase shares and there are
insufficient funds in your bank account the purchase will be canceled and you
will be subject to any losses or fees incurred in the transaction. QuickBuy
transactions are not available for most retirement plan accounts. However,
QuickBuy transactions are available for Scudder IRA accounts.

In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow for 15 days for this service to be available.

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.

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 Fund 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. (the "Distributor") 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 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

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

24
<PAGE>

If transactions are arranged and settlement is made through a member of
the NASD, other than the Distributor that member may, at its discretion, charge
a fee for that service. The Board of Directors and the Distributor, 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.

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 at
current net asset value through Scudder's Automatic Exchange Program. Exchanges
must be for a minimum of $50. Shareholders may add this free feature over the
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.

25
<PAGE>

The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds. For more information, please call
1-800-225-5163.

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 $100,000 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.

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 QuickSell

Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of the Fund by telephone. To sell
shares by QuickSell, shareholders should call before 4 p.m. eastern time.
Redemptions must be for at least $250. Proceeds in the amount of your redemption
will be transferred to your bank checking account two or three

26
<PAGE>

business days following your call. For requests received by the close of regular
trading on the Exchange, shares will be redeemed at the net asset value per
share calculated at the close of trading on the day of your call. QuickSell
requests received after the close of regular trading on the Exchange will begin
their processing and be redeemed at the net asset value calculated the following
business day. QuickSell transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.

In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.

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.

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.

27
<PAGE>

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.

Shareholders should maintain a share balance worth at least $2,500 ($1,000
for IRAs, Uniform Gift to Minors Act, and Uniform Trust to Minors Act accounts),
which amount may be changed by the Board of Trustees. Scudder retirement plans
have similar or lower minimum balance requirements. A shareholder may open an
account with at least $1,000 ($500 for an UGMA, UTMA, IRA and other retirement
accounts), if an automatic investment plan (AIP) of $100/month ($50/month for an
UGMA, UTMA, IRA and other retirement accounts) is established.

Shareholders who maintain a non-fiduciary account balance of less than
$2,500 in the Fund, without establishing an AIP, will be assessed an annual
$10.00 per fund charge with the fee to be reinvested in the Fund. The $10.00
charge will not apply to shareholders with a combined household account balance
in any of the Scudder Funds of $25,000 or more. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account. The Fund
will mail the proceeds of the redeemed account to the shareholder at the address
of record. Reductions in value that result solely from market activity will not
trigger an involuntary redemption. UGMA, UTMA, IRA and other retirement accounts
will not be assessed the $10.00 charge or be subject to automatic liquidation.

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.

28
<PAGE>

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 No-Load Fund
YEARS Pure No-Load(TM) 8.50% Load Load Fund with with 0.25%
Fund Fund 0.75% 12b-1 Fee 12b-1 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.

Dividends and Capital Gains Distributions Options

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 in 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

29
<PAGE>

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 Investors Centers

Investors may visit any of the Centers, listed below, maintained by the
Distributor. 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".)

<S> <C> <C>
Boca Raton Chicago San Francisco
4400 North Federal Highway #130 The Rookery Building 180 Montgomery Street
Boca Raton, Florida 33431 209 South LaSalle Street San Francisco, CA 94104
407-395-0040 Chicago, IL 60604 415-788-3212
312-629-1929

Boston
166 Federal Street New York
Boston, Massachusetts 02110 345 Park Avenue
800-225-2470 New York, New York 10154
</TABLE>

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 Funds' prospectuses.)

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.

MONEY MARKET

Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current income.
The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible, and declares
dividends daily.

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. SCIT seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not
be possible, and declares dividends daily.

30
<PAGE>

Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices and
with preservation of capital and liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.

Scudder Government Money Market Series seeks to provide investors with as
high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of shares
of this Fund is not within the Scudder Family of Funds.

TAX FREE MONEY MARKET

Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt from
regular federal income tax and stability of principal through investments
primarily in municipal securities. STFMF seeks to maintain a constant net
asset value of $1.00 per share, although in extreme circumstances this may
not be possible.

Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal income
tax by reason of federal law as is consistent with its investment policies
and with preservation of capital and liquidity. The Fund seeks to maintain
a constant net asset value of $1.00 per share, but there is no assurance
that it will be able to do so. The institutional class of shares of this
Fund is not within the Scudder Family of Funds.

Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.

Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There can
be no assurance that the stable net asset value will be maintained.

TAX FREE

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 Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.

Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.

Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.

Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of California municipal securities.

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

31
<PAGE>

Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.

Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.

Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.

Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income tax.
The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.

Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.

U.S. INCOME

Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.

Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.

Scudder GNMA Fund seeks to provide high current income primarily from U.S.
Government guaranteed mortgage-backed (Ginnie Mae) securities.

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

Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.

GLOBAL INCOME

Scudder Global Bond Fund seeks to provide total return with an emphasis on
current income by investing primarily in high-grade bonds denominated in
foreign currencies and the U.S. dollar. As a secondary objective, the Fund
will seek capital appreciation.

Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. 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 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 by governments and
corporations in emerging markets.

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

32
<PAGE>

ASSET ALLOCATION

Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will have
some exposure to Scudder equity mutual funds.

Scudder Pathway Series: Balanced Portfolio seeks to provide investors with
a balance of growth and income by investing in a select mix of Scudder
money market, bond and equity mutual funds.

Scudder Pathway Series: Growth Portfolio seeks to provide investors with
long-term growth of capital. In pursuing this objective, the Portfolio
will, under normal market conditions, invest predominantly in a select mix
of Scudder equity mutual funds designed to provide long-term growth.

Scudder Pathway Series: International Portfolio seeks maximum total return
for investors. Total return consists of any capital appreciation plus
dividend income and interest. To achieve this objective, the Portfolio
invests in a select mix of established international and global Scudder
funds.

U.S. GROWTH AND INCOME

Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund also
seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.

Scudder Growth and Income Fund seeks long-term growth of capital, current
income, and growth of income.

Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's 500
Composite Stock Price Index.

U.S. GROWTH

Value

Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.

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

Scudder Small Company Value Fund invests for long-term growth of capital
by seeking out undervalued stocks of small U.S. companies.

Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.

Growth

Scudder Classic Growth Fund seeks to provide long-term growth of capital
with reduced share price volatility compared to other growth mutual funds.

Scudder Large Company 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 Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.

33
<PAGE>

Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies poised
to be leaders in the 21st century.

SCUDDER CHOICE SERIES

Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.

Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related to
the treatment or prevention of diseases and other medical problems.

Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the development,
production or distribution of technology-related products or services.

GLOBAL GROWTH

Worldwide

Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.

Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.

Scudder International Fund seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities.

Scudder Global Discovery 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 Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the globe.

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

Regional

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

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

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

The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts) of
Japanese companies.

The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on

34
<PAGE>

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 Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds may not be available
for purchase or exchange. For more information, please call 1-800-225-5163.

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 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 Plan

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

Scudder IRA: Individual Retirement Account

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

35
<PAGE>

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 $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. 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 $2,000 per individual for married couples if only one spouse has
earned income). All income and capital gains derived from IRA investments are
reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.

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.)

Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution

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

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.)

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

Scudder Roth IRA: Individual Retirement Account

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

A single individual earning below $95,000 can contribute up to $2,000 per
year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full

36
<PAGE>

$4,000 per year ($2,000 per IRA). The maximum contribution amount for married
couples filing jointly phases out from $150,000 to $160,000.

An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.

All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions from a Roth IRA are taxable
and subject to a 10% tax penalty unless an exception applies. Exceptions to the
10% penalty include: disability, excess medical expenses, the purchase of health
insurance for an unemployed individual and education expenses.

An individual with an income of less than $100,000 (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.

Scudder 403(b) Plan

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

Automatic Withdrawal Plan

Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. 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
1-800-225-5163.

Group or Salary Deduction Plan

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

37
<PAGE>

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 shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.

Uniform Transfers/Gifts to Minors Act

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

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

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

(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 its net investment
income and net realized capital gains after utilization of capital loss
carryforwards, if any, in December to prevent application of a federal excise
tax. An additional distribution may be made 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:

38
<PAGE>

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):

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 12/31/97

One Year Five Years Ten Years

-- -- --

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 12/31/97

One Year Five Years Ten Years

-- -- --

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.

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<PAGE>

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.

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.

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.

From time to time, in marketing and other Fund literature,
(Trustees)(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.

40
<PAGE>

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 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
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.

41
<PAGE>

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.

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

IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC'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 Business 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.

42
<PAGE>

SmartMoney, 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 news weekly that periodically reports
mutual fund performance data.

Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.

The 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 issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.

Taking a Global Approach

Many U.S. investors limit their holdings to U.S. securities because they
assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.

The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.

Investing beyond the United States can open this world of opportunity, due
partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.

Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.

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<PAGE>

International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S. investments
strike the best balance between risk and reward.

Scudder's 30% Solution

The 30 Percent Solution -- A Global Guide for Investors Seeking Better
Performance With Reduced Portfolio Risk is a booklet, created by Scudder, to
convey its vision about the new global investment dynamic. This dynamic is a
result of the profound and ongoing changes in the global economy and the
financial markets. The booklet explains how Scudder believes an equity
investment portfolio with up to 30% in international holdings and 70% in
domestic holdings can improve long-term performance while simultaneously helping
to reduce overall risk.

FUND ORGANIZATION

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

TO BE UPDATED

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 March 31, 1998, 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 March 31, 1998, 5,507,653 shares in the aggregate, 12.08% 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 March 31, 1998, 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 an Investment Management Agreement with Scudder, Stevens & Clark, Inc.,
succeeding Asia Management as the Fund's investment adviser. This agreement has
the effect of reducing the total advisory fees paid by the Fund. The
shareholders' approval of this agreement was ratified at a special meeting held
on July 22, 1994.

Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load

44
<PAGE>

mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") entered into
an agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder
and Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc.

Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.

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 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
Pathway Series, Scudder Securities 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, Scudder World Income Opportunities Fund,
Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc., The
Japan Fund, Inc., The Latin America Dollar Income Fund, Inc. and Scudder Spain
and Portugal 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 $13 billion and includes the AARP Growth
Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed Investment
Portfolios Trust and AARP Cash Investment Funds.

Pursuant to an Agreement between Scudder, Stevens & Clark, Inc. and AMA
Solutions, Inc., a subsidiary of the American Medical Association (the "AMA"),
dated May 9, 1997, Scudder has agreed, subject to applicable state regulations,
to pay AMA Solutions, Inc. royalties in an amount equal to 5% of the management
fee received by Scudder with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink (SM) Program. Scudder
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of Scudder (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLink
(SM) is a service mark of AMA Solutions, Inc.

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

45
<PAGE>

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 ________________ and will continue in effect until ________________
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 Fund, cast in person at a meeting
called for the purpose of voting on such approval, and either by a vote of the
Fund'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
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 Fund
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 Fund, 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.

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

46
<PAGE>

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
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.

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 Fund. 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.

DIRECTORS AND OFFICERS

Name, Age and Address Position with Fund Principal Occupation***

Henry Rosovsky (70)* Chairman of the Professor,
Harvard University Board and Director Harvard University
17 Quincy Street
Cambridge, MA 02138

Lynn Birdsong (51)# President Managing Director,
Scudder Kemper
Investments, Inc.

William L. Givens (68) Director President,
Twain Associates, Inc. Twain Associates
553 Boylston Street
Brookline, MA 02146

William H. Gleysteen, Jr. (71) Director Consultant
4937 Crescent Street
Bethesda, MD 20816

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<PAGE>

Name, Age and Address Position with Fund Principal Occupation***

John F. Loughran (66) Director Retired Senior Adviser
711 Silvergate Avenue for Asia Pacific to J.P.
Point Loma Morgan & Co., Inc.
San Diego, CA 92106

Yoshihiko Miyauchi (62) Director President and Chief
World Trade Center Executive Officer of ORIX
Building 2-4-1 Corporation
Hamamatsu-cho, Minato-ku
Tokyo, Japan

William V. Rapp (59) Director Managing Director,
131 Begbie Rue Associates;
University of Victoria Professor, University of
Victoria, BC Canada Victoria;
Senior Research Fellow,
Columbia University
Center on Japan Economy
and Business

O. Robert Theurkauf (70)*# Director Advisory Managing
Director, Scudder Kemper
Investments, Inc.

Shoji Umemura (78)* Honorary Director Board Counselor,
The Nikko Securities Co., Ltd. The Nikko Securities Co.,
3-1-1, Marunouchi, Chiyoda-ku Ltd.
Tokyo, Japan

Hiroshi Yamanaka (85) Director Adviser to the Board,
Meiji Mutual Life The Meiji Mutual Life
Insurance Company Insurance Company
2-1-1, Marunouchi, Chiyoda-ku
Tokyo, Japan

Tristan E. Beplat (84) Honorary Director Director, Daiwa Bank
One Haslet Avenue & Trust Co., Yasuda Fire
Princeton, NJ 08540 and Marine Insurance
Company of America

Allan Comrie (78) Honorary Director Director,
40 Sheridan Drive Petroleum & Resources
New Canaan, CT 06840 Corp., The Adams Express
Co.

Jonathan Mason (82) Honorary Director Retired First Vice
12092 Longwood Green Drive President
West Palm Beach, FL 33414 Prudential-Bache
Securities, Inc.

James W. Morley (76) Honorary Director Professor of Political
145 Piermont Road Science
Closter, NJ 07624 Emeritus
Columbia University

Robert G. Stone, Jr. (75) Honorary Director Chairman of the Board
Kirby Corporation and Director,
405 Lexington Ave - 39th Fl. Kirby Corporation
New York, NY 10174

48
<PAGE>

Name, Age and Address Position with Fund Principal Occupation***

Elizabeth J. Allan (44)# Vice President Principal,
Scudder Kemper
Investments, Inc.

William E. Holzer (48)# Vice President Managing Director,
Scudder Kemper
Investments, Inc.

Thomas W. Joseph (58)**+ Vice President Principal,
Scudder Kemper
Investments, Inc.

Seung K. Kwak (36)# Vice President Managing Director,
Scudder Kemper
Investments, Inc.

Miyuki Wakatsuki (61) Vice President General Manager,
17-9, Nihonbashi-Hakozakicho Japan Fund Office,
Chuo-Ku Nikko International
Tokyo 103, Japan Capital Management Co.,
Ltd.

Gina Provenzano (55)# Vice President and Vice President,
Treasurer Scudder Kemper
Investments, Inc.

Kathryn L. Quirk (44)# Vice President and Managing Director,
Secretary Scudder Kemper
Investments, Inc.

Thomas F. McDonough (50)+ Assistant Secretary Principal,
Scudder Kemper
Investments, Inc.

John R. Hebble ( )+ Assistant Treasurer Principal,
Scudder Kemper
Investments, 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

The Executive Committee of the Fund's Board of Directors, which currently
consists of Messrs. 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 Kemper Investments, 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. Each of the Directors who is not
affiliated with Scudder Kemper Investments, 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 $______ with the exception of the Chairman of the
Board, who receives $______ annually. Each Director also receives fees of
$______ for attending each meeting of the Board and $____ for attending each
committee meeting, or meeting held for the purpose of considering arrangements
between the Fund and Scudder Kemper Investments, Inc., or any of its other
affiliates. Each unaffiliated Director also receives $____ per committee meeting

49
<PAGE>

attended. As of July 30, 1992, Honorary Directors of the Fund received $1,000
for each Board meeting attended. For the year ended December 31, 1997,
Directors' fees and expenses totaled $________.

The following table shows the aggregate compensation received by each
unaffiliated director during 1996 from The Japan Fund and from all Scudder funds
as a group.

Name The Japan Fund, Inc. All Scudder
Funds
Henry Rosovsky

William Givens

William H.
Gleysteen, Jr.

Nobuo Ishizaka

John F. Loughran

William V. Rapp

Hiroshi Yamanaka

Tristan E. Beplat,
Honorary Director

Allan Comrie,
Honorary Director

Jonathan Mason,
Honorary Director

James W. Morley,
Honorary Director

Robert G. Stone,
Jr.,
Honorary Director

DISTRIBUTOR

Under the terms of the Underwriting Agreement dated and effective August
14, 1987, between the Fund and the Distributor, a Massachusetts corporation,
which is a 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 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

50
<PAGE>

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 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 Securities 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, AARP Managed Investment Portfolios Trust and AARP Cash Investment Funds.
Scudder Kemper Investments, 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.

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

51
<PAGE>

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) or
in any issuers of the same industry that are controlled by the Fund. 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.

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.

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.

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<PAGE>

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
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
with substantially identical shares 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.

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<PAGE>

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.

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.

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<PAGE>

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
1997, $__________ for 1996 and $__________ for 1995. 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 $303,671 for 1996, $186,917 for 1995 and $60,488
for 1994. Such amounts represented _ %, 7.6% and 2.3% of the total brokerage
commissions paid by the Fund in such years, respectively. The advisory fee paid
to NICAM was not reduced because of such brokerage commissions. During the years
ended December 31, 1997, 1996 and 1995, there were ___ commissions paid or
accrued by the Fund to J.P. Morgan Securities Asia, Ltd. The rate of total
portfolio turnover of the Fund for the years 1997, 1996 and 1995 was ____%,
____%, and ____%, 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.

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<PAGE>

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 options 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 options
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 options contract and at the most recent asked quotation in the case of
a written options 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
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.

56
<PAGE>

ADDITIONAL INFORMATION

Experts

The financial statements of the Fund included in the Annual Report to
shareholders dated December 31, 1997, attached to this Statement of Additional
Information, have been examined by Price Waterhouse LLP, 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 Davis Polk and Wardwell as the Fund's counsel.

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

Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02205-2291, a subsidiary of the Adviser, is the transfer,
dividend-paying and shareholder service agent for the Fund. For the year ended
December 31, 1996, the Fund was charged by Scudder Service Corporation $685,999,
of which $50,828 was unpaid at December 31, 1996.

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 ___ through ___, inclusive, in the Annual Report to the shareholders of
the Fund dated December 31, 1997, and are deemed to be a part of this Statement
of Additional Information.

<PAGE>

THE JAPAN FUND, INC.

December 31, 1997

Dear Japan Fund Shareowner,

On the reverse side, you will find language supplementing The Japan Fund,
Inc.'s prospectus. As it details, the Fund's investment adviser has changed its
name to Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc.
This change is pursuant to the acquisition of a majority interest in Scudder,
Stevens & Clark, Inc. by Zurich Insurance Company, and the combining of
Scudder's business with that of Zurich Kemper Investments, Inc.

We thank you for your continued investment in the Fund, and encourage you
to contact a Japan Fund representative at 1-800-53-JAPAN with any questions.

Sincerely,

/s/Lynn S. Birdsong
Lynn S. Birdsong
President, The Japan Fund, Inc.
Vice President, Scudder Investor Services, Inc.

This letter is for explanatory purposes and is not part of
the prospectus supplement on the following pages.

<PAGE>

THE JAPAN FUND, INC.

Supplement to Prospectus
Dated May 1, 1997

The Fund's investment adviser, Scudder, Stevens & Clark, Inc. ("Scudder"), and
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, have formed a new global investment organization by
combining Scudder's business with that of Zurich's subsidiary, Zurich Kemper
Investments, Inc., and Scudder has changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper"). As a result of the transaction, Zurich
owns approximately 70% of Scudder Kemper, with the balance owned by Scudder
Kemper's officers and employees. Scudder Kemper now manages in excess of $200
billion in assets.

Following the transaction, the Scudder Family of Funds will continue to be pure
no-load. The Scudder Family of Funds consists of those Funds or classes of Funds
advised by Scudder Kemper which are offered without commissions to purchase or
redeem shares or to exchange from one Fund to another.

The transaction between Scudder and Zurich resulted in the termination of the
Fund's investment management agreement with Scudder. However, a new investment
management agreement between the Fund and Scudder Kemper was approved by the
Board of Directors. A special meeting of stockholders (the "Special Meeting")
was held in October, 1997, at which time the stockholders also approved a new
investment management agreement. The new investment management agreement is
effective as of December 31, 1997 and will be in effect for an initial term
ending on the same date as would the previous investment management agreement.

The Fund's Investment Management Agreement is the same in all material respects
as the previous investment management agreement, except that Scudder Kemper is
the new investment adviser to the Fund.

The Fund's fundamental policies have been amended by a vote of stockholders at
the Fund's Special Meeting. Following is a list of the Fund's amended and
restated fundamental policies. As a matter of fundamental policy, the Fund will
not:

o borrow money, except as permitted under the Investment Company Act of 1940,
as amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;

o issue senior securities, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;

o concentrate its investments in a particular industry, as that term is used
in the Investment Company Act of 1940, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time;

<PAGE>

o engage in the business of underwriting securities issued by others, except
to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities;

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

o purchase physical commodities or contracts relating to physical
commodities;

o make loans to other persons, except (i) loans of portfolio securities, and
(ii) to the extent that entry into repurchase agreements and the purchase
of debt instruments or interests in indebtedness in accordance with the
Fund's investment objective and policies may be deemed to be loans.

The Fund's non-fundamental borrowing and lending policies have been amended by
the Board of Directors as follows:

o The Fund does not currently intend to borrow money in an amount greater
than 5% of its total assets, except (i) for temporary or emergency purposes
and (ii) by engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's registration
statement which may be deemed to be borrowings.

o The Fund currently does not intend to lend portfolio securities in an
amount greater than 5% of its total assets.

December 31, 1997
<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, 1997 to be filed by amendment

Included in Part B:
Statement of Assets and Liabilities, as of December 31,
1997 to be filed by amendment
Statement of Operations for the fiscal year ended
December 31, 1997 to be filed by amendment
Statements of Changes in Net Assets for the two fiscal
years ended December 31, 1997 to be filed by amendment
Financial Highlights for the ten fiscal years ended
December 31, 1997 to be filed by amendment
Notes to Financial Statements to be filed by amendment
Report of Independent Accountants are to be filed by
amendment

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").

1. (a) Articles of Incorporation.
(Incorporated by reference to the Post-
Effective Amendment No. 11 to the Registratio
n Statement.)

(b) Articles of Amendment and Restatement of the
Articles of Incorporation.
(Incorporated by reference to the Post-
Effective Amendment No. 11 to the Registration
Statement.)

2. (a) Registrant's By-Laws.

(b) Amendment to Registrant's By-Laws dated
January 28, 1993. (Incorporated by reference
to the Post-Effective Amendment No. 11 to the
Registration Statement.)

(c) Amendment to Registrant's By-Laws dated July
23. (Incorporated by reference to the
Post-Effective Amendment No. 11 to the
Registration Statement.)

(d) Amendment to Registrant's By-Laws dated April
25, 1996. (Incorporated by reference to
Exhibit 2(d) to Post-Effective Amendment No.
10 to the Registration Statement.)

Part C - Page 1
<PAGE>

(e) Amendment to Registrant's By-Laws dated
October 25, 1996. (Incorporated by reference
to Exhibit 2(e) to Post-Effective Amendment
No. 10 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.)

5. (a) Investment Management Agreement between the
Registrant and Asia Management Corporation
("Asia Management") dated May 24, 1991.
(Incorporated by reference to the
Post-Effective Amendment No. 11 to the
Registration Statement.)

(b) Advisory Agreement between Asia Management and
The Nikko Research Center, Ltd. ("Nikko")
dated July 1, 1986. (Incorporated by reference
to the Post-Effective Amendment No. 11 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 the
Post-Effective Amendment No. 11 to the
Registration Statement.)

(d) Agreement between Scudder, Stevens & Clark
Ltd. and Asia Management dated July 24, 1984.
(Incorporated by reference to the
Post-Effective Amendment No. 11 to the
Registration Statement.)

(e) Investment Management Agreement between the
Registrant and Scudder, Stevens & Clark, Inc.
dated January 1, 1994. (Incorporated by
reference to the Post-Effective Amendment No.
11 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 the Post-Effective Amendment No.
11 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 the
Post-Effective Amendment No. 11 to the
Registration Statement.)

7. Form of Directors' Retirement Plan.
(Incorporated by reference to the
Post-Effective Amendment No. 11 to the
Registration Statement.)

Part C - Page 2
<PAGE>

8. (a) Custodian Agreement between the Registrant and
Brown Brothers Harriman & Co. ("Brown
Brothers"). (Incorporated by reference to the
Post-Effective Amendment No. 11 to the
Registration Statement.)

(b) Sub-Custodian Agreement between Brown Brothers
Harriman & Company and Citibank, N.A.
(Incorporated by reference to the
Post-Effective Amendment No. 11 to the
Registration Statement.)

(c) Custodian Agreement between the Registrant and
Brown Brothers dated April 21, 1995.
(Incorporated by reference to Exhibit 8(c) to
Post-Effective Amendment No. 9 to the
Registration Statement.)

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 the
Post-Effective Amendment No. 11 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 the
Post-Effective Amendment No. 11 to the
Registration Statement.)

(c) COMPASS and TRAK 2000 Service Agreement dated
July 19, 1996.
(Incorporated by reference to Exhibit 9(c) to
Post-Effective Amendment No. 10 to the
Registration Statement.)

10. Inapplicable.

11. Inapplicable.

12. Inapplicable.

13. Inapplicable.

14. (a) Scudder Flexi-Plan for Corporations and
Self-Employed Individuals. (Incorporated by
reference to the Post-Effective Amendment No.
11 to the Registration Statement.)

(b) Scudder Individual Retirement Plan.
(Incorporated by reference to the
Post-Effective Amendment No. 11 to the
Registration Statement.)

(c) Scudder Funds 403(b) Plan. (Incorporated by
reference to the Post-Effective Amendment No.
11 to the Registration Statement.)

(d) Scudder Employer - Select 403(b) Plan.
(Incorporated by reference to the
Post-Effective Amendment No. 11 to the
Registration Statement.)

Part C - Page 3
<PAGE>

(e) Scudder Cash or Deferred Profit Sharing Plan
under Section 401(k). (Incorporated by
reference to the Post-Effective Amendment No.
11 to the Registration Statement.)

15. Inapplicable.

16. Performance Information. (Incorporated by
reference to the Post-Effective Amendment No.
11 to the Registration Statement.)

17. Inapplicable.

18. Inapplicable.

Item 25. Persons Controlled by or under Common Control with Registrant

None

Item 26. Number of Holders of Securities as of February 10, 1998

(1) (2)
Title of Class Number of Shareholders
-------------- -----------------------

Shares of capital stock 25,362
($.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

Part C - Page 4
<PAGE>

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 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

Scudder Kemper Investments, Inc. has stockholders and employees
who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 28.

Business and Other Connections of Board
Name of Directors of Registrant's Adviser
------ ---------------------------------------

Stephen R. Treasurer and Chief Financial Officer, Scudder Kemper
Beckwith Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting
Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services,
Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**

Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments,
Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#

Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company
of Switzerland##
Director, ZKI Holding Corporation xx

Steven Gluckstern Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company
of Switzerland##
Director, Zurich Holding Company of Americao

Part C - Page 5
<PAGE>

Rolf Huppi Director, Chairman of the Board, Scudder Kemper
Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company
of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of
Americao
Director, ZKI Holding Corporation xx

Kathryn L. Quirk Director, Chief Legal Officer, Chief Compliance Officer and
Secretary, Scudder Kemper Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder
Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund
Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty
Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder
Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens &
Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada
Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty
Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark
Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas
Corporationoo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined
Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital
Asset Corporation**
Director, Vice President and Secretary, Scudder Capital
Stock Corporation**
Director, Vice President and Secretary, Scudder Capital
Planning Corporation**
Director, Vice President and Secretary, SS&C Investment
Corporation**
Director, Vice President and Secretary, SIS Investment
Corporation**
Director, Vice President and Secretary, SRV Investment
Corporation**
Director, Vice President and Secretary, Scudder Brokerage
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+

Markus Rohrbasser Director, Scudder Kemper Investments, Inc.**
Member Corporate Executive Board, Zurich Insurance Company
of Switzerland##
President, Director, Chairman of the Board, ZKI Holding
Corporation xx

Cornelia M. Small Vice President, Scudder Kemper Investments, Inc.**

Edmond D. Villani Director, President and Chief Executive Officer, Scudder
Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas
Corporationoo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg,
Grand-Duchy of Luxembourg

* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland

Part C - Page 6
<PAGE>

Item 29. Principal Underwriters.

(a)

Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.

(b)

The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of this
Item 29.

(1) (2) (3)

Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
------------------ ------------------------------- -----------------------

<S> <C> <C>
William S. Baughman Vice President None
Two International Place
Boston, MA 02110

Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154

Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110

Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110

Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110

Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154

Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154

Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111

Part C - Page 7
<PAGE>

William F. Glavin Vice President
Two International Place
Boston, MA 02110

Margaret D. Hadzima Assistant Treasurer
Two International Place
Boston, MA 02110

Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110

Thomas F. McDonough Clerk Assistant Secretary
Two International Place
Boston, MA 02110

Daniel Pierce Director, Vice President None
Two International Place and Assistant Treasurer
Boston, MA 02110

Kathryn L. Quirk Director, Senior Vice President and Vice President and
345 Park Avenue Assistant Clerk Secretary
New York, NY 10154

Robert A. Rudell Vice President None
Two International Place
Boston, MA 02110

William M. Thomas Vice President None
Two International Place
Boston, MA 02110

Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110

Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110

Linda J. Wondrack Vice President None
Two International Place
Boston, MA 02110
</TABLE>

(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>

Part C - Page 8
<PAGE>

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.

Part C - Page 9
<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 15th day of February, 1998.

THE JAPAN FUND, INC.

By /s/Lynn Birdsong
----------------------------
Lynn Birdsong
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.

SIGNATURE TITLE DATE
- --------- ----- ----

/s/Henry Rosovsky
- ------------------------
Henry Rosovsky* Chairman of the Board February 15, 1998
and Director

/s/Lynn Birdsong
- -------------------------
Lynn Birdsong President (Principal February 15, 1998
Executive Officer)

/s/Gina Provenzano
- -------------------------
Gina Provenzano* Treasurer (Principal February 15, 1998
Financial and
Accounting Officer)
and Vice President

/s/William L. Givens
- -------------------------
William L. Givens* Director February 15, 1998

- -------------------------
William H.Glystgeen, Jr.* Director February 15, 1998

- -------------------------
John F. Loughran* Director February 15, 1998

/s/Yoshihiko Miyauchi
- -------------------------
Yoshihiko Miyauchi* Director February 15, 1998
<PAGE>

/s/William V. Rapp
- -------------------------
William V. Rapp* Director February 15, 1998

/s/O. Robert Theurkauf
- -------------------------
O. Robert Theurkauf* Director February 15, 1998

/s/Hiroshi Yamanaka
- -------------------------
Hiroshi Yamanaka* Director February 15, 1998

*By: /s/Kathryn L. Quirk
---------------------
Kathryn L. Quirk,
Attorney-in-fact pursuant to
powers of attorney contained
in the signature pages of Post-
Effective Amendment No. 9
to the Registration Statement.

<PAGE>

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

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

EXHIBITS

FORM N-1A

POST-EFFECTIVE AMENDMENT NO. 12

TO REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

AND

AMENDMENT NO. 23

TO REGISTRATION STATEMENT

UNDER

THE INVESTMENT COMPANY ACT OF 1940

THE JAPAN FUND, INC.
<PAGE>

THE JAPAN FUND

EXHIBIT INDEX

The Japan Fund, Inc.
345 Park Avenue
New York, New York 10154
December 31, 1997

Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154

Investment Management Agreement

Ladies and Gentlemen:

The Japan Fund, Inc. (the "Corporation") has been established as a
Maryland corporation to engage in the business of an investment company.
Pursuant to the Corporation's Articles of Incorporation, as amended from
time-to-time (the "Articles"), the Board of Directors may divide the
Corporation's shares of capital stock, par value $.33 1/3 per share, (the
"Shares") into separate series, or funds. Series may be abolished and dissolved,
and additional series established, from time to time by action of the Directors.

The Corporation, on behalf of the Fund, has selected you to act as the
sole investment manager of the Fund and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Corporation on behalf of the
Fund agrees with you as follows:

1. Delivery of Documents. The Corporation engages in the business of
investing and reinvesting the assets of the Fund in the manner and in accordance
with the investment objectives, policies and restrictions specified in the
currently effective Prospectus (the "Prospectus") and Statement of Additional
Information (the "SAI") relating to the Fund included in the Corporation's
Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Corporation under the Investment Company
Act of 1940, as amended, (the "1940 Act") and the Securities Act of 1933, as
amended. Copies of the documents referred to in the preceding sentence have been
furnished to you by the Corporation. The Corporation has also furnished you with
copies properly certified or authenticated of each of the following additional
documents related to the Corporation and the Fund:

(a) The Articles dated January 10, 1992, as amended to date.

(b) By-Laws of the Corporation as in effect on the date hereof (the
"By-Laws").

(c) Resolutions of the Directors of the Corporation and the shareholders of
the Fund selecting you as investment manager and approving the form of
this Agreement.

The Corporation will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
<PAGE>

2. Portfolio Management Services. As manager of the assets of the Fund,
you shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue Code of 1986, as amended, (the "Code") relating to regulated
investment companies and all rules and regulations thereunder; and all other
applicable federal and state laws and regulations of which you have knowledge;
subject always to policies and instructions adopted by the Corporation's Board
of Directors. In connection therewith, you shall use reasonable efforts to
manage the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 2, you shall
be entitled to receive and act upon advice of counsel to the Corporation or
counsel to you. You shall also make available to the Corporation promptly upon
request all of the Fund's investment records and ledgers as are necessary to
assist the Corporation in complying with the requirements of the 1940 Act and
other applicable laws. To the extent required by law, you shall furnish to
regulatory authorities having the requisite authority any information or reports
in connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Corporation are
being conducted in a manner consistent with applicable laws and regulations.

You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Fund and place orders
with broker-dealers, foreign currency dealers, futures commission merchants or
others pursuant to your determinations and all in accordance with Fund policies
as expressed in the Registration Statement. You shall determine what portion of
the Fund's portfolio shall be invested in securities and other assets and what
portion, if any, should be held uninvested.

You shall furnish to the Corporation's Board of Directors periodic reports
on the investment performance of the Fund and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Corporation's officers or Board of Directors
shall reasonably request.

3. Administrative Services. In addition to the portfolio management
services specified above in section 2, you shall furnish at your expense for the
use of the Fund such office space and facilities in the United States as the
Fund may require for its reasonable needs, and you (or one or more of your
affiliates designated by you) shall render to the Corporation administrative
services on behalf of the Fund necessary for operating as an open-end investment
company and not provided by persons not parties to this Agreement including, but
not limited to, preparing reports to and meeting materials for the Corporation's
Board of Directors and reports and notices to Fund shareholders; supervising,
negotiating contractual arrangements with, to the extent appropriate, and
monitoring the performance of, accounting agents, custodians, depositories,
transfer agents and pricing agents, accountants, attorneys, printers,
underwriters, brokers and dealers, insurers and other persons in any capacity
deemed to be necessary or desirable to Fund operations; preparing and making
filings with the Securities and Exchange Commission (the "SEC") and other
regulatory and self-regulatory organizations, including, but not limited to,
preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Fund's transfer agent; assisting in the preparation and filing of the Fund's
federal, state and local tax

2
<PAGE>

returns; preparing and filing the Fund's federal excise tax return pursuant to
Section 4982 of the Code; providing assistance with investor and public
relations matters; monitoring the valuation of portfolio securities and the
calculation of net asset value; monitoring the registration of Shares of the
Fund under applicable federal and state securities laws; maintaining or causing
to be maintained for the Fund all books, records and reports and any other
information required under the 1940 Act, to the extent that such books, records
and reports and other information are not maintained by the Fund's custodian or
other agents of the Fund; assisting in establishing the accounting policies of
the Fund; assisting in the resolution of accounting issues that may arise with
respect to the Fund's operations and consulting with the Fund's independent
accountants, legal counsel and the Fund's other agents as necessary in
connection therewith; establishing and monitoring the Fund's operating expense
budgets; reviewing the Fund's bills; processing the payment of bills that have
been approved by an authorized person; assisting the Fund in determining the
amount of dividends and distributions available to be paid by the Fund to its
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is required for
such parties to effect the payment of dividends and distributions; and otherwise
assisting the Corporation as it may reasonably request in the conduct of the
Fund's business, subject to the direction and control of the Corporation's Board
of Directors. Nothing in this Agreement shall be deemed to shift to you or to
diminish the obligations of any agent of the Fund or any other person not a
party to this Agreement which is obligated to provide services to the Fund.

4. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, you shall pay the compensation and expenses of all
Directors, officers and executive employees of the Corporation (including the
Fund's share of payroll taxes) who are affiliated persons of you, and you shall
make available, without expense to the Fund, the services of such of your
directors, officers and employees as may duly be elected officers of the
Corporation, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 2 hereof and the administrative services described
in section 3 hereof.

You shall not be required to pay any expenses of the Fund other than those
specifically allocated to you in this section 4. In particular, but without
limiting the generality of the foregoing, you shall not be responsible, except
to the extent of the reasonable compensation of such of the Fund's Directors and
officers as are directors, officers or employees of you whose services may be
involved, for the following expenses of the Fund: organization expenses of the
Fund (including out-of-pocket expenses, but not including your overhead or
employee costs); fees payable to you and to any other Fund advisors or
consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Corporation; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars;
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing share
certificates and, except as provided below in this section 4, other expenses in
connection with the issuance, offering, distribution, sale, redemption or
repurchase of securities issued by the Fund; expenses relating to investor and
public relations; expenses and fees of registering or qualifying Shares of the
Fund for sale; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Corporation business) of Directors,
officers and employees of the Corporation who are not affiliated persons of you;
brokerage commissions or other costs of acquiring or disposing of any portfolio
securities of the Fund; expenses of printing and distributing reports, notices
and dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto;

3
<PAGE>

costs of stationery; any litigation expenses; indemnification of Directors and
officers of the Corporation; costs of shareholders' and other meetings; and
travel expenses (or an appropriate portion thereof) of Directors and officers of
the Corporation who are directors, officers or employees of you to the extent
that such expenses relate to attendance at meetings of the Board of Directors of
the Corporation or any committees thereof or advisors thereto held outside of
Boston, Massachusetts or New York, New York.

You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Fund if and to the extent
that (i) such expenses are required to be borne by a principal underwriter which
acts as the distributor of the Fund's Shares pursuant to an underwriting
agreement which provides that the underwriter shall assume some or all of such
expenses, or (ii) the Corporation on behalf of the Fund shall have adopted a
plan in conformity with Rule 12b-1 under the 1940 Act providing that the Fund
(or some other party) shall assume some or all of such expenses. You shall be
required to pay such of the foregoing sales expenses as are not required to be
paid by the principal underwriter pursuant to the underwriting agreement or are
not permitted to be paid by the Fund (or some other party) pursuant to such a
plan.

5. Management Fee. For all services to be rendered, payments to be made
and costs to be assumed by you as provided in sections 2, 3 and 4 hereof, the
Corporation on behalf of the Fund shall pay you in United States Dollars on the
last day of each month the unpaid balance of a fee equal to the excess of 1/12
of 0.85 of 1 percent of the average daily net assets as defined below of the
Fund for such month; provided that, for any calendar month during which the
average of such values exceeds $100 million, the fee payable for that month
based on the portion of the average of such values in excess of $100 million
shall be 1/12 of 0.75 of 1 percent of such portion; and provided that, for any
calendar month during which the average of such values exceeds $300 million, the
fee payable for that month based on the portion of the average of such values in
excess of $300 million shall be 1/12 of 0.70 of 1 percent of such portion; and
provided that, for any calendar month during which the average of such values
exceeds $600 million, the fee payable for that month based on the portion of the
average of such values in excess of $600 million shall be 1/12 of 0.65 of 1
percent of such portion over any compensation waived by you from time to time
(as more fully described below). You shall be entitled to receive during any
month such interim payments of your fee hereunder as you shall request, provided
that no such payment shall exceed 75 percent of the amount of your fee then
accrued on the books of the Fund and unpaid.

The "average daily net assets" of the Fund shall mean the average of the
values placed on the Fund's net assets as of 4:00 p.m. (New York time) on each
day on which the net asset value of the Fund is determined consistent with the
provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully determines
the value of its net assets as of some other time on each business day, as of
such time. The value of the net assets of the Fund shall always be determined
pursuant to the applicable provisions of the Articles and the Registration
Statement. If the determination of net asset value does not take place for any
particular day, then for the purposes of this section 5, the value of the net
assets of the Fund as last determined shall be deemed to be the value of its net
assets as of 4:00 p.m. (New York time), or as of such other time as the value of
the net assets of the Fund's portfolio may be lawfully determined on that day.
If the Fund determines the value of the net assets of its portfolio more than
once on any day, then the last such determination thereof on that day shall be
deemed to be the sole determination thereof on that day for the purposes of this
section 5.

You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your services.
You shall be contractually bound hereunder by the

4
<PAGE>

terms of any publicly announced waiver of your fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were fully set forth herein.

6. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.

Your services to the Fund pursuant to this Agreement are not to be deemed
to be exclusive and it is understood that you may render investment advice,
management and services to others. In acting under this Agreement, you shall be
an independent contractor and not an agent of the Corporation.

Whenever the Fund and one or more other accounts or investment companies
advised by the Manager have available funds for investment, investments suitable
and appropriate for each shall be allocated in accordance with procedures
believed by the Manager to be equitable to each entity. Similarly, opportunities
to sell securities shall be allocated in a manner believed by the Manager to be
equitable. The Fund recognizes that in some cases this procedure may adversely
affect the size of the position that may be acquired or disposed of for the
Fund.

7. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Corporation
agrees that you shall not be liable under this Agreement for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates, provided that nothing in this
Agreement shall be deemed to protect or purport to protect you against any
liability to the Corporation, the Fund or its shareholders to which you would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of your duties, or by reason of your reckless
disregard of your obligations and duties hereunder. Any person, even though also
employed by you, who may be or become an employee of and paid by the Fund shall
be deemed, when acting within the scope of his or her employment by the Fund, to
be acting in such employment solely for the Fund and not as your employee or
agent.

8. Duration and Termination of This Agreement. This Agreement shall remain
in force until October 31, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Directors who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Directors of the Corporation, or by the vote of a majority of the
outstanding voting securities of the Fund. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually" shall
be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder and any applicable SEC exemptive order therefrom.

This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Fund or by the

5
<PAGE>

Corporation's Board of Directors on 60 days' written notice to you, or by you on
60 days' written notice to the Corporation. This Agreement shall terminate
automatically in the event of its assignment.

9. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.

10. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.

This Agreement shall be construed in accordance with the laws of the State
of Maryland, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, or in a manner which would cause the Fund to
fail to comply with the requirements of Subchapter M of the Code.

This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Corporation on behalf of the Fund.

6
<PAGE>

If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Corporation, whereupon this letter shall become a binding
contract effective as of the date of this Agreement.

Yours very truly,

THE JAPAN FUND, INC

By: ______________________________
President

The foregoing Agreement is hereby accepted as of the date hereof.

SCUDDER KEMPER INVESTMENTS, INC.

By: ______________________________
Managing Director