CAPSTONE INTERNATIONAL SERIES TRUST, 485BPOS, 1996-03-01

CAPSTONE INTERNATIONAL SERIES TRUST
485BPOS, 1996-03-01

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<PAGE> 1

REGISTRATION NO. 33-6867

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /

Pre-Effective Amendment No. _____ / /

Post-Effective Amendment No. 24 / X /

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /

Capstone International Series Trust
on behalf of its series, Capstone Nikko Japan Fund
- ------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

5847 San Felipe, Suite 4100, Houston, Texas 77057
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (713) 260-9000
- ------------------------------------------------------------------------------
Allan S. Mostoff, Esq., Dechert Price & Rhoads
- ------------------------------------------------------------------------------
1500 K Street, N.C., Suite 500, Washington, DC 20005
- ------------------------------------------------------------------------------
(Name and Address of Agent for Service)

It is proposed that this filing will become effective (check appropriate box)

/ X / immediately upon filing pursuant to paragraph (b).

/ / on ________________ pursuant to paragraph (b).

/ / 60 days after filing pursuant to paragraph (a).

/ / on (date) pursuant to paragraph (a) of rule 485.

The Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940,
and:

/ X / filed the notice required by that Rule on December 28, 1995; or

/ / intends to file the notice required by that Rule on or about
________________; or

/ / during the most recent fiscal year did not sell any securities
pursuant to Rule 24f-2 under the Investment Company Act of
1940, and, pursuant to Rule 24f-2(b)(2), need not file the
Notice.

Total Pages ______ Exhibit Index Page ______

<PAGE> 2
CAPSTONE INTERNATIONAL SERIES TRUST
CAPSTONE NIKKO JAPAN FUND
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND PROSPECTUS
(PART A TO REGISTRATION STATEMENT NO. 33-6867)

<TABLE>
<CAPTION>
Item
Number Form N-1A Heading Caption in Prospectus
- ------ ----------------- ---------------------
<S> <C> <C>
1. Cover Page Prospectus Cover Page

2. Synopsis Prospectus Summary

3. Condensed Financial Information Financial Highlights

4. General Description of Registrant Investment Objective and Policies;
Risk Factors; Investment
Restrictions; Management of the
Fund; General Information

5. Management of the Fund Management of the Fund

6. Capital Stock and Other Securities General Information; Distributions
and Taxes

7. Purchase of Securities Being Offered Determination of Net Asset Value;
Purchasing Shares

8. Redemption or Repurchase Redemption and Repurchase of
Shares

9. Pending Legal Proceedings Inapplicable
</TABLE>

<PAGE> 3
CAPSTONE NIKKO JAPAN FUND

A Fund of
Capstone International Series Trust

5847 San Felipe, Suite 4100
Houston, TX 77057
1-800-262-6631

MARCH 1, 1996

PROSPECTUS

The investment objective of Capstone Nikko Japan Fund ("the Fund") is
to seek an average annual total return from a portfolio of shares in
Japanese companies which exceeds the average annual total return of the
First Section of the Tokyo Stock Exchange as measured by the Tokyo Stock
Price Index (the "Benchmark").

This Prospectus sets forth certain information about Capstone
International Series Trust and the Fund that a prospective investor should
know before investing. Investors should read and retain this Prospectus
for future reference.

A STATEMENT OF ADDITIONAL INFORMATION about the Fund dated March 1,
1996 has been filed with the Securities and Exchange Commission and
contains further information about the Fund. A copy of the Statement of
Additional Information may be obtained without charge by calling or writing
the Fund at the telephone number or address listed above. The Statement of
Additional Information is incorporated herein by reference.

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

<PAGE> 4
CAPSTONE NIKKO JAPAN FUND

Investment Adviser: Administrator:
Nikko Capital Management (U.S.A.), Inc. Capstone Asset Management Company
489 Fifth Avenue, 6th Floor 5847 San Felipe, Suite 4100
New York, New York 10017 Houston, Texas 77057

Distributor: Transfer and Dividend Paying Agent:
Capstone Asset Planning Company Fund/Plan Services, Inc.
5847 San Felipe, Suite 4100 P.O. Box 874
Houston, Texas 77057 2 W. Elm Street
1-800-262-6631 Conshohocken, Pennsylvania 19428

TABLE OF CONTENTS

PAGE

Prospectus Summary. . . . . . . . . . . . . . . . . 3
Fund Expenses . . . . . . . . . . . . . . . . . . . 5
Financial Highlights. . . . . . . . . . . . . . . . 7
Investment Objective and Policies . . . . . . . . . 8
Risk Factors. . . . . . . . . . . . . . . . . . . .11
Investment Restrictions . . . . . . . . . . . . . .12
Performance Information . . . . . . . . . . . . . .12
Management of the Fund. . . . . . . . . . . . . . .13
Purchasing Shares . . . . . . . . . . . . . . . . .16
Distributions and Taxes . . . . . . . . . . . . . .18
Redemption and Repurchase of Shares . . . . . . . .18
Determination of Net Asset Value. . . . . . . . . .20
Portfolio Transactions and Brokerage. . . . . . . .21
Stockholder Services. . . . . . . . . . . . . . . .21
General Information . . . . . . . . . . . . . . . .23

No dealer, salesman, or any other person has been authorized to give
any information or to make any representations, other than those contained
in this Prospectus, in connection with the offer contained in this
Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or its
Distributor. This Prospectus does not constitute an offer by the Fund or
by the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund or the Distributor to make such offer or solicitation
in such jurisdiction.

<PAGE> 5
CAPSTONE NIKKO JAPAN FUND

PROSPECTUS SUMMARY

Type of Company . . . .The Fund, which commenced operations on July 10,
1989, is a series of an open-end diversified
management investment company. (see page 23)

Investment Objective. .The objective of the Fund is to seek an average
annual total return from a portfolio of shares
in Japanese companies which exceeds the average
annual total return of the Benchmark. (see page 8)

Investment Policies . .The Fund will seek to achieve this objective by use
of the Nikko Capital Management (U.S.A.), Inc.'s
proprietary Return Reversal Strategy. The Return
Reversal Strategy identifies the bottom 25% of
the Tokyo Stock Exchange First Section's issues
according to the past 96-month performance period
and then ranks them in accordance to their exposure
to "Sales Revenue to Price", one of the 12 risk
indices of the BARRA/Nikko Japanese Equity Risk
Model, a dedicated computer system developed for
the Japanese equity market by The Nikko Securities
Co., Ltd. in conjunction with BARRA, an international
investment consulting firm specializing in applications
of modern portfolio theory and investment technology.
(see page 8)

Investment Risk . . . .Investments in Japanese securities involve certain
risks not associated with U.S. investments. These
include currency exchange rate fluctuations, non-
negotiable brokerage commissions, differences in
securities regulation, less liquidity and less
publicly available information about Japanese
securities. (see page 11).

Investment Adviser. . .Nikko Capital Management (U.S.A.), Inc. (the
"Adviser") is the Fund's Investment Adviser.
The Adviser provides investment advice and
portfolio management services to the Fund.
The Adviser is paid at an annual rate of
0.40% of the Fund's average net assets.
(see page 13)

Administrator . . . . .Capstone Asset Management Company is the Fund's
Administrator (the "Administrator"). The
Administrator provides advisory and/or
administrative services to the other investment
companies in the Capstone Group. The Administrator
is paid at an annual rate of 0.20% of the Fund's
average net assets, plus a fee to cover the cost
of accounting, bookkeeping and pricing services
it performs for the Fund. (see page 14)

Dividends and
Distributions. . . . .The Fund pays dividends from net investment income and
distributions from long-term capital gains, if any, at
least annually. (see page 18)

<PAGE> 6

Distributor and
Offering Price . . . .Shares of the Fund are continuously offered for sale
through the Fund's Distributor, Capstone Asset
Planning Company, without a sales load, at the
net asset value next determined after receipt of
the order. The Fund pays certain expenses
pursuant to a written distribution plan. (see
page 16)

Minimum Purchase. . . .The minimum initial investment is $200, except for
continuous investment plans, and there is no minimum
for subsequent purchases. (see page 16)

Redemption. . . . . . .Shares of the Fund are redeemed at the next
determined net asset value, without charge. (see
page 18)

<PAGE> 7
FUND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 0%

Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering price) 0%

Deferred Sales Load (as a percentage of
original purchase price or redemption of
proceeds, as applicable) 0%

Redemption Fees (as a percentage of amount
redeemed, if applicable) 0%

Exchange Fee 0%

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)

Management and Administrative Fees 0.00%
(After expense reimbursements)
12b-1 Fee* 0.25%
Other Expenses 3.28%
Total Fund Operating Expenses 3.53%

EXAMPLE

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period: $36 $108 $183 $380
</TABLE>

_______________
* Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against
the assets of a Fund, long-term stockholders may indirectly pay more in
total sales charges than the economic equivalent of the maximum front-end
sales charge permitted by rules of the NASD (see "Distributor").

<PAGE> 8

The purpose of the foregoing table is to assist investors in
understanding the various costs and expenses that an investor in the Fund
will bear directly or indirectly. The information disclosed in the table
for "Other Expenses" is based on expenses actually incurred by the Fund
during the fiscal year ended October 31, 1995. In light of the Fund's
objective of investing primarily in Japanese securities, the operating
expenses of the Fund are expected to be higher than those of investment
companies investing in domestic securities (see "Risk Factors"). The
management and administration fee information contained in the table
reflects deductions for expense reimbursements by the Fund's Adviser and
Administrator during the fiscal year ended October 31, 1995. Without the
expense reimbursements, the fees paid to the Adviser and Administrator,
respectively, would have amounted to 0.40% and 0.20% of the Fund's average
net assets, total Fund operating expenses would have been 4.21%, and
expenses in the same 1, 3, 5 and 10 year periods shown in the Example would
have been $42, $128, $215 and $438, respectively. A separate charge by the
Administrator for accounting, pricing and bookkeeping services is included
in "Other Expenses". See "Management of the Fund" for more complete
descriptions of the fees paid to the Adviser and Administrator. The
information disclosed in the table for "12b-1 Fees" has been restated to
reflect the maximum distribution expense that may be incurred by the Fund
effective August 21, 1995. The actual amount paid by the Fund during the
fiscal year ended October 31, 1995 was 0.33% of its average net assets.
(Prior to August 21, 1995 the maximum payout permitted under the
12b-1 Plan was 0.35% of the Fund's average net assets).

THE EXAMPLE WHICH IMMEDIATELY FOLLOWS THE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL FUND EXPENSES MAY BE
GREATER OR LESSER THAN THOSE SHOWN IN THE EXAMPLE OR IN THE TABLE.

<PAGE> 9
FINANCIAL HIGHLIGHTS

The following table sets forth the per share operating performance
data for a share of capital stock outstanding, total return, ratios to
average net assets and other supplemental data for each year indicated.
This information has been derived from information provided in the Fund's
financial statements which have been examined by Tait, Weller & Baker,
independent certified public accountants. The Fund's Annual Report
contains additional performance information and is available free of charge
by calling the Fund at 1-800-262-6631.

<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------------
1995 1994 1993 1992 1991(1) 1990 1989(2)
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
- --------------
Net asset value at beginning
of year $8.03 $6.99 $4.89 $7.46 $7.96 $10.62 $10.00
----- ----- ----- ----- ----- ------ ------
Income from investment
operations:
Net investment income(loss) (.21) (.21) (.20) (.23) (.14) (.09) .01
Net realized and unrealized
gain(loss) on investments (1.06) 1.25 2.30 (2.34) (.36) (2.38) .61
----- ---- ---- ----- ---- ----- ------
Total from investment
operations (1.27) 1.04 2.10 (2.57) (.50) (2.47) .62
----- ---- ---- ----- ---- ----- ------
Less distributions from net
realized gain on
investments -- -- -- -- -- .19 --
----- ---- ---- ----- ---- ----- ------
Net asset value at end of
year $6.76 $8.03 $6.99 $4.89 $7.46 $ 7.96 $10.62
===== ===== ===== ===== ===== ====== ======
TOTAL RETURN(3) (15.82)% 14.88% 42.94% (34.45)% (6.28)% (23.73)% 6.20%

RATIOS/SUPPLEMENTAL DATA

Net assets at end of year
(in thousands) $2,908 $3,484 $3,096 $2,130 $3,552 $7,801 $19,647

Ratios to average net assets:
Expenses 3.61% 3.25% 4.26% 4.38% 2.74% 1.53% 1.36%(4)
Net investment loss (2.93)% (2.62)%(3.54)% (3.42)% (2.01)% (.81)% .32%(4)

Ratios to average net assets,
prior to reimbursement of
expenses:
Expenses 4.21% 3.85% 4.86% 4.98% 3.07% .-- .--
Net investment income(loss) (3.53)% (3.22)%(4.14)% (4.02)% (2.34)% .-- .--

Portfolio turnover rate 27% 57% 42% 112% 24% 39% 6%
</TABLE>

______________
(1) Based on average month-end shares outstanding.
(2) For the period July 10, 1989 ( commencement of operations) to October
31, 1989.
(3) Calculated without sales charge.
(4) Annualized.

<PAGE> 10
INVESTMENT OBJECTIVE AND POLICIES

The objective of the Fund is to seek an average annual total return
from a portfolio of shares in Japanese companies which exceeds the average
annual total return of the First Section of the Tokyo Stock Exchange
("TSE1") as measured by the Tokyo Stock Price Index ("TOPIX"). The Fund
will seek to achieve this objective by use of the Adviser's proprietary
Return Reversal Strategy (the "Reversal Strategy") as the source of greater
returns. The Reversal Strategy identifies the bottom 25% of the TOPIX
issues according to the past 96-month performance period and then ranks
them in accordance to their exposure to Sales Revenue to Price.

The Fund's portfolio is constructed in three stages. First, a purely
technical screening of all stocks in the TOPIX universe is performed and
the issues whose performance ranks in the bottom 25% of the universe as
measured over the preceding 96-month period are identified. In order to
measure the fundamental value of these issues, the next stage in the
strategy's process is to rank these identified issues in accordance with
their exposure to "Sales Revenue to Price". This fundamental screening
minimizes the risk of including companies that have fundamental financial
or business problems. In the third and final step of the strategy, those
issues that rank in the top 25% in terms of "Sales Revenue to Price" are
selected for inclusion in the Fund's portfolio.

The Reversal Strategy is based on the theory that, in the Japanese
market, equity securities which underperform the market during one period
are likely to overperform the market in the succeeding period ("return
reversal effect"). Similarly, those stocks that overperform in the first
period are likely to underperform in the following period. According to
this theory, these types of deviations from a stock's fundamental value
occur due to the tendency of investors to overreact, either positively or
negatively, to market information. Over the longer term, however,
according to this hypothesis, stock prices tend to revert to their
fundamental value. Accordingly, stocks which are currently underperforming
due to investor overreaction to negative information would, under this
theory, be excellent candidates for outperforming the market in the near
future.

Despite the existence of some empirical evidence and academic studies
to support the existence of the "return reversal effect", its validity in
the Japanese market has not been fully investigated nor has it been widely
applied to portfolio management. Based on its own analyses, however, the
Adviser believes that this theory represents one of the most significant
anomalies that can be successfully capitalized upon in order to achieve a
superior risk/reward profile in managing a portfolio of Japanese equity
securities. There can, of course, be no assurance that the Adviser's
belief is correct or that the Reversal Strategy will be successful in
achieving the Fund's investment objective.

TOPIX has been selected to serve as the standard performance
comparison or benchmark of the Fund. The index comprises all the stocks
currently listed on the TSE1 weighted by market capitalization. The stocks
together account for over 90% of all Japanese equities traded on the Tokyo
Stock Exchange.

It is expected that the investment portfolio of the Fund will consist
of about 75 of the stocks listed on the TSE1. Portfolio turnover is
expected to be higher than that of an index fund in view of the objective
of pursuing active returns.

The Fund is also authorized to engage in a number of practices
designed to manage or hedge against risks, such as fluctuations in
securities prices and fluctuations in currency exchange rates and to

<PAGE> 11
adjust its risk exposure relative to the Benchmark. These practices, which the
Fund will undertake only for hedging purposes, include entering into
interest-rate, index and currency futures contracts, and purchasing and
writing put and call options on those contracts, on individual securities,
on currencies and on stock indices (collectively, "derivatives"). The Fund
may also enter into forward foreign currency contracts. The extent to
which the Fund may engage in such practices will depend on the availability
of the various hedging instruments which are both suitable for use by the
Fund and authorized for investment by a U.S. registered investment company.
In addition, the Fund's exchange-traded options transactions are subject to
trading and position limits. Tax considerations also may limit the Fund's
ability to engage in forward contracts and futures and options
transactions.

Interest rate and currency futures contracts create an obligation to
purchase or sell specified amounts of debt securities or currency on a
specified future date. Although these contracts generally call for making
or taking delivery of the underlying securities or currency, the contracts
are in most cases closed out before the maturity date by entering into an
offsetting transaction which may result in a profit or loss.

Securities index futures contracts are contracts to buy or sell units
of a particular index of securities at a specified future date for an
amount equal to the difference between the original contract purchase price
and the price at the time the contract is closed out, which may be at
maturity or through an earlier offsetting transaction.

The purchase or writing of put or call options on futures contracts,
individual securities or currencies would give the Fund, respectively, the
right or obligation to sell or purchase the underlying futures contract,
security or currency at the stated exercise price any time before the
option expires. The purchase or writing of put and call options on stock
indices would give the Fund, respectively, the right or obligation to
receive or pay a specified amount at any time prior to expiration of the
option. The value of the option varies with the aggregate price movements
of the stocks reflected in the index. The Fund's risk in purchasing an
option, if the price of the underlying currency, security or index moves
adverse to the purchaser, is limited to the premium it pays for the option.
If price movements are favorable, on the other hand, the option will
increase in value and the Fund would benefit from the sale or exercise of
the option. As the writer of an option, the Fund would receive a premium.
The premium would be a gain to the Fund if price movements in the
underlying items are favorable to the writer and would reduce the loss if
price movements are unfavorable. Any call options written by the Fund are
"covered", i.e., backed by securities owned by the Fund. The writing of a
covered call option tends to limit the Fund's opportunity to profit from an
increase in value of the underlying securities to the amount of the
premium.

The Fund may engage in options and futures transactions on exchanges
and in the over-the-counter ("OTC") markets. Exchange-traded contracts
generally have standardized strike prices and expiration dates and their
performance is guaranteed by an exchange or clearing corporation. OTC
transactions, on the other hand, are generally negotiated directly between
the buyer and the seller and there is no independent guarantor. Similar
types of exchange-traded and OTC contracts and options may be available in
markets outside the U.S. from time to time. The Fund may invest in such
non-U.S. contracts and options to the extent they are suitable for the Fund
and are permissible investments for a U.S. registered investment company.

In addition to purchasing and writing put and call options on foreign
currencies, the Fund may also enter into forward foreign currency contracts
as a hedge against possible variations in the exchange

<PAGE> 12
rates of currencies in which it conducts its activities. Forward currency
contracts are two-party agreements to purchase or sell a specified currency
at a specified future date and price. The Fund will not enter into or maintain
a position in these contracts if their consummation would obligate the Fund to
deliver an amount of foreign currency greater than the value of the Fund's
assets denominated or quoted in, or its currency convertible into, that
currency.

These hedging transactions involve brokerage costs and require the
Fund to make margin deposits against its performance obligations under the
contracts. The Fund may also be required to segregate assets in an amount
equal to the value of instruments underlying its futures contracts, call
options purchased and put options written; to otherwise "cover" its futures
and options positions; or to limit these transactions so that they are
backed to a level of 300 percent by total Fund assets. The aggregate of
initial margin deposits for futures contracts and related options and
premiums paid for open futures options may not exceed 5 percent of the fair
market value of the Fund's assets.

There can be no assurance that the Fund's hedging transactions will be
successful. Securities prices, interest rates and currency exchange rates
may change in unanticipated manners or may move in ways which do not
correlate closely to movements in the value of securities held by the Fund.
Additionally, there can be no assurance that offsetting transactions will
be available at any given time to enable the Fund to close out particular
futures or options contracts. If these contracts cannot be closed out, the
Fund may incur losses in excess of its initial margin deposit. The
bankruptcy of a broker or other person with whom the Fund has an open
futures or options position may also expose the Fund to risk of losing its
margin deposits or collateral. See also "Investment Practices and
Restrictions" in the Statement of Additional Information.

The Fund may from time to time lend securities from its portfolio,
with a market value not exceeding 10% of its total assets at the time of
the loan, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government or its instrumentalities which will be maintained at all times
in an amount equal to at least 100% of the current market value of the
loaned securities. During the period of such a loan, the Fund will receive
income on both the loaned securities and the collateral, or on the
investment of any cash received as collateral, and thereby increase its
yield. With respect to the lending of portfolio securities, there is the
risk of failure by the borrower to return the securities involved in such
transactions, in which event the Fund may incur a loss.

There can be no assurance that the Fund will achieve its investment
objective. The investments of the Fund are subject to market fluctuations
and other risks inherent in investing in securities and, despite any
attempts to hedge or manage risk, the value of the Fund's shares and the
income from them may go down as well as up. The Fund's investment
flexibility may be limited by restrictions on foreign investment in certain
Japanese securities. In addition, the Fund's flexibility to structure its
portfolio to follow the Reversal Strategy may be limited by various
regulatory requirements applicable to the Fund as a registered investment
company.

The investment objective of the Fund is not a fundamental policy and
may be changed without stockholder approval.

The portfolio turnover rate for the fiscal years ended October 31,
1995 and 1994 was 27% and 57%, respectively.

<PAGE> 13
RISK FACTORS

United States persons investing in securities of Japanese issuers
should be aware of certain information about Japan and international
investment which can make this type of investing different from investments
in securities of United States issuers.

The Japanese economy has now entered into a mild recovery phase after
experiencing nearly zero growth for the last couple of years. This
recovery is primarily due to the combination of a cyclical upswing, the
emergence of the positive effects of earlier implemented fiscal stimulus
measures, and sustained accommodative monetary policy and extremely low
interest rates. However, given the lingering dampening effects of the
structural problems such as non-performing loans of financial institutions
and excess capital stocks of manufacturers accumulated in the bubble era of
late 80's, we are unlikely to see a return of the strong, rapid growth of
earlier years. Based on this, we further expect the present deflationary
conditions to persist for a while yet and for this reason, believe that
interest rates will hold at low levels for still some time to come.

The Adviser believed that the following four conditions must be met in
order for Japan to break out of the recessionary economic phase, i.e.,
government support through aggressive fiscal policy, writing-off of
financial institutions' bad debts, improved labor productivity through
corporate restructuring and shifting of industrial priorities toward
promising new fields. What we have seen lately is either realization or
significant progress on all these aspects. The government has announced a
series of big economic stimulus packages in 1995 to get the economy back on
track. The effect of this fiscal policy is gradually filtering through the
overall economy. Secondly, the government is finally committed to tackling
the bad debt problems, disclosing the plan to liquidate a number of failing
housing loan corporations. Banks are also making progress on their bad
loan problems by writing off significant portions of their non-performing
portfolios within the fiscal year.

Turning to the micro economy side, Japanese corporations have been
undergoing major restructuring and rationalization efforts to cope with the
lower growth era of 1990's. This includes the structural realignment
within the industries, shifting of production and procurement base overseas
to benefit from low cost and higher yen, and cutting of actual work forces
to trim the high fixed-cost structure of the balance sheets. These
restructurings have been a major factor for strong corporate earnings
recovery, especially for the manufacturing sector. The Adviser expects
that corporate earnings will grow by 18% on an all-industry basis in
fiscal year 1996 while the manufacturing sector and non-manufacturing
sector will exhibit the growth rate of 25% and 7%, respectively.

We expect the steady performance in the stock market to continue
throughout this year. Foreign investors will continue to be the net
purchasers of the Japanese equities since the exposure to Japan by foreign
institutional investors is still generally underweighted. We will continue
to manage the Fund using the Return Reversal Strategy which, in the opinion
of the Adviser, is effective in selecting underperforming stocks with good
fundamental values in the recovery phase of the Japanese economy.

Various other factors involved in international investing generally
may affect the Fund's performance either favorably or unfavorably. These
include: fluctuations in currency exchange rates; possible imposition of,
or changes in, exchange controls; costs of currency conversion; non-
negotiable brokerage commissions (which may result in higher commissions);
less publicly available information;

<PAGE> 14
different accounting standards; less liquidity and greater market volatility;
difficulties of enforcing obligations in other countries; differences in the
nature and quality of securities regulation; differences in taxation (which may
include withholding taxes on income earned on Fund securities and transfer tax
on sales proceeds); war; expropriation; political or social unrest; diplomatic
developments; and natural disasters.

The Fund's management will attempt to be alert to these factors and to
act to mitigate any unfavorable consequences to the extent practicable, but
there can be no assurance its efforts will be successful or that protective
action will be feasible.

The operating expense ratio of the Fund can be expected to be higher
than that of an investment company investing exclusively in securities of
United States issuers since the expenses of the Fund (such as custodial,
currency exchange, valuation and communications costs) are higher. Because
of its emphasis on Japan, the Fund should be considered as a vehicle for
diversification of investments and not as a balanced investment program.

INVESTMENT RESTRICTIONS

The Fund has adopted certain investment restrictions which cannot be
changed without approval by holders of a majority of the Fund's shares.
These restrictions, which are designed to enhance the realization of the
Fund's investment objective, provide, among other things, that the Fund may
not:

- As to 75% of its total assets, invest more than 5% of the value
of such assets in the securities of any one issuer, or purchase
more than 10% of the voting securities of any one issuer (except
for investments in securities issued or guaranteed by the United
States Government, its agencies or instrumentalities).

- Invest more than 25% of its total assets (taken at market value
at the time of each investment) in the securities of issuers in
any particular industry or in securities issued or guaranteed by
the Japanese government or its agencies or instrumentalities
provided that this restriction shall not prevent the Fund from
purchasing the securities of any issuer pursuant to the exercise
of rights distributed to the Fund by the issuer, except that no
such purchase may be made if as a result the Fund would no longer
be a diversified investment company as defined in the Investment
Company Act of 1940.

Additional investment restrictions of the Fund, some of which are
fundamental policies that may not be changed without stockholder approval,
are set forth under the caption "Investment Practices and Restrictions" in
the Statement of Additional Information.

PERFORMANCE INFORMATION

<PAGE> 15

investment income"), and will be computed by dividing net investment income by
the maximum public offering price per share on the last day of the period.
Average annual total return and total return figures represent the increase (or
decrease) in the value of an investment in the Fund over a specified period.
Both calculations assume that all income dividends and capital gain
distributions during the period are reinvested at net asset value in additional
Fund shares. Quotations of the average annual total return reflect the
deduction of a proportional share of Fund expenses on an annual basis. The
results, which are annualized, represent an average annual compounded rate of
return on a hypothetical investment in the Fund over a period of 1,5, and 10
years ending on the most recent calendar quarter (but not for a period greater
than the life of the Fund). Quotations of total return, which are not
annualized, represent historical earnings and asset value fluctuations.
Performance figures are based on past performance and are not a guarantee of
future results.

MANAGEMENT OF THE FUND

Capstone Nikko Japan Fund is a series of Capstone International Series
Trust, an open-end diversified management investment company, commonly
called a mutual fund. The management and affairs of the Fund and the Trust
are supervised by the Trust's Board of Trustees. Through the purchase of
Fund shares, investors with goals similar to the investment objective of
the Fund can participate in the investment performance of a diversified
portfolio of investments designed to meet that objective.

ADVISER

Nikko Capital Management (U.S.A.), Inc. (the "Adviser") provides
investment advice, portfolio management and brokerage allocation services
to the Fund. The Adviser is a wholly-owned subsidiary of Nikko
International Capital Management Co., Ltd., Tokyo and is registered as an
investment adviser under the Investment Advisers Act of 1940. The Adviser
provides asset management and advisory services to pension plans and other
institutional investors and currently has funds of approximately $1.3
billion under management or advice. The Adviser's parent company, Nikko
International Capital Management Co., Ltd., Tokyo, and its subsidiaries has
funds of approximately $16 billion under management or advice. Nikko
International Capital Management Co., Ltd., Tokyo is a separately managed
member of the Nikko Securities Co., Ltd. group of companies. Nikko
Securities Co., Ltd. is one of the largest broker-dealers in Japan.

The Adviser was incorporated under the laws of the State of New York
on June 8, 1981 for an indefinite period of duration and has issued and
paid in capital of $1 million. The Adviser's directors are: Takao
Nakanishi (Chairman), Tadao Kobayashi (Director), Higashino
Kazuhiro (Director), Kenji Wada (Director), Tetsuya Itoh (Director), and
Stanley Kirtman (President).

Portfolio decisions for the Fund are made by the Portfolio Manager,
Mr. Tetsuya Itoh. After graduating from Chuo University in 1981, Mr. Itoh
began his career at Canon Inc. In 1990 he joined Nikko International
Capital Management Co., Ltd., Tokyo as an investment strategist in the
International Planning Division where he was responsible for marketing
strategies and product development. He was named Portfolio Manger of the
Fund in March 1994.

<PAGE> 16

As compensation for its services, the Adviser receives from the Fund a
fee computed daily and payable at the end of each calendar quarter, equal
to an annual rate of 0.40% of the Fund's average net assets. Pursuant to
an expense limitation discussed below, the Adviser reimbursed all of its
advisory fees received from the Fund during the fiscal year ended October
31, 1995.

ADMINISTRATOR

Capstone Asset Management Company (the "Administrator"), a subsidiary
of Capstone Financial Services, Inc., provides administrative services for
the Fund and supervises the Fund's daily business affairs, including
arranging for the provision of the Fund's legal services, supervising the
activities of persons providing services to the Fund, and furnishing office
space and equipment to the Fund. These services are subject to general
review by the Trust's Board of Trustees.

As compensation for its services, the Administrator receives from the
Fund a fee, computed daily and payable quarterly, at an annual rate of
0.20% of the Fund's average net assets. Pursuant to an expense limitation
discussed below, the Administrator reimbursed all of its administrative
fees received from the Fund during the fiscal year ended October 31, 1995.

The Administrator also performs certain accounting, bookkeeping and
pricing services. For these services the Administrator receives a monthly
fee to reimburse the Administrator for its costs. This amount is not
intended to include any profit to the Administrator and is in addition to
the administrative fees described above.

The Administrator provides administrative and/or investment advisory
services to five other mutual funds: Capstone Government Income Fund,
Capstone Intermediate Government Fund, Capstone Growth Fund, Inc., Capstone
New Zealand Fund and Medical Research Investment Fund, Inc. (the "Capstone
Group"). The Administrator also provides investment advice to pension and
profit sharing accounts, corporations and individuals.

DISTRIBUTOR

Pursuant to a Distribution Agreement with the Trust dated August 10,
1992, Capstone Asset Planning Company (the "Distributor") is the principal
underwriter of the Fund and, acting as exclusive agent, sells shares of the
Fund to the public on a continuous basis.

The Fund has adopted a Service and Distribution Plan (the "Plan")
pursuant to which it uses its assets to finance activities relating to the
distribution of its shares to investors and provision of certain
stockholder services. The Plan permits payments to be made by the Fund to
the Distributor to reimburse it for expenditures incurred by it in
connection with the distribution of the Fund shares to investors and
provision of certain stockholder services including but not limited to the
payment of compensation, including incentive compensation, to securities
dealers (which may include the Distributor itself) and other financial
institutions and organizations (collectively, the "Service Organizations")
to obtain various distribution related and/or administrative services for
the Fund. These services include, among other things, processing new
stockholder account applications, preparing and transmitting to the Fund's
Transfer Agent computer processable tapes of all transactions by customers
and serving as the primary source of information to customers in answering
questions concerning the Fund and their transactions with the Fund. The
Distributor is also authorized to engage in advertising, the preparation
and

<PAGE> 17
distribution of sales literature and other promotional activities on
behalf of the Fund. In addition, the Plan authorizes payment by the Fund
of the cost of preparing, printing and distributing Fund Prospectuses and
Statements of Additional Information to prospective investors and of
implementing and operating the Plan.

Under the Plan, payments made to the Distributor may not exceed an
amount computed at an annual rate of 0.25% of the average net assets of the
Fund. (Prior to August 21, 1995, the maximum payout under the Plan was
0.35% of the average net assets of the Fund.) Of this amount, the
Distributor may reallocate amounts up to 0.25% of the Fund's average net
assets to Service Organizations (which may include the Distributor). Any
remaining amounts not so allocated will be retained by the Distributor for
the purposes described above. The Distributor is permitted to collect the
fees under the Plan on a monthly basis. Any expenditures incurred by the
Distributor in excess of the limitation described above during a given
month may be carried forward up to twelve months for reimbursement, subject
always to the 0.25% limit, and no interest or carrying charges will be
payable by the Fund on amounts carried forward. The Plan may be terminated
by the Fund at any time and the Fund will not be liable for amounts not
reimbursed as of the termination date.

The Plan was last approved by a majority of the Fund's trustees,
including a majority of the trustees who have no direct or indirect
financial interest in the operation of the Plan or any of its agreements
("Plan Trustees") on May 7, 1995. The Plan was approved by the Fund's
stockholders on August 10, 1992 and took effect on September 1, 1992. The
Plan will continue from year to year, provided that such continuance is
approved at least annually by a vote of a majority of the Board of
Trustees, including a majority of the Plan Trustees.

The Glass-Steagall Act and other applicable laws currently prohibit
banks from engaging in the business of underwriting, selling or
distributing securities. Accordingly, unless such laws are changed, if the
Fund engages banks as Service Organizations, the banks would perform only
administrative and stockholder servicing functions. If a bank were
prohibited from acting as a Service Organization, alternative means for
continuing the servicing of such stockholders would be sought. State law
may differ from Federal law and banks and other financial institutions may
be required to be registered as broker-dealers to perform administrative
and stockholder servicing functions.

EXPENSES

The Fund's expenses are accrued daily and are deducted from its total
income before dividends are paid. These expenses include, but are not
limited to: fees paid to the Adviser and the Administrator; taxes; legal
fees; custodian and auditing fees; reimbursement of the costs incurred by
the Administrator in providing pricing and accounting services to the Fund;
and printing and other miscellaneous expenses paid by the Fund.

Under the Advisory and Administrative Agreements, if the Fund's
ordinary business expenses exceed the expense limitations of any state
having jurisdiction over the Fund, then the advisory and administration
fees will be reduced pro rata (but not below zero) to the extent necessary
to comply with such expense limitations. The Adviser and the Administrator
have each agreed to bear its pro rata share of any such fee reduction based
on the percentage that such person's fee bears to the total fees paid by
the Fund to the Adviser under the Investment Advisory Agreement and to the
Administrator under the Administration Agreement. The Fund's total
operating expenses (after reimbursements from the Adviser

<PAGE> 18

and Administrator) during the fiscal year ended October 31, 1995 were 3.61% of
its average net assets.

PURCHASING SHARES

Capstone Asset Planning Company (the "Distributor"), located at 5847
San Felipe, Suite 4100, Houston, Texas 77057, is the principal underwriter
of the Fund and, acting as exclusive agent, sells shares of the Fund to the
public on a continuous basis. Edward L. Jaroski is President of the Trust,
and a director of the Administrator and the Distributor. Some other
officers of the Trust are also officers of the Administrator and the
Distributor.

Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized investment dealers or
directly from the Fund's Distributor. Except for the Fund itself, only the
Distributor and investment dealers which have a sales agreement with the
Distributor are authorized to sell shares of the Fund. For further
information, reference is made to the caption "Distributor" in the Fund's
Statement of Additional Information.

Shares of the Fund are sold at net asset value, without a sales charge
and will be credited to a stockholder's account at the net asset value next
computed after an order is received. The minimum initial investment is
$200, except for continuous investment plans which have no minimum, and
there is no minimum for subsequent purchases. No stock certificates
representing shares purchased will be issued except upon written request to
the Fund's Transfer Agent. The Fund's management reserves the right to
reject any purchase order if, in its opinion, it is in the Fund's best
interest to do so.

At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain
sales efforts or recognition programs conforming to criteria established by
the Distributor, or participates in sales programs sponsored by the
Distributor. In addition, the Adviser, the Administrator and/or the
Distributor in their discretion may from time to time, pursuant to
objective criteria established by the Adviser, the Administrator and/or the
Distributor sponsor programs designed to reward selected dealers for
certain services or activities which are primarily intended to result in
the sale of shares of the Fund. Such payments are made out of their own
assets, and not out of the assets of the Fund. These programs will not
change the price you pay for your shares or the amount that the Fund will
receive from such sale.

Payment for all orders to purchase Fund shares must be received by the
Fund's Transfer Agent within three business days after the order was
placed.

INVESTING THROUGH AUTHORIZED DEALERS

If any authorized dealer receives an order of at least $200, the
dealer may contact the Distributor directly. Orders received by dealers by
the close of trading on the New York Stock Exchange on a business day that
are transmitted to the Distributor by 4:00 p.m. Central time on that day
will be effected at the net asset value per share determined as of the
close of trading on the New York Stock Exchange on that day. It is the
dealer's responsibility to transmit orders so that they will be received by
the Distributor before 4:00 p.m. Central time.

After each investment, the stockholder and the authorized investment
dealer receive

<PAGE> 19
confirmation statements of the number of shares purchased and owned.

PURCHASES THROUGH THE DISTRIBUTOR

An account may be opened by mailing a check or other negotiable bank
draft (payable to Capstone Nikko Japan Fund) for $200 or more together with
the completed Investment Application Form to the Fund's Transfer Agent:
Capstone Nikko Japan Fund, c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W.
Elm Street, Conshohocken, Pennsylvania 19428. The $200 minimum initial
investment may be waived by the Distributor for plans involving continuing
investments (see "Stockholder Services"). There is no minimum for
subsequent investments, which may be mailed directly to the Transfer Agent.
All such investments are effected at the net asset value of Fund shares
next computed following receipt of payment by the Transfer Agent.
Confirmations of the opening of an account and of all subsequent
transactions in the account are forwarded by the Transfer Agent to the
stockholder's address of record.

TELEPHONE PURCHASE AUTHORIZATION (INVESTING BY PHONE)

Stockholders who have completed the Telephone Purchase Authorization
section of the Investment Application Form may purchase additional shares
by telephoning the Fund's Transfer Agent at (800) 845-2340. The minimum
telephone purchase is $1,000 and the maximum is five times the net asset
value of shares for which payment has been received (and for which
certificates have not been issued) held by the stockholder on the day
preceding such telephone purchase. The telephone purchase will be effected
at the net asset value next computed after receipt of the call by the
Transfer Agent. Payment for the telephone purchase must be received by the
Transfer Agent within three business days after the order is placed. If
payment is not received within three business days, the stockholder will be
liable for all losses incurred as a result of the purchase.

INVESTING BY WIRE

Investors having an account with a commercial bank that is a member of
the Federal Reserve System may purchase shares of the Fund by requesting
their bank to transmit funds by wire to: United Missouri Bank KC NA, ABA
#10-10-00695, For: Fund/Plan Services, Inc., Account #98-7037-0719;
Further Credit Capstone Nikko Japan Fund. The investor's name and account
number must be specified in the wire.

Initial Purchases - Before making an initial investment by wire, an
investor must first telephone (800) 845-2340 to be assigned an account
number. The investor's name, account number, taxpayer identification or
social security number, and address must be specified in the wire. In
addition, the investment application should be promptly forwarded to
Capstone Nikko Japan Fund, c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W.
Elm Street, Conshohocken, Pennsylvania 19428.

Subsequent Purchases - Additional investments may be made at any time
through the wire procedures described above, which must include the
investor's name and account number. The investor's bank may impose a fee
for investments by wire.

<PAGE> 20
DISTRIBUTIONS AND TAXES

PAYMENT OPTIONS

Distributions (whether treated for tax purposes as ordinary income or
long-term capital gains) to the Fund's stockholders are paid in additional
shares of the Fund, with no sales charge, based on the Fund's net asset
value as of the close of business on the record date for such
distributions. However, a stockholder may elect on the application form to
receive distributions as follows:

Option 1. To receive income dividends treated as ordinary income in
cash and distributions treated as capital gains in
additional Fund shares, or

Option 2. To receive all income dividend and capital gains
distributions in cash.

The Fund pays dividends from investment company taxable income and
distributions representing capital gains at least annually, usually in
December. The Fund will advise each stockholder annually of the amounts of
dividends from investment income and of long-term capital gain
distributions reinvested or paid in cash to the stockholder during the
calendar year.

If you select Option 1 or Option 2 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, your
distribution checks will be reinvested in your account at the then-current
net asset value and your election will be converted to the purchase of
additional shares.

TAXES

The Fund intends to qualify as a regulated investment company under
the Federal tax law. As such, the Fund generally will not pay Federal
income tax on the income and gains it pays as dividends to its
stockholders. In order to avoid a 4% Federal excise tax, the Fund intends
to distribute each year all of its net income and gains.

Stockholders will be taxed on dividends received from the Fund,
regardless of whether received in cash or reinvested in additional shares.
Stockholders must treat dividends, other than capital gain dividends, as
ordinary income. Dividends designated as capital gain dividends are
taxable to stockholders as long-term capital gains. Certain dividends
declared in October, November or December of a calendar year are taxable to
stockholders as though received on December 31 of that year if paid to
stockholders during January of the following calendar year. The Fund will
advise stockholders annually of the amount and nature of dividends paid to
them.

Investors are advised to consult their tax advisers with respect to
the particular tax consequences to them of an investment in the Fund. A
more detailed description of tax consequences to stockholders is contained
in the Statement of Additional Information.

REDEMPTION AND REPURCHASE OF SHARES

Generally, stockholders may require the Fund to redeem their shares by
sending a written

<PAGE> 21

request, signed by the record owner(s), to Capstone Nikko Japan Fund, c/o
Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm Street, Conshohocken,
Pennsylvania 19428. In addition, certain expedited redemption methods
described below are available. If stock certificates have been issued for
shares being redeemed, such certificates must accompany the written request
with the stockholder's signature guaranteed by an "eligible guarantor
institution", as defined in Rule 17Ad-15 under the Securities Exchange Act
of 1934, which participates in a signature guarantee program. Eligible
guarantor institutions include banks, brokers, dealers, credit unions,
national securities exchanges, registered securities associations, clearing
agencies and savings associations. A broker-dealer guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at
least $100,000. Credit unions must be authorized to issue signature
guarantees. Signature guarantees will be accepted from any eligible
guarantor institution which participates in a signature guarantee program.
No signature guarantees for shares for which no certificates have been
issued are required when an application is on file at the Transfer Agent and
payment is to be made to the stockholder of record at the stockholder's
address of record. However, if the proceeds of the redemption are to be
paid to someone other than the registered holder, or to other than the
stockholder's address of record, or the shares are to be transferred, the
owner's signature must be guaranteed as specified above. The redemption
price shall be the net asset value per share next computed after receipt of
the redemption request. See "Determination of Net Asset Value."

In addition, the Distributor is authorized as agent for the Fund to
offer to repurchase shares which are presented by telephone or telegraph to
the Distributor by authorized investment dealers. The repurchase price is
the net asset value per share next determined after the request is
received. See "Determination of Net Asset Value". Broker-dealers may
charge for their services in connection with the repurchase, but the
Distributor and its affiliates will not charge any fee for such repurchase.
Payment for shares presented for repurchase or redemption by authorized
investment dealers will be made within seven days after receipt by the
Transfer Agent of a written notice and/or certificate in proper order.

The Fund reserves the right to pay any portion of redemption requests
in excess of $1 million in readily marketable securities from the Fund's
portfolio. In this case, the redeeming stockholder may incur brokerage
charges on the sale of the securities.

The right of redemption and payment of redemption proceeds are subject
to suspension for any period during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or when trading
on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission; during any period when an emergency as
defined by the rules and regulations of the Securities and Exchange
Commission exists; or during any period when the Securities and Exchange
Commission has by order permitted such suspension. The Fund will not mail
redemption proceeds until checks (including certified checks or cashier's
checks) received for the shares purchased have cleared, which can be as
long as 15 days.

The value of shares on repurchase or redemption may be more or less
than the investor's cost depending upon the market value of the Fund's
portfolio securities at the time of redemption. No redemption fee is
charged for the redemption of shares.

EXPEDITED TELEPHONE REDEMPTION

A stockholder redeeming at least $1,000 of shares (for which
certificates have not been issued),

<PAGE> 22

and who has authorized expedited redemption on the application form filed
with the Transfer Agent may at the time of such redemption request that
funds be mailed or wired to the commercial bank or registered broker-dealer
he has previously designated on the application form by telephoning the
Transfer Agent at (800) 845-2340. Redemption proceeds will be sent to the
investor on the next business day following receipt of the telephone
redemption request. In order to allow the Adviser to manage the Fund more
effectively, stockholders are strongly urged to initiate redemptions as
early in the day as possible and to notify the Transfer Agent as least 5
days in advance of redemptions in excess of $1 million. If a stockholder
seeks to use an expedited method of redemption of shares recently purchased
by check, the Fund may withhold the redemption proceeds until it is
reasonably assured of the collection of the check representing the purchase,
which may take up to 15 days from the purchase date. The Fund, Distributor
and Transfer Agent reserve the right at any time to suspend or terminate the
expedited redemption procedure or to impose a fee for this service. At the
present time there is no fee charged for this service. During periods of
unusual economic or market changes, stockholders may experience difficulties
or delays in effecting telephone redemptions.

When exchanges or redemption requests are made by telephone, the Fund
has procedures in place designed to give reasonable assurance that such
telephone instructions are genuine, including recording telephone calls and
sending written confirmations of transactions. The Fund will not be liable
for losses due to unauthorized or fraudulent telephone transactions unless
it does not follow such procedures, in which case it may be liable for such
losses.

DETERMINATION OF NET ASSET VALUE

The Fund's net asset value is computed daily, Monday through Friday,
as of the close of regular trading on the New York Stock Exchange, which is
currently 4:00 p.m. Eastern time. The Fund's net asset value will not be
computed on the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The Fund will in some cases value its portfolio securities
as of days on which the Japanese Exchanges are closed for Japanese holidays
or other reasons. At such times, the Fund will follow such procedures as
the trustees have determined to be reasonable.

The Fund's net asset value per share is computed by dividing the value
of the securities held by the Fund plus any cash or other assets (including
any accrued expenses) by the total number of Fund shares outstanding at
such time. To avoid large fluctuations in the computed net asset value,
accrued expenses will be charged against the Fund on a daily basis, i.e.
1/360 of the annual amount due by the Fund each year.

Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the prevailing market rates
at 14:00 Greenwich Mean Time on each U.S. business day.

Portfolio securities and futures contracts which are traded on a
Japanese Exchange are valued at the last sale price on that exchange prior
to the relevant closing or, if there is no recent last sale price
available, at the last current bid quotation. A security or futures
contract which is listed or traded on more than one exchange is valued at
the quotation on the exchange determined to be the primary market for such
security or contract. All other equity securities and futures contracts
not so traded are valued at the last current bid quotation prior to the
relevant Japanese Exchange closing. Fixed income securities

<PAGE> 23
are valued using market quotations or pricing services. In the absence of an
applicable price, securities and futures contracts will be valued at a fair
value as determined in good faith by the trustees or in accordance with
procedures established by the trustees.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to policies established by the Fund's Board of Trustees, the
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The policies established by
the trustees require that the Adviser seek to obtain the best net results
in executing transactions for the Fund, except that the Fund is authorized
to pay higher commissions in return for brokerage and research services in
accordance with certain regulatory conditions. Subject to the Fund's
policy of seeking best execution, the Fund may consider sales of Fund
shares when allocating portfolio brokerage and will generally execute
transactions through Nikko Securities, an affiliate of the Adviser. The
Fund is also permitted to execute transactions through broker-dealer
affiliates of the Administrator. Since commission rates in Japan are
fixed, the Adviser is not able to negotiate commission rates on its
Japanese securities transactions.

STOCKHOLDER SERVICES

Capstone Nikko Japan Fund provides its stockholders with a number of
services and conveniences designed to assist investors in the management of
their investments. These stockholder services include the following:

TAX-DEFERRED RETIREMENT PLANS

Shares may be purchased by virtually all types of tax-deferred
retirement plans. The Distributor or its affiliates make available plan
forms and/or custody agreements for the following:

o Individual Retirement Accounts (for individuals and their non-
employed spouses who wish to make limited tax deductible
contributions to a tax-deferred account for retirement); and

o Simplified Employee Pension Plans.

Dividends and distributions will be automatically reinvested without a
sales charge. For further details, including fees charged, tax
consequences and redemption information, see the specific plan documents
which can be obtained from the Fund.

Investors should consult with their tax adviser before establishing
any of the tax-deferred retirement plans described above.

EXCHANGE PRIVILEGE

Shares of the Fund which have been outstanding for 15 days or more may
be exchanged for shares of other Capstone Funds at a price based on their
respective net asset values with no sales or administrative charge. Any
exchange must meet applicable minimum investment and other requirements

<PAGE> 24

for the Capstone Fund into which the exchange is requested. A stockholder
requesting such an exchange will be sent a current prospectus for the fund
into which the exchange is requested. Shares held less than 15 days cannot
be exchanged; such shares will be redeemed at the next computed net asset
value.

Purchases, redemptions and exchanges should be made for investment
purposes only. A pattern of frequent exchanges, purchases and sales may be
deemed abusive by the Administrator and, at the discretion of the
Administrator, can be limited by the Fund's refusal to accept further
purchase and/or exchange orders from the investor. Although the
Administrator will consider all factors it deems relevant in determining
whether a pattern of frequent purchases, redemptions and/or exchanges by a
particular investor is abusive and not in the best interests of the Fund or
its other stockholders, as a general policy investors should be aware that
engaging in more than one exchange or purchase-sale transaction during any
thirty-day period with respect to a particular fund may be deemed abusive
and therefore subject to the above restrictions.

An exchange of shares is treated for Federal income tax purposes as a
sale of shares given in exchange and the stockholder may, therefore,
realize a taxable gain or loss. The exchange privilege may be exercised
only in those states where shares of the fund for which shares held are
being exchanged may be legally sold, and the privilege may be amended or
terminated upon 60 days' notice to stockholders.

The stockholder may exercise the following exchange privilege options:

Exchange by Mail - Stockholders may mail a written notice
requesting an exchange to the Fund's Transfer Agent.

Exchange by Telephone - Stockholders must complete telephone
exchange on the application form filed with the Transfer Agent to
exchange shares by telephone. Telephone exchanges may be made
from 9:30 a.m. to 4:00 p.m. Eastern time, Monday through Friday,
except holidays. If certificates have been issued to the
investor, this procedure may be utilized only if he delivers his
certificates, duly endorsed for transfer, to the Transfer Agent
prior to giving telephone instructions. During periods of
unusual economic or market changes, stockholders may experience
difficulties or delays in effecting exchanges over the telephone.

PRE-AUTHORIZED PAYMENT

A stockholder may arrange to make regular monthly investments of $25
or more automatically from his checking account by authorizing the Fund's
Transfer Agent to withdraw the payment from his checking account.

<PAGE> 25
SYSTEMATIC WITHDRAWAL PLAN

Investors may open a withdrawal plan providing for withdrawals of $50
or more monthly, quarterly, semi-annually or annually if they have made a
minimum investment in the shares of the Fund of $5,000. The minimum amount
which may be withdrawn pursuant to this plan is $50.

These payments do not represent a yield or return on investment and
may constitute return of initial capital. In addition, such payments may
deplete or eliminate the investment. Stockholders cannot be assured that
they will receive payment for any specific period because payments will
terminate when all shares have been redeemed. The number of such payments
will depend primarily upon the amount and frequency of payments and the
yield on the remaining shares. Under this plan, any distributions must be
reinvested in additional shares at net asset value.

The Systematic Withdrawal Plan is voluntary, flexible, and under the
stockholder's control and direction at all times, and does not limit or
alter the stockholder's right to redeem shares. Such plan may be
terminated in writing at any time by either the stockholder or the Fund.
The cost of operating the Systematic Withdrawal Plan is borne by the Fund.

GENERAL INFORMATION

Capstone International Series Trust is an open-end diversified
management investment company, as defined in the Investment Company Act of
1940, as amended. It was organized in Massachusetts in 1986 as a business
trust. The Trust is authorized to issue an unlimited number of shares of
beneficial interest of $0.01 par value and to divide such shares into
separate series (or funds). The Fund was established as a series of the
Trust on April 24, 1989. The Trust currently has one other series,
Capstone New Zealand Fund, which invests in securities of New Zealand
issuers. Stockholders are entitled to one vote for each full share held
and to fractional votes for fractional shares held in the election of
trustees (to the extent hereafter provided) and on other matters submitted
to the vote of stockholders of the Fund. The Trust is not required to hold
regular annual meetings of stockholders and will do so only when required
by law. There are no cumulative voting rights. In the event additional
series are established, matters submitted to stockholder vote must be
approved by each series except (i) as to matters required by the Investment
Company Act of 1940 to be voted on by all stockholders as a single class
and (ii) as to matters determined by the trustees not to affect a
particular series, which will not be submitted to vote by stockholders of
that series. Stockholders may, in accordance with the Declaration of
Trust, cause a meeting of stockholders to be held for the purpose of voting
on the removal of trustees. Fund shares have equal dividend rights, are
fully paid, non-assessable and freely transferable and have no conversion,
pre-emptive or subscription rights. Fractional shares have the same
rights, pro rata, as full shares.

Under Massachusetts law, stockholders of a business trust may, under
certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of stockholder liability for acts or obligations of the Trust.
The Declaration of Trust provides for indemnification out of the Trust's
property for any stockholder held personally liable for the obligations of
the Trust. Thus, the risk of a stockholder's incurring financial loss on
account of stockholder's liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations.

<PAGE> 26
The Fund's custodian is The Bank of Tokyo Trust Company. It is
anticipated that the Fund's assets will be maintained primarily in Japan
with The Bank of Tokyo, Ltd., pursuant to a sub-custody agreement between
The Bank of Tokyo Trust Company and The Bank of Tokyo, Ltd. In approving
these custody arrangements, the Board of Trustees considered the effect
that Japanese law may have on the safety of the Fund's assets and the
Fund's ability to convert those assets into U.S. dollars, the ability of
the custodian and sub-custodian to provide the services required by the
Fund in a cost-effective manner, the safeguards used by the custodian and
sub-custodian to protect the Fund's assets and other factors deemed
relevant by the trustees.

As of February 6, 1996, the following stockholders owned more than 5%
of the Fund's outstanding shares of beneficial interest: Nikko Capital
Management Company (USA), Inc. (24.4%), SMC Pneumatics, Inc. (23.3%) and
Smith Barney Shearson (6.6%).

Fund/Plan Services, Inc. acts as both Transfer Agent and Dividend
Paying Agent for the Fund.

Stockholders should address inquiries to the Fund at its address
stated on the cover page of this Prospectus.

<PAGE> 27
CAPSTONE INTERNATIONAL SERIES TRUST
CAPSTONE NIKKO JAPAN FUND
CROSS REFERENCE SHEET
BETWEEN
ITEMS OF FORM N-1A AND THE
STATEMENT OF ADDITIONAL INFORMATION
(PART B TO REGISTRATION STATEMENT NO. 33-6867)

<TABLE>
<CAPTION>
Item Caption in Statement of
Number Form N-1A Heading Additional Information
- ----- ----------------- -----------------------
<S> <C> <C>
10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and History General Information

13. Investment Objectives and Policies Investment Practices and Restrictions

14. Management of the Fund Trustees and Executive Officers

15. Control Persons and Principal Control Persons and Principal
Holders of Securities Holders of Securities

16. Investment Advisory and Other Investment Advisory Agreement;
Services Administration Agreement; Expenses;
Other Information

17. Brokerage Allocation Portfolio Transactions and Brokerage

18. Capital Stock and Other Securities Inapplicable

19. Purchase, Redemption and Pricing of Determination of Net Asset Value; How to Buy
Securities Being Offered and Redeem Shares

20. Tax Status Taxes

21. Underwriter Distributor

22. Calculation of Performance Data Performance Information

23. Financial Statements Financial Statements
</TABLE>

<PAGE> 28
CAPSTONE NIKKO JAPAN FUND

A Fund of
Capstone International Series Trust

STATEMENT OF ADDITIONAL INFORMATION

MARCH 1, 1996

This Statement of Additional Information is not a Prospectus but
contains information in addition to and more detailed than that set forth
in the Prospectus and should be read in conjunction with the Prospectus.
The Statement of Additional Information and the related Prospectus are both
dated March 1, 1996. A Prospectus may be obtained without charge by
contacting Capstone Asset Planning Company, by phone at (800) 262-6631 or
by writing to it at 5847 San Felipe, Suite 4100, Houston, Texas 77057.

TABLE OF CONTENTS

Page

General Information. . . . . . . . . . . . . . . . . . . . . .2
Investment Practices and Restrictions. . . . . . . . . . . . .2
Performance Information. . . . . . . . . . . . . . . . . . . .7
Trustees and Executive Officers. . . . . . . . . . . . . . . .9
Investment Advisory Agreement. . . . . . . . . . . . . . . . 11
Administration Agreement . . . . . . . . . . . . . . . . . . 11
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . 12
Portfolio Transactions and Brokerage . . . . . . . . . . . . 13
Determination of Net Asset Value . . . . . . . . . . . . . . 15
How to Buy and Redeem Shares . . . . . . . . . . . . . . . . 16
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Control Persons and Principal Holders of Securities. . . . . 22
Other Information. . . . . . . . . . . . . . . . . . . . . . 22
Financial Statements . . . . . . . . . . . . . . . . . . . . 23

<PAGE> 29
GENERAL INFORMATION

Capstone Nikko Japan Fund (the "Fund") is a series (or fund) of
Capstone International Series Trust (the "Trust"). The Trust currently has
one other series, Capstone New Zealand Fund, which invests in securities of
New Zealand issuers. The Trust may create additional series in the future,
but each series will be treated as a separate mutual fund. The Trust was
organized as a business trust in Massachusetts on May 9, 1986 and commenced
business shortly thereafter. It is an open end diversified management
investment company under the Investment Company Act of 1940. The Fund is a
member of a group of investment companies sponsored by Capstone Asset
Management Company (the "Administrator"), which also provides
administrative services to the Fund.

INVESTMENT PRACTICES AND RESTRICTIONS

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with U.S. government securities dealers recognized by the Federal Reserve
Board, with member banks of the Federal Reserve System or with such other
brokers or dealers that meet the credit guidelines of the Trust's Board of
Trustees. In a repurchase agreement, the Fund buys a security from a
seller that has agreed to repurchase the same security at a mutually agreed
upon date and price. The Fund's resale price will be in excess of the
purchase price, reflecting an agreed upon interest rate. This interest
rate is effective for the period of time the Fund is invested in the
agreement and is not related to the coupon rate on the underlying security.
Repurchase agreements may also be viewed as a fully collateralized loan of
money by the Fund to the seller. The period of these repurchase agreements
will usually be short, from overnight to one week, and at no time will the
Fund invest in repurchase agreements for more than one year. The Fund will
always receive as collateral securities whose market value including
accrued interest is, and during the entire term of the agreement remains,
at least equal to 100% of the dollar amount invested by the Fund in each
agreement, and the Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of
the Custodian. If the seller defaults, the Fund might incur a loss if the
value of the collateral securing the repurchase agreement declines and
might incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with
respect to the seller of a security which is the subject of a repurchase
agreement, realization upon the collateral by the Fund may be delayed or
limited. The Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligors under
repurchase agreements, in accordance with the credit guidelines of the
Trust's Board of Trustees.

FOREIGN CURRENCY TRANSACTIONS. The Fund may, to a limited extent,
deal in forward foreign exchange between the currencies of the United
States and Japan as a hedge against possible variations in the foreign
exchange rates between these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time of the
contract. The Fund's dealings in forward foreign exchange contracts are
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund
accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of
forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not enter
into or maintain a position in those contracts if their

<PAGE> 30
consummation would obligate the Fund to deliver an amount of foreign currency
greater than the value of the Fund's assets denominated or quoted in, or
currency convertible into, such currency.

When the Fund enters into a position hedging transaction, its
custodian bank places cash or liquid securities in a separate account of
the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of the forward contract. The amount of the
securities placed in the separate account are adjusted to maintain the
value of those securities equal to the Fund's commitment under the
contract.

Hedging against a decline in the value of a currency by means of
forward currency contracts, options on currencies, currency futures
contracts and options on currency futures contracts (see below and
"Investment Objectives and Policies" in the Prospectus) does not eliminate
fluctuations in the value of the Fund's portfolio securities or prevent
losses. Such transactions also preclude the opportunity for gain if the
value of the currency moves in an unanticipated manner. Moreover, it may
not be possible for the Fund to hedge against a change which is generally
anticipated, since appropriate transactions might not then be available.

The cost of engaging in foreign currency transactions by the Fund
varies with such factors as the currencies involved, the length of the
contract period and the market conditions then prevailing. Transactions in
foreign currency exchange usually are conducted on a principal basis, so no
fees or commissions are involved.

LOANS OF PORTFOLIO SECURITIES. The Fund has authority to lend its
portfolio securities provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities or cash or cash
equivalents adjusted daily to make a market value at least equal to the
current market value of the securities loaned; (2) the Fund may at any time
call the loan and regain the securities loaned; (3) the Fund will receive
any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed 10%
of the total assets of the Fund. In addition, it is anticipated that the
Fund may share with the borrower some of the income received on the
collateral for the loan or that it will be paid a premium for the loan. In
determining whether to lend securities, the Adviser considers all relevant
factors and circumstances including the creditworthiness of the borrower.

FUTURES TRANSACTIONS. The Fund may enter into futures contracts on
U.S. and foreign debt securities ("interest-rate futures"), on stock
indices and on currencies of countries in which the Fund conducts its
investment activities. Interest rate and currency futures contracts create
an obligation to purchase or sell specified amounts of debt securities or
currency on a specified future date. Although these contracts generally
call for making or taking delivery of the underlying securities or
currency, the contracts are in most cases closed out before the maturity
date by entering into an offsetting transaction which may result in a
profit or loss.

The purchase or sale of a futures contract involves no sale price or
premium, unlike the purchase of a security or option. Instead, an amount
of cash or securities acceptable to the broker and the relevant

<PAGE> 31
contract market, generally about 5% of the contract amount, must be deposited
with the broker as "initial margin." This "initial margin" represents a "good
faith" deposit assuring the performance of both the purchaser and the
seller under the futures contract. Subsequent "variation margin" payments
must be made daily to and by the broker to reflect variations in the price
of the futures contract. When the contract is settled or closed out by an
offsetting transaction, a final determination is made of variation margin
due to or from the broker. A nominal commission is also paid on each
completed sale transaction.

OPTIONS TRANSACTIONS. The Fund may purchase or write put or call
options on futures contracts, individual securities, currencies or stock
indices to hedge against fluctuations in securities prices and currency
exchange rates and to adjust its risk exposure relative to the Benchmark.
See "Investment Objective and Policies" in the Prospectus.

The Fund may purchase options on exchanges and in over-the-counter
markets to the extent the value of such options owned by the Fund does not
exceed 5% of its net assets. The Fund may write put options and covered
call options on exchanges and in the over-the-counter markets. A call
option gives the purchaser the right, until the option expires, to purchase
the underlying futures contract, security or currency at the exercise price
or, in the case of a stock index option, to receive a specified amount. A
put option gives the purchaser the right, until the option expires, to sell
the underlying futures contract, security or currency at the exercise price
or, in the case of a stock index option, to pay a specified amount.

When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. By writing a call option, the Fund
becomes obligated, either for a certain period or on a certain date, to
sell the underlying futures contract, security or currency to the purchaser
at the exercise price (or to pay a specified price with respect to an index
option) if the option is exercised. At the time or during the period when
the option may be exercised, the Fund risks losing any gain in the value of
the underlying futures contract, security or currency or stock index over
the exercise price. By writing a put option, the Fund becomes obligated
either for a certain period or on a certain date, to purchase the
underlying futures contract, security or currency at the exercise price, or
to pay the specified price in connection with an index option, if the
option is exercised. The Fund might, therefore, be obligated to purchase
or make a payment for more than the current market price of the particular
futures contract, security, currency or index option.

The Fund writes only "covered" options on securities and currencies.
This means that so long as the Fund is obligated as the writer of a call
option on a security or currency, it will own an equivalent amount of the
underlying security, currency or liquid securities denominated, quoted in
or currently convertible into such currency. The Fund will be considered
"covered" with respect to a put option it writes if, so long as it is
obligated as the writer of a put option, it deposits and maintains with its
custodian in a segregated account an amount of the underlying securities,
currency or liquid securities denominated, quoted in or currently
convertible into such currency having a value equal to or greater than the
exercise price of the option. There is no limitation on the amount of call
options the Fund may write. However, the Fund may write covered put
options on currencies only to the extent that cover for such options does
not exceed 25% of the Fund's net assets.

The writer of an option that wishes to terminate an obligation may in
some cases be able to effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the

<PAGE> 32
option previously written. The effect of the purchase is that the writer's
position will be cancelled by the clearing corporation. However, a writer
may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an
option may liquidate a position by effecting a "closing sale transaction."
This is accomplished by selling an option of the same series as the option
previously purchased. There is no guarantee that either a closing purchase
or a closing sale transaction can be effected.

The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund
will realize a loss from a closing transaction if the price of the
transaction is more than the premium paid to purchase the option. Because
increases in the market price of a call option will generally reflect
increases in the value of the underlying security, futures contract, index
option or currency, any loss in closing out a call option is likely to be
offset in whole or in part by appreciation of the underlying collateral
owned by the Fund.

INVESTMENT RESTRICTIONS. The Trust has adopted with respect to the
Fund the following "fundamental" restrictions which, along with its
investment objective, cannot be changed without approval by the holders of
a majority of the shares of beneficial interest in the Fund ("Fund
shares"). Such majority is defined by the Investment Company Act of 1940
as the lesser of (i) 67% or more of the Fund shares present in person or by
proxy at a meeting, if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy; or (ii) more than
50% of the outstanding voting securities. The Fund may not:

1. With respect to 75% of its total assets, invest more than 5% of
the value of such assets in the securities of any one issuer or
purchase more than 10% of the voting securities of any one issuer
(except for investments in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities).

2. Invest more than 25% of its total assets (taken at market value
at the time of each investment) in the securities of issuers in
any particular industry or in securities issued or guaranteed by
the Japanese government or its agencies or instrumentalities
provided that this restriction shall not prevent the Fund from
purchasing the securities of any issuer pursuant to the exercise
of rights distributed to the Fund by the issuer, except that no
such purchase may be made if as a result the Fund would no longer
be a diversified investment company as defined in the Investment
Company Act of 1940.

3. Borrow amounts in excess of 10% of its total assets taken at cost
(not including the amount borrowed) and then only for temporary
or emergency purposes.

4. Issue senior securities except as appropriate to evidence
permitted borrowing (for the purpose of this restriction, forward
foreign currency exchange contracts and collateral arrangements
with respect to such contracts are not deemed to be senior
securities).

5. Underwrite securities issued by other persons except to the
extent that the purchase of portfolio securities and their later
disposition may be deemed to be underwriting.

6. Purchase or sell real estate except that the Fund may invest in
securities secured by real

<PAGE> 33
estate or interests therein or securities issued by companies
which invest in real estate or interests therein.

7. Purchase or sell commodities or commodity contracts (for purposes
of this restriction, interest-rate, index and currency futures
contracts, options on such contracts and on stock indices and
currencies, and forward foreign currency exchange contracts are
not deemed to be commodities or commodity contracts).

8. Make loans to other persons except that the Fund may (i) lend its
portfolio securities in accordance with applicable legal
requirements, (ii) enter into repurchase agreements and (iii)
purchase debt obligations in accordance with its investment
objective and policies.

With respect to restriction 8, above, the Fund has no present
intention of lending its portfolio securities.

The Fund has adopted the following additional restrictions which are
not fundamental and which may be changed without stockholder approval, to
the extent permitted by applicable law, regulation or regulatory policy.
The Fund may not:

a. With respect to 25% of its total assets, invest more than 5% of
the value of such assets in the securities of any one issuer, or
purchase more than 10% of the voting securities of any one issuer
(except for investments in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities)1

b. Make short sales of securities, maintain short positions or
purchase securities on margin, except for short-term credits as
are necessary for the clearance of transactions and in connection
with transactions involving forward foreign currency exchange
contracts, futures contracts and related options;

c. Invest more than 5% of its total assets in securities of
unseasoned issuers which, including their predecessors, have been
in operation for less than three years (except obligations issued
or guaranteed by the U.S. Government, the Japanese government or
their agencies or instrumentalities) and equity securities which
are not readily marketable;

d. Enter into a repurchase agreement not terminable within seven
days if the total of such agreements would be more than 5% of the
value of the Fund's total assets;

e. Invest in securities of other investment companies (other than in
connection with a merger, consolidation, reorganization or
acquisition of assets) except to the extent permitted by the
Investment Company Act of 1940 and related rules and regulatory
interpretation;

f. Purchase put or call options if, as a result thereof, the value
of put and call options owned by the Fund would exceed 5% of the
Fund's net assets;

1 With respect to the remaining 75% of the value of the Fund's total
assets, this limitation is fundamental and therefore cannot be changed
without the approval of a majority of the Fund shares. See
restriction number 1, supra.

<PAGE> 34
g. Purchase warrants of any issuer if, as a result more than 2% of
the value of the total assets of the Fund would be invested in
warrants which are not listed on the New York Stock Exchange or
the American Stock Exchange, or more than 5% of the value of the
total assets of the Fund would be invested in warrants. Warrants
acquired by the Fund in units or attached to securities may be
deemed to be without value;

h. Purchase or retain for the Fund the securities of any issuer if
those officers and trustees of the Trust, or directors and
officers of its investment adviser, who individually own more
than 1/2 of 1% of the outstanding securities of such issuer,
together own more than 5% of such outstanding securities;

i. Purchase from or sell to any of the officers and trustees of the
Trust, its investment adviser, its principal underwriter or the
officers and directors of its investment adviser or principal
underwriter, portfolio securities of the Fund;

j. Invest in oil, gas or other mineral exploration or development
companies (although it may purchase securities of issuers which
own, sponsor or invest in such interests);

k. Pledge, mortgage or hypothecate its assets, except that to secure
permitted borrowings it may pledge securities having a value at
the time of the pledge of not more than 15% of the Fund's total
assets taken at cost. (For purposes of this restriction,
collateral arrangements with respect to permitted options and
futures transaction and forward foreign exchange contracts are
not deemed to involve a pledge of assets.);

l. Purchase any securities subject to legal or contractual
restrictions on the resale thereof, or purchase securities which
are not readily marketable including securities of foreign
issuers which are not listed on a recognized domestic or foreign
securities exchange, or enter into repurchase agreements which
are not terminable within seven days if such purchase or entering
into a repurchase agreement would cause more than 10% of the
value of the total assets of the Fund to be invested in such
securities and such repurchase agreements, except that the Fund
may not invest more than 5% of the value of the total assets in
repurchase agreements which are not terminable within seven days.

The portfolio securities of the Fund may be turned over whenever
necessary or appropriate in the opinion of the Fund's management to seek
the achievement of the basic objective of the Fund. The turnover rate of
the Fund's portfolio was 27% for the fiscal year ended October 31, 1995.

PERFORMANCE INFORMATION

The Fund may from time to time include figures indicating the Fund's
yield, total return or average annual total return in advertisements or
reports to stockholders or prospective investors. Quotations of the Fund's
yield will be based on all investment income per share earned during a
particular 30-day period (including dividends and interest), less expenses
accrued during the period ("net investment income"), and are computed by
dividing net investment income by the maximum offering price per share
(which includes the maximum sales charge) on the last day of the period,
according to the following formula:

<PAGE> 35
YIELD = 2[(a-b + 1)6-1]
-------
cd

where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements or
waivers),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.

For the 30-day period ended October 31, 1995 the Fund's yield was
(5.600)%.

Average annual total return and total return figures represent the
increase (or decrease) in the value of an investment in the Fund over a
specified period. Both calculations assume that all income dividends and
capital gains distributions during the period are reinvested at net asset
value in additional Fund shares. Quotations of the average annual total
return reflect the deduction of a proportional share of Fund expenses on an
annual basis. The results, which are annualized, represent an average
annual compounded rate of return on a hypothetical investment in the Fund
over a period of 1, 5 and 10 years ending on the most recent calendar
quarter (but not for a period greater than the life of the Fund),
calculated pursuant to the following formula:

P (1 + T)n= ERV

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

For the one year period ended October 31, 1995, the Fund's average
annual total return was (15.82)%. For the five year period ended October
31, 1995 and the period July 10, 1989 (commencement of operations) to
October 31, 1995 the Fund's average annual total return was (3.22)% and
(5.76)%, respectively.

Quotations of total return, which are not annualized, represent
historical earnings and asset value fluctuations. Total return is based on
past performance and is not a guarantee of future results. For the one
year and five year periods ended October 31, 1995 and the period July 10,
1989 to October 31, 1995 the Fund's total return was (15.82)%, (15.08)%,
and (31.21)%, respectively.

Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Morgan Stanley Capital International
Index; (ii) the Tokyo Stock Exchange; (iii) the Standard & Poor's 500 Stock
Price Index ("S&P 500 Index"), the Dow Jones Industrial Average ("DJIA"),
or other appropriate unmanaged indices of performance of various types of
investments, so that investors may compare the Fund's results with those of
indices widely regarded by investors as representative of the securities
markets in general; (iv) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies, publications, or persons who rank
mutual funds on overall performance or other criteria; (v) the Consumer
Price Index (a measure of inflation) to assess the real rate of return from
an investment in the Fund; and (vi) a universe of money managers with

<PAGE> 36
similar country allocation and performance objectives. Unmanaged indices
may assume the reinvestment of dividends, but generally do not reflect
deductions for administrative and management costs and expenses.

Performance information for the Fund reflects only the performance of
a hypothetical investment in the Fund during the particular time period on
which the calculations are based. Performance information should be
considered in light of the Fund's investment objectives and policies, the
types and quality of the Fund's portfolio investments, market conditions
during the particular time period and operating expenses. Such information
should not be considered as a representation of the Fund's future
performance.

TRUSTEES AND EXECUTIVE OFFICERS

The trustees and executive officers of the Trust are listed below.
Certain persons named as trustees also serve in similar capacities for
other mutual funds sponsored by the Distributor as indicated below.

* EDWARD L. JAROSKI, Trustee and President of the Trust. 5847 San
Felipe, Suite 4100, Houston, Texas 77057. Chairman of the Board
and Director of the Administrator since 1992; President and
Director of Capstone Asset Planning Company and Capstone
Financial Services, Inc. since 1987; Director and officer of
other Capstone Funds.

EUGENE W. POTTER, JR., Trustee. 43 Elm Lane, Bronxville, New
York 10708. Corporate Director and Private Investor; formerly
President of Inco Investment Management Services (1981-1986);
Director of the Schafer Value Fund, Inc. and Formula 40 U.S.A.,
Inc.

PHILIP C. SMITH, Trustee. 87 Lord's Highway, Weston, Connecticut
06880. Private investor; Director of the Lexington Mutual Funds
and other Capstone Funds.

BERNARD J. VAUGHAN, Trustee. 113 Bryn Mawr Avenue, Bala Cynwyd,
Pennsylvania 19004. Director of other Capstone Funds; formerly
Vice President of Fidelity Bank (1979-1993).

STANLEY KIRTMAN, President of the Fund. 485 Fifth Avenue, 6th
Floor, New York, New York 10017. President and Chief Investment
Officer of Nikko Capital Management (U.S.A.), Inc. (since
September 1995) and Director and Chief Investment Officer of
Nikko Capital Management (U.S.A.), Inc. (1987-1995).

IRIS R. CLAY, Secretary. 5847 San Felipe, Suite 4100, Houston,
Texas 77057. Secretary (since February 1996), Assistant Vice
President (1994-1996) and Assistant Secretary (1990-1994) of
Capstone Financial Services, Inc., Capstone Asset
Management Company and Capstone Asset Planning Company; Officer
of other Capstone Funds.

______________
* Trustee who is an interested person as defined in the Investment
Company Act of 1940.

<PAGE> 37

NORMA R. YBARBO, Assistant Secretary. 5847 San Felipe, Suite
4100, Houston, Texas 77057. Assistant Compliance Officer (since
1994), Compliance Analyst (1993-1994) and Compliance Assistant
(1987-1993) of Capstone Financial Services, Inc.; Officer of
other Capstone Funds.

LINDA G. GIUFFRE, Treasurer. 5847 San Felipe, Suite 4100,
Houston, Texas 77057. Vice President and Treasurer (since
February 1996) of Capstone Financial Services, Inc. Capstone
Asset Management Company and Capstone Asset Planning Company;
Treasurer (1990-1996) and Secretary (1994-1996) of Capstone
Financial Services, Inc. and Capstone Asset Management Company;
Treasurer (1990-1996) and Secretary (1995-1996) of Capstone Asset
Planning Company; Officer of other Capstone Funds.

The trustees and officers of the Trust as a group own less than one
percent of the outstanding Fund shares. Messrs. Smith and Vaughan also
receive compensation for serving as directors of other investment companies
sponsored by the Administrator.

Each trustee not affiliated with the Adviser or Administrator is
entitled to $250 for each Board meeting attended, and is paid a $1,000
annual retainer by the Trust. The trustees and officers of the Trust are
also reimbursed for expenses incurred in attending meetings of the Board of
Trustees. For the fiscal year ended October 31, 1995, the Fund paid or
accrued for the account of the trustees and officers, as a group for
services in all capacities, a total of $3,518.

The following table represents the fees paid during the 1995 calendar
year to the trustees of the Trust and the total compensation each trustee
received during that period from the Capstone Funds complex.

COMPENSATION TABLE

<TABLE>
<CAPTION>
Total
Compensation
From
Aggregate Pension or Registrant
Compensation Retirement Estimated Annual and Fund
From Benefits Accrued Benefits Upon Complex Paid
Name of Person, Position Registrant* As Part of Fund Retirement to Trustees
------------------------ ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Eugene W. Potter, Jr., Trustee $ 875 $0 $0 $1,750(1)
Philip C. Smith, Trustee 1,000 0 0 6,750(1)(2)(3)
Bernard J. Vaughan, Trustee 1,125 0 0 6,250(1)(2)

______________
* Amounts do not include deferred compensation.
(1) Trustee of Capstone International Series Trust. - Capstone New Zealand Fund
(2) Director of Capstone Fixed Income Series, Inc. and Capstone Growth Fund, Inc.
(3) Director of Medical Research Investment Fund, Inc.
</TABLE>

<PAGE> 38
INVESTMENT ADVISORY AGREEMENT

Pursuant to an investment advisory agreement dated July 10, 1989 (the
"Advisory Agreement"), Nikko Capital Management (USA), Inc. (the "Adviser")
manages the investment of the Fund's assets and places orders for the
purchase and sale of its portfolio securities. The Adviser is responsible
for obtaining and evaluating economic, statistical, and financial data and
for formulating and implementing investment programs in furtherance of the
Fund's investment objectives and policies.

Under the Advisory Agreement, the Fund pays to the Adviser as
compensation for the services rendered by it a fee, calculated daily and
payable quarterly, equal to an annual rate of 0.40% of the average net
assets of the Fund. For the fiscal year ended October 31, 1995 the Fund
paid investment advisory fees in the amount of $12,315, all of which was
reimbursed to the Fund pursuant to an expense limitation (see "Expenses"
below).

The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any actions or omissions in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
Adviser's obligations or duties under the Advisory Agreement.

The Advisory Agreement was last approved by the Board of Trustees on
May 7, 1995 and may be continued from year to year if specifically approved
at least annually (a) by the Board of Trustees of the Trust or by vote of a
majority of the Fund shares and (b) by the affirmative vote of a majority
of the trustees who are not parties to the agreement or interested persons
of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.

ADMINISTRATION AGREEMENT

Under an agreement ("Administration Agreement") between the Trust and
Capstone Asset Management Company (the "Administrator"), the Administrator
supervises all aspects of the Fund's operations other than the management
of its investments. As part of these services, it oversees the performance
of administrative and professional services to the Fund by others; provides
office facilities; prepares reports to stockholders and the Securities and
Exchange Commission; and provides personnel for supervisory, administrative
and clerical functions. Except as noted below, the costs of these services
are borne by the Administrator. For the Administrator's services, the Fund
will pay to the Administrator a fee, calculated daily and payable
quarterly, equal to an annual rate of 0.20% of the Fund's average net
assets. For the fiscal year ended October 31, 1995 the Fund paid
administrative fees in the amount of $6,157, all of which was reimbursed to
the Fund (see "Expenses" below).

Under the Administration Agreement, the Fund bears the cost of its
accounting services, which includes maintaining its financial books and
records and calculating its daily net asset value. The cost of such
accounting services, which is currently $2,000 per month, includes the
salaries and overhead expenses of personnel of the Administrator, office
space, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services are provided at cost which
is allocated among the investment companies administered by the
Administrator. The Fund also pays transfer agency fees, custodian fees,
legal and auditing fees, the costs of printing reports to stockholders and
the

<PAGE> 39
Securities and Exchange Commission, fees under the Service and Distribution
Plan (see "Distributor") and all other ordinary expenses not specifically
borne by the Administrator.

The overhead of the Administrator which is charged to the Fund relates
only to the maintenance of the account records of the Fund and calculating
its net asset value. Such overhead does not include any costs with respect
to legal, blue sky, supervisory personnel, preparation of stockholder and
director reports and other functions of the Administrator for which it is
already being compensated under the Administration Agreement.

EXPENSES

The Adviser and Administrator have agreed to reduce their fees (and
reimburse the Fund if necessary) if the ordinary business expenses of the
Fund exceed any expense limitation applicable to the Fund pursuant to the
laws or regulations of any state. Such reimbursement shall be shared by
the Adviser and the Administrator ratably in proportion to the fees
received by them from the Fund. The most restrictive limitation presently
applicable to the Fund is equal to the sum of 2 1/2% of the first $30
million of the Fund's average net assets, 2% of the next $70 million of the
Fund's average net assets, and 1 1/2% of the Fund's average net assets in
excess of $100 million.

During the fiscal year ended October 31, 1995 the total operating
expenses of the Fund prior to the reimbursements by the Adviser and
Administrator were 4.21% of the Fund's average net assets, and 3.61% after
the reimbursements.

DISTRIBUTOR

Capstone Asset Planning Company (the "Distributor"), acts as the
principal underwriter of the Fund shares pursuant to an agreement with the
Trust (the "Distribution Agreement"). The Distributor has the exclusive
right to distribute Fund shares in a continuous offering through affiliated
and unaffiliated dealers. The Distributor's obligation is an agency or
"best efforts" arrangement under which the Distributor is required to take
and pay for only such Fund shares as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses
used in connection with this offering and the cost and expense of
supplemental sales literature, promotion and advertising. Prior to August
21, 1995, sales of Fund shares were subject to a sales charge equal to a
percentage of the net asset value of the shares to be purchased. The sales
charge was paid to the Distributor, who reallowed a portion of the sales
charge to broker-dealers who had an agreement with the Distributor to
participate in the offering of Fund shares. For the fiscal year ended
October 31, 1995 the Distributor received $2,840 from the sale of Fund
shares. During the fiscal years ended October 31, 1994 and October 31,
1993, the Distributor received $19,267 and $5,822, respectively, from the
sale of Fund shares.

The Distribution Agreement is renewable from year to year if approved
(a) by the Fund's Board of Trustees or by a vote of a majority of the
Fund's outstanding voting securities and (b) by the affirmative vote of a
majority of trustees who are not parties to the Distribution Agreement or
interested persons of any party, by votes cast in person at a meeting
called for such purpose. The Distribution Agreement provides that it will
terminate if assigned, and that it may be terminated without penalty by

<PAGE> 40
either party on 60 days' written notice.

The Fund adopted, effective September 1, 1992, a Service and
Distribution Plan (the "Plan") pursuant to Rule 12b-1 of the Investment
Company Act of 1940 which permits the Fund to absorb certain expenses in
connection with the distribution of its shares and provision of certain
services to stockholders. See "Management of the Fund - Distributor" in
the Fund's Prospectus. As required by Rule 12b-1, the Fund's Plan and
related agreements were approved by a vote of the Fund's Board of Trustees,
and by a vote of the trustees who are not "interested persons" of the Fund
as defined under the 1940 Act and have no direct or indirect interest in
the operation of the Plan or any agreements related to the Plan (the "Plan
Trustees"), and by the Fund's stockholders at a Special Meeting of
Stockholders held August 10, 1992.

As required by Rule 12b-1, the trustees review quarterly reports
prepared by the Distributor on the amounts expended and the purposes for
the expenditures. The Fund paid $10,193 in 12b-1 fees during the fiscal
year ended October 31, 1995, of which less than 1% was paid to Service
Organizations other than the Distributor.

The Plan and related agreements may be terminated at any time by a
vote of the Plan Trustees or by vote of a majority of the Fund's
outstanding voting securities. As required by Rule 12b-1, selection and
nomination of disinterested trustees for the Fund is committed to the
discretion of the trustees who are not "interested persons" as defined
under the 1940 Act.

Any change in the Plan that would materially increase the distribution
expenses of the Fund requires stockholder approval, but otherwise, the Plan
may be amended by the trustees, including a majority of the Plan Trustees.

The Plan will continue in effect for successive one year periods
provided that such continuance is specifically approved by a majority of
the trustees, including a majority of the Plan Trustees. Continuance of
the Plan was last approved by a majority of trustees and Plan Trustees on
May 7, 1995. In compliance with the Rule, the trustees, in connection with
both the adoption and continuance of the Plan, requested and evaluated
information they thought necessary to make an informed determination of
whether the Plan and related agreements should be implemented, and
concluded, in the exercise of reasonable business judgment and in light of
their fiduciary duties, that there is a reasonable likelihood that the Plan
and related agreements will benefit the Fund and its stockholders.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities
for the Fund and for the placement of its portfolio business and the
negotiation of the commissions paid on such transactions. In over-the-
counter transactions, orders are placed directly with a principal market
maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay
higher brokerage commissions for brokerage and research services (as
described below) on a portion of its transactions executed on securities
exchanges, the Adviser seeks the best security price at the most favorable
commission rate. In selecting dealers and in negotiating commissions, the
Adviser considers the firm's reliability, the quality of its execution
services on a continuing basis and its financial condition. When more than
one firm are believed to meet these criteria, preference may be given to

<PAGE> 41
firms which also provide research services to the Fund or the Adviser.
Subject to the Fund's overall brokerage policies, the Adviser may effect
securities transactions through Capstone Asset Planning Company, TradeStar
Investments, Inc. and Williams McKay Jordan & Mills, Inc., broker-dealer
affiliates of the Administrator, and with The Nikko Securities Company
International, Inc., an affiliate of the Fund's Adviser.

Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an
account to pay a broker or dealer who supplies brokerage and research
services a commission for effecting a securities transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting the transaction. Brokerage and research services include (a)
furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (b) furnishing analyses
and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy, and the performance of accounts, and (c)
effecting securities transactions and performing functions incidental
thereto (such as clearance, settlement and custody).

Pursuant to provisions of the Advisory Agreement, the Trust's Board of
Trustees has authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return
for brokerage and research services which provide lawful and appropriate
assistance to the Adviser in carrying out its investment-decision making
responsibilities. The Adviser is of the opinion that the continued receipt
of supplemental investment research services from dealers is essential to
its provision of high quality portfolio management services to the Fund.
The Adviser undertakes that such higher commissions will not be paid by the
Fund unless (a) the Adviser determines in good faith that the amount is
reasonable in relation to the services in terms of the particular
transaction or in terms of the Adviser's overall responsibilities with
respect to the accounts as to which it exercises investment discretion, (b)
such payment is made in compliance with the provisions of Section 28(e) and
other applicable state and Federal laws and regulations, and (c) in the
opinion of the Adviser, the total commissions paid by the Fund are
reasonable in relation to the expected benefits to the Fund over the long
term. The investment advisory fee paid by the Fund under the Advisory
Agreement is not reduced as a result of the Adviser's receipt of research
services.

Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such
other policies as the Board of Trustees may determine, the Adviser may
consider sales of Fund shares as a factor in the selection of dealers to
execute portfolio transactions for the Fund.

The Adviser places portfolio transactions for other advisory accounts.
Research services furnished by firms through which the Fund effects its
securities transactions may be used by the Adviser in servicing all of its
accounts; not all of such services may be used by the Adviser in connection
with the Fund. In the opinion of the Adviser, the benefits from research
services to each of the accounts (including the Fund) managed by the
Adviser cannot be measured separately. Because the volume and nature of
the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the
benefits received by the Fund on a continuing basis.

<PAGE> 42
The Adviser seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by
the Fund and another advisory account. In some cases, this procedure could
have an adverse effect on the price or the amount of securities available
to the Fund. In making such allocations among the Fund and other advisory
accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same
or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.

The Fund contemplates that, consistent with its policy of obtaining
best net results, a substantial amount of its brokerage transactions will
be conducted through affiliates of the Adviser. Fixed commissions are
charged on the securities exchanges in Japan. Such fixed commissions are
generally higher than negotiated commissions on comparable United States
transactions. Brokerage commissions paid by the Fund on portfolio
transactions for the fiscal year ended October 31, 1995 totalled $17,273
(0.56% of the average net assets of the Fund), all of which was paid to The
Nikko Securities Co. International, Inc., an affiliate of the Adviser. For
the fiscal year ended October 31, 1995 all portfolio transactions were
effected with the payment of a commission.

DETERMINATION OF NET ASSET VALUE

Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the prevailing market rates
at 14:00 Greenwich Mean Time on each U.S. business day.

<PAGE> 43
HOW TO BUY AND REDEEM SHARES

Shares of the Fund are sold in a continuous offering without a sales
charge and may be purchased on any business day through authorized dealers,
including Capstone Asset Planning Company or The Nikko Securities Co.
International, Inc., an affiliate of the Adviser. Certain broker-dealers
assist their clients in the purchase of shares from the Distributor and
charge a fee for this service in addition to the Fund's public offering
price.

After an order is received by the Distributor, shares will be credited
to a stockholder's account at the net asset value next computed after an
order is received. See "Determination of Net Asset Value". Initial
purchases must be at least $200; however, this requirement may be waived by
the Distributor for plans involving continuing investments. There is no
minimum for subsequent purchases of shares. No stock certificates
representing shares purchased will be issued except upon written request to
the Fund's Transfer Agent. The Fund's management reserves the right to
reject any purchase order if, in its opinion, it is in the Fund's best
interest to do so. See "Purchasing Shares" in the Prospectus.

Generally, stockholders may require the Fund to redeem their shares by
sending a written request, signed by the record owner(s), to Capstone Nikko
Japan Fund, c/o Fund/Plan Services, Inc., P.O. Box 874, 2 W. Elm Street,
Conshohocken, Pennsylvania 19428. In addition, certain expedited
redemption methods are available. See "Redemption and Repurchase of
Shares" in the Prospectus.

TAXES

The following summary describes some of the more significant U.S.
Federal income tax consequences applicable to investors in the Fund based
on existing Federal tax law. New tax laws may be enacted which may affect
the tax consequences of an investment in the Fund. The following
discussion is necessarily general, and prospective investors are urged to
consult their own tax advisers with respect to the particular tax
consequences to the investor of an investment in the Fund.

The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). Qualification and election to be
taxed as a regulated investment company involves no supervision of
management or investment policies or practices by any government agency.
To qualify as a regulated investment company the Fund must, with respect to
each taxable year, distribute to stockholders at least 90% of its
investment company taxable income (which includes, among other items,
dividends, interest, certain foreign currency gains and losses and the
excess of net short-term capital gains over net long-term capital losses)
and meet certain diversification of assets, source of income, and other
requirements of the Code.

As a regulated investment company, the Fund generally will not be
subject to Federal income tax on its investment company taxable income and
net capital gains (net long-term capital gains in excess of net short-term
capital losses), if any, that it distributes to stockholders. The Fund
intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and net capital gains.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax.
To prevent imposition of the tax, the Fund must distribute during each
calendar year an amount equal to the sum of: (1) at least 98% of its
ordinary

<PAGE> 44
income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its
capital losses for the twelve-month period ending on October 31 of the
calendar year (reduced by certain net operating losses, as prescribed by
the Code), and (3) all ordinary income and capital gains from previous
years that were not distributed during such years. A distribution will be
treated as paid on December 31 of the calendar year if it is declared by
the Fund in October, November or December of that year to stockholders on a
record date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to
stockholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution
requirement.

The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross
income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock.
The Fund itself will be subject to tax on the portion, if any, of the
excess distribution that is allocated to the Fund's holding period in prior
taxable years (and an interest factor will be added to the tax, as if the
tax had actually been payable in such prior taxable years) even though the
Fund distributes the corresponding income to stockholders. Excess
distributions include any gain from the sale of PFIC stock as well as
certain distributions from a PFIC. All excess distributions are taxable as
ordinary income.

The Fund may be able to elect alternative tax treatment with respect
to PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any
distributions are received from the PFIC. If this election is made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. Alternatively, the Fund may elect to mark-
to-market its PFIC stock, resulting in the stock being treated as sold at
fair market value on the last business day of each taxable year. Any
resulting gain would be reported as ordinary income, and any resulting loss
would not be recognized. If this election were made, the special rules
described above with respect to excess distributions would still apply.
The Fund's intention to qualify annually as a regulated investment company
may limit its elections with respect to PFIC stock.

Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing
of the recognition of income with respect to PFIC stock, as well as subject
the Fund itself to tax on certain income from PFIC stock, the amount that
must be distributed to stockholders and which will be taxed to stockholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC stock.

If the Fund retains net capital gains for reinvestment, although it
has no plans to do so, the Fund may elect to treat such amounts as having
been distributed to its stockholders. As a result, the stockholders would
be subject to tax on undistributed capital gains, would be able to claim
their proportionate share of the Federal income taxes paid by the Fund on
such gains as a credit against their own Federal income tax liabilities,
and would be entitled to an increase in their basis in the Fund shares.

DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income will be

<PAGE> 45
taxable to a stockholder as ordinary income. Distributions of net capital
gains, if any, designated by the Fund as capital gain dividends, are taxable
as long-term capital gains, regardless of how long the stockholder has held
the Fund's shares, and are not eligible for the dividends received deduction.

Dividends received by corporate stockholders may qualify for the
dividends received deduction to the extent the Fund designates its
dividends as derived from dividends from domestic corporations. The amount
designated by the Fund as so qualifying cannot exceed the aggregate amount
of dividends received by the Fund from domestic corporations for the
taxable year. Since the Fund's income may not consist exclusively of
dividends eligible for the corporate dividends received deduction, its
distributions of investment company taxable income likewise may not be
eligible, in whole or in part, for that deduction. The alternative minimum
tax applicable to corporations may reduce the benefits of the dividends
received deductions. The dividends received deduction may be further
reduced if the shares of the Fund are debt-financed or are deemed to have
been held less than 46 days.

All distributions are taxable to the stockholder whether reinvested in
additional shares of the Fund or received in cash. Stockholders receiving
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share received equal to the net asset
value of a share of the Fund on the reinvestment date. Stockholders will
be notified annually as to the Federal tax status of distributions paid to
them by the Fund.

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

HEDGING AND OTHER TRANSACTIONS. Certain options, futures contracts
and forward foreign currency contracts are "section 1256 contracts." Any
gains or losses on section 1256 contracts generally are considered 60%
long-term and 40% short-term capital gains or losses ("60/40"); however,
foreign currency gains or losses (as discussed below) arising from certain
section 1256 contracts may be treated as ordinary income or loss. Also,
section 1256 contracts held by the Fund at the end of each taxable year are
"marked-to-market" with the result that unrealized gains or losses are
treated as though they were realized and the resulting gain or loss is
generally treated as 60/40 gain or loss.

Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for Federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In
addition, losses realized by the Fund on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken
into account in calculating the taxable income for the taxable year in
which such losses are realized. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences
to the Fund of hedging transactions are not entirely clear. The hedging
transactions may increase the amount of short-term capital gain realized by
the Fund, which is taxed as ordinary income when distributed to
stockholders.

<PAGE> 46
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules
that vary according to the election(s) made. The rules applicable under
certain of the elections may operate to defer the recognition of losses
and/or accelerate the recognition of gains or losses from the affected
straddle positions.

Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.

Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to
which the Fund will be able to engage in transactions in options, futures
and forward contracts.

FOREIGN CURRENCY GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in foreign currency exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
the disposition of debt securities denominated in a foreign currency and on
the disposition of certain options, futures and forward contracts, gains or
losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its stockholders as ordinary income.

DISPOSITION OF SHARES. Upon a taxable disposition (by redemption,
repurchase, sale or exchange) of Fund shares, a stockholder may realize a
taxable gain or loss, depending upon his basis in his shares. That gain or
loss will be a capital gain or loss if the shares are capital assets in the
stockholder's hands, and generally will be long-term or short-term
depending upon the stockholder's holding period for the shares. Any loss
realized by a stockholder on a disposition of Fund shares held by the
stockholder for six months or less will be treated as a long-term capital
loss to the extent of any distributions of capital gain dividends received
by the stockholder with respect to such shares. Any loss realized on a
disposition will be disallowed to the extent the shares disposed of are
replaced (whether by reinvestment of distributions or otherwise) within a
period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.

Under certain circumstances, the sales charge incurred in acquiring
shares of the Fund may not be taken into account in determining the gain or
loss on the disposition of those shares. This rule applies where shares of
the Fund are exchanged within 90 days after the date they were purchased
and new shares of a Capstone Fund or another regulated investment company
are acquired without a sales charge or at a reduced sales charge. In that
case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of
the sales charge incurred in acquiring those shares. This exclusion
applies to the extent that the otherwise applicable sales charge

<PAGE> 47
with respect to the newly acquired shares is reduced as a result of having
incurred a sales charge initially. The portion of the sales charge
affected by this rule will be treated as a sales charge for the new shares.

Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount on a taxable debt security earned in a given year generally is
treated for Federal income tax purposes as interest and, therefore, such
income would be subject to the distribution requirements of the Code.

BACKUP WITHHOLDING. The Fund may be required to withhold Federal
income tax at the rate of 31% of all taxable distributions from the Fund
and of gross proceeds from the redemption of Fund shares payable to
stockholders 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 stockholders and certain other stockholders
specified in the Code generally are exempt from backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the stockholder's U.S. Federal income tax liability.

FOREIGN TAXES. Income received by the Fund from sources within
foreign countries may be subject to withholding and other taxes imposed by
such countries. Tax conventions between certain countries and the United
States may reduce or eliminate these taxes. Under the current income tax
treaty between the United States and Japan, the withholding tax imposed by
Japan on dividends from Japanese sources is generally 15% (although a 10%
rate may be applicable in some circumstances) and the withholding tax on
interest from Japanese sources is generally 10%. Japan also imposes a tax
on the transfer of securities. It is impossible to determine in advance
the amount of foreign taxes that will be imposed on the Fund.

If more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the
Fund will be eligible and intends to elect to "pass-through" to the Fund's
stockholders the amount of foreign income and similar taxes paid by the
Fund. Pursuant to this election, a stockholder will be required to include
in gross income (in addition to taxable dividends actually received) his
pro rata share of the foreign income and similar taxes paid by the Fund,
and generally will be entitled either to deduct (as an itemized deduction)
his pro rata share of such foreign taxes in computing his taxable income or
to use it (subject to limitations) as a foreign tax credit against his U.S.
Federal income tax liability. No deduction for foreign taxes may be
claimed by a stockholder who does not itemize deductions. Each stockholder
will be notified within 60 days after the close of the Fund's taxable year
whether the foreign taxes paid by the Fund will "pass-through" for that
year and, if so, such notification will designate (a) the stockholder's
portion of the foreign taxes paid to foreign countries and (b) the portion
of the dividend which represents income derived from sources outside the
U.S.

Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the stockholder's U.S. Federal income tax
attributable to his total foreign source taxable income. For this purpose,
if the pass-through election is made, the source of the Fund's income flows
through to its stockholders. With respect to the Fund, gains from the sale
of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign
currency denominated debt securities, receivables and payables, will be
treated as derived from U.S. sources. The

<PAGE> 48
limitation on the foreign tax credit is applied separately to foreign source
passive income, such as dividends received from the Fund. Stockholders may
be unable to claim a credit for the full amount of their proportionate share
of foreign taxes paid by the Fund. In addition, the foreign tax credit may
offset only 90% of the alternative minimum tax (prior to reduction for the
"regular" tax liability for the year) imposed on corporations and individuals.
In addition, foreign taxes may not be deducted by a stockholder that is an
individual in computing alternative minimum taxable income.

The foregoing is only a general description of the foreign tax credit
under current law. Because application of the credit depends on the
particular circumstances of each stockholder, stockholders are advised to
consult their own tax advisers.

FOREIGN STOCKHOLDERS - U.S. FEDERAL INCOME TAXATION. U.S. Federal
income taxation of a stockholder who, as to the United States, is a non-
resident alien individual, a foreign trust or estate, a foreign
corporation, or a foreign partnership (a "foreign stockholder"), depends on
whether the income from the Fund is "effectively connected" with a U.S.
trade or business carried on by such stockholder, as discussed generally
below. Special U.S. Federal income tax rules that differ from those
described below may apply to foreign persons who invest in the Fund. For
example, the tax consequences to a foreign stockholder entitled to claim
the benefits of an applicable tax treaty may be different from those
described below. Foreign stockholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.

FOREIGN STOCKHOLDERS - INCOME NOT EFFECTIVELY CONNECTED. If the
income from the Fund is not effectively connected with a U.S. trade or
business carried on by the stockholder, distributions of investment company
taxable income generally will be subject to a U.S. Federal withholding tax
of 30% (or lower treaty rate) on the gross amount of the distribution.
Foreign stockholders may also be subject to the U.S. Federal withholding
tax on the income resulting from any election by the Fund to treat foreign
taxes paid by it as paid by its stockholders, but foreign stockholders will
not be able to claim a credit or deduction for the foreign taxes treated as
having been paid by them.

Capital gains realized directly by foreign stockholders upon the sale
of Fund shares and distributions of net capital gains, as well as amounts
retained by the Fund which are designated as undistributed capital gains,
generally will not be subject to U.S. Federal income tax unless the foreign
stockholder is a non-resident alien individual and is physically present in
the United States for more than 182 days during the taxable year. However,
this rule only applies in exceptional cases because any individual present
in the United States for more than 182 days during the taxable year
generally is treated as a resident for U.S. Federal income tax purposes and
is taxable on his worldwide income at the graduated rates applicable to
U.S. citizens, rather than the 30% U.S. Federal withholding tax. In the
case of certain foreign stockholders, the Fund may be required to withhold
U.S. Federal income tax at a rate of 31% of distributions of net capital
gains and of the gross proceeds from a redemption of Fund shares unless the
stockholder furnishes the Fund with certifications regarding the
stockholder's foreign status. See "Backup Withholding."

FOREIGN STOCKCHOLDERS- INCOME EFFECTIVELY CONNECTED. If the income
from the Fund is effectively connected with a U.S. trade or business
carried on by a foreign stockholder, then all distributions and any gains
realized upon the disposition of Fund shares will be subject to U.S.
Federal income tax at the graduated rates applicable to U.S. citizens and
domestic corporations. Foreign stockholders may also be subject to the
branch profits tax.

<PAGE> 49
FOREIGN STOCKHOLDERS - ESTATE TAX. Foreign individuals generally are
subject to U.S. Federal estate tax on their U.S. situs property, such as
shares of the Fund, that they own at the time of their death. Certain
credits against such tax and relief under applicable tax treaties may be
available.

OTHER TAXATION. Distributions and redemption proceeds with respect to
the Fund also may be subject to additional state, local and foreign taxes,
depending upon each stockholder's particular situation. Stockholders are
advised to consult their tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

The following table sets forth information concerning such persons
which, to the knowledge of the Fund's Board of Trustees, owned more than
five percent of the Fund's shares as of February 6, 1996:

Name and Address Percent of Ownership
---------------- --------------------
Nikko Capital Management Company (USA), Inc. 24.4%
489 Fifth Avenue, 6th Floor
New York, NY 10017

SMC Pneumatics, Inc. 23.3%
3011 N. Franklin Rd.
Indianapolis, IN 46226-6308

Smith Barney Shearson 6.6%
333 W. 34th Street, 7th Floor
New York, NY 10001

OTHER INFORMATION

CUSTODY OF ASSETS. All securities owned by the Fund and cash from the
sale of securities in the Fund's investment portfolio are held by The Bank
of Tokyo Trust Company, as custodian, either directly or pursuant to a Sub-
Custody Agreement with The Bank of Tokyo, Ltd. in Tokyo.

STOCKHOLDER REPORTS. Semi-annual reports are furnished to
stockholders, and annually the financial statements in such reports are
audited by the Fund's independent accountants.

INDEPENDENT ACCOUNTANTS. Tait, Weller & Baker, Two Penn Center Plaza,
Suite 700, Philadelphia, PA 19102-1707, the independent accountants for the
Fund, performs annual audits of the Fund's financial statements.

LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, DC 20005, is legal counsel to the Fund.

<PAGE> 50

CAPSTONE NIKKO JAPAN FUND
- ------------------------------------------------------------------------------

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders and Board of Trustees
of Capstone Nikko Japan Fund

We have audited the accompanying statement of assets and liabilities of
Capstone Nikko Japan Fund, including the portfolio of investments, as of
October 31, 1995 and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in
the period then ended, and financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosure in
the financial statements. Our procedures included confirmation of securities
owned as of October 31, 1995 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Capstone Nikko Japan Fund as of October 31, 1995, the results of
its operations, changes in its net assets and financial highlights for each
of the periods presented, in conformity with generally accepted accounting
principles.

Tait, Weller & Baker

Philadelphia, Pennsylvania
November 20, 1995

<PAGE> 51

<TABLE>
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1995
- ------------------------------------------------------------------------------
<CAPTION>
MARKET
VALUE PERCENTAGE OF
COMMON STOCKS - 99.33% SHARES (NOTE 1-A) NET ASSETS
- ---------------------- ------ ---------- -------------
<S> <C> <C> <C>
AUTOMOBILES & TRUCKS (1.67%)
Fuji Heavy Industries (a). . . . . . . . . 14,000 $ 48,399 1.67%

BANKING (4.72%)
Ind. Bank of Japan . . . . . . . . . . . . 2,000 54,492 1.87
Mitsubishi Trust Bank. . . . . . . . . . . 4,000 55,860 1.92
Nippon Trust & Banking . . . . . . . . . . 8,000 26,953 0.93
-------- ----
137,305 4.72

CHEMICALS (6.74%)
Asahi Organic Chemical Industry. . . . . . 6,000 45,118 1.55
Central Glass Co., Ltd. (a). . . . . . . . 15,000 47,607 1.64
Daicel Chemical Industries.. . . . . . . . 10,000 52,441 1.80
NOF Corporation. . . . . . . . . . . . . . 10,000 50,781 1.75
-------- ----
195,947 6.74

COMMERCE (5.77%)
Mutow... . . . . . . . . . . . . . . . . . 6,000 40,195 1.38
Nagase & Co. . . . . . . . . . . . . . . . 7,000 55,371 1.91
Seiko Corporation. . . . . . . . . . . . . 4,000 27,305 0.94
Uni-Charm Corporation. . . . . . . . . . . 2,000 44,922 1.54
-------- ----
167,793 5.77

COMMUNICATIONS EQUIPMENT (5.37%)
NEC Corporation. . . . . . . . . . . . . . 6,000 79,102 2.72
Tokin Corp . . . . . . . . . . . . . . . . 5,000 77,148 2.65
-------- ----
156,250 5.37

CONSUMER ELECTRONICS (4.88%)
Alps Electric Co., Ltd (a) . . . . . . . . 5,000 51,270 1.76
Uniden Corp. . . . . . . . . . . . . . . . 6,000 48,340 1.66
Victor of Japan, Ltd (a) . . . . . . . . . 4,000 42,578 1.46
-------- ----
142,188 4.88

FOOD & BEVERAGE (11.51%)
Fuji Oil Co., Ltd. . . . . . . . . . . . . 6,000 39,551 1.36
Fujiya Confectionay. . . . . . . . . . . . 8,000 29,609 1.02
Kandenko Co., Ltd. . . . . . . . . . . . . 3,000 36,914 1.27
Marudai Foods Co., Ltd . . . . . . . . . . 6,000 40,430 1.39
Misawa Hom . . . . . . . . . . . . . . . . 5,000 38,867 1.34
Sapporo Breweries. . . . . . . . . . . . . 6,000 51,211 1.76
SXL. . . . . . . . . . . . . . . . . . . . 5,000 50,293 1.73
Taisei Corp. . . . . . . . . . . . . . . . 8,000 47,734 1.64
-------- ----
334,609 11.51

INDUSTRIAL MACHINERY (3.84%)
Shibuya Kogyo. . . . . . . . . . . . . . . 5,000 47,656 1.64
Sumitomo Precision Products. . . . . . . . 6,000 63,867 2.20
-------- ----
111,523 3.84

MASS-MEDIA/COMMUNICATIONS (1.39%)
Kokusai Denshin Denwa. . . . . . . . . . . 500 40,283 1.39
</TABLE>

<PAGE> 52

<TABLE>
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1995
- ------------------------------------------------------------------------------
<CAPTION>
MARKET
VALUE PERCENTAGE OF
SHARES (NOTE 1-A) NET ASSETS
------ ---------- -------------
<S> <C> <C> <C>
MASS-SALES STORES & FOOD SERVICES (4.38%)
Life Corporation.. . . . . . . . . . . . . 6,000 $ 44,004 1.51%
Marui Co., Ltd . . . . . . . . . . . . . . 3,000 51,855 1.78
Mitsukoshi, Ltd. . . . . . . . . . . . . . 4,000 31,680 1.09
-------- ----
127,539 4.38

MISCELLANEOUS ELECTRICAL PRODUCTS (9.01%)
Fanuc, Ltd.. . . . . . . . . . . . . . . . 1,500 64,893 2.23
Graphtec (a).. . . . . . . . . . . . . . . 6,000 34,277 1.18
Matshushita Electirc Works . . . . . . . . 5,000 49,316 1.70
Nitto Denko Corporation. . . . . . . . . . 4,000 63,672 2.19
Taiyo Yuden Co., Ltd . . . . . . . . . . . 5,000 49,805 1.71
-------- ----
261,963 9.01

MISCELLANEOUS FINANCING (8.63%)
Daiwa Securities Co., Ltd. . . . . . . . . 4,000 46,875 1.61
Diamond Lease Corp, Ltd. . . . . . . . . . 4,000 54,687 1.88
Monura Securities Co., Ltd . . . . . . . . 3,000 54,785 1.88
Nipon Shinpan Co . . . . . . . . . . . . . 7,000 43,682 1.50
Tikio Marine & Fire. . . . . . . . . . . . 5,000 51,270 1.76
-------- ----
251,299 8.63

PETROLEUM PRODUCTS (1.46%)
Nippon Oil Co., Ltd. . . . . . . . . . . . 8,000 42,422 1.46

PHARMACEUTICALS (6.75)
Dainippon Pharmaceuticals. . . . . . . . . 4,000 35,664 1.23
Green Cross. . . . . . . . . . . . . . . . 5,000 32,910 1.13
Shiseido Co., Ltd. . . . . . . . . . . . . 5,000 50,293 1.73
Tanabe Seiyaku Co., Ltd. . . . . . . . . . 5,000 32,715 1.13
Yamanouchi Pharmaceuticals.. . . . . . . . 2,000 44,531 1.53
-------- ----
196,113 6.75

PRECISION MACHINERY (8.14%)
JMS Co., Ltd . . . . . . . . . . . . . . . 8,000 54,140 1.86
NIFCO. . . . . . . . . . . . . . . . . . . 4,000 47,266 1.63
Shimadzu Corp. . . . . . . . . . . . . . . 10,000 55,469 1.91
Yamaha Corp. . . . . . . . . . . . . . . . 5,000 79,590 2.74
-------- ----
236,465 8.14

REAL ESTATE (5.05%)
Kokusai Kogyo. . . . . . . . . . . . . . . 5,000 45,215 1.55
Sumitomo Realty Development. . . . . . . . 8,000 51,016 1.75
Tokyo Corp.. . . . . . . . . . . . . . . . 8,000 50,859 1.75
-------- ----
147,090 5.05

RETAIL STORES & FOOD SERVICES (3.59%)
Royal Co., Ltd.. . . . . . . . . . . . . . 4,000 59,766 2.06
Seiyo Food Systems, Incorporated . . . . . 5,000 44,433 1.53
-------- ----
104,199 3.59
SERVICES (5.46%)
Csk Corp . . . . . . . . . . . . . . . . . 2,000 56,641 1.95
Intec. . . . . . . . . . . . . . . . . . . 4,000 54,687 1.88
Kansai Electric Power. . . . . . . . . . . 2,020 47,344 1.63
-------- ----
158,672 5.46
</TABLE>

<PAGE> 53

TOTAL INVESTMENTS (Cost $2,994,865). 2,888,379 99.33
OTHER ASSETS, LESS LIABILITIES. . . . 19,523 0.67
---------- ------
NET ASSETS. . . . . . . . . . . . . . $2,907,902 100.00%
========== ======
</TABLE>

(a) Non-income producing security

SEE ACCOMPANYING NOTES OF FINANCIAL STATEMENTS

<PAGE> 54

STATEMENT OF ASSETS AND LIABILITIES October 31, 1995
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:

Investments in securities at market (identified
cost $2,994,865)(Note 1-A). . . . . . . . . . . . . . . . . . . . $2,888,379
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,366
Foreign currency holdings - Yen account, at market (Note 1-B) . . . 1,836
Receivables:
Dividends . . . . . . . . . . . . . . . . . . . . $ 7,055
Trust shares sold . . . . . . . . . . . . . . . . 60 7,115
------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . 2,930,696
----------

LIABILITIES:

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 22,794
----------

NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,907,902
==========

NET ASSET VALUE AND REDEMPTION PRICE PER SHARE:
($2,907,902/430,009 shares of beneficial interest
outstanding) $.01 par value, unlimited shares authorized (Note 3) . $ 6.76
==========

SOURCE OF NET ASSETS:

Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . $6,025,718
Undistributed net investment deficit. . . . . . . . . . . . . . . . (90,106)
Accumulated net realized loss on investments and foreign currency
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,921,095)
Net unrealized depreciation on investments and foreign currencies . (106,615)
----------
$2,907,902
==========
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 55

<TABLE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1995
- ------------------------------------------------------------------------------

<S> <C>
INVESTMENT INCOME:

Income:
Dividends (net of foreign taxes withheld of $3,588) . . . $ 20,514
Interest. . . . . . . . . . . . . . . . . . . . . . . . . 591
---------
Total Investment Income . . . . . . . . . . . . . . . . 21,105
---------

Expenses:
Advisory fees (Note 2). . . . . . . . . . . . . . . $ 12,315
Administration services (Note 2). . . . . . . . . . 30,157
Transfer agent fees . . . . . . . . . . . . . . . . 27,587
Professional fees . . . . . . . . . . . . . . . . . 13,938
Reports and notices to stockholders . . . . . . . . 13,107
Distribution fees (Note 2). . . . . . . . . . . . . 10,193
Custodian fees. . . . . . . . . . . . . . . . . . . 9,818
Filing and registration fees. . . . . . . . . . . . 7,636
Trustees' fees and expenses . . . . . . . . . . . . 3,518
Miscellaneous . . . . . . . . . . . . . . . . . . . 1,414
--------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 129,683

Less reimbursements from:
Adviser . . . . . . . . . . . . . . . . . . . . . 12,315
Administrator . . . . . . . . . . . . . . . . . . 6,157 18,472
-------- --------
Net Expenses. . . . . . . . . . . . . . . . . . . . . . 111,211
--------
Net Investment Loss. . . . . . . . . . . . . . . . . (90,106)
--------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 4)

Net realized gain on investments . . . . . . . . . . . . 180,197
Realized gain on foreign currency transactions . . . . . 108,677
--------
Net realized gain . . . . . . . . . . . . . . . . . . . . 288,874
Unrealized depreciation of investments and foreign currencies (736,415)
---------
Net realized and unrealized loss on investments and
foreign currencies. . . . . . . . . . . . . . . . . . . (447,541)
---------
Net decrease in net assets resulting from operations. . $(537,647)
=========
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE> 56

<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------

YEAR ENDED OCTOBER 31,
--------------------------
1995 1994
---------- ----------
<S> <C> <C>
OPERATIONS:
Net investment loss. . . . . . . . . . . . . . . . $ (90,106) $ (92,383)
Net realized gain on investments and foreign
currencies . . . . . . . . . . . . . . . . . . . 288,874 486,044
Net increase (decrease) in unrealized appreciation
of investments and foreign currencies. . . . . . (736,415) 149,232
---------- ----------
Net increase (decrease) in net assets
resulting from operations . . . . . . . . . (537,647) 542,893

TRUST SHARE TRANSACTIONS:
Decrease in net assets resulting from Trust share
transactions (Note 3). . . . . . . . . . . . . . (38,119) (154,853)
---------- ----------
Net increase (decrease) in net assets. . . . (575,766) 388,040

NET ASSETS:
Beginning of year. . . . . . . . . . . . . . . . . 3,483,668 3,095,628
---------- ----------
End of year, including net investment deficit of
$90,106 and $0, respectively . . . . . . . . . . $2,907,902 $3,483,668
========== ==========
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - OCTOBER 31, 1995
- ------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Capstone Nikko Japan Fund (the "Fund"), is one of two series of
beneficial interest of Capstone International Series Trust (the "Trust")
which is registered under the Investment Company Act of 1940, as amended
(the "Act"), as a diversified, open-end management investment company.
The Fund's investment objective is to seek an average annual total
return from a portfolio of shares in Japanese companies which exceeds
the average annual total return of the First Section of the Tokyo Stock
Exchange as measured by the Tokyo Stock Price Index. The following is
a summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.

A) SECURITY VALUATION - Portfolio securities which are traded on
Japanese securities exchanges are valued at the last sales price on the
valuation date or, if there is no recent last sales price available, at
the last current bid quotation. A security which is listed or traded on
more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security or contract. All
other equity securities not so traded are valued at the last current bid
quotations on the valuation date. In the absence of any applicable
price, securities will be valued at a fair value as determined in good
faith in accordance with procedures established by the trustees.

B) CURRENCY TRANSLATION - For purposes of determining the Fund's net
asset value, all assets and liabilities initially expressed in foreign
currency values are converted into U.S. dollar values at the prevailing
market rate at 14:00 GMT on each U.S. business day, as established by
the Board of Trustees. The cost of securities is determined by using
historical exchange rates. Income and expenses are translated at
approximate rates prevailing when accrued or incurred. The Fund does
not isolate that portion of gains and losses on investments which is due
to changes in foreign exchange rates from that which is due to changes
in the market prices of the investments. Such fluctuations are included
with the net realized and unrealized gains and losses from investments.

<PAGE> 57

C) ACCOUNTING FOR INVESTMENTS - Security transactions are accounted for
on the trade date. Realized gains and losses on security transactions
are determined based on the identified cost method. Dividend income and
other distributions are recorded on the ex-dividend date, except that
certain dividends from foreign securities are recorded as soon as the
Fund is informed after the ex-dividend date. Interest income and
expenses are accrued daily.

D) FORWARD CURRENCY CONTRACTS - Forward currency transactions are
undertaken to hedge against possible variations in the foreign exchange
rates between the United States Dollar and the Japanese Yen. A forward
currency contract is an agreement between two parties to buy or sell a
currency at a set price on a future date. Forward contracts are marked
to market daily and the change in the market value is recorded by the
Fund as an unrealized gain or loss. When a contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed. The Fund could be exposed to risk if the
counterparties are unable to meet the terms of the contracts or if the
value of the currency changes unfavorably.

E) FEDERAL INCOME TAXES - No provision for Federal income taxes has
been made since it is the Fund's policy to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income and
realized capital gains in excess of any capital loss carryovers to its
shareholders. At October 31, 1995 the Fund had capital loss carryovers
of $3,029,772 of which $1,535,126 expires in 1999 and $1,494,646
expires in 2000. Under the United States-Japan tax treaty, Japan
imposes a withholding tax of 15% on the dividends received. There is
currently no Japanese tax on capital gains.

NOTE 2 - INVESTMENT ADVISORY FEES, AND OTHER TRANSACTIONS WITH
AFFILIATES

The Investment Adviser, Nikko Capital Management (USA), Inc., is paid
a fee, calculated daily and paid quarterly, equal to an annual rate of
0.40% of the average net assets of the Fund. The Administrator,
Capstone Asset Management Company, is paid a fee, calculated daily and
paid quarterly, equal to an annual rate of 0.20% of the Fund's average
daily net assets. The Administrator is also paid a monthly fee of
$2,000 representing the cost of certain accounting and bookkeeping
services. This fee, which amounted to $24,000 for the year ended
October 31, 1995, is not subject to the expense limitation discussed
below.

The Adviser and Administrator have agreed to reduce their fees if the
ordinary business expenses of the Fund exceed any expense limitation
applicable to the Fund pursuant to the laws or regulations of any state.
Such reimbursement shall be shared by the Adviser and the Administrator
ratably in proportion to the fees received by them from the Fund, except
that reimbursement shall not exceed the amount paid to the Adviser and
Administrator, respectively. The most restrictive limitation presently
applicable to the Fund is equal to the sum of 2.5% of the first $30
million of the Fund's average net assets, 2.0% of the next $70 million
of the Fund's average net assets and 1.5% of the Fund's average net
assets in excess of $100 million. For the year ended October 31, 1995,
the Adviser and the Administrator reimbursed the Fund $12,315 and
$6,157, respectively.

Capstone Asset Planning Company ("CAPCO") serves as Distributor and
Underwriter to the Fund. Effective August 21, 1995, the 4.75% front end
sales load applicable to sales of Fund shares was eliminated.
Commissions and underwriting fees earned on sales of the Fund's shares
during the period of November 1, 1994 through August 20, 1995 by the
Distributor/Underwriter were $1,203 and $1,637, respectively. CAPCO is
an affiliate of the Administrator, and both are wholly-owned
subsidiaries of Capstone Financial Services, Inc. ("CFS").

The Fund has adopted a Service and Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act whereby Fund assets are used to
reimburse CAPCO for costs and expenses incurred with the distribution
and marketing of shares of the Fund and servicing of the Fund
shareholders. Distribution and marketing expenses include, among other
things, printing of prospectuses, advertising literature and costs of
personnel involved with the promotion and distribution of the Fund's
shares. Under the Plan, the Fund pays CAPCO an amount computed at an
annual rate of up to .25% (.35% prior to August 21, 1995) of the Fund's
average net assets (including reinvested dividends paid with respect to
those assets). Of this amount, CAPCO may reallocate to securities
dealers (which may include CAPCO itself) and other financial
institutions and organizations (collectively, Service Organizations )
amounts based on the Fund's average net assets owned by stockholders for
whom the Service Organizations have a servicing relationship. The Plan
permits CAPCO to carry forward for a maximum of twelve months
distribution expenses covered by the Plan for which CAPCO has not yet
received reimbursement. For the year ended October 31, 1995, the Fund
paid $10,193 in 12b-1 fees, of which less than 1% was paid to Service
Organizations other than CAPCO.

<PAGE> 58

The Administrator is an affiliate of CAPCO and both are wholly-owned
subsidiaries of Capstone Financial Services, Inc. ("CFS").

Certain officers and trustees of the Trust and the Fund, who are also
officers and directors of the Adviser, the Administrator, CAPCO or CFS,
received no compensation from the Fund. During the year ended October
31, 1995, Trustees of the Fund who are not "interested Persons" received
trustees' fees of $2,875.

Commissions earned by The Nikko Securities Co. International, Inc.,
(an affiliate of the Adviser), on investment transactions for the year
ended October 31, 1995 were $17,273.

NOTE 3 -TRUST SHARES

Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31,
-------------------------------------------
1995 1994
------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold. . . . . . . . . . . . 121,924 $ 850,114 405,829 $ 2,987,493
Shares redeemed. . . . . . . . . .(125,481) (888,233) (415,218) (3,142,346)
------- --------- ------- -----------
Net decrease. . . . . . . . . (3,557) $ (38,119) (9,389) $ (154,853)
======= ========= ======= ===========
</TABLE>

NOTE 4 - SECURITIES TRANSACTIONS

Purchases and sales of securities (excluding short-term securities)
aggregated $906,372 and $803,141, respectively. At October 31, 1995,
the cost of investments for Federal income tax purposes was $2,994,865.
Accumulated net unrealized depreciation on investments was $106,486
consisting of $212,378 gross unrealized appreciation and $318,864 gross
unrealized depreciation.

<PAGE> 59
CAPSTONE INTERNATIONAL SERIES TRUST
CAPSTONE NIKKO JAPAN FUND
OTHER INFORMATION
(PART C TO REGISTRATION STATEMENT NO. 33-6867)

Item 24. Financial Statements and Exhibits
---------------------------------

Exhibits not incorporated by reference to a prior filing are
designated by an asterisk; all exhibits not so designated are incorporated
hereby by reference to a prior filing as indicated.

(a) Financial Statements of Capstone Nikko Japan Fund (included in
Parts A and B):

Per Share Data and Ratios for the period ended October
31, 1995 (Part A)
Auditor's Report (Part B)
Statement of Assets and Liabilities at October 31, 1995
(Part B)
Portfolio of Investments in Securities at October 31,
1995 (Part B)
Statement of Operations for the year ended October 31,
1995 (Part B)
Statement of Changes in Net Assets for the period ended
October 31, 1995 (Part B)
Notes to Financial Statements (Part B)

(b) Exhibits:

A. Exhibits filed pursuant to Form N-1A

1 Copy of Declaration of Trust as amended and
restated September 29, 1986; Exhibit 1 to Pre-
Effective Amendment No. 1 to Registration No. 33-
6867.

1(a) Proposed form of Written Instrument of the
Trustees Amending Name of the Trust; Exhibit 1(a)
to Post-Effective Amendment No. 2 to Registration
No. 33-6867.

1(b) Amendment and Restatement to the Declaration of
Trust dated September 19, 1991 to establish and
designate a separate series, New Zealand Fund;
Exhibit 1(b) to Post-Effective Amendment No. 9 to
Registration No. 33-6867.

2(a) Copy of By-Laws; Exhibit 2 to Pre-Effective
Amendment No. 1 to Registration No. 33-6867.

2(b) Copy of Amendment to By-Laws dated July 24, 1989;
Exhibit 2(b) to Post-Effective Amendment No. 5 to
Registration No. 33-6867.

3 None.

4(a) Copy of Specimen Certificate of Beneficial
Interest of The

<PAGE> 60
European Fund; Exhibit 4 to Pre-Effective Amendment
No. 1 to Registration No. 33-6867.

4(b) Copy of Specimen Certificate of Beneficial
Interest of Nikko Japan Tilt Fund; Exhibit 4 to
Post-Effective Amendment No. 5 to Registration No.
33-6867.

4(c) Specimen Certificate of Beneficial Interest of New
Zealand Fund; Exhibit 4(d) to Post-Effective
Amendment No. 9 to Registration No. 33-6867.

5(a) Copy of Investment Advisory Agreement between
Investors International Series Trust, on behalf of
The European Fund, and CCF International Finance
Corp. dated September 29, 1986; Exhibit 5 to Pre-
Effective Amendment No. 1 to Registration No. 33-
6867.

5(b) Copy of Investment Advisory Agreement between
Investors International Series Trust, on behalf of
The European Fund, and CCF International Finance
Corp. dated June 10, 1987; Exhibit 5(b) to Post-
Effective Amendment No. 1 to Registration No. 33-
6867.

5(c) Copy of Investment Advisory Agreement between
Capstone International Series Trust, on behalf of
Nikko Japan Tilt Fund, and NIKKO Capital
Management (U.S.A), Inc. dated April 24, 1989;
Exhibit 5(c) to Post-Effective Amendment No. 3 to
Registration No. 33-6867.

5(d) Proposed form of Investment Advisory Agreement
between Capstone International Series Trust, on
behalf of New Zealand Fund, and FCA Corp; Exhibit
5(e) to Post-Effective Amendment No. 9 to
Registration No. 33-6867.

6(a) Copy of General Distribution Agreement between
Investors International Series Trust, on behalf of
The European Fund, and Tenneco Asset Planning
Company dated September 29, 1986; Exhibit 6 to
Pre-Effective Amendment No. 1 to Registration No.
33-6867.

6(b) Copy of General Distribution Agreement between
Investors International Series Trust, on behalf of
The European Fund, and Capstone Asset Planning
Company dated September 1, 1987; Exhibit 6(b) to
Post-Effective Amendment No. 1 to Registration No.
33-6867.

6(c) Copy of General Distribution Agreement between
Capstone International Series Trust, on behalf of
Nikko Japan Tilt Fund, and Capstone Asset Planning
Company dated April 24, 1989;

<PAGE> 61
Exhibit 6 to Post-Effective Amendment No. 3 to
Registration Statement No. 33-6867.

6(d) Copy of General Distribution Agreement between
Capstone International Series Trust, on behalf of
New Zealand Fund, and Capstone Asset Planning
Company; Exhibit 6(e) to Post-Effective Amendment
No. 9 to Registration No. 33-6867.

6(e) Proposed form of General Distribution Agreement
between Capstone International Series Trust, on
behalf of New Zealand Fund, and Capstone Asset
Planning Company; Exhibit 6(e) to Post-Effective
Amendment No. 18 to Registration No. 33-6867.

6(f) Copy of General Distribution Agreement dated July
31, 1992 between Capstone International Series
Trust, on behalf of Capstone European Fund, and
Capstone Asset Planning Company; Exhibit 6(f) to
Post-Effective Amendment No. 17 to Registration
No. 33-6867.

6(g) Copy of General Distribution Agreement dated
August 10, 1992 between Capstone International
Series Trust, on behalf of Capstone Nikko Japan
Fund, and Capstone Asset Planning Company; Exhibit
6(g) to Post-Effective Amendment No. 18 to
Registration Statement No. 33-6867.

7 None.

8(a) Copy of Custodian Agreement between Investors
International Series Trust, on behalf of The
European Fund, and Credit Commercial de France
dated September 29, 1986; Exhibit 8(a) to Pre-
Effective Amendment No. 1 to Registration No. 33-
6867.

8(b) Copy of Custodian Agreement between Investors
International Series Trust, on behalf of The
European Fund, and First Pennsylvania Bank, N.A.
dated November 1, 1986; Exhibit 8(b) to Pre-
Effective Amendment No. 1 to Registration No. 33-
6867.

8(c) Copy of Custodian Agreement between Capstone
International Series Trust, on behalf of Nikko
Japan Tilt Fund, and The Bank of Tokyo Trust
Company dated July 10, 1989; Exhibit 8(c) to Post-
Effective Amendment No. 5 to Registration No. 33-
6867.

8(d) Copy of Custodian Agreement between Capstone
International Series Trust, on behalf of New
Zealand Fund, and Citibank, N.A.; Exhibit 8(e) to
Post-Effective Amendment No. 9 to Registration No.
33-6867.

9(a)(1) Copy of Administration Agreement between Investors
International Series Trust, on behalf of The European
Fund, and

<PAGE> 62
Tenneco Asset Management Company dated September 29,
1986; Exhibit 9(a) to Pre-Effective Amendment No. 1
to Registration No. 33-6867.

9(a)(2) Copy of Administration Agreement between Investors
International Series Trust, on behalf of The European
Fund, and Capstone Asset Management Company dated
September 1, 1987; Exhibit 9(a)(2) to Post-Effective
Amendment No. 1 to Registration No. 33-6867.

9(a)(3) Copy of Administration Agreement between Capstone
International Series Trust, on behalf of Nikko Japan
Tilt Fund, and Capstone Asset Management Company
dated April 24, 1989; Exhibit 9(a)(3) to Post-
Effective Amendment No. 3 to Registration No. 33-6867.

9(a)(4) Copy form of Administration Agreement between Capstone
International Series Trust, on behalf of New Zealand
Fund, and Capstone Asset Management Company; Exhibit
9(a)(5) to Post-Effective Amendment No. 9 to
Registration No. 33-6867.

9(b)(1) Copy of Transfer Agency Agreement between Investor
International Series Trust, on behalf of The European
Fund, and Fund/Plan Services, Inc. dated November 1,
1986; Exhibit 9(b) to Pre-Effective Amendment No. 1 to
Registration No. 33-6867.

9(b)(2) Copy of Agency Agreement between Investors
International Series Trust and Capstone Financial
Services, Inc. dated October 2, 1987; Exhibit 9(b)(2)
to Post-Effective Amendment No. 1 to Registration
No. 33-6867.

9(b)(3) Copy of Shareholder Services Agreement between Capstone
International Series Trust and Fund/Plan Services, Inc.
dated February 1, 1991; Exhibit 9(b)(3) to Post-
Effective Amendment No. 7 to Registration No. 33-6867.

10 Opinion of Dechert Price & Rhoads; Exhibit 10 to
Rule 24f-2 Notice dated December 23, 1989.

10(a) Opinion of Dechert Price & Rhoads.

*11(a) Consent of Tait, Weller & Baker, Independent
Certified Public Accountants.

*11(b) Powers of Attorney of Messrs. Eugene W. Potter,
Jr., Philip C. Smith and Bernard J. Vaughan.

____________
* Filed herewith

<PAGE> 63
12 None.

13 None.

14 None.

15 Form of Service and Distribution Plan.

*16 Schedule for Computation of Performance Quotations.

B. Exhibits filed pursuant to Rule 483 of Regulation C under
the Securities Act of 1933, as amended.

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

Registrant does not control and is not under common control with
any person.

Item 26. Number of Holders of Securities
-------------------------------

Number of Record Holders
Title of Class as of February 21, 1996
-------------- ------------------------
Shares of beneficial interest,
par value $0.01 1,065

Item 27. Indemnification
---------------

The Declaration of Trust of the Registrant includes the following:

Section 4.3. Mandatory Indemnification.

(a) Subject to the exceptions and limitations contained in
paragraph (b) below:

(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the
Trust to the fullest extent permitted by law
against all liability and against all expenses
reasonably incurred or paid by him in connection
with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or
officer and against amounts paid or incurred by
him in the settlement thereof;

____________
* Filed herewith

<PAGE> 64
(ii) the words "claim", "action", "suit", or
"proceeding" shall apply to all claims, actions,
suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the
words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines,
penalties and other liabilities.

(b) No indemnification shall be provided hereunder to a
Trustee or officer:

(i) against any liability to the Trust or the
Shareholders by reason of a final adjudication by
the court or other body before which the
proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the
conduct of his office;

(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in
good faith in the reasonable belief that his
action was in the best interest of the Trust;

(iii) in the event of a settlement or other disposition
not involving a final adjudication as provided in
paragraph (b)(i) resulting in a payment by a
Trustee or officer, unless there has been a
determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of his office:

(A) By the court or other body approving the
settlement or other disposition; or

(B) based upon a review of readily available
facts (as opposed to a full trial-type
inquiry) by (1) vote of a majority of the
Disinterested Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees then in office act on
the matter) or (2) written opinion of
independent legal counsel.

(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust,
shall be severable, shall not affect any other rights to
which any Trustee or officer may now or hereafter be
entitled, shall continue as to a person who has ceased to
be such Trustee or officer and shall inure to the benefit
of the heirs, executors, administrators and assigns of
such a person. Nothing contained herein shall affect any
rights to indemnification to which personnel of the Trust
other than Trustees and officers may be entitled by
contract or otherwise under law.

(d) Expenses of preparation and presentation of a defense to
any claim, action, suit or proceeding of the character
described in paragraph (a) of this Section 4.3 may be
advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the
recipient to repay such

<PAGE> 65
amount if it is ultimately determined that he is not entitled
to indemnification under this Section 4.3, provided that
either:

(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the
recipient, or the Trust shall be insured against
losses arising out of any such advances; or

(ii) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the
Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion
shall determine, based upon a review of readily
available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to
indemnification.

As used in this Section 4.3, a "Disinterested Trustee" is
one who is not (i) an "Interested Person" of the Trust
(including anyone who has been exempted from being an
"Interested Person" by any rule, regulation or order of
the Commission), or (ii) involved in the claim, action,
suit or proceeding."

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised by the Securities and
Exchange Commission that, in the opinion of the 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 trustee, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such trustee, 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 or not such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

To the extent that the Declaration of Trust, By-Laws or any other
instrument pursuant to which the Registrant is organized or administered
indemnify any trustee or officer of the Registrant, or that any contract or
agreement indemnifies any person who undertakes to act as investment
advisor or principal underwriter to the Registrant, any such provision
protecting or purporting to protect such persons against any liability to
the Registrant or its security holders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence,
in the performance of his duties, or by reason of his reckless disregard of
his duties pursuant to the conduct of his office or obligations pursuant to
such contract or agreement, will be interpreted and enforced in a manner
consistent with the provisions of Sections 17(h) and (i) of the Investment
Company Act of 1940, as amended, and Release No. IC-11330 issued
thereunder.

Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------

The Registrant's investment adviser, NIKKO Capital Management
(USA), Inc., also manages the corporate assets of foreign institutions, and
pension and profit sharing plans.

Set forth below is a list of each officer and director of the
Registrant's investment adviser,

<PAGE> 66
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged for the past two years, for
his own account or in the capacity of director, officer, partner or trustee.

<TABLE>
<CAPTION>
Other Substantial
Position with Business, Profession,
Name Investment Adviser Vocation or Employment
---- ------------------ ----------------------
<S> <C> <C>
Kazuhiro Higashino Director Managing Director of Nikko
International Capital
Management, Co., Ltd.

Tetsuya Itoh Director & Portfolio Manager --

Stanley Kirtman President --

Tadao Kobayashi Director Chairman of Nikko
International Capital
Management, Co., Ltd.

Takao Nakanishi Chairman President of Nikko
International Capital
Management, Co., Ltd.

Kenji Wada Director Managing Director of Nikko
International Capital
Management, Co., Ltd.
</TABLE>

Item 29. Principal Underwriters
----------------------

(a) The principal underwriter of the Registrant, Capstone Asset
Planning Company, also acts as principal underwriter for Capstone
Government Income Fund, Capstone Intermediate Government Fund, Capstone
Growth Fund, Inc., Capstone New Zealand Fund and Medical Research
Investment Fund, Inc.

(b)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ -------------------- ---------------------
<S> <C> <C>
Dan E. Watson Chairman of the Board --
and Director

Edward L. Jaroski President and Director Trustee and President of the Trust

Leticia N. Jaroski Vice President --

Janet K. Roberts Assistant Vice President --

Iris R. Clay Secretary Secretary

______________
* 5847 San Felipe, Suite 4100, Houston, Texas 77057
</TABLE>

<PAGE> 67

<TABLE>
<CAPTION>
<S> <C> <C>
Norma R. Ybarbo -- Assistant Secretary

Linda G. Giuffre Vice President and Treasurer
Treasurer
</TABLE>

Item 30. Location of Accounts and Records
--------------------------------

Capstone Asset Management Company, the administrator to the
Registrant, 5847 San Felipe, Suite 4100, Houston, TX 77057, The Bank of
Tokyo Trust Company, the custodian of the Registrant, 100 Broadway, 4th
Floor, New York, New York 10005, and Fund/Plan Services, Inc., 2 W. Elm
Street, Conshohocken, Pennsylvania 19428, maintain physical possession of
each account, book or other document required to be maintained by Section
31(a) of Investment Company Act of 1940 and the rules promulgated
thereunder.

Item 31. Management Services
-------------------

Not applicable.

Item 32. Undertakings
------------

Not applicable.

<PAGE> 68
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement or
Amendment pursuant to Rule 485(b) under the Securities Act of 1933 and had
duly caused this Registration Statement or Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Houston, and State of Texas on the 1st day of March, 1996.

CAPSTONE INTERNATIONAL SERIES TRUST
CAPSTONE NIKKO JAPAN FUND

Registrant

By: /s/EDWARD L. JAROSKI
------------------------------
Edward L. Jaroski, President

Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

Signatures Title Date
---------- ----- ----

/s/EDWARD L. JAROSKI President and Trustee March 1, 1996
- ------------------------- (Principal Executive
Edward L. Jaroski Officer)

/s/LINDA G. GIUFFRE Treasurer (Principal March 1, 1996
- ------------------------- Financial & Accounting
Linda G. Giuffre Officer)

EUGENE W. POTTER, JR.* Trustee March 1, 1996
- -------------------------
Eugene W. Potter, Jr.

PHILIP C. SMITH* Trustee March 1, 1996
- -------------------------
Philip C. Smith

BERNARD J. VAUGHAN* Trustee March 1, 1996
- -------------------------
Bernard J. Vaughan

* By: /s/EDWARD L. JAROSKI
------------------------------
Edward L. Jaroski, Attorney-In-Fact

<PAGE> 69
INDEX TO EXHIBITS

Exhibit
Number Description of Exhibits
- ------- -----------------------

11(a) Consent of Tait, Weller & Baker, Independent
Certified Public Accountants

11(b) Powers of Attorney for Messrs. Eugene W. Potter, Jr.,
Philip C. Smith and Bernard J. Vaughan

16 Schedule of Computation of Performance Quotations

27 Financial Data Schedule

<PAGE> 1 EXHIBIT 11.A
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the reference to our firm in the Registration Statement,
(Form N-1A) and related Statement of Additional Information of Capstone
Nikko Japan Fund and to the inclusion of our report dated November 20, 1995
to the Shareholders and Board of Trustees of Capstone Nikko Japan Fund.

TAIT, WELLER & BAKER

Philadelphia, Pennsylvania
February 22, 1996

<PAGE> 1 EXHIBIT 11.B
POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints Edward L. Jaroski as his true and lawful attorney-
in-fact, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.

/s/EUGENE W. POTTER, JR. Trustee March 1, 1996
- ------------------------------
Eugene W. Potter, Jr.

/s/PHILIP C. SMITH Trustee March 1, 1996
- ------------------------------
Philip C. Smith

/s/BERNARD J. VAUGHAN Trustee March 1, 1996
- ------------------------------
Bernard J. Vaughan

<PAGE> 1 EXHIBIT 16
CAPSTONE NIKKO JAPAN FUND
SCHEDULE FOR COMPUTATION OF YIELD

Yield = 2[(a - b) + 1)6 - 1]
-----
cd

a = dividends and interest earned during the period,

b = expenses accrued for the period (net of reimbursements),

c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and

d = the maximum offering price per share on the last day of the
period.

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

Yield = 2[(1,997.04 - 15,653.15) + 1)6 - 1]
--------------------
(427,773.890)(6.76)

= (5.600)% (for 1 month period ending October 31, 1995)

<PAGE> 2
CAPSTONE NIKKO JAPAN FUND
SCHEDULE OF COMPUTATION FOR AVERAGE ANNUAL TOTAL RETURN

P (1 + T)n = ERV

P = a hypothetical initial payment of $1,000,

T = the average annual total return,

n = the number of years,

ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period.

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

The Fund's average annualized total return for the one year
period ending October 31, 1995 is (15.816)%.

$1,000 (1 + -.15816)1 = ERV

$841.80 = ERV

An initial payment of $1,000 invested on 11/01/94 will result in
118.624 shares. There were no income or capital gain
distributions during the period. On 10/31/95 the net asset value
of Capstone Nikko Japan Fund was $6.76 per share, thereby
creating a total market value of $841.80 and yielding a return of
(15.816)%.

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

The Fund's average annualized total return for the five year
period from November 1, 1990 to ending October 31, 1995 is
(3.215)%.

$1,000 (1 + -.03215)5 = ERV

$849.20 = ERV

An initial payment of $1,000 invested on 11/01/90 will result in
119.617 shares. There were no income or capital gain
distributions during the period. On 10/31/95 the net asset value
of Capstone Nikko Japan Fund was $6.76 per share, thereby
creating a total market value of $849.20 and yielding a return of
(3.215)%.

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

The Fund's average annualized total return for the period July
10, 1989 to October 31, 1995 is (5.754)%.

$1,000(1+ -.05754)6.31 = ERV

$687.90 = ERV

An initial payment of $1,000 invested on 07/10/89 will result in
95.238 shares. A capital gain distribution of $0.19 for the
period resulted in 1.677 additional shares, rendering a total of
96.915 shares. On 10/31/95 the net asset value of Capstone Nikko
Japan Fund was $6.76 per share, thereby creating a total market
value of $841.80 and yielding a return of (5.754)%.

<PAGE> 3
CAPSTONE NIKKO JAPAN FUND
SCHEDULE OF COMPUTATION FOR TOTAL RETURN

P(1+T) = ERV

P = a hypothetical initial payment of $1,000,

T = the total return,

ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.

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

The Fund's total return for the one year period ending October
31, 1995 is (15.816)%.

$1,000(1 + -.15816) = ERV

$841.84 = ERV

An initial payment of $1,000 invested on 11/01/94 will result in
124.533 shares. There were no income or capital gain
distributions during the period. On 10/31/95 the net asset value
of Capstone Nikko Japan Fund was $6.76 per share, thereby
creating a total market value of $841.80 and yielding a return of
(15.816)%.

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

The Fund's total return for the five year period from November 1,
1990 to October 31, 1995 is (15.075)%.

$1,000(1 + -.15075) = ERV

$849.25 = ERV

An initial payment of $1,000 invested on 11/01/90 will result in
127.628 shares. There were no income or capital gain
distributions during the period. On 10/31/95 the net asset value
of Capstone Nikko Japan Fund was $6.76 per share, thereby
creating a total market value of $849.20 and yielding a return of
(15.075)%.

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

The Fund's total return for the period July 10, 1989 through
October 31, 1995 is (31.210)%.

1,000(1 + -.31210) = ERV

$687.90 = ERV

An initial payment of $1,000 invested on 07/10/89 will result in
100.000 shares. A capital gain distribution of $0.190 for the
period resulted in 1.761 additional shares, rendering a total of
101.761 shares. On 10/31/95 the net asset value of Capstone
Nikko Japan Fund was $6.76 per share, thereby creating a total
market value of $687.90 and yielding a return of (31.210)%.

<ARTICLE> 6
<LEGEND>
The Annual Report of Capstone Nikko Japan Fund for the fiscal year ended October
31, 1995.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 2,994,865
<INVESTMENTS-AT-VALUE> 2,888,379
<RECEIVABLES> 7,115
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<NUMBER-OF-SHARES-REDEEMED> (125,481)
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</TABLE>