Edgar Filing: CENTRAL EUROPE & RUSSIA FUND INC

(AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 2004)

SECURITIES ACT FILE NO. 333-111828

INVESTMENT COMPANY ACT FILE NO. 811-06041
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF [ ]
1940 [X]
AMENDMENT NO. 11

---------------------
THE CENTRAL EUROPE AND RUSSIA FUND, INC.
(Exact Name of Registrant as Specified in its Charter)

345 PARK AVENUE, NEW YORK, NEW YORK 10154
(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code: (800) 437-6269

BRUCE A. ROSENBLUM, ESQ.
THE CENTRAL EUROPE AND RUSSIA FUND, INC.
C/O DEUTSCHE ASSET MANAGEMENT
1 SOUTH STREET
BAL01-1806
BALTIMORE, MD 21202
(Name and Address of Agent for Service)

COPIES TO:

JOHN T. BOSTELMAN, ESQ THOMAS A. HALE, ESQ.
SULLIVAN & CROMWELL LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
125 BROAD STREET 333 WEST WACKER DRIVE, SUITE 2100
NEW YORK, NEW YORK 10004 CHICAGO, ILLINOIS 60606

---------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement. If any securities being
registered on this form will be offered on a delayed or continuous basis in
reliance on Rule 415 under the Securities Act of 1933, other than securities
offered in connection with a dividend reinvestment plan, check the following
box. [X]

It is proposed that this filing will become effective when declared effective
pursuant to Section 8(c).
---------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED BEING REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE(2)
------------------------------------------------------------------------------------------------------------------------

Common Stock, $.001 par value...... 42,373 $23.60 1,000,000 $126.70
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------

(1) Estimated solely for purposes of calculating the registration fee as
required by Rule 457(c) under the Securities Act of 1933 based upon the
average of the high and low sales prices reported on the New York Stock
Exchange consolidated reporting system of $23.60 on February 3, 2004.

(2) $80.90 was previously paid on January 9, 2004 upon the filing under the
Securities Act of 1933 of this Registration Statement for 39,293 shares of
Common Stock.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

CROSS REFERENCE SHEET
THE CENTRAL EUROPE AND RUSSIA FUND, INC.

PARTS A AND B OF REGISTRATION STATEMENT

ITEM LOCATION IN PROSPECTUS OR STATEMENT OF
NO. CAPTION ADDITIONAL INFORMATION ("SAI")
---- ------- -----------------------------------------------

1. Outside Front Cover Page....................... Front Cover Page
2 Cover Pages; Other Offering Information........ Front Cover Page
3. Fee Table and Synopsis......................... Fee Table and Prospectus Summary
4. Financial Highlights........................... Financial Highlights
5. Plan of Distribution........................... Front Cover Page; Prospectus Summary; Our
Rights Offering
6. Selling Shareholders........................... Not Applicable
7. Use of Proceeds................................ Use of Proceeds
8. General Description of the Registrant.......... Front Cover Page; Prospectus Summary; Market
and Net Asset Value Information; Investment
Objective and Policies; Risk Factors
9. Management..................................... Our Management; Custodian, Dividend-Paying
Agent, Transfer Agent and Registrar
10. Capital Stock, Long-Term Debt, and Other Front Cover Page; Market and Net Asset Value
Securities..................................... Information; Common Stock; Dividends and
Distributions; Voluntary Cash Purchase Program
and Dividend Reinvestment Plan; Taxation
11. Defaults and Arrears on Senior Securities...... Not Applicable
12. Legal Proceedings.............................. Not Applicable
13. Table of Contents of the Statement of Table of Contents of Statement of Additional
Additional Information......................... Information
14. Cover Page of SAI.............................. Cover Page of SAI
15. Table of Contents of SAI....................... Cover Page of SAI
16. General Information and History................ General Information in SAI
17. Investment Objective and Policies.............. Investment Objective and Policies in SAI;
Investment Restrictions in SAI
18. Management..................................... Management in SAI; Investment Advisory and
Other Services in SAI; Brokerage Allocation and
Other Services in SAI
19. Control Persons and Principal Holders of Control Persons and Principal Holders of
Securities..................................... Securities in SAI
20. Investment Advisory and Other Services......... Investment Advisory and Other Services in SAI
21. Brokerage Allocation and Other Practices....... Brokerage Allocation and Other Practices in SAI
22. Tax Status..................................... Taxation in Prospectus
23. Financial Statements........................... Financial Statement in SAI

PART C OF REGISTRATION STATEMENT

Information required to be included in Part C is set forth under the appropriate
item, so numbered in Part C to this Registration Statement.

--------------------------------------------------------------------------------
I

The information in this prospectus is not complete and may be changed. A
registration statement relating to the securities has been filed with the
Securities and Exchange Commission. We may not sell these securities until the
registration statement is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer, solicitation or sale is not permitted.

PRELIMINARY PROSPECTUS Subject to completion dated February 10, 2004

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

THE CENTRAL EUROPE AND RUSSIA FUND, INC.
[ ] Shares of Common Stock
Issuable Upon Exercise of Rights to Subscribe for Those Shares
--------------------------------------------------------------------------------

We are issuing to our stockholders of record as of the close of business on
, 2004 transferable rights entitling the holders of those rights to
subscribe for up to an aggregate of shares of our common stock.
Stockholders of record will receive one right for each share of common stock
held on the record date. These rights entitle the holders to purchase one new
share of common stock for every three rights held, and holders who fully
exercise their rights will be entitled to subscribe, subject to certain
limitations and subject to allotment, for any shares not acquired by the
exercise of rights. Our outstanding common stock is listed on the New York Stock
Exchange ("NYSE") and trades under the symbol "CEE," as will be the shares
offered for subscription in this rights offering. The rights are transferable
and application will be made to list the rights for trading on the NYSE under
the symbol "CEE.RT" during the course of this rights offering. See "Our Rights
Offering" on page 14 in this prospectus for a complete discussion of the terms
of this rights offering. The subscription price per share will be % of the
lower of (i) the average of the last reported sale prices of a share of our
common stock on the NYSE on the expiration date of the rights offering and the
four preceding business days and (ii) the net asset value per share on the
expiration date. THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 2004, UNLESS EXTENDED AS DESCRIBED IN THIS PROSPECTUS.

We announced the preliminary filing with the Securities and Exchange Commission
in connection with this rights offering on January 9, 2004. The net asset values
per share of our common stock at the close of business on January 9, 2004 and
, 2004 were $26.47 and $ , respectively, and the last
reported sale prices of a share of common stock on the NYSE were $25.41 and
$ , respectively, 96.0% and % of net asset value, respectively.

As a result of the terms of this rights offering, stockholders who do not fully
exercise their rights, upon completion of this rights offering, will own a
smaller proportional interest in us than they owned prior to this rights
offering. In addition, because the subscription price per share may be less than
the then current net asset value per share, the completion of this rights
offering may result in an immediate dilution of the net asset value per share
for all existing stockholders. Such dilution is not currently determinable
because it is not known how many shares will be subscribed for, what the net
asset value or market price of our common stock will be on the expiration date
for the shares or what the subscription price will be. Such dilution could be
substantial. Stockholders will experience a decrease in the net asset value per
share held by them, irrespective of whether they exercise all or any portion of
their rights. See "Our Rights Offering--Investment Considerations" on page 24 of
this prospectus and "Risk Factors and Special Considerations-- Dilution of Net
Asset Value" on page 33 of this prospectus.

If you have questions or need further information about this rights offering,
please write or call Georgenson Shareholder Communications, Inc., our
information agent for this rights offering, at or 1-800- .

(Continued on page 3)

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

A B
PER SHARE TOTAL(1)
----------------------------------------------------------------------------------

Estimated Subscription Price(2)
----------------------------------------------------------------------------------
Estimated Sales Load(2)(3)
----------------------------------------------------------------------------------
Proceeds, before expenses, to the Fund(2)(4)
----------------------------------------------------------------------------------

(Footnotes continued on page 3)

UBS INVESTMENT BANK
--------------------------------------------------------------------------------
The date of this prospectus is , 2004

[INSERT MAP OF ALL THE COUNTRIES]

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

Available information

We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the Investment Company Act of
1940, as amended (the "Investment Company Act"), and in accordance with these
requirements, we file reports and other information with the United States
Securities and Exchange Commission (the "SEC"). Such reports and other
information can be inspected and copied at the public reference facilities
maintained by the SEC in Washington, D.C. Information about the operation of the
SEC's public reference facilities may be obtained by calling the SEC at
1-202-942-8090. Such reports and other information are also available on the
SEC's website at http://www.sec.gov.
---------------------------

(Continued from front cover page)

We were incorporated in Maryland on February 6, 1990. We are a non-diversified
closed-end management investment company that seeks capital appreciation by
investing primarily in equity or equity-linked securities of Central European
and Russian companies. No assurance can be given that our investment objective
will be achieved. DUE TO OUR INVESTMENT OBJECTIVE AND POLICIES, INVESTMENT IN US
INVOLVES CERTAIN RISK CONSIDERATIONS, INCLUDING THE RISK OF EXCHANGE-RATE
FLUCTUATIONS, WHICH ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN THE UNITED
STATES. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" ON PAGE 29 OF THIS
PROSPECTUS. Our investment manager is Deutsche Bank Securities Inc. and our
investment adviser is Deutsche Asset Management International GmbH.

This prospectus sets forth concisely the information that a prospective investor
ought to know before investing. Investors are advised to read this prospectus
carefully and retain it for future reference. A Statement of Additional
Information dated , 2004 (the "SAI") containing additional information
about us has been filed with the Securities and Exchange Commission and is
incorporated by reference in its entirety into this prospectus. A copy of the
SAI, the table of contents of which appears on page 51 of this prospectus, may
be obtained without charge upon written or oral request from our information
agent at or 1-800- .
---------------------------

(Footnotes continued from front cover page)

(1) Assumes that all rights offered in this rights offering were exercised at
the estimated subscription price.

(2) Estimated on the basis of % of the lower of (i) the average of the last
reported sales price of a share of our common stock on the NYSE on
, 2004 and the four preceding business days and (ii) the net asset
value per share of our common stock on , 2004.

(3) UBS Securities LLC will act as dealer manager for this rights offering. We
have agreed to pay the dealer manager a fee for its financial services equal
to 3.75% of the subscription price per share. We have agreed to reimburse
the dealer manager up to $100,000 for its reasonable expenses incurred in
connection with this rights offering. These fees will be borne by us and
indirectly by all of our stockholders, including those who do not exercise
their rights. We and our investment manager have each agreed to indemnify
the dealer manager or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Our Rights Offering--Distribution
Arrangements" on page 21 of this prospectus.

(4) Before deducting offering expenses payable by us estimated at $ ,
including an aggregate of up to $100,000 as partial reimbursement of the
dealer manager for their out-of-pocket expenses. See "Our Rights
Offering--Distribution Arrangements" on page 21 of this prospectus.

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

Unless otherwise specified, all references in this prospectus to "dollars," "US
$", "U.S. dollars" or "$" are to United States dollars.

--------------------------------------------------------------------------------
3

Prospectus summary

This is only a summary. This summary may not contain all of the information that
you should consider before investing in us. You should review the more detailed
information contained in this prospectus and our SAI.

PURPOSE OF OUR RIGHTS OFFERING

Our board of directors has determined that it would be in our best interest and
in our stockholders' best interest to increase our assets available for
investment, thereby permitting us to take advantage more fully of investment
opportunities in Central Europe, Russia and Turkey. Our investment manager and
investment adviser believe that the outlook for a number of industries and
companies in Central Europe, Russia and Turkey is promising. In addition, our
board of directors believes that increasing our assets available for investment
should result in a modest lowering of our expenses as a percentage of average
net assets because our fixed cost can be spread over a larger asset base.

There is no assurance that this rights offering will be successful or that by
increasing our size, our aggregate expenses and, correspondingly, our expense
ratio, will be lowered. See "Our Rights Offering--Purpose of Our Rights
Offering" on page 14 of this prospectus.

Our outstanding common stock is listed on the NYSE and trades under the symbol
"CEE," as will be the shares offered for subscription in this rights offering.

IMPORTANT TERMS OF OUR RIGHTS OFFERING

The following are a few of the important terms of our rights offering. For a
detailed discussion of the terms of this rights offering, see "Our Rights
Offering" on page 14 of this prospectus.

Aggregate number of shares of our
common stock offered................

Number of transferable rights issued
to each stockholder................. One right for every share of our common
stock held

Subscription ratio.................. One share of common stock for every
three rights held (1-for-3)

Subscription price.................. The subscription price per share will
be % of the lower of (i) the
average of the last reported sale
prices of a share of our common stock
on the NYSE on the expiration date of
the rights offering and the four
preceding business days and (ii) the
net asset value per share on the
expiration date

TRANSFERABILITY OF RIGHTS

We are issuing to stockholders on the record date transferable rights to
subscribe for additional shares of our common stock. The rights are transferable
until the close of business on the last business day prior to the expiration
date. Application will be made to list the rights on the NYSE under the symbol
"CEE.RT," subject to notice of issuance. Trading in the rights on the NYSE is
expected to be conducted on a when-issued basis from , 2004 until the
record date; thereafter, they will trade regular-way until the expiration date
(including extensions). We will use our best efforts to ensure that an adequate
trading market for the rights will exist, although there is no assurance that a
market for the rights will develop. Assuming a market exists for the rights, the
rights may be purchased and sold through usual brokerage channels or sold
through the subscription agent.

Stockholders on the record date who do not wish to exercise any of the rights
issued to them pursuant to this rights offering may instruct the subscription
agent to sell any unexercised rights through or to the dealer manager.
Subscription certificates representing the rights to be sold through or to the
dealer manager must be received by the subscription agent on or before
, 2004, (or, if the subscription period is extended, on or before two
business days prior to the extended expiration date). Alternatively, the rights
evidenced by a subscription certificate may be transferred in whole by endorsing
the subscription certificate for transfer in accordance with the accompanying
instructions.

See "Our Rights Offering--Transferability and Sale of Rights" on page 16 of this
prospectus.

IMPORTANT DATES TO REMEMBER

Record Date.................................................
Subscription Period......................................... *
Expiration Date............................................. *
Notices for Guarantees of Delivery Due...................... *
Payment for Guarantees of Delivery Due...................... *
Confirmation Mailed to Participants......................... *
Final Payment of Shares..................................... *

------------
* Unless this rights offering is extended.

OVER-SUBSCRIPTION PRIVILEGE

Shares not subscribed for during the subscription period will be offered, by
means of the over-subscription privilege, only to stockholders on the record
date who have exercised all rights issued to them (other than those rights that
cannot be exercised because they represent in the aggregate the right to acquire
less than one share of our common stock). Investors who are not stockholders on
the record date, but who otherwise acquire rights to purchase shares of our
common stock pursuant to this rights offering, are not entitled to subscribe for
any shares of our common stock pursuant to the over-subscription privilege. If
these requests for our common shares exceed the common shares available, the
available common shares will be allocated pro rata among stockholders who
over-subscribed based on the number of rights originally issued to them pursuant
to this rights offering. See "Our Rights Offering--Over-Subscription Privilege"
on page 15 of this prospectus.

METHOD FOR EXERCISING RIGHTS

Rights are evidenced by subscription certificates that will be mailed to
stockholders of record or, if stockholder's shares are held by Cede & Co. or any
other depository or nominee, to Cede & Co. or the other depository or nominee.
Rights may be exercised by filling in and signing the subscription certificate
and mailing it in the envelope provided, or otherwise delivering the completed
and signed subscription certificate to the subscription agent, together with
payment at the estimated subscription price for the shares. Rights may also be
exercised by contacting your broker, banker or trust company, which can arrange,
on your behalf, to guarantee delivery of payment and of a properly completed and
executed subscription certificate. A fee may be charged for this service.
Completed subscription certificates and payments must be received by the
subscription agent prior to 5:00 p.m., New York City time, on the expiration
date at the offices of the subscription agent. See "Our Rights
Offering--Exercise of Rights" on page 18 of this prospectus and "Our Rights
Offering--Payment for Shares" on page 19 of this prospectus.

DISTRIBUTION ARRANGEMENTS

UBS Securities LLC will act as dealer manager for this rights offering. Under
the terms and subject to the conditions contained in the dealer manager
agreement, the dealer manager will provide financial

advisory services and marketing services in connection with this rights offering
and will solicit the exercise of rights and participation in the
over-subscription privilege. We have agreed to pay the dealer manager a fee for
its financial advisory, marketing and soliciting services equal to 3.75% of the
aggregate subscription price for shares issued pursuant to this rights offering.
The dealer manager will reallow a part of their fees to other broker-dealers
which have assisted in soliciting the exercise of rights.

Other offering expenses incurred by us in connection with this rights offering
are estimated to be $ , which includes up to $100,000 that may be paid
to the dealer manager as reimbursement for its reasonable expenses incurred in
connection with this rights offering. For additional information about the
distribution arrangements, see "Our Rights Offering--Distribution Arrangements"
on page 21 of this prospectus.

INFORMATION AGENT

The Information agent for this rights offering is: Georgenson Shareholder
Communications, Inc.

OUR INVESTMENT OBJECTIVE AND POLICIES

We are a non-diversified closed-end management investment company registered
under the Investment Company Act. Our investment objective is to seek long-term
capital appreciation through investment primarily in equity and equity-linked
securities of issuers domiciled in Central Europe and Russia. Under normal
circumstances, at least 80% of our net assets will be invested in the securities
of issuers domiciled in Central Europe or Russia. We may also invest in
additional types of securities, such as warrants, if consistent with our
investment objective, and participation certificates of issuers in any European
country or Russia. For hedging purposes, we may also invest in put and call
options on European or Russian securities and indices. We may invest up to 20%
of our total assets in fixed income securities of European or Russian issuers.
For temporary defensive purposes, we also may invest in money market instruments
and lend our portfolio securities to banks, securities dealers and other
institutions. Although we do not currently engage in foreign exchange
transactions, we may, when our investment manager and our investment adviser
deem it advisable, attempt to hedge our foreign currency exposure by entering
into forward currency contracts. See "Investment Objective and Policies" on page
25 of this prospectus and page B-2 of the SAI and "Investment Restrictions" on
page B-5 of the SAI.

MANAGEMENT

Under our investment advisory agreement, our investment adviser is Deutsche
Asset Management International GmbH ("DeAMI"), and under our management
agreement, our investment manager is Deutsche Bank Securities Inc. ("DBSI").
Both DeAMI and DBSI are wholly owned direct or indirect subsidiaries of Deutsche
Bank AG, a major German banking institution. See "Our Management" on page 37 of
this prospectus and "Investment Advisory and Other Services" on page B-17 of the
SAI.

MANAGEMENT FEES

We pay our investment manager a management fee, computed weekly and payable
monthly, at the annual rate of 0.65% of our average weekly net assets up to $100
million, and 0.55% of our assets in excess of $100 million. We pay our
investment adviser an advisory fee, computed weekly and payable monthly, at an
annual rate of 0.35% of our average weekly net assets up to $100 million and
0.25% of our assets in excess of $100 million. See "Our Management" on page 37
of this prospectus and "Investment Advisory and Other Services" on page B-17 of
the SAI.

CUSTODIANS

Investors Bank & Trust Company acts as our custodian. Our custodian has
agreements with a global network of sub-custodians. See "Custodians,
Dividend-Paying Agent, Transfer Agent and Registrar" on page 76 of this
prospectus.

DIVIDEND-PAYING AGENT, TRANSFER AGENT AND REGISTRAR

Investors Bank & Trust Company acts as our dividend-paying agent, transfer agent
and registrar.

RISK FACTORS AND SPECIAL CONSIDERATIONS

Risk Factors Relating to Foreign Investment Generally. Foreign investments may
involve certain considerations and risks not typically associated with those of
domestic origin as a result of, among others, the possibility of political and
economic developments and the level of governmental supervision and regulation
of foreign securities markets. In addition, certain foreign markets may be
substantially smaller, less developed, less liquid and more volatile than the
major markets of the United States.

Some foreign markets in which we invest are considered to be emerging market
countries. Investment in these countries subjects us to a greater risk of loss
than investments in a developed country. This is due to, among other things,
greater market volatility, lower trading volume, political and economic
instability, greater risk of market shut down and more governmental limitations
on foreign investment policy than those typically found in a developed market.

The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in many respects. The economies of developing
countries generally are heavily dependent upon international trade, and have
been and may be adversely affected by trade restrictions, currency values and
economic conditions in the countries with which they trade. In addition, foreign
investment in certain emerging markets is restricted or controlled to varying
degrees, which will increase our cost and expenses.

Some emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market country's balance of payments, the country could impose
temporary restrictions on foreign capital remittances. Investing in local
markets in emerging market countries may require us to adopt special procedures,
seek local government approvals or take other actions, each of which may involve
additional costs to us.

No established secondary markets may exist for many of the emerging market
issuer securities in which we invest. This reduced secondary market liquidity
may have an adverse effect on market price and our ability to dispose of
particular instruments when necessary and may make it more difficult for us to
obtain accurate market quotations for purposes of valuing our portfolio and
calculating our net asset value.

For a detailed discussion of risk factors and special considerations, see "Risk
Factors and Special Considerations" on page 29 of this prospectus.

Risk Factors Relating to Investment in Central Europe. Central European
countries are in varying stages of transition towards market-oriented economies
based on private and entrepreneurial initiatives, multi-party democracies,
pluralism and market economies. These countries experienced the extremely
volatile market performance in the past decade, and investing in securities of
Central European issuers entails all of the risks of investing in securities of
foreign issuers to a heightened degree. In addition, a substantial portion of
the economic growth, if any, of Central European countries is attributable to
their exporting industries rather than domestic consumption; therefore, the
Central European countries are also highly susceptible to economic downturns in
Western European countries and the United States, which are substantial
consumers of their exported products.

Central European markets continue to be relatively volatile, and our investments
will remain subject to currency fluctuation and local political, economic and
social uncertainties. Investing in any developing market means tolerating a
certain amount of volatility and, in some cases, severe market corrections. In
addition, investments in a single region, even though representing a number of
different countries, may be affected by common economic forces and other
factors.

Less developed markets involve higher levels of risks, and are subject to more
substantial volatility and price fluctuations than securities that are traded in
more developed markets.

Risks Factors Relating to Investment in Russia. Investing in Russia subjects us
to many of the same risks associated with investing in Central European
countries. There are significant risks inherent in Russian securities that are
not typically associated with securities of companies in more developed
countries. The value of Russian securities may be affected by various
uncertainties, such as economic, political and social instability, investment
and regulatory risk, including crime and corruption in government and business,
and inconsistency and underdevelopment of Russia's tax and legal systems. As is
the case with issuers in most emerging markets, Russian securities are subject
to a higher degree of volatility than the securities of Western companies.

Russia continues to make the transition from a centrally controlled command
system to a market-oriented, democratic model of government, but its continued
development, and the pace with which it continues to make the transition,
remains uncertain. The Russian economy suffers from the lack of an effective
banking system and is plagued by a deteriorating infrastructure. Russia's role
and its reintegration into the global political economy are also unsettled, and
internal regional conflicts continue to exist.

The Russian economy relies heavily on the production and export of oil. Russia
also has substantial trading links with Iraq. Because Russia is highly sensitive
to changes in the world oil price and because of recent United States legal and
military action against Iraq, it is even more difficult to predict future oil
price movements with any certainty and fluctuations in pricing may increase
substantially.

There is still no centralized public market for trading Russian securities,
despite the number of stock exchanges in Russia, and trading occurs mostly
over-the-counter. Corporate governance standards for Russian companies have also
proven to be poor, and minority stockholders in Russian companies have suffered
losses due to abusive share dilutions, asset transfers and transfer-pricing
practices. Stockholders of Russian companies also lack many of the protections
available to stockholders of Western issuers. Accounting, financial and auditing
reporting by Russian companies is also generally of less quality and less
reliable compared with Western companies.

Laws and regulations involving foreign investment in Russian enterprises, title
to securities and transfer of title are also relatively new and can change
quickly and unpredictably. Moreover, Russia's taxation system is frequently
subject to change and enforcement is inconsistent at federal, regional and local
levels.

Dilution of Net Asset Value. We will experience a dilution of the aggregate net
asset value per share of our common stock upon the completion of this rights
offering because the subscription price may be less than our then current net
asset value per share. This dilution, which may be substantial, will be
experienced by all stockholders, irrespective of whether they exercise all or
any portion of their rights. Also, Stockholders who do not fully exercise their
rights should expect that they will own a smaller proportional interest in us
after the completion of the rights offering. The distribution to stockholders of
transferable rights which themselves may have intrinsic value will afford
non-participating stockholders the potential of receiving a cash payment upon
sale of their rights, receipt of which may be viewed as partial compensation for
the dilution of their interest in us. No assurance can be given that a market
for the rights will develop or as to the value, if any, that rights will have.

Net Asset Value Discount. Shares of closed-end investment companies frequently
trade at a discount from net asset value. This is a risk separate and distinct
from the risk that our net asset value will

decrease. We cannot predict whether our common stock will trade at, above or
below net asset value. Our shares of common stock currently trade at a discount.
See "Market and Net Asset Value Information" on page 13 of this prospectus.
Stockholders wishing to sell their shares of common stock during this rights
offering should be aware that there is greater risk that the discount to net
asset value, which may increase during this rights offering, will adversely
affect them. This increased risk is because, among other things, the market
price per share may reflect anticipated dilution that will result from this
rights offering. There can be no assurance that, after the completion of this
rights offering, our shares will trade at the same level as our current discount
to net asset value.

Exchange Rate Fluctuations and Foreign Currency Considerations. Substantially
all of our assets are invested in Central Europe and Russia, and substantially
all of the income we receive from these investments will be in euros or other
foreign currencies. Since we will compute and distribute income in U.S. dollars,
and the computation of income will be made on the day we earn the income, any
fluctuation in the value of foreign currency relative to the U.S. dollar between
the earning of the income and the time at which we convert the foreign
currencies to U.S. dollars may have an adverse impact on us. In addition, since
we will invest in securities denominated or quoted in currencies other than the
U.S. dollar, changes in foreign currency exchange rates will affect the value of
our securities in our portfolio and the unrealized appreciation or depreciation
of our investments.

We generally expect that the foreign currencies received by us with respect to
most of our investments will be freely convertible into U.S. dollars on foreign
exchange markets and that in most cases the U.S. dollars received will be fully
repatriable out of the various foreign countries in which we invest. However,
our investments in Russia will be in securities denominated in Russian Rubles,
which are not externally convertible into other currencies outside of Russia.

We do not currently, nor do we expect to, engage in foreign exchange
transactions as an investment strategy. However, we may enter into forward
currency transactions in the future in order to seek to hedge the value of our
portfolio, if our investment manager and investment adviser deem it necessary.

Interest Expense. We may, subject to limitations, borrow money for temporary or
emergency purposes for the clearance of transactions. Borrowing money will
subject us to interest expenses and we may incur other transaction costs.

Certain Provisions of Our Articles of Incorporation and Bylaws. We have
provisions in our articles of incorporation and bylaws that could have the
effect of delaying, deferring, preventing or otherwise limiting the ability of
other entities or persons to acquire control of us, to cause us to engage in
certain transactions or to modify our structure.

Foreign Custody. Our foreign securities and cash are generally held in foreign
banks and securities depositories by a global network of custodians. There may
be limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on our ability to recover our assets if a
foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt.

Market Disruption. As a result of terrorist attacks on the World Trade Center
and the Pentagon on September 11, 2001, some of the U.S. securities markets were
closed for a four-day period. These terrorist attacks and related events have
led to increased short-term market volatility. U.S. military and related action
in Iraq and Afghanistan and events in the Middle East could have significant
adverse effects on U.S. and world economics and markets. A similar disruption of
the U.S. or world financial markets could impact interest rates, auctions,
secondary trading, ratings, credit risk, inflation and other factors relating to
our common stock.

Fee table

SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)(1)......... 3.75%
Dividend Reinvestment and Cash Purchase Plan Fees(2)...... None
ANNUAL EXPENSES (as a percentage of net assets attributable
to common shares)
Advisory and Management Fees(3)(4)........................ %
Other Expenses(5)......................................... %
Total Annual Expenses(4).................................. %

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

(1) The dealer manager will receive a fee for its financial advisory, marketing
and soliciting services equal to 3.75% of the aggregate subscription price
for shares issued pursuant to this rights offering. We have also agreed to
reimburse the dealer manager for out-of-pocket expenses up to an aggregate
of $100,000. These fees will be borne by us and indirectly by all of our
stockholders, including those who do not exercise their rights. See "Our
Rights Offering--Distribution Arrangements" on page 21 of this prospectus.

(2) See "Voluntary Cash Purchase Program and Dividend Reinvestment Plan" on
page 43 of this prospectus.

(3) See "Our Management" on page 37 of this prospectus and "Investment Advisory
and Other Services" on page B-17 of the SAI for additional information.

(4) The indicated advisory and management fees and the expense ratio assume
that this rights offering is fully subscribed, yielding estimated net
proceeds of approximately $ million. It also assumes that net assets
attributable to our common stock will not increase or decrease due to price
or currency fluctuation.

(5) "Other Expenses" have been estimated for the current fiscal year. See
"Brokerage Allocation and Other Practices" on page B-18 of the SAI for
additional information.

This fee table is intended to assist investors in understanding the costs and
expenses that an investor will bear directly or indirectly by investing in our
shares.

EXAMPLE

An investor would directly or indirectly pay the following expenses on a $1,000
investment, assuming a 5% annual return throughout the periods:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------

$ $ $ $

This example assumes that all dividends and all other distributions are
reinvested at net asset value and that the percentage amounts listed under
Annual Expenses remain the same in the years shown. The example also reflects
payment of the 3.75% sales load and other expenses incurred in connection with
this rights offering. The above tables and the assumption in this example of a
5% annual return are required by SEC regulations applicable to all investment
companies; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of our shares. For a more
complete description of our costs and expenses, see "Our Management" on page 42
of this prospectus, "Investment Advisory and Other Services" on page B-17 of the
SAI and "Brokerage Allocation and Other Practices" on page B-18 of the SAI.

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR
RATE OF RETURN AND OUR ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

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

Financial highlights

Set forth below and on the next page is selected data for a share of common
stock outstanding throughout each of the years indicated. The information below
has been audited by PricewaterhouseCoopers LLP ("PwC"), our independent
auditors, whose report thereon was unqualified. The information should be read
in conjunction with the financial statements and notes contained therein. The
unqualified report of PwC for the year ended October 31, 2003 is included in the
SAI under "Financial Statements."

FOR THE YEAR ENDED OCTOBER 31
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------

Per share operating performance
Net asset value:
Beginning of year.......................................... $ 15.93 $ 13.83 $ 16.14 $ 15.99 $ 15.74
-------- -------- -------- -------- --------
Net investment income (loss)............................... .21 (.07) .10 (.09) (.08)
Net realized and unrealized gain (loss) on investments and
foreign currency transactions............................ 6.86 2.37 (2.70) (.38) .09
-------- -------- -------- -------- --------
Increase (decrease) from investment operations............. 7.07 2.30 (2.60) (.47) 0.01
-------- -------- -------- -------- --------
Increase resulting from share repurchases.................. .08 .06 .29 .62 .40
-------- -------- -------- -------- --------
Distributions from net investment income................... -- (.10) -- -- (.13)
Distributions from net realized foreign currency gains..... -- (.13) -- -- (.01)
Distributions from net realized short-term capital gains... -- -- -- -- --
Distributions from net realized long-term capital gains.... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions(1)..................................... -- (.23) -- -- (.14)
-------- -------- -------- -------- --------
Dilution in NAV from dividend reinvestment................. -- (.03) -- -- (.02)
-------- -------- -------- -------- --------
Net asset value:
End of year.............................................. $ 23.08 $ 15.93 $ 13.83 $ 16.14 $ 15.99
======== ======== ======== ======== ========
Market value:
End of year.............................................. $ 21.25 $ 13.25 $ 10.95 $ 11.875 $ 12.50
Total investment return for the year:(2)
Based upon market value.................................. 60.38% 23.43% (7.79)% (5.00)% (3.29)%
Based upon net asset value............................... 44.88% 17.05% (14.31)% .94% 2.48%
Ratio to average net assets:
Total expenses before custody credits(3)................. 1.51% 1.55% 1.66% 1.37% 1.44%
Net investment income (loss)............................. 1.00% (.44)% .63% (.44)% (.44)%
Portfolio turnover......................................... 43.88% 57.77% 57.83% 59.17% 60.35%
Net assets at end of year (000's omitted).................. $177,766 $126,467 $111,213 $140,923 $157,265
(1) For U.S. tax purposes, total distributions consisted
of:
Ordinary income.......................................... -- $ 0.23 -- -- $ 0.14
Long term capital gains.................................. -- -- -- -- --
-------- -------- -------- -------- --------
-- $ 0.23 -- -- $ 0.14
-------- -------- -------- -------- --------
(2) Total investment return based on market value is calculated assuming that shares of our common stock were
purchased at the closing market price as of the beginning of the year, dividends, capital gains and other
distributions were reinvested as provided for in our dividend reinvestment plan and then sold at the closing
market price per share on the last day of the year. The computation does not reflect any sales commission
investors may incur in purchasing or selling shares of the Fund. The total investment return based on the net
asset value is similarly computed except that the Fund's net asset value is substituted for the closing
market value.
(3) The custody credits are attributable to interest earned on the U.S. cash balances. The ratios of total
expenses after custody credits to average net assets are 1.50%, 1.54%, 1.62%, 1.35% and 1.43% for 2003, 2002,
2001, 2000 and 1999 respectively.

--------------------------------------------------------------------------------
11

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

FOR THE YEAR ENDED OCTOBER 31
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------------

Per share operating performance
Net asset value:
Beginning of year............................. $ 28.00 $ 24.56 $ 20.70 $ 18.65 $ 16.76
-------- -------- -------- -------- --------
Net investment income (loss).................. .13 .09 .17 .13 .19
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions................................ (6.18) 5.26 3.93 2.03 1.76
-------- -------- -------- -------- --------
Increase (decrease) from investment
operations.................................. (6.05) 5.35 4.10 2.16 1.95
-------- -------- -------- -------- --------
Increase resulting from share repurchases..... .82 .28 .14 .09 .02
-------- -------- -------- -------- --------
Distributions from net investment income...... (.01) (.11) (.13) (.19) (.08)
Distributions from net realized foreign
currency gains.............................. -- -- (.03) (.01) --
Distributions from net realized short-term
capital gains............................... (1.54) -- -- -- --
Distributions from net realized long-term
capital gains............................... (5.02) (1.81) (.22) -- --
-------- -------- -------- -------- --------
Total distributions........................... (6.57) (1.92) (.38) (.20) (.08)
-------- -------- -------- -------- --------
Dilution in NAV from dividend reinvestment.... (.46) (.27) -- --
-------- -------- -------- -------- --------
Net asset value:
End of year................................. $ 15.74 $ 28.00 $ 24.56 $ 20.70 $ 18.65
======== ======== ======== ======== ========
Market value:
End of year................................. $13.0625 $ 23.125 $ 19.625 $ 16.00 $ 15.25
Total investment return for the year:(1)
Based upon market value..................... (22.89)% 28.93% 25.28% 6.37% (3.42)%
Based upon net asset value.................. (26.09)% 22.41% 20.74% 12.22% 12.90%
Ratio to average net assets:
Total expenses.............................. 1.17% 1.10% 1.08% 1.24% 1.14%
Net investment income (loss)................ .56% .32% .73% .68% 1.07%
Portfolio turnover............................ 97.48% 68.20% 52.30% 38.89% 32.38%
Net assets at end of year (000's omitted)..... $173,825 $325,972 $289,133 $247,529 $226,554

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

(1) Total investment return based on market value is calculated assuming that
shares of our common stock were purchased at the closing market price as of
the beginning of the year, dividends, capital gains and other distributions
were reinvested as provided for in our dividend reinvestment plan and then
sold at the closing market price per share on the last day of the year. The
computation does not reflect any sales commission investors may incur in
purchasing or selling shares of the Fund. The total investment return based
on the net asset value is similarly computed except that the Fund's net
asset value is substituted for the closing market value.

--------------------------------------------------------------------------------
12

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

Market and net asset value information

Our outstanding common stock is, and the shares offered for subscription
pursuant to this rights offering, will be listed on the NYSE. Our common stock
is also listed on the Regulated Market Segment (Geregelter Markt) of the
Frankfurt Stock Exchange. Since our commencement of operations in March 1990,
our common stock traded in the market at both a premium and a discount to net
asset value. Since 1990, our common stock has generally traded at a discount to
net asset value. Our officers have not determined the reasons why our common
stock has traded at a discount to net asset value, nor can they predict whether
our common stock will continue to trade at a discount to net asset value, and if
so, the level of such discount. Shares of closed-end investment companies
frequently trade at a discount to net asset value.

We announced the preliminary filing with the United States Securities and
Exchange Commission in connection with this rights offering on January 9, 2004.
The net asset values per share of our common stock at the close of business on
January 9, 2004 and , 2004, the last business day prior to the date of
this prospectus, were $26.47 and $ , respectively, and the last
reported sale prices of a share of common stock on the NYSE were $25.41 and
$ , respectively, 96.0% and % of net asset value, respectively.

The following table sets forth for our common stock for the periods indicated:
(i) the per share net asset value corresponding to the high/low market price for
each quarter, (ii) the per share high and low market price on the NYSE, (iii)
the discount to net asset value of each high/low market price and (iv) the total
volume of trading on the NYSE during the period.

DISCOUNT TO NET
NET ASSET VALUE(1) MARKET PRICE(2) ASSET VALUE (%) VOLUME OF
COMMON STOCK HIGH LOW HIGH LOW HIGH LOW TRADING(3)
-----------------------------------------------------------------------------------------------------------

Fiscal Year 2002
January 31, 2002............... $16.00 $13.83 $13.25 $11.00 17.19% 20.46% 729,200
April 30, 2002................. $17.25 $15.12 $14.89 $12.55 13.68% 17.00% 652,100
July 31, 2002.................. $17.79 $14.33 $15.34 $11.60 13.77% 19.05% 804,100
October 31, 2002............... $15.93 $14.21 $13.25 $11.67 16.82% 17.87% 438,800
Fiscal Year 2003
January 31, 2003............... $17.37 $16.03 $15.05 $13.25 13.36% 17.34% 481,300
April 30, 2003................. $17.72 $15.81 $14.99 $13.25 15.41% 16.19% 623,800
July 31, 2003.................. $20.29 $18.13 $17.61 $14.99 13.21% 17.32% 1,379,600
October 31, 2003............... $24.73 $20.26 $23.65 $17.40 4.37% 14.12% 1,965,500
Fiscal Year 2004
January 31, 2004............... $26.30 $22.36 $25.82 $20.02 1.83% 10.47% 1,444,035

------------
(1) Based on our computations.

(2) As reported by the NYSE.

(3) As reported by the NYSE.

--------------------------------------------------------------------------------
13

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

Our rights offering

PURPOSE OF OUR RIGHTS OFFERING

Our board of directors has determined that it would be in our best interest and
in our stockholders best interest to increase our assets available for
investment, thereby permitting us to take advantage more fully of investment
opportunities in Central Europe, Russia and Turkey. In connection with our
directors' consideration of this rights offering, our investment manager and
investment adviser believe that the outlook for a number of industries and
companies in Central Europe, Russia and Turkey is promising.

This rights offering provides existing stockholders the opportunity to purchase
additional shares of our common stock at a price below market price and net
asset value (subject to the sales load described in this prospectus). The
distribution to stockholders of transferable rights, which may themselves have
intrinsic value, also will afford non-participating stockholders the potential
of receiving cash payment upon the sale of the rights, receipt of which may be
viewed as partial compensation for the dilution of their interests. In addition,
our board of directors believes that increasing our assets available for
investment should result in a modest lowering of our expenses as a percentage of
average net assets because our fixed cost can be spread over a larger asset
base. Moreover, our board of directors considered the impact of this rights
offering on our net asset value per share. For a discussion of the potential
impact of this rights offering on current stockholders, such as dilution, see
"Risk Factors and Special Considerations" on page 29 of this prospectus and
"--Investment Considerations" below on page 24.

In determining that this rights offering was in our best interest and in the
best interest of our stockholders, our board of directors retained UBS
Securities LLC, the dealer manager in this rights offering, to provide us with
financial advisory, marketing and soliciting services relating to this rights
offering, including the structure, timing and terms of the rights offering. In
addition, our board of directors considered, among other things, using a fixed
pricing versus variable pricing mechanism, the benefits and drawbacks of
conducting a non-transferable versus a transferable rights offering, the effect
on us if this rights offering is not fully subscribed and the experience of the
dealer manager in conducting rights offerings.

There is no assurance that this rights offering will be successful or that, by
increasing our size, our aggregate expenses and, correspondingly, our expense
ratio will be lowered.

We may, in the future and at our discretion, choose to make additional rights
offerings from time to time for a number of shares and on terms which may or may
not be similar to this rights offering. Any such future rights offering will be
made in accordance with the Investment Company Act.

For a discussion of certain benefits of this rights offering to our affiliates,
see "--Certain Effects of This Rights Offering" below on page 23.

TERMS OF THE OFFER

We are issuing to stockholders on the record date transferable rights to
subscribe for an aggregate of shares of our common stock. Stockholders
of record will receive one right for each share of our common stock held on the
record date. Each stockholder on the record date, or each rights holder, will be
entitled to acquire at the subscription price one share of our common stock for
every three rights held. Fractional shares of our common stock will not be
issued upon the exercise of rights; accordingly, rights may be exercised only in
integral multiples of three, except that any stockholder on the record date who
is issued fewer than three rights may subscribe, at the subscription price, for
one full share of our common stock. Rights may be exercised at any time during
the subscription period, which commences on , 2004 and ends on the
expiration date, which is 5:00 p.m., New York City time, on , 2004. We
may extend the expiration date until 5:00 p.m., New York City time, to a date
not later than ,

--------------------------------------------------------------------------------
14

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

2004. See "--Expiration of This Rights Offering" below on page 18. Shares of our
common stock not subscribed for during the subscription period will be offered,
by means of the over-subscription privilege, to our stockholders on the record
date who fully exercise the rights issued to them pursuant to this rights
offering (other than those rights that cannot be exercised because they
represent in the aggregate the right to acquire less than one share of our
common stock) and who wish to acquire more than the number of shares they are
entitled to purchase pursuant to the exercise of their rights, subject to
certain limitations and subject to allotment. Investors who are not stockholders
on the record date, but who otherwise acquire rights to purchase shares of our
common stock pursuant to this rights offering, are not entitled to subscribe for
any shares of our common stock pursuant to the over-subscription privilege. See
"--Over-Subscription Privilege" below on page 15.

For purposes of determining the maximum number of shares of our common stock a
stockholder may acquire pursuant to this rights offering, broker-dealers whose
shares are held of record by Cede & Co., the nominee for the Depository Trust
Company ("DTC"), or by any other depository or nominee will be deemed to be the
holders of the rights that are held by Cede & Co. or such other depository or
nominee on their behalf.

The rights are transferable and application will be made to list them for
trading on the NYSE under the symbol "CEE.RT." See "--Transferability and Sale
of Rights" below on page 16.

Rights may be exercised by completing a subscription certificate and delivering
it, together with payment at the estimated subscription price, to the
subscription agent. A rights holder will have no right to rescind a purchase
after the subscription agent has received a completed subscription certificate
together with payment for the shares offered pursuant to this rights offering.
Rights holders who exercise the rights will not know at the time of exercise the
subscription price of the shares being acquired and will be required initially
to pay for both the shares subscribed for during the subscription period and, if
eligible, any additional shares subscribed for pursuant to the over-subscription
privilege at the estimated subscription price of $ per share. For a
discussion of the method by which rights may be exercised and shares paid for,
see "--Exercise of Rights" below on page 18 and "--Payment for Shares" below on
page 19.

There is no minimum number of rights which must be exercised in order for this
rights offering to close.

OVER-SUBSCRIPTION PRIVILEGE

Shares not subscribed for during the subscription period will be offered, by
means of the over-subscription privilege, only to stockholders on the record
date who have exercised all rights issued to them (other than those rights that
cannot be exercised because they represent in the aggregate the right to acquire
less than one share of our common stock) and who wish to acquire more than the
number of our shares of our common stock for which the rights issued to them are
exercisable. Investors who are not stockholders on the record date, but who
otherwise acquire rights to purchase shares of our common stock pursuant to this
rights offering, are not entitled to subscribe for any shares of our common
stock pursuant to the over-subscription privilege.

Stockholders on the record date who are fully exercising their rights during the
subscription period should indicate, on the subscription certificate which they
submit with respect to the exercise of the rights issued to them, how many
shares they are willing to acquire pursuant to the over-subscription privilege.

All over-subscriptions will be honored in full to the extent that our shares of
common stock not subscribed for during the subscription period are available. If
there are insufficient shares of our common stock to honor all
over-subscriptions, the available shares of our common stock will be allocated
pro rata among those who over-subscribe based solely on the number of rights
initially issued to them pursuant to this rights offering, so that the number of
shares of our common stock issued to stockholders who subscribe pursuant to the
over-subscription privilege will generally be in proportion

--------------------------------------------------------------------------------
15

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

to the number of shares of our common stock owned by them on the record date.
The allocation process may involve a series of allocations in order to assure
that the total number of shares of common stock available for over-subscriptions
is distributed on a pro rata basis.

We will not offer or sell any shares of our common stock which are not
subscribed for during the subscription period or pursuant to the
over-subscription privilege.

TRANSFERABILITY AND SALE OF RIGHTS

The rights are transferable until the close of business on the last business day
prior to the expiration date, which is , 2004, unless we extend the
expiration date, until 5:00 p.m., New York City time, to a date not later than
, 2004. Application will be made to list the rights on the NYSE under
the symbol "CEE.RT," subject to notice of issuance. Trading in the rights on the
NYSE is expected to be conducted on a when-issued basis from , 2004
until the record date; thereafter, they will trade regular way until the
expiration date (including extensions). Stockholders are encouraged to contact
their broker, bank or financial adviser for more information about trading the
rights. We will use our best efforts to ensure that an adequate trading market
for the rights will exist, although there is no assurance that a market for the
rights will develop. Assuming a market exist for the rights, the rights may be
purchased and sold through usual brokerage channels or sold through the
subscription agent.

Sales through Subscription Agent and Dealer Manager. Stockholders on the record
date who do not wish to exercise any of the rights issued to them pursuant to
this rights offering may instruct the subscription agent to sell any unexercised
rights through or to the dealer manager. Subscription certificates representing
the rights to be sold through or to the dealer manager must be received by the
subscription agent on or before , 2004, (or, if the subscription
period is extended, on or before two business days prior to the extended
expiration date). Upon the timely receipt by the subscription agent of
appropriate instructions to sell rights, the subscription agent will ask the
dealer manager either to purchase or to use its best efforts to complete the
sale, and the subscription agent will remit the proceeds of the sale to the
selling stockholder. If the rights are sold, sales of those rights will be
deemed to have been effected at the weighted average price received by the
dealer manager on the day those rights are sold. The sale price of any rights
sold to the dealer manager will be based upon the then current market price for
the rights. The dealer manager will also attempt to sell all rights which remain
unclaimed as a result of subscription certificates being returned by the postal
authorities to the subscription agent as undeliverable as of the fourth business
day prior to the expiration date (or, if the subscription period is extended, as
of the fourth business day prior to the extended expiration date). The
subscription agent will hold the proceeds from those sales for the benefit of
those nonclaiming stockholders until the proceeds are either claimed or escheat.
There can be no assurance that the dealer manager will purchase or be able to
complete the sale of any of those rights and neither we nor the dealer manager
have guaranteed any minimum sales price for the rights. If a stockholder does
not utilize the services of the subscription agent and chooses to use another
broker-dealer or other financial institution to sell rights issued to them
pursuant to this rights offering, then the other broker-dealer or financial
institution may charge a fee to sell the rights.

Other Transfers. The rights evidenced by a subscription certificate may be
transferred in whole by endorsing the subscription certificate for transfer in
accordance with the accompanying instructions. A portion of the rights evidenced
by a single subscription certificate (but not fractional rights) may be
transferred by delivering to the subscription agent a subscription certificate
properly endorsed for transfer, with instructions to register such portion of
the rights evidenced thereby in the name of the transferee and to issue a new
subscription certificate to the transferee evidencing the transferred rights. If
this occurs, a new subscription certificate evidencing the balance of the
rights, if any, will be issued to the stockholder or, if the stockholder so
instructs, to an additional transferee. The signature on the subscription
certificate must correspond with the name as written upon the face of the
subscription

--------------------------------------------------------------------------------
16

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

certificate in every particular, without alteration or enlargement, or any
change. A signature guarantee must be provided by an eligible financial
institution as defined in Rule 17Ad-15 of the Exchange Act, subject to the
standards and procedures we adopt.

Stockholders wishing to transfer all or a portion of their rights should allow
at least five business days prior to the expiration date for: (i) the transfer
instructions to be received and processed by the subscription agent; (ii) a new
subscription certificate to be issued and transmitted to the transferee or
transferees with respect to transferred rights, and to the transferor with
respect to retained rights, if any; and (iii) the rights evidenced by the new
subscription certificate to be exercised or sold by the recipients of the
subscription certificate. Neither we nor the subscription agent nor the dealer
manager shall have any liability to a transferee or transferor of rights if
subscription certificates are not received in time for exercise or sale prior to
the expiration date.

Except for the fees charged by the subscription agent and dealer manager (which
we will pay), all commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred or charged in connection with the
purchase, sale or exercise of rights will be for the account of the transferor
of the rights, and none of these commissions, fees or expenses will be paid by
us, the subscription agent or the dealer manager.

We anticipate that the rights will be eligible for transfer through, and that
the exercise of the primary subscription (and the over-subscription) may be
effected through, the facilities of DTC using the PSOP System at or prior to
5:00 p.m., New York City time, on the expiration date.

THE SUBSCRIPTION PRICE

The subscription price per share of our common stock will be % of the lower
of (i) the average of the last reported sale prices of a share of our common
stock on the NYSE on the expiration date and the preceding four business days
and (ii) the net asset value per share as of the close of business on the
expiration date. For example, if the average of the last reported sale prices on
the NYSE on the expiration date and the preceding four business days of a share
of our common stock is $ and the net asset value per share of our
common stock on the expiration date is $ , the subscription price would
be $ ( % of $ ). If, however, the five-day average of the
last reported sale prices on the NYSE on the expiration date is $ , and
the net asset value per share of our common stock on such date is $ ,
the subscription price would be $ ( % of $ ). Since the
expiration date of the subscription period will be , 2004 (unless we
extend the subscription period), rights holders will not know the subscription
price at the time of exercise and will be required initially to pay for both the
shares subscribed for on primary subscription and, if eligible, any additional
shares subscribed for pursuant to the over-subscription privilege at the
estimated subscription price of $ per share. See "Payment for Shares" below.
Rights holders who exercise their rights will have no right to rescind a
purchase after receipt of their completed subscription certificates together
with payment for shares by the subscription agent. We do not have the right to
withdraw the rights or cancel this rights offering after the rights have been
distributed.

We announced the preliminary filing with the United States Securities and
Exchange Commission in connection with this rights offering on January 9, 2004.
The net asset values per share of our common stock at the close of business on
January 9, 2004 and on , 2004, the last business day prior to the date
of this prospectus, were $26.47 and $ , respectively, and the last
reported sale prices of a share of our common stock on the NYSE on such dates
were $25.41 and $ , respectively, equivalent to 96.0% and % of net
asset value, respectively. See "Market and Net Asset Value Information" on page
13 of this prospectus.

--------------------------------------------------------------------------------
17

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

EXPIRATION OF THIS RIGHTS OFFERING

The offer will expire at 5:00 p.m., New York City time, on , 2004
unless we extend the expiration date until 5:00 p.m., New York City time, to a
date not later than , 2004. Rights will expire on the expiration date
and may not be exercised after this date.

SUBSCRIPTION AGENT

The subscription agent for this rights offering is Colbent Corporation, which
will receive for its administrative, processing, invoicing and other services as
subscription agent a fee estimated to be approximately $35,000, including
reimbursement for all out-of-pocket expenses related to this rights offering.
Questions regarding the subscription certificates should be directed to
Georgenson Shareholder Communication, Inc., our information agent at
1-800- ; stockholders may also consult their brokers or nominees.
SIGNED SUBSCRIPTION CERTIFICATES SHOULD BE SENT, TOGETHER WITH PAYMENT OF THE
ESTIMATED SUBSCRIPTION PRICE, TO COLBENT CORPORATION, ATTENTION: CORPORATE
ACTIONS, by one of the methods described below:

(1) BY MAIL: (2) BY EXPRESS MAIL OR
OVERNIGHT COURIER:
P.O. Box 859208
Braintree, MA 02185-9208 161 Bay State Road
Braintree, MA 02184
(3) BY HAND:
Securities Transfer and Reporting Services
c/o Colbent Corporation
100 Williams Street Galeria
New York, NY 10038

WE WILL HONOR ONLY SUBSCRIPTION CERTIFICATES RECEIVED BY THE SUBSCRIPTION AGENT
ON OR PRIOR TO THE EXPIRATION DATE AT ONE OF THE ADDRESSES LISTED ABOVE.
DELIVERY TO AN ADDRESS OTHER THAN THOSE LISTED ABOVE WILL NOT CONSTITUTE GOOD
DELIVERY.

EXERCISE OF RIGHTS

Rights are evidenced by subscription certificates that will be mailed to
stockholders of record or, if stockholder's shares are held by Cede & Co. or any
other depository or nominee, to Cede & Co. or the other depository or nominee.
Rights may be exercised by filling in and signing the subscription certificate
and mailing it in the envelope provided, or otherwise delivering the completed
and signed subscription certificate to the subscription agent, together with
payment at the estimated subscription price for the shares as described below
under "--Payment for Shares" on page 19 of this prospectus. Rights may also be
exercised by contacting your broker, banker or trust company, which can arrange,
on your behalf, to guarantee delivery of payment and of a properly completed and
executed subscription certificate. A fee may be charged for this service.
Completed subscription certificates and payments must be received by the
subscription agent prior to 5:00 p.m., New York City time, on the expiration
date at the offices of the subscription agent at the addresses set forth above
under "Subscription Agent."

Stockholders Who Are Record Owners. Stockholders who are record owners can
choose between either option set forth below on page 19 under "--Payment for
Shares." If time is of the essence, option (2) will permit delivery of the
subscription certificate and payment after the expiration date.

Investors Whose Shares Are Held By A Nominee. Stockholders whose shares are
held by a nominee, such as a broker or trustee, must contact that nominee to
exercise their rights. In that case, the

--------------------------------------------------------------------------------
18

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

nominee will complete the subscription certificate on behalf of the investor and
arrange for proper payment by one of the methods set forth below under
"--Payment for Shares."

Nominees. Nominees, such as brokers, trustees or depositories for securities,
who hold shares of our common stock for the account of others should notify the
respective beneficial owners of such shares as soon as possible to ascertain
those beneficial owners' intentions and to obtain instructions with respect to
the rights. If the beneficial owner so instructs, the nominee should complete
the subscription certificate and submit it to the subscription agent with the
proper payment as described below on page 19 of this prospectus under "--Payment
for Shares."

Banks, brokers, trustees and other nominee holders of rights will be required to
certify to the subscription agent, before any over-subscription privilege may be
exercised with respect to any particular beneficial owner on the record date, as
to the aggregate number of rights exercised during the subscription period and
the number of shares subscribed for pursuant to the over-subscription privilege
by the beneficial owner and that the beneficial owner exercised all the rights
issued to them pursuant to this rights offering. Nominee-Holder
Over-Subscription Exercise Forms and Beneficial Owner Certification Forms will
be distributed to banks, brokers, trustees and other nominees with the
subscription certificates.

INFORMATION AGENT

Any questions or requests for assistance may be directed to the information
agent at its telephone number and address listed below:

The information agent for this rights offering is: Georgenson Shareholder
Communication, Inc.

Stockholders may also contact their brokers or nominees for information with
respect to this rights offering.

The information agent will receive a fee estimated to be approximately
$ , plus reimbursement for all out-of-pocket expenses related to this
rights offering.

PAYMENT FOR SHARES

Rights holders who wish to acquire shares of our common stock pursuant to this
rights offering or, if eligible, pursuant to the over-subscription privilege may
choose between the following methods of payment:

(1) A rights holder can send the subscription certificate together with payment
for the shares of our common stock subscribed for during the subscription
period and, if eligible, for any additional shares subscribed for pursuant
to the over-subscription privilege to the subscription agent based upon an
estimated subscription price of $ per share. Subscription will be
accepted when payment, together with the executed subscription certificate,
is received by the subscription agent at one of the addresses set forth
above; the payment and subscription certificate must be received by the
subscription agent no later than 5:00 p.m., New York City time, on the
expiration date. The subscription agent will deposit all checks received by
it for the purchase of shares into a segregated interest-bearing account of
ours (the interest from which will belong to us) pending proration and
distribution of shares of our common stock. A payment pursuant to this
method must be in U.S. dollars by money order or check drawn on a bank
located in the United States, must be payable to THE CENTRAL EUROPE AND
RUSSIA FUND, INC. and must accompany an executed Subscription Certificate
for such Subscription Certificate to be accepted.

--------------------------------------------------------------------------------
19

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

(2) Alternatively, a subscription will be accepted by the subscription agent if,
prior to 5:00 p.m., New York City time, on the expiration date, the
subscription agent has received a notice of guaranteed delivery by facsimile
(telecopy) or otherwise from a bank, a trust company or NYSE member
guaranteeing delivery of (i) payment of the full subscription price for the
shares of our common stock subscribed for during the subscription period
and, if eligible, any additional shares subscribed for pursuant to the
over-subscription privilege, and (ii) a properly completed and executed
subscription certificate. The subscription agent will not honor a notice of
guaranteed delivery unless a properly completed and executed subscription
certificate and full payment for the shares of our common stock are received
by the subscription agent by the close of business on the fifth business day
after the expiration date.

On the confirmation date, which will be seven business days following the
expiration date, a confirmation will be sent by the subscription agent to each
rights holder exercising their rights (or, if shares of our common stock are
held by Cede & Co. or any other depository or nominee, to Cede & Co. and that
other depository or nominee), showing (i) the number of shares of our common
stock acquired during the subscription period, (ii) the number of shares, if
any, acquired pursuant to the over-subscription privilege, (iii) the per share
and total purchase price for the shares and (iv) any additional amount payable
to us by the rights holder or any excess to be refunded by us to the rights
holder, in each case based on the subscription price as determined on the
expiration date. If any rights holder, if eligible, exercises his right to
acquire shares of our common stock pursuant to the over-subscription privilege,
any excess payment which would otherwise be refunded to him will be applied by
us toward payment for shares acquired pursuant to exercise of the
over-subscription privilege. Any additional payment required from a rights
holder must be received by the subscription agent within ten business days after
the confirmation date. Any excess payment to be refunded by us to a rights
holder will be mailed by the subscription agent to him as promptly as
practicable. All payments by a rights holder must be in U.S. dollars by money
order or check drawn on a bank located in the United States and payable to THE
CENTRAL EUROPE AND RUSSIA FUND, INC.

Whichever of the two methods described above is used, issuance and delivery of
certificates for the shares of our common stock purchased are subject to
collection of checks and actual payment.

A RIGHTS HOLDER WHO HAS EXERCISED THEIR RIGHTS WILL HAVE NO RIGHT TO RESCIND
THEIR SUBSCRIPTION AFTER RECEIPT OF THE COMPLETED SUBSCRIPTION CERTIFICATE
TOGETHER WITH PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT.

If a rights holder who acquires shares of our common stock during the
subscription period or pursuant to the over-subscription privilege does not make
payment of any additional amounts due, we reserve the right to take any or all
of the following actions: (i) find other stockholders for the subscribed and
unpaid for shares; (ii) apply any payment actually received by us toward the
purchase of the greatest whole number of shares which could be acquired by the
rights holder upon exercise of his rights acquired during the subscription
period or pursuant to the over-subscription privilege; or (iii) exercise any and
all other rights or remedies to which we may be entitled, including, without
limitation, the right to set-off against payments actually received by us with
respect to the subscribed shares.

The method of delivery of subscription certificates and payment of the
subscription price to the subscription agent will be at the election and risk of
the stockholders, but if sent by mail it is recommended that such forms and
payments be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery to
the subscription agent and clearance of payment prior to 5:00 p.m., New York
City time, on the expiration date. Because uncertified personal checks may take
at least five business days to clear, you are strongly urged to pay, or arrange
for payment, by means of certified or cashier's check or money order.

--------------------------------------------------------------------------------
20

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

All questions concerning the timeliness, validity, form and eligibility of any
exercise of rights will be determined by us, which determinations will be final
and binding. We, in our sole discretion, may waive any defect or irregularity,
or permit a defect or irregularity to be corrected within such time as we may
determine, or reject the purported exercise of any right. Subscriptions will not
be deemed to have been received or accepted until substantially all
irregularities have been waived or cured within such time as we determine in our
sole discretion. We will not be under any duty to give notification of any
defect or irregularity in connection with the submission of subscription
certificates or incur any liability for failure to give such notification.

NOTICE OF NET ASSET VALUE DECLINE

We have, pursuant to the SEC's regulatory requirements, undertaken to suspend
this rights offering until we amend this prospectus if subsequent to ,
2004, the effective date of our registration statement, our net asset value
declines more than 10% from our net asset value as of that date. In that event,
we will notify stockholders on the record date of any such decline and permit
them to cancel their exercise of rights.

DELIVERY OF STOCK CERTIFICATES

Participants in our dividend reinvestment plan will have any shares of our
common stock acquired pursuant to this rights offering credited to their
stockholder dividend reinvestment accounts in the plan. Stockholders whose
shares are held of record by Cede & Co. or by any other depository or nominee on
their behalf or their broker-dealers' behalf will have any shares acquired
during the subscription period credited to the account of Cede & Co. or other
depository or nominee. Shares acquired pursuant to the over-subscription
privilege will be certificated and stock certificates representing these shares
will be sent directly to Cede & Co. or other depository or nominee. Stock
certificates will not be issued for shares credited to plan accounts for
participants in our dividend reinvestment plan. With respect to all other
stockholders, stock certificates for all shares acquired pursuant to this rights
offering will be mailed promptly after payment for the shares subscribed for has
cleared.

DISTRIBUTION ARRANGEMENTS

UBS Securities LLC, 299 Park Avenue, New York, New York 10171, who is a
broker-dealer and member of the National Association of Securities Dealers, Inc.
will act as dealer manager for this rights offering. Under the terms and subject
to the conditions contained in the dealer manager agreement dated the same date
as this prospectus, the dealer manager will provide financial advisory services
and marketing services in connection with this rights offering and will solicit
the exercise of rights and participation in the over-subscription privilege.
This rights offering is not contingent upon any number of rights being
exercised. We have agreed to pay the dealer manager a fee for its financial
advisory, marketing and soliciting services equal to 3.75% of the aggregate
subscription price for shares issued pursuant to this rights offering.

The dealer manager will reallow to broker-dealers included in the selling group
to be formed and managed by the dealer manager selling fees equal to 2.50% of
the subscription price per share for each share issued pursuant to this rights
offering as a result of their selling efforts. In addition, the dealer manager
will reallow to other broker-dealers that have executed and delivered a
soliciting dealer agreement and have solicited the exercise of rights,
solicitation fees equal to 0.50% of the subscription price per share for each
share issued pursuant to the exercise of rights as a result of their soliciting
efforts, subject to a maximum fee based on the number of shares held by each
broker-dealer through DTC on the record date. Fees will be paid to the
broker-dealer designated on the applicable portion of the subscription
certificates or, in the absence of such designation, to the dealer manager.

--------------------------------------------------------------------------------
21

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

In addition, we have agreed to reimburse the dealer manager up to $100,000 for
its reasonable expenses incurred in connection with this rights offering. We and
our investment manager have each agreed to indemnify UBS Securities LLC or
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act. The dealer manager agreement also provides that the
dealer manager will not be subject to any liability to us in rendering the
services contemplated by the dealer manager agreement except for any act of bad
faith, willful misconduct, or gross negligence of the dealer manager or reckless
disregard by the dealer manager of its obligations and duties under the dealer
manager agreement.

Prior to the expiration of this rights offering, the dealer manager may
independently offer for sale shares of our common stock, including shares
acquired through purchasing and exercising the rights, at prices it sets. The
dealer manager may realize profits or losses independent of any fees described
in this prospectus.

We have agreed not to offer or sell, or enter into any agreement to sell, any
equity or equity related securities of ours or securities convertible into
equity or equity related securities for a period of 180 days after the date of
the dealer manager agreement without the prior consent of the dealer manager,
except for the shares of our common stock issued in reinvestment of dividends or
distributions.

FOREIGN RESTRICTIONS

Subscription certificates will not be mailed to stockholders whose record
addresses are outside the United States, which includes the District of
Columbia, and the territories and possessions of the United States. These
stockholders will receive written notice of this rights offering. The rights to
which these subscription certificates relate will be held by the subscription
agent for these stockholders' accounts until instructions are received to
exercise the rights. If no instructions have been received by 5:00 p.m., New
York City time on , 2004, three business days prior to the expiration
date (or, if the subscription period is extended, on or before three business
days prior to the extended expiration date), the rights of these stockholders
will be transferred by the subscription agent to the dealer manager who will
either purchase the rights or use its best efforts to sell the rights. The net
proceeds, if any, from sale of those rights by or to the dealer manager will be
remitted to these stockholders.

FEDERAL INCOME TAX CONSEQUENCES

The following summary of the material United States federal income tax
consequences of the issuance and exercise transfer or lapse of the rights does
not discuss all aspects of federal income taxation that may be relevant to a
particular stockholder, and stockholders should consult their own tax advisors
regarding the tax consequences, including state, local and foreign tax
consequences, relevant to their particular circumstances.

(1) The value of a right will not be includible in the income of a stockholder
at the time the right is issued.

(2) The basis of a right issued to a stockholder will be zero, and the basis of
the share with respect to which the right was issued (the old share) will
remain unchanged, unless either (a) the fair market value of the right on
the date of distribution is at least 15% of the fair market value of the old
share, or (b) the stockholder affirmatively elects (in the manner set out in
Treasury Regulations under the Internal Revenue Code of 1986, as amended
(the "Code")) to allocate to the right a portion of the basis of the old
share. If either (a) or (b) applies, the stockholder must allocate basis
between the old share and the right in proportion to their fair market
values on the date of distribution.

--------------------------------------------------------------------------------
22

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

(3) The basis of a right purchased in the market will generally be its purchase
price.

(4) The holding period of a right issued to a stockholder will include the
holding period of the old share.

(5) No loss will be recognized by a stockholder if a right distributed to the
stockholder expires unexercised because the basis of the old share may be
allocated to a right only if the right is exercised. If a right that has
been purchased in the market expires unexercised, there will be a recognized
loss equal to the basis of the right.

(6) Any gain or loss on the sale of a right will be a capital gain or loss if
the right is held as a capital asset (which in the case of rights issued to
stockholders will depend on whether the old share is held as a capital
asset), and will be a long-term capital gain or loss if the holding period
exceeds one year.

(7) No gain or loss will be recognized by a stockholder upon the exercise of a
right, and the basis of any share acquired upon exercise (the new share)
will equal the sum of the basis, if any, of the right and the subscription
price for the new share. The holding period for the new share will begin
with the date on which the right is exercised.

EMPLOYEE PLAN CONSIDERATIONS

Stockholders who are employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") (including corporate savings
and 401(k) plans), Keogh or H.R. 10 plans of self-employed individuals and
individual retirement accounts should be aware that additional contributions of
cash to the employee retirement plan (other than rollover contributions or
trustee-to-trustee transfers from other employee retirement plans) in order to
exercise rights would be treated as contributions to the employee retirement
plan and, when taken together with contributions previously made, may result in,
among other things, excise taxes for excess or nondeductible contributions. In
the case of employee retirement plan qualified under Section 401(a) of the Code
and certain other employee retirement plans, additional cash contributions could
cause the maximum contribution limitations of Section 415 of the Code or other
qualification rules to be violated. In addition, there may be other adverse tax
and ERISA consequences if rights are sold or transferred by an employee
retirement plan.

Employee retirement plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Section 511 of the Code. If any portion of an
individual retirement account ("IRA") is used as security for a loan, the
portion so used is also treated as distributed to the IRA depositor.

ERISA contains fiduciary responsibility requirements, and ERISA and the Code
contain prohibited transaction rules that may affect the exercise of rights. Due
to the complexity of these rules and the penalties for noncompliance, employee
retirement plans should consult with their counsel and other advisers regarding
the consequences of their exercise of rights under ERISA and the Code.

CERTAIN EFFECTS OF THIS RIGHTS OFFERING

Our investment manager and investment adviser will benefit from this rights
offering because the investment management fee and the investment advisory fee
are based on our average weekly net assets. See "Our Management" on page 37 of
this prospectus and "Investment Advisory and Other Services" on page B-17 of the
SAI. It is not possible to state precisely the amount of additional compensation
our investment manager and investment adviser will receive as a result of this
rights offering because it is not known how many shares of our common stock will
be subscribed for and

--------------------------------------------------------------------------------
23

OUR RIGHTS OFFERING
--------------------------------------------------------------------------------

because the proceeds of this rights offering will be invested in additional
portfolio securities, which will fluctuate in value. However, assuming (i) all
rights are exercised, (ii) our average weekly net asset value during 2004 is
$ per share (the net asset value per share on , 2004) and (iii)
the subscription price is $ per share ( % of the average of the
last reported sale prices of a share of our common stock on , 2004 and
the four preceding business days) and after giving effect to dealer manager and
soliciting fees, our investment manager and investment adviser would receive
additional annual advisory and administrative fees of approximately
$ and $ , respectively. Some of our directors who voted to
authorize this rights offering may benefit indirectly from their affiliations.
One of our directors who voted to authorize this rights offering is an
interested person of our investment manager and our investment adviser. Another
one of our directors is affiliated with UBS Securities LLC, the dealer manager
in this rights offering. The other directors who voted to authorize this rights
offering are not affiliated with our investment manager, investment adviser or
with the dealer manager. See "Our Management" on page 37 of this prospectus and
"Management" on page B-8 of the SAI.

INVESTMENT CONSIDERATIONS

Upon completion of this rights offering, stockholders who do not exercise their
rights fully will own a smaller proportional interest in us than would be the
case if this rights offering had not been made. In addition, because the
subscription price per share may be less than the then net asset value per share
of our common stock, this rights offering may result in a dilution of net asset
value per share of our common stock for all stockholders, irrespective of
whether they exercise all or any portion of their rights. This dilution will
disproportionately affect stockholders who do not exercise their rights.
Although it is not possible to state precisely the amount of such a decrease in
value, because it is not known at this time what the subscription price will be,
what the net asset value per share will be at the expiration date or what
proportion of our shares will be subscribed for, the dilution could be
substantial. For example, assuming that all rights are exercised, that our net
asset value on the expiration date is $ per share (the net asset value per
share on , 2004), and that the subscription price is % of an
average market price of $ per share (the average of the last reported sale
prices of a share of our common stock on , 2004 and the four preceding
business days), our net asset value per share on this date would be reduced by
approximately $
per share, after giving affect to the dealer manager and broker solicitation
fees payable by us, estimated at $ , and other expenses of this rights
offering, estimated at $ , payable by us. Stockholders on the record
date may experience a decrease in the net asset value per share held by them,
irrespective of whether they exercise all or any portion of their rights.

IMPORTANT DATES TO REMEMBER

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

* Unless this rights offering is extended.

--------------------------------------------------------------------------------
24

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

Use of proceeds

Assuming all shares in this rights offering are sold at an estimated
subscription price of $ per share, the net proceeds of this rights offering
are estimated to be approximately US $ after payment of the dealer
manager and soliciting fees and estimated offering expenses. However, we do not
know whether all rights will be exercised in full, and the subscription price
will not be determined until the close of business on the expiration date of
this rights offering. We expect that the net proceeds will be invested in
accordance with the policies set forth below under "Investment Objective and
Policies" and on page B-2 of the SAI under "Investment Objective and Policies"
within three months from the expiration date, and in no event will the time
period for investment exceed six months.

Investment objective and policies

Republic of Albania Federal Republic of Germany Romania
Republic of Austria Republic of Hungary Slovak Republic
Republic of Bosnia and Herzegovina Republic of Latvia Republic of Slovenia
Republic of Belarus Grand Duchy of Liechtenstein Swiss Confederation
("Switzerland")
Republic of Bulgaria Republic of Lithuania Ukraine
Republic of Croatia Former Yugoslav Republic of Macedonia Federal Republic of Yugoslavia
Czech Republic Republic of Moldova
Republic of Estonia Republic of Poland

A map showing these countries is set forth on the inside cover page of this
prospectus.

Under normal circumstances, at least 80% of our net assets will be invested in
the securities of issuers domiciled in Central Europe or Russia. If we borrow
money (referred to as "leverage"), which we are permitted to do only for
emergency or exceptional circumstances, the 80% minimum will apply to the total
of our net assets plus the amount of those borrowings. We may also invest in
equity or equity-linked securities of issuers domiciled elsewhere in Europe. An
issuer is deemed to be "domiciled" in a country or region if:

+ it is organized under the laws of that country, or a country within that
region, or maintains its principal place of business in that country or
region,

+ it derives 50% or more of its annual revenues or profits from goods produced
or sold, investments made or services performed in that country or region, or
has 50% or more of its assets in that country or region, in each case as
determined in good faith by our investment manager, or

+ its equity securities are traded principally in that country or region.

--------------------------------------------------------------------------------
25

INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------

The term "Europe" includes the countries of Central Europe, as well as:

Kingdom of Belgium Republic of Ireland Kingdom of Spain
Kingdom of Denmark Italian Republic Kingdom of Sweden
Republic of Finland Grand Duchy of Luxembourg Republic of Turkey
Republic of France Kingdom of the United Kingdom of Great Britain and Northern Ireland
Netherlands
Hellenic Republic ("Greece") Kingdom of Norway
Republic of Iceland Republic of Portugal

Any future country or countries (or other political entity) formed by
combination or division of the countries comprising Central Europe, Europe or
Russia shall also be deemed to be included within the term "Central Europe",
"Europe" or "Russia", respectively.

Our investment objective and the investment policies described above are
fundamental and may be changed only by the approval of a majority of our
outstanding voting securities. Under the Investment Company Act, a "majority"
means 67% of our shares present at a meeting of our stockholders if the owners
of more than 50% of our shares then outstanding are present in person or by
proxy or, if lower, more than 50% of our outstanding shares. We refer to this
approval voting level as a "majority vote." We will not trade in securities for
short-term gain. Current interest and dividend income are not an objective of
ours. No assurance can be given that we will be able to achieve our objective.

For purposes of the above policies and for the policies and practices described
below in "--Portfolio Structure" and "--Other Investment Practices," all
percentage limitations apply only immediately after a transaction, and any
subsequent change in any applicable percentage resulting from changing values
will not require elimination of any security from our portfolio.

PORTFOLIO STRUCTURE

We will seek to achieve our investment objective of long-term capital
appreciation primarily by investing in equity and equity-linked securities of
companies in a spectrum of industries. Equity and equity-linked securities
include common stock, convertible and non-convertible preferred stock, whether
voting or non-voting, convertible bonds, bonds with warrants and unattached
warrants. Equity-linked securities refer to debt securities convertible into
equity and securities such as warrants, options and futures, the prices of which
reflect the value of the underlying equity securities receivable upon exercise
or settlement of the linked security. For a discussion of the types of futures
and options that we may or may not invest in, see "--Other Investment Practices"
described below and "Investment Objective and Policies--Futures and Options" on
page B-3 of the SAI.

We will not concentrate investments in any one industry. Non-concentration means
that we will not invest more than 25% of our total assets in the securities of
issuers in any one industry. For purposes of this non-concentration policy, our
investment manager generally classifies the issuers of our portfolio securities
according to the broad industry classification used by Standard & Poor's
Corporation.

In selecting industries and companies for our investments, our investment
adviser and the investment manager generally consider factors such as overall
growth prospects, competitive position in their product markets, management,
technology, research and development, productivity, labor costs, raw material
costs and sources, profit margins, return on investment, capital resources and
government regulation.

We have no current intention of focusing our investments in any particular
countries other than Poland, Russia, Hungary, the Czech Republic and Turkey. Our
investments in Poland, Russia, Hungary and the Czech Republic are and may in the
future be significant. In addition, our investments in Turkey may in the future
be significant. On December 31, 2003, the percentages of our total assets
invested in these countries were: Poland--32.9%, Russia--30.9%, Hungary--21.3%,
the Czech Republic--11.2% and Turkey--0.0%.

--------------------------------------------------------------------------------
26

INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------

Nonetheless, except as described below, there are no prescribed limits on
geographic asset distribution and, from time to time, a significant portion of
our assets may be invested in companies domiciled in as few as three countries.
Our board of directors has also adopted a non-fundamental policy, which may be
changed without stockholder approval, that for the time being permits us to
invest up to the following percentages of the value of our total assets in
equity and equity-linked securities of issuers domiciled in the following
countries. Our board reserves the right to change this policy.

COUNTRY PERCENTAGE OF TOTAL ASSET LIMIT
------- -------------------------------

Poland...................................................... 65%
Hungary..................................................... 50%
Russia...................................................... 50%*
Czech Republic.............................................. 30%
Turkey...................................................... 20%**
Any single other country.................................... 15%

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

* Our Board of Directors has increased the percentage limit for investment in
Russia from 35% to 50%, effective upon the completion of this rights
offering.

** Our Board of Directors has increased the percentage limit for investment in
Turkey from 15% to 20%, effective upon the completion of this rights
offering.

We may not purchase more than 10% of the outstanding voting securities of any
single issuer.

Although we intend to focus our investments in equities or equity-linked
securities that are listed on a recognized securities exchange or otherwise
publicly traded, we may also invest in securities that are not readily
marketable.

We may also invest in other investment companies, subject to applicable
limitations under the Investment Company Act. These limitations include a
prohibition on our acquiring more than 3% of the voting securities of any other
investment company, more than 5% of our total assets in securities of any one
investment company, or more than 10% of our total assets in securities of all
investment companies combined. Any investment companies in which we may invest
will have a policy of investing all or substantially all of their assets in one
or more European countries or Russia. Investments in other investment companies
may involve an additional layer of expenses because of the fees and expenses
payable by such other investment companies. In determining whether to invest our
assets in other investment companies, our investment manager and investment
adviser will take into consideration, among other factors, the advisory fee and
other expenses payable by those other investment companies.

OTHER INVESTMENT PRACTICES

In addition to the investment practices discussed above in "Investment Objective
and Policies--Portfolio Structure," we may also invest in additional types of
securities, such as warrants, if consistent with our investment objective, and
participation certificates of issuers in any European country or Russia.
Participation certificates generally entitle the holder to participate in
dividend distributions, but not to vote or claim assets in liquidation.

For hedging purposes, we may also purchase put and call options on stock of
European or Russian issuers and, if and when permitted by applicable U.S. law,
invest in the index and bond futures of any other derivative securities listed
on any organized exchange. We may also purchase put and call options on bonds
and other securities, as well as securities indices and, to the extent permitted
by applicable U.S. law, may invest in other options, futures and options on
futures with respect to any

--------------------------------------------------------------------------------
27

INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------

securities or securities indices compatible with our investment objective that
may from time to time become available on any organized exchange.

We may invest up to 20% of our total assets in fixed income securities of
European or Russian issuers. For temporary defensive purposes, we also may
invest in money market instruments denominated in U.S. dollars or in a European
or Russian currency or composite currency, including bank time deposits and
certificates of deposit.

We may also lend our portfolio securities to banks, securities dealers and other
institutions meeting the creditworthiness standards established by our board of
directors. We may lend our portfolio securities so long as the terms and the
structure of the loans are consistent with the Investment Company Act.

Although we do not currently engage in foreign exchange transactions as an
investment strategy, we may, when our investment adviser and our investment
manager deem it advisable, attempt to hedge our foreign currency exposure by
entering into forward currency contracts.

For a more detailed discussion of our investment practices with respect to
warrants, participation certificates, futures and options, fixed income
securities, securities lending and currency transactions and the special
considerations relevant to those practices, see "Investment Objective and
Policies" on page B-2 of the SAI. For information regarding other investment
restrictions, see "Investment Restrictions" on page B-5 of the SAI.

--------------------------------------------------------------------------------
28

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

Risk factors and special considerations

RISK FACTORS RELATING TO FOREIGN INVESTMENT GENERALLY

Foreign investments may involve certain considerations and risks not typically
associated with those of domestic origin as a result of, among others:

+ generally less liquid and less efficient securities markets;

+ generally greater price volatility;

+ exchange rate fluctuations and exchange controls and the costs associated
therewith;

+ currency fluctuation;

+ imposition of restrictions on the expatriation of funds or other assets;

+ less publicly available information about issuers;

+ the imposition of taxes;

+ higher transaction and custody costs;

+ settlement delays and risk of loss;

+ difficulties in enforcing contracts;

+ difficulties in obtaining or enforcing a court judgment;

+ less liquidity and smaller market capitalizations;

+ lesser governmental regulation of the securities markets;

+ different accounting, auditing, financial and disclosure standards;

+ governmental interference;

+ higher inflation;

+ social, economic and political uncertainties;

+ the risk of expropriation of assets; and

+ the risk of war.

The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade.

--------------------------------------------------------------------------------
29

RISK FACTORS AND SPECIAL CONSIDERATIONS
--------------------------------------------------------------------------------

Foreign investment in certain emerging market issuers is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain emerging market issuers and increase
our costs and expenses. Certain emerging market countries require governmental
approval prior to investments by foreign persons in a particular issuer, limit
the amount of investment by foreign persons in a particular issuer, limit the
investment by foreign persons only to a specific class of securities of an
issuer that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain emerging market countries may also restrict
investment opportunities in issuers in industries deemed important to national
interests.

Emerging market countries may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market
country's balance of payments, the country could impose temporary restrictions
on foreign capital remittances. We could be adversely affected by delays in, or
a refusal to grant, any restrictions on investments. Investing in local markets
in emerging market countries may require us to adopt special procedures, seek
local government approvals or take other actions, each of which may involve
additional costs to us.

No established secondary markets may exist for many of the emerging market
issuer securities in which we invest. Reduced secondary market liquidity may
have an adverse effect on market price and our ability to dispose of particular
instruments when necessary. Reduced secondary market liquidity for certain
emerging market issuer securities may also make it more difficult for us to
obtain accurate market quotations for purposes of valuing our portfolio and
calculating our net asset value. Market quotations are generally available on
many emerging market issuer securities only from a limited number of dealers and
may not necessarily represent firm bids of those dealers or prices for actual
sales.

RISK FACTORS RELATING TO INVESTMENT IN CENTRAL EUROPE

Central European countries are in varying stages of transition towards
market-oriented economies based on private and entrepreneurial initiatives,
multi-party democracies, pluralism and market economies. These countries
experienced extremely volatile market performance in the past decade, and
investing in securities of Central European issuers entails all of the risks of
investing in securities of foreign issuers to a heightened degree. In addition,
a substantial portion of the economic growth, if any, of Central European
countries is attributable to their exporting industries rather than domestic
consumption; therefore, the Central European countries are also highly
susceptible to economic downturns in Western European countries and the United
States, which are substantial consumers of their exported products.

Central European markets continue to be relatively volatile, and our investments
will remain subject to currency fluctuation and local political, economic and
social uncertainties. Investments in a single region, even though representing a
number of different countries, may be affected by common economic forces and
other factors. We are subject to greater risks of adverse events which occur in
the region and may experience greater volatility than a fund that is more
broadly diversified geographically. There are also individual exceptions within
Central Europe from a risk perspective. For example, while the Republic of
Belarus and the Republic of Moldova are geographically in the same region, their
economies are significantly less developed than those of other Central European
countries. Less developed markets involve higher levels of risk. In addition,
many companies in Central Europe generally do not have operating histories of
significant duration. Consequently, these markets may be subject to more
substantial volatility and price fluctuations than securities that are traded in
more developed markets.

--------------------------------------------------------------------------------
30

RISK FACTORS AND SPECIAL CONSIDERATIONS
--------------------------------------------------------------------------------

Investing in any developing market means tolerating a certain amount of
volatility and, in some cases, severe market corrections. Such highly
speculative investing involves special risk considerations not typically
associated with investing in U.S. securities markets. The specific nature of
such risks may vary according to the Central European country in which
investments are made. These risks include, among others:

+ the risk of nationalization or expropriation of assets or confiscatory
taxation, which may involve the risk of total loss;

+ controls on foreign investment and local practices disfavoring foreign
investors and limitations on repatriation of invested capital, profits and
dividends, and on our ability to exchange local currencies for U.S. dollars;

+ greater social, economic and political uncertainty (including regional
conflict and the risk of war);

+ transitional forms of government;

+ delays in settling portfolio transactions and risk of loss arising out of the
system of share registration and custody used in certain Central European
countries;

+ risks in connection with the maintenance of our portfolio securities and cash
with foreign sub-custodians and securities depositories, including the risk
that appropriate sub-custody arrangements will not be available to us;

+ the risk that it may be impossible or more difficult than in other countries
to obtain and/or enforce a judgment;

+ pervasiveness of public corruption and crime in the economic systems of
certain Central European countries;

+ greater price volatility, substantially less liquidity and significantly
smaller market capitalization of securities markets in which we may invest;

+ currency exchange rate volatility and the lack of available currency hedging
instruments;

+ the use of derivative instruments, which may include: forward foreign
currency exchange contracts, currency futures contracts and options thereon,
put and call options on securities, indices and foreign currencies, stock
index futures contracts and options thereon and interest rate futures
contracts and options thereon;

+ higher rates of inflation (including the risk of social unrest associated
with periods of hyperinflation);

+ the risk that, by possibly investing significantly in certain multi-industry
sectors, we may be affected more by any single economic, political or
regulatory development relating to a specific sector;

+ the financial condition of Central European issuers, including any debt
amounts and the fact that such issuers may be smaller, less seasoned and
newly organized;

+ the risk that dividends may be withheld at the source;

+ dependency on exports and the corresponding importance of international
trade;

+ the difference in, or lack of, disclosure, auditing and financial reporting
standards, which may result in unavailability of material information about
issuers in many Central European countries;

+ the risk that the tax systems of Central European countries may not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation;

--------------------------------------------------------------------------------
31

RISK FACTORS AND SPECIAL CONSIDERATIONS
--------------------------------------------------------------------------------

+ the fact that statistical information regarding the economy of Central
European countries may be inaccurate or not comparable to statistical
information regarding the United States or other economies;

+ less extensive regulation of the securities markets than in more developed
countries;

+ markets that may be substantially influenced by insider trading and other
market practices not accepted in developed markets;

+ the risks associated with the difficulties that may occur in pricing our
portfolio securities;

+ possible difficulty in identifying a purchaser of securities held by us due
to the underdeveloped nature of the securities markets in Central Europe; and

+ the risk of lawsuits arising from restrictive regulations and practices with
respect to foreign investment in particular industries.

RISKS FACTORS RELATING TO INVESTMENT IN RUSSIA

Investing in Russia subjects us to many of the same risks associated with
investing in Central European countries that are described above. However, there
are significant risks inherent in Russian securities that are not typically
associated with securities of companies in more developed countries. The value
of Russian securities may be affected by various uncertainties, such as
economic, political and social instability, investment and regulatory risk,
including crime and corruption in government and business, and inconsistency and
underdevelopment of Russia's tax and legal systems. As is the case with issuers
in most emerging markets, Russian securities are subject to a higher degree of
volatility than the securities of Western companies. Although investment in
Central European countries shares some of these risks, as described above,
investments in Russia should be considered to have greater risks.

Since the break-up of the USSR at the end of 1991, Russia has undergone
substantial and, at times, turbulent economic disruption and political and
social upheaval. Russia continues to make the transition from a centrally
controlled command system to a market-oriented, democratic model of government,
but its continued development, and the pace with which it continues to make the
transition, remains uncertain. Since 1991, Russia has been affected by declines
in gross domestic product (GDP), hyperinflation, an unstable currency and high
government indebtedness relative to GDP. The Russian economy also suffers from
the lack of an effective banking system and a significant proportion of
commercial transactions are settled in kind or by the use of promissory notes.
The Russian economy is also plagued by a deteriorating infrastructure due to
poor funding and maintenance, and potential inflationary pressures and currency
devaluation as a result of insufficient funding on its debts. Russia's role and
its reintegration into the global political economy are also unsettled.
Moreover, internal regional conflicts continue to exist, which highlight the
political tension between the central government in Moscow and certain regions
within the Russian Federation. At times, the Russian government also engages in
expropriation, nationalism and confiscation of assets.

Russia's lower house of parliament, the Duma, held elections on December 9th,
2003. The elections have resulted in a firmer shift of power towards parties
professing loyalty to President Vladimir Putin, who with their support now has a
simple majority that would allow him to pass legislation without having to
compromise with other parties. There is also the possibility that an alliance of
the parties loyal to President Putin could effect changes in Russia's
constitution, including extending the term for which the President is allowed to
serve. The election also led to the defeat of liberal and free-market political
parties, which failed to attain the necessary 5% of the votes to gain seats in
the Duma. At the same time one ultra-nationalistic party was able to double its
representation in parliament. The election was criticized almost unanimously by
independent observers, and allegations of election tampering remain unresolved.
President Putin himself has been criticized for using state-run media

--------------------------------------------------------------------------------
32

RISK FACTORS AND SPECIAL CONSIDERATIONS
--------------------------------------------------------------------------------

outlets, which control major segments of Russia's media landscape, for election
purposes, as well as for failing to enforce a Russian law that would have
mandated similar coverage for other political parties. Russia's transition
towards a well-functioning democracy remains uncertain and much will depend on
President Putin in the future, particularly on his relationship to the parties
now loyal to him. President Putin will run for reelection in March of 2004.

The Russian economy relies heavily on the production and export of oil. Oil and
gas companies can be significantly affected by the supply of and demand for
energy fuels generally as well as the supply of and demand for oil and gas in
particular, the general condition of industries that serve oil and gas
companies, price fluctuations in energy and oil and gas prices, exploration and
production spending, energy conservation, the success of exploration projects,
government regulation, including taxation, world events, events involving
nature, other events involving international politics, increased competition,
social views, environmental concerns and economic conditions. Natural gas
companies, moreover, are subject to changes in price and supply of both
conventional and alternative energy sources. Russia also has substantial trading
links with Iraq. Because Russia is highly sensitive to changes in the world oil
price and because of recent United States military action against Iraq, it is
even more difficult to predict future oil price movements with any certainty and
fluctuations in pricing may increase substantially.

In addition, Russia's largest oil company, Yukos, is undergoing significant
difficulties. An investigation over several billion U.S. dollars worth of
allegedly back taxes has been launched, and the company's former chief executive
has been arrested and charged with tax evasion and fraud. In early 2003 Yukos
and Sibneft, another major Russian oil company, began merger talks which would
have resulted in the world's fourth largest oil company. Sibneft has since
announced it is terminating the merger, and the company is currently in the
process of repurchasing the majority of its shares from Yukos. Yukos'
difficulties have led to uncertainty in the Russian markets in general, and
allegations of political motivations behind the company's investigation have
added further uncertainty.

There is still no centralized public market for trading Russian securities,
despite the number of stock exchanges in Russia, and trading occurs mostly
over-the-counter. The Russian securities market is still developing and is
regulated by several different authorities that are often in competition with
each other, resulting in contradictory regulations, at times. Corporate
governance standards for Russian companies have also proven to be poor, and
minority stockholders in Russian companies have suffered losses due to abusive
share dilutions, asset transfers and transfer-pricing practices. Stockholders of
Russian securities also lack many of the protections available to stockholders
of Western issuers. In addition, businesses and parts of the Russian economic
system also continue to suffer from very high crime levels, including extortion
and fraud. Moreover, accounting, financial and auditing reporting by Russian
companies is also generally of less quality and less reliable compared with
Western companies.

Laws and regulations involving foreign investment in Russian enterprises, title
to securities and transfer of title are also relatively new and can change
quickly and unpredictably in a manner far more volatile than in developed market
economies. We may also experience difficulty transferring income received in
investments in Russian issuers, such as profits, dividends and interest
payments, abroad. See "--Exchange Rate Fluctuations and Foreign Currency
Considerations" below on page 34.

Russia's taxation system is frequently subject to change, and enforcement is
inconsistent at federal, regional and local levels. Decision-making and
enforcement under Russia's legal system also lack any consistency as a result of
the volume of new legislation and political instability.

DILUTION OF NET ASSET VALUE

A dilution of the aggregate net asset value on a share of our common stock may
be experienced as a result of this rights offering because the subscription
price may be less than our then current net asset

--------------------------------------------------------------------------------
33

RISK FACTORS AND SPECIAL CONSIDERATIONS
--------------------------------------------------------------------------------

value per share. This dilution will be experienced by all stockholders,
irrespective of whether they exercise all or a portion of their rights. In
addition, as a result of the terms of this rights offering, stockholders who do
not fully exercise their rights should expect that they will, at the completion
of this rights offering, own a smaller proportional interest in us than would
otherwise be the case. Although it is not possible to state precisely the amount
of such a decrease in value, because it is not known at this time what
proportion of the shares will be subscribed for as a result of this rights
offering, what the subscription price will be or what the net asset value per
share will be on the expiration date, the dilution could be substantial. For
example, assuming that all rights are exercised and that the subscription price
of $ is approximately % below our net asset value of
$ per share on , 2004, our net asset value per share (after
payment of the financial advisory and soliciting fees and estimated offering
expenses) would be reduced by approximately $
per share. The distribution to stockholders of transferable rights which
themselves may have intrinsic value will also afford non-participating
stockholders the potential of receiving a cash payment upon sale of their
rights, receipt of which may be viewed as partial compensation for the dilution
of their interest in us. No assurance can be given that a market for the rights
will develop or as to the value, if any, that rights will have.

NET ASSET VALUE DISCOUNT

As with any stock, the price of our shares of common stock will fluctuate with
market conditions and other factors. Shares of closed-end investment companies
frequently trade at a discount from net asset value. This is a risk separate and
distinct from the risk that our net asset value will decrease. We cannot predict
whether our common stock will trade at, above or below net asset value. The risk
of purchasing shares of a closed-end fund which might trade at a discount is
more pronounced for investors who wish to sell their shares in a relatively
short period of time after the purchase because, for those investors,
realization of gain or loss on their investment is likely to be more dependent
upon the existence of a premium or discount than upon portfolio performance. Our
shares of common stock are not entitled to redemption. Investors desiring
liquidity may, subject to applicable securities laws, trade their shares on the
NYSE. Stockholders wishing to sell their shares of common stock during this
rights offering should be aware that there is greater risk that the discount to
net asset value, which may increase during this rights offering, will adversely
affect them. This increased risk is because, among other things, the market
price per share may reflect anticipated dilution that will result from this
rights offering. There can be no assurance that, after the completion of this
rights offering, our shares will trade at the same level as our current discount
to net asset value. For information about our common stock and its current and
historical performance, see "Market and Net Asset Value Information" on page 13
of this prospectus and "Description of Common Stock" on page 66 of this
prospectus.

EXCHANGE RATE FLUCTUATIONS AND FOREIGN CURRENCY CONSIDERATIONS

Substantially all of our assets are invested in Central Europe and Russia, and
substantially all of the income we receive from these investments will be in
euros or other foreign currencies. We anticipate that in general the foreign
currencies received by us with respect to most of our investments will be freely
convertible into U.S. dollars on foreign exchange markets and that in most cases
the U.S. dollars received will be fully repatriable out of the various foreign
countries in which we invest. However, our investments in Russia will be in
securities denominated in Russian Roubles, which are not externally convertible
into other currencies outside of Russia. There can be no assurance that the
foreign countries in which we invest will not impose restrictions in the future
movement of U.S. dollars or foreign currencies across local borders or on the
convertibility of the foreign currencies into U.S. dollars.

The value of our assets and income will be measured in U.S. dollars. Assets and
liabilities denominated in euros or other foreign currency amounts are
translated into U.S. dollars at 10:00 a.m. mid-point of

--------------------------------------------------------------------------------
34

RISK FACTORS AND SPECIAL CONSIDERATIONS
--------------------------------------------------------------------------------

the buying and selling spot rates quoted by the Federal Reserve Bank of New
York. We will compute and distribute income in U.S. dollars, and the computation
of income will be made on the day we earn the income. Therefore, if the value of
foreign securities in which we receive income falls relative to the U.S. dollar
between the earning of the income and the time at which we convert the foreign
currencies to U.S. dollars, we may be required to liquidate securities in order
to make distributions if we have insufficient cash in U.S. dollars to meet
distribution requirements. The liquidation of investments, if required, may have
an adverse impact on our performance.

Since we will invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates will affect the
value of our securities in our portfolio and the unrealized appreciation or
depreciation of our investments. Further, we may incur costs in connection with
conversions between various currencies.

We do not currently engage in foreign exchange transactions as an investment
strategy. However, at such future time as our investment manager and investment
advisor believe that one or more currencies in which our securities are
denominated might suffer a substantial decline against the U.S. dollar, we may,
in order to hedge the value of our portfolio, enter into forward currency
contracts. For more information on our investment policies with respect to
currency transactions, see "Investment Objective and Policies--Currency
Transactions" on page B-5 of the SAI.

INTEREST EXPENSE

We may, subject to limitations described under "Investment Restrictions" in the
SAI, borrow money for temporary or emergency purposes for the clearance of
transactions. Borrowing money will subject us to interest expenses, and we may
incur other transactions costs.

CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS

FOREIGN CUSTODY

Investors Bank and Trust Company ("IBT") acts as our custodian. IBT has
agreements with a global network of sub-custodians, which, together with IBT,
maintain custody of our portfolio securities and cash. Thus, our foreign
securities and cash are generally held in foreign banks and securities
depositories. There may be limited or no regulatory oversight over their
operations. Also, the laws of certain countries may put limits on our ability to
recover our assets if a foreign bank, depository or issuer of a security, or any
of their agents, goes bankrupt. In addition, it is often more expensive for us
to buy, sell and hold securities in certain foreign markets than in the United
States. The increased expense of investing in foreign markets reduces the amount
we can earn on our investments and typically results in a higher operating
expense ratio for us than for investment companies invested only in the United
States.

MARKET DISRUPTION

As a result of terrorist attacks on the World Trade Center and the Pentagon on
September 11, 2001, some of the U.S. securities markets were closed for a
four-day period. These terrorist attacks and related events have led to
increased short-term market volatility. U.S. military and related action in Iraq
and Afghanistan and events in the Middle East could have significant adverse
effects on U.S. and

--------------------------------------------------------------------------------
35

RISK FACTORS AND SPECIAL CONSIDERATIONS
--------------------------------------------------------------------------------

world economies and markets. We do not know how long the securities markets will
continue to be affected by these events and cannot predict the effects of the
military action or similar events in the future on the U.S. economy and
securities markets. A similar disruption of the U.S. or world financial markets
could impact interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to our common stock.

--------------------------------------------------------------------------------
36

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

Our management

INFORMATION REGARDING DIRECTORS AND OFFICERS

Our business and affairs are managed under the direction of our board of
directors. The directors approve all significant agreements between us and
persons or companies furnishing services to us, including our agreement with our
investment manager, investment adviser, custodian and transfer agent. The
management of our day-to-day operations is delegated to our officers and to our
investment manager and investment adviser, subject always to our investment
objective and policies and to the general supervision of our board of directors.
We have nine directors, three of whom are "interested persons" (as defined in
the Investment Company Act) and six of whom are not "interested persons." An
"interested person" is a director who is not independent under the specific
requirements of the Investment Company Act. The names and business addresses of
our directors and officers and their principal occupations and other
affiliations during the past five years are set forth on page B-8 under
"Management" in the SAI.

INVESTMENT MANAGER

Deutsche Bank Securities Inc. ("DBSI"), with principal offices located at 60
Wall Street, New York, New York, is our investment manager and administrator.
Subject to the supervision of our board of directors and pursuant to
recommendations made by our investment adviser, DBSI also determines which
securities are suitable for our investment. We pay DBSI an annual management fee
equal to 0.65% of our average weekly net assets up to $100 million, and 0.55%
for those assets in excess of $100 million.

DBSI is an indirect wholly-owned subsidiary of Deutsche Bank AG. DBSI is engaged
in the securities underwriting, investment advisory and securities brokerage
business, and it is a member of the NYSE and other principal United States stock
exchanges. DBSI also serves as investment manager for The Germany Fund, Inc. and
The New Germany Fund, Inc., which are closed-end registered investment
companies.

With total assets of approximately $1,826.7 billion, Deutsche Bank AG is the
largest commercial and investment bank in Germany and a leading European
financial institution, and is ranked among the world's largest banks in terms of
total assets as of September 30, 2003. Its principal corporate offices are
located at Taunusanlage 12, 60325 Frankfurt am Main, Germany. Deutsche Bank AG
and certain of its affiliates are engaged in the management of client funds as
well as investment advisory activities. The total amount of funds under
management by Deutsche Bank AG and its affiliates was approximately $
billion as of , 2003.

For additional information about our investment manager, see "Investment
Advisory and Other Services" on page B-17 of the SAI.

INVESTMENT ADVISER

Deutsche Asset Management International GmbH ("DeAMI"), with principal offices
located at Mainzer Landstrasse 178-190, 60327 Frankfurt am Main, Germany, is our
investment adviser. In accordance with our investment objective, policies and
restrictions, DeAMI makes recommendations to our investment manager with respect
to our investments and, upon instructions given by our investment manager as to
which securities are suitable for investment, transmits purchase and sale orders
and selects brokers and dealers to execute portfolio transactions on our behalf.
We pay DeAMI an annual investment advisory fee equal to 0.35% of our average
weekly net assets up to $100 million, and 0.25% for those assets in excess of
$100 million.

--------------------------------------------------------------------------------
37

OUR MANAGEMENT
--------------------------------------------------------------------------------

DeAMI is a subsidiary of Deutsche Bank AG. DeAMI provides international
portfolio management services to institutional investors worldwide. As of
December 31, 2003, funds worth $8.7 billion were managed by DeAMI for
institutional accounts in more than ten countries, including the United States.
DeAMI also serves as investment adviser for The Germany Fund, Inc. and The New
Germany Fund, Inc., which are closed-end registered investment companies.

For additional information about our investment adviser, see "Investment
Advisory and Other Services" on page B-17 of the SAI.

PORTFOLIO MANAGEMENT

The names of the persons primarily responsible for the day-to-day management of
our investment portfolio and their business experience during at least the past
five years are set forth in the table below.

NAME TITLE LENGTH OF TIME SERVED BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---- ------------------------ ------------------------ -------------------------------------------

Hanspeter Ackermann Chief Investment Officer Year to year since 1996. President of Deutsche Bank Investment
Management Inc. Managing Director, Deutsche
Bank Securities Inc. Managing Director and
Senior International Equity Portfolio
Manager, Bankers Trust Co. CIO, The Germany
Fund, Inc. and The New Germany Fund, Inc.
President and Managing Partner, Eiger Asset
Management (1993-1996), Managing Director
and CIO, SBC Brinson, formerly SBC
Portfolio Management International Inc.
(institutional investment management)
(1983-1993).
Steffen Gruschka Head of Emerging Year to year since 2001. Funds manager for Emerging European
European Equities, Equities at DWS/DeAM since 1998.
Director
Robert Kalin Senior Fund Manager Year to year since 2002. Senior Portfolio Manager Equities, Emerging
Equities Markets at DWS/DeAM since 2002. Before:
Senior Portfolio Manager at Zurich Invest
(2001-2002), responsible for Emerging
Europe; Advisor to Zurich Invest
Mittelosteuropa Fund (1998-2001).
Sylwia Szczepek Senior Fund Manager Year to year since 2001. Funds manager for Emerging European
Equities Equities at DWS/DeAM since 2001. Before:
Deutsche Bank, Corporate Development (Afk).

AFFILIATED BROKERAGE

We pay brokerage commissions to Deutsche Bank AG, and its affiliates. Deutsche
Bank AG is the German parent of our investment manager and investment adviser.
For our fiscal year ended October 31, 2003, Deutsche Bank AG and its affiliates
received $5,665 in brokerage commissions as a result of executing agency
transactions in portfolio securities on our behalf. For information about
brokerage practices and commissions, see "Brokerage Allocation and Other
Practices" on page B-18 of the SAI.

OUR EXPENSES

In addition to the management fee and advisory fee of our investment manager and
investment adviser, respectively, we are responsible for the following expenses
if incurred:

+ the fees and expenses of directors who are not affiliated with our investment
manager or investment adviser;

--------------------------------------------------------------------------------
38

OUR MANAGEMENT
--------------------------------------------------------------------------------

+ interest expenses;

+ all taxes and corporate fees payable by us to governmental agencies;

+ broker's commissions and other expenses in connection with our securities
transactions;

+ the cost of stock certificates representing our shares;

+ expenses of registering our shares with federal, state and foreign securities
authorities;

+ the charges and expenses of our legal counsel and independent accountants;

+ the fees and certain expenses of our custodian and transfer and dividend
disbursing agents, including those in respect of the accounting and
record-keeping services;

+ expenses related to stock exchange listings of our shares;

+ expenses of our stockholders meetings and of preparing and distributing
proxies and reports to our stockholders; and

+ litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of our business.

NON-RESIDENT DIRECTORS AND INVESTMENT ADVISER

Five of our directors reside outside of the United States and all or a
significant portion of the assets of these directors are located outside of the
United States. In addition, our investments adviser's principal offices are
based outside the United States and all or a significant portion of our
investment adviser's assets are located outside of the United States. Our
non-resident directors have no authorized agents in the United States to receive
service of process. As a result, it may not be possible for investors to effect
service of process within the United States upon these directors or to enforce
against them in United States courts judgments predicated upon the civil
liability provisions of United States securities laws.

--------------------------------------------------------------------------------
39

Central European, Russian and Turkish Economies and Markets

Following 50 years of communist command and control economies, the Central
European countries, Russia and Turkey now have economies that essentially are
market-based but starved for investment capital. Progress in transitioning to
capitalist economies within the region is occurring at different rates of speed,
as these countries are in varying stages of political and economic development.
While each country's markets are gradually becoming more consumer-driven, they
depend almost entirely on exports to Western European countries and the United
States to generate growth.

The Central European countries, Russia and Turkey have demonstrated positive
rates of economic growth over the past several years.

Key Economic Indicators, 1998-2002

PER CAPITA INCOME
ANNUAL GDP ANNUAL IN 2002
COUNTRY GROWTH RATE INFLATION (USD $, MARKET RATE)
-

Czech Republic...................................... 1.5% 1.8% 6,810
Hungary............................................. 4.3 9.7 6,530
Poland.............................................. 3.0 7.2 4,944
Russia.............................................. 4.0 32.2 2,384
Turkey.............................................. 1.0 60.2 2,605

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

Source: The Economist Intelligence Unit

Foreign investment levels have increased rapidly over the past decade, with more
than $100 billion of direct investment capital flowing into the region. Interest
rates in Central European countries have been gradually converging to the levels
of Western Europe. Historically, lower interest rates have made investment
projects more viable and have stimulated economic activity.

By the fall of 2003, all Central European countries had held referenda to
approve their admission to the European Union (the "EU"). Results of referenda
were overwhelmingly positive. For example, in Hungary, 83.8% voted in favor of
joining the EU; in Poland, 77.5% voted in favor; and in the Czech Republic,
77.3% assented. Negotiations to complete the admissions process are progressing.
In the past, emerging economies joining the EU have benefited from higher income
levels and consumption patterns resulting from the affiliation with their more
developed Western European neighbors. This effect occurred with the admission to
the European Community (now EU) of Greece in 1981, and with Spain and Portugal
in 1986. While Spain and Portugal adopted the euro as its currency when it
launched in 1999, Greece became a member of the European Monetary Union ("EMU")
in 2001.

In anticipation of the admission of the Central European countries into the EU,
foreign investors have increased investments in the region, as evidenced by fund
flows (representing direct investment and portfolio investments) reaching record
levels in Hungary, Poland and the Czech Republic in 2003. The equity market
indices of Spain, Portugal and Greece and moved closely in line with each other
as the timing of their membership in the EMU approached in 1999 and 2001. It is
possible that this pattern may be repeated as the Central European nations join
the EU.

In Russia, President Vladimir Putin has made the country's reformation into a
free market economy a key priority. It generally believed by many political
analysts, though far from a certainty, that Putin's policies, as well as the
designation by the United States of Russia as a market economy, may help smooth
the country's path to eventual membership in the World Trade Organization.

In Turkey, the government has undertaken important structural reforms in its
economy in the expectation that it will begin membership discussions in earnest
with the EU in December 2004.

--------------------------------------------------------------------------------
40

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

POLAND'S ECONOMY AND SECURITIES MARKETS

After two years of weak economic growth and high levels of unemployment, Poland
has recently shown signs of an economic recovery driven by rising levels of
consumption and exports. With a market size greater than those of the Czech
Republic, Slovakia and Hungary combined, Poland's 38.6 million consumers
comprise the largest economy in Central Europe. For the past decade, Poland's
Gross Domestic Product ("GDP") has grown at an annualized rate of 4.5%, nearly
twice that of the Central European average of 2.8%.

Poland began its transition to a market economy in 1990 under difficult
macroeconomic conditions, which included high inflation and high levels of
external debt. In an effort to introduce structural economic reforms, Polish
policymakers liberalized prices, made its currency (the zloty, or PLN)
convertible, fixed the exchange rate and lowered import barriers. Over the past
five years, Poland has moved rapidly from a country that was heavily dependent
on agricultural production to a more diversified economy. 37.6% of Poland's
exports in 2002 were related to machinery and transport equipment, while food
and live animals accounted for just 7.2% of exports. In 1999, by contrast,
agricultural production accounted for 25% of Poland's GDP.

In 2003, Poland held a referendum on question of the country's admission to the
EU, and 77.5% voted in favor. The country will join the EU on May 1, 2004.

Still, according to a report published by The Economist in June 2003, the
country faces several economic challenges. Poverty, as defined by the World
Bank, affects some seven million or more of Poland's population (about 18%) and
is more widespread than in other advanced transition economies of Central Europe
such as Hungary and the Czech Republic. Low productivity rates in the
agricultural sector concentrates poverty largely in rural areas. Moreover, the
rise in unemployment as a result of the global economic slowdown has increased
poverty levels and slowed the country's rate of poverty reduction. Nevertheless,
in 2003 recovery appears to have resumed and, according to preliminary estimates
published by the National Bank of Poland (the central bank of the Republic of
Poland) on January 21, 2004, GDP growth in 2003 was expected to exceed 3.5%.
Inflation has been brought under control, though real interest rates remain
relatively high (around 5.0%).

In addition to high unemployment, the main impediment to growth is the public
sector, especially the weak public finance system and continuing high fiscal
deficits. However, on May 28, 2003, Poland's central bank reduced its main
interest rate for the fifth time in that year after a steep decline in
inflation. Poland's intervention rate now stands at a record low of 5.5%, while
in 2001 the intervention rate stood at 19%.

--------------------------------------------------------------------------------
41

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

Economic Trends in Poland

1999 2000 2001 2002
-------------------------------

GDP per capita (USD $).................................... 9,280 9,860 10,210 10,450
GDP (% real change, per annum)............................ 4.1 4 1 1.4
Government consumption (% of GDP)......................... 15.54 17.79 17.74 17.64
Budget balance (% of GDP)................................. (2.03) (2.15) (4.32) (5.1)
Consumer prices (% change per annum; average)............. 7.29 10.14 5.49 1.87
Public debt (% of GDP).................................... 43.37 37.99 38.83 43.8
Labor costs per hour (USD $).............................. 2.39 2.46 2.8 2.91
Recorded unemployment (%)................................. 11.99 14.51 16.23 17.76
Current-account balance/GDP............................... (7.46) (6.06) (3.91) (3.54)

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

Source: The Economist Intelligence Unit

Furthermore, to stimulate economic growth, the Polish Government has proposed
reducing the corporate income tax (the "CIT") to 19%, down eight percentage
points from the current 27%. The tax cut would be dependent on the removal of
all tax breaks, allowances and deductions that reduce the nominal income tax.
Although its passage is still uncertain, this reduction, if approved by the
government and the Parliament, could have a positive effect on corporate
earnings and job growth. The government has estimated the 2003 effective tax
rate to be 23.7%, reducing the possible tax reduction to a still-meaningful
4.7%. A lower CIT, if it occurs, could be regarded favorably by the Polish
equity market. A lower tax rate could also attract foreign investors and
increase the number of international firms looking to do business in Poland.

The Polish Securities Markets

The existence of an organized investment exchange in Poland dates from 1817,
although it was suspended after World War II. Following the collapse of the
Soviet Union, the Warsaw Stock Exchange (the "WSE") was established in 1991 with
the introduction of an electronic trade settlement system. Although this event
ushered in the development of the country's modern capital market, the market
for traded shares on the WSE took several years to develop. Supervised by the
Polish Securities and Exchange Commission (the "PSEC"), the WSE is the main
platform in Poland for the trading of equity shares, bonds, some stock futures
and a future on the WIG 20, a blue-chip index.

--------------------------------------------------------------------------------
42

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

As of December 31, 2003, the total market capitalization of companies listed on
the WSE was 140 billion zlotys (USD $37.5 billion). The following table depicts
the total number of listed companies and the average daily trading volume on the
WSE:

AVERAGE DAILY TRADING VOLUME
NUMBER OF IN THOUSANDS IN MILLIONS IN THOUSANDS
YEAR LISTED COMPANIES OF SHARES* PLN OF USD $(1)
-------------------------------------------------------------------------------------------------------

1995..................................... 65 -- -- --
1996..................................... 83 31 251 67,310
1997..................................... 143 518 3,583 960,692
1998..................................... 198 1,626 8,766 2,350,270
1999..................................... 221 4,085 28,667 7,685,680
2000..................................... 225 6,157 58,329 15,638,647
2001..................................... 230 12,097 60,032 15,155,679
2002..................................... 216 11,190 47,599 12,495,547
2003..................................... 203 12,085 66,281 17,743,291

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

Source: Warsaw Stock Exchange

* Continuous trading. Does not include single-price auction trading or block
trading.

(1) U.S. dollar equivalents calculated at year-end exchange rate.

The WSE employs an order-driven trading system, which means that prices are
determined by buy and sell orders. Equities may be listed on three markets based
on the company's size, level of public disclosure, and value:

+ Main--This part of the exchange market encompasses securities with the
highest liquidity. Companies on the main market generally have more capital
and longer operating histories.

+ Parallel--This part of the exchange encompasses securities with lower
liquidity. Companies on the parallel market generally have less capital and
shorter histories than companies on the main market.

+ Free--This part of the exchange encompasses securities that are admitted for
public trading but that do not meet requirements for listing on the WSE's
main or parallel markets.

In addition to these three main market segments, investors may select the SiTech
segment, which lists companies across the major market segments principally
engaged in the information technology and telecommunications industries.

Quotations are made in a continuous, single-price with two auctions, and trading
for large numbers of shares are available through block trades. Clearing of
trades is handled by the National Depository for Securities, with settlement
periods for stocks of T+3; bonds, T+2; and futures T+1. The Depository uses the
National Bank of Poland, the country's central bank, as its clearing bank.

--------------------------------------------------------------------------------
43

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

Poland's stock market is concentrated in the banking sector, with concentration
also in the telecom and chemicals sectors, as illustrated in the table below.

Industry Composition of the Warsaw Stock Exchange, as of December 31, 2003

INDUSTRY DIVISION BY
ECONOMIC INDUSTRY SECTOR MARKET CAPITALIZATION
-----------------------------------------------------------------------------------

Banking..................................................... 39.6%
Telecom..................................................... 16.5
Chemicals................................................... 11.9
Metals...................................................... 5.6
Food........................................................ 5.6
Information Technology...................................... 3.6
Wood & Paper................................................ 3.6
Media....................................................... 2.2
Wholesale & Retail.......................................... 2.0
Construction................................................ 1.9
Insurance................................................... 1.4
Other....................................................... 6.0
-----------
Total....................................................... 100.0%
===========

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

Source: Warsaw Stock Exchange, Monthly Bulletin, December 2003

As of December 31, 2003, the following 20 largest companies traded on the WSE
accounted for 79.8% of the total market capitalization of all companies traded
on the exchange:

20 Largest Companies Traded on the Warsaw Stock Exchange by Market
Capitalization, December 2003

MIL. SHARES MARKET CAPITALIZATION
COMPANY INDUSTRY TICKER OUTSTANDING IN MIL. ZLOTYS IN MIL. USD $(1)
--------------------------------------------------------------------------------------------------------

Telekomunikacja Polska SA........ Telecom TPSA 1,400.0 21,210 5,678
Bank Polska Kasa Opieki SA....... Finance PEO 166.1 17,941 4,803
Polski Koncern Natowy Orlen SA... Chemicals PKN 427.7 10,693 2,862
Bank Przemyslowo-Hanlowy PBK
SA............................. Finance PBH 28.7 10,194 2,729
Bank Handlowy W Warszawie SA..... Finance BHW 130.7 7,539 2,018
Bank Zachodni WBK SA............. Finance BZW 73.0 5,523 1,478
KGHM Polska Miedz SA............. Metals KGH 200.0 5,240 1,403
Grupa Zywiec SA.................. Brewery ZWC 11.3 4,920 1,317
ING Bank Slaski SA............... Finance BSK 13.0 4,488 1,201
Frantschach Swiecie SA........... Wood and Paper SFC 50.0 3,860 1,033
Agora SA......................... Media ABO 56.8 2,900 776
Prokom Software SA............... Information
Technology PKM 13.8 2,400 642
Europejski Fundusz Leasingowy
SA............................. Finance EFL 43.0 2,364 633

--------------------------------------------------------------------------------
44

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

Bank Millennium SA............... Finance MIL 849.2 2,165 580
BRE Bank SA...................... Finance BRE 23.0 2,125 569
Towarzystwo Ubezpieczen i
Reasekuracji Warta SA.......... Insurance WAR 8.1 1,837 492
Firma Oponiarska Debica SA....... Chemicals DBC 13.8 1,767 473
Kredyt Bank SA................... Finance KRB 211.3 1,690 452
Grupa Kety SA.................... Metals KTY 10.5 1,418 380
Netia SA......................... Telecom NET 344.5 1,378 369
Total 20 Companies............... 4,074.4 111,651 29,889
Total Shares Market.............. 6,508.9 140,001 37,478

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

Source: Warsaw Stock Exchange, Monthly Bulletin, December 2003

(1) U.S. dollar equivalents calculated at year-end exchange rate.

As is the case with the majority of exchange-listed bonds in the Central
European countries, the bulk of Poland's bond issues are Treasury bonds.
Corporate bonds, including those issued by foreign corporations, are also
traded. In Poland, a regulated off-Exchange market is organized by a company
called CeTO, which handles wholesale transactions in bonds and T-bills on a
dedicated platform called the Electronic Treasury Securities Market (ERSPW).
CeTO also manages a market for corporate and municipal public utilities bonds.

The Polish Traded Index (the "PTX"), one of the currently five indexes owned by
the Vienna Stock Exchange (the so-called "CECE Index family", covering the
emerging stock markets of the four Visegrad countries of the Czech Republic,
Hungary, Poland and the Slovak Republic), is a commonly used measure of the
performance of the Polish stock markets. The PTX is a capitalization-weighted
price index reflecting in real time the movement of the most liquid blue chip
stocks traded on the WSE. It is calculated in U.S. dollars as well as in euros
and on a local currency basis. Published criteria for selecting stocks for the
PTX include market capitalization, liquidity, price availability, sector
representation and market interest, with the primary criteria being market
capitalization and liquidity. The PTX is not adjusted for dividend payments.
Although there is no prescribed number of stocks to be included in the PTX, the
Index included 11 stocks as of February 5, 2004, which represented approximately
30.9% of the total market capitalization of stocks listed on the WSE as of the
same date.

The following table presents the annual performance in U.S. dollar terms of the
PTX, along with the U.S. dollar-denominated returns of the Polish currency, the
zloty (the "PLN"), between 1999 and 2003:

Annual Returns of Polish Stock Markets(1) and Currency (in USD $)

1999 2000 2001 2002 2003
-------------------------------------------------------------------------------------------------

Polish Traded Exchange ("PTX")............... 39.07% (3.59)% (29.89)% 3.28% 30.69%
Zloty ("PLN")................................ (15.42) 0.42 4.24 3.54 2.57

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

Source: Bloomberg

(1) Simple price appreciation only.

--------------------------------------------------------------------------------
45

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

THE CZECH REPUBLIC'S ECONOMY AND SECURITIES MARKETS

The Czech Republic is an upper middle-income country situated in the heart of
Central Europe. Over the past twelve years, the Czech economy has undergone a
process of rapid transformation, bringing it closer to its goal of admission to
the EU. Negotiations for EU membership were completed in December 2002 and, in a
June 2003 referendum, 77% of the Czech population voted in favor of admission.
The country is scheduled to join the EU in May 2004.

Economic Trends in The Czech Republic

1999 2000 2001 2002
-------------------------------------------------------------------------------------------

GDP per capita (USD $).................................. 10,610 11,214 11,894 12,220
GDP (% real change, per annum).......................... 0.47 3.25 3.09 1.96
Government consumption (% of GDP)....................... 19.68 19.63 19.34 21.41
Budget balance (% of GDP)............................... (2.34) (2.32) (3.11) (2.02)
Consumer prices (% change per annum; average)........... 2.11 3.90 4.68 1.80
Public debt (% of GDP).................................. 15.04 18.8 22.92 28.00
Labor costs per hour (USD $)............................ 2.08 2.00 2.16 2.69
Recorded unemployment (%)............................... 8.63 8.96 8.55 9.19
Current-account balance/GDP (%)......................... (2.66) (5.29) (4.59) (5.33)

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

Source: The Economist Intelligence Unit

Privatization has attracted considerable foreign direct investment. The EU is by
far the country's largest trading partner, accounting for 68.3% of exports and
60.1% of imports in 2002. Machinery and transport equipment and intermediate
manufactured goods are the Czech Republic's major exports as well as imports.
The Czech Republic, Hungary, Poland and Slovakia together produce about one
million vehicles per year.

The Czech economy continued to perform relatively well in 2003. Both monetary
and fiscal policies generally were stimulative in 2002 and 2003. The Czech
National Bank, the country's central bank, began easing interest rates
relatively early which, together with an expansionary fiscal policy, provided
needed stimulus to the economy. Inflation has been subdued, falling to 1.8% in
2002 from an average of 4.6% between 1998 and 2002. Unemployment has remained in
the 8% to 10% range over the past several years.

Notwithstanding those positive factors, the current-account deficit has been
growing steadily since 1997, both in absolute terms and as a percentage of GDP.
Although financing government debt levels has been facilitated by privatization,
the few assets that remain, including the telecom, power and steel sectors, and
the uncertain timing of their privatization, makes fiscal consolidation a high
priority.

The Czech Securities Markets

Following World War II, the Czech exchange business, which traces its roots as a
major commodities exchange to the middle of the 19th century, closed its doors.
In May 1991, following the collapse of the Soviet Union, an association of eight
banking houses was formed that later was reorganized into the Prague Stock
Exchange (the "PSE"). The PSE opened for business in April 1993.

The PSE is the largest market organizer in the Czech Republic. Initially, the
PSE was set up to handle transactions between two classes of securities, listed
and unlisted. For companies to be considered for listing on the PSE, they
generally are required to adhere to certain standards such as disclosing
financial strength, operating history and significant changes in their
businesses that might affect the

--------------------------------------------------------------------------------
46

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

prices of their securities. Unlisted securities were those whose issuers used
the PSE as a mechanism by which to transfer share or interest ownership, with no
requirement for disclosure. In 1995, the PSE sought to impose more stringent
disclosure standards by dividing the markets further into three segments:

+ Main--Securities that were previously listed were automatically transferred
to the Main Market. This part of the exchange market encompasses securities
with the highest liquidity. Companies on the main market generally have more
capital and longer operating histories.

+ Secondary--The Secondary Market was established to provide a market for
listed companies whose market capitalizations fell under a certain limit.
This part of the exchange encompasses securities with lower liquidity.
Companies on the Secondary Market generally have less capital and shorter
histories than companies on the Main market.

+ Free--Formerly unlisted securities were relegated to the Free Market. This
part of the exchange encompasses securities that are admitted for public
trading but that do not meet requirements for listing on the PSE's Main or
Secondary Markets.

Unified disclosure requirements for companies in both the Main and Secondary
Markets became effective in 1997. In 1999, a new market (the "New Market"),
oriented mainly towards young and developing companies that were seeking capital
for further development, was spun off from the Secondary Market. The New Market
generally has not been active, and currently there are no companies listed on
it.

Trades on the PSE are settled by its wholly owned subsidiary, Univyc, which was
licensed in July 2000 by the Czech Securities Commission to handle settlement of
exchange trades and over-the-counter transactions of the stock exchange. Univyc,
a member of the Central and Eastern European Central Securities Depositories and
Clearing Houses ("CEECSDA"), works through The Czech National Bank's (the
central bank) Clearing Centre (the "CNB-CC") and The Prague Securities Centre
("SCP"), a self-funding government agency established by the Czech Ministry of
Finance in 1993 to promote the development of the capital market. The former
book-entry system for clearing trades was upgraded in 2001 to an on-line
information link with CNB-CC. This system enhancement made it possible for
Univyc to introduce in September 2002 T+3 settlement dates for the trading of
equities and bonds.

--------------------------------------------------------------------------------
47

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

The following table illustrates a multi-year history of the number and type of
listed companies on the PSE.

The Czech Equity Market

NUMBER OF ISSUES, BY
TOTAL MARKET CAP TOTAL MARKET CAP NUMBER MARKET TYPE(2)
YEAR (BIL. CZK) (MIL. USD $)(1) OF ISSUES MAIN SECONDARY FREE
------------------------------------------------------------------------------------------------------

1996................. 539.2 21,017 1,670 44 52 1,574
1997................. 495.7 19,322 320 45 58 217
1998................. 416.2 16,223 304 10 96 198
1999................. 479.7 18,688 195 8 81 106
2000................. 442.9 17,263 151 5 60 86
2001................. 340.3 13,264 102 5 48 49
2002................. 478.0 18,632 79 5 41 33
2003................. 644.5 25,122 65 5 34 26

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

Source: Prague Stock Exchange

(1) U.S. dollar equivalents calculated at year-end exchange rate.

(2) Includes shares and units.

--------------------------------------------------------------------------------
48

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

As illustrated in the table below, the Czech Republic's stock market offers
representation across most economic sectors, with fairly high concentration in
the finance, power generation and transportation/communications sectors.

Industry Composition of the Prague Stock Exchange, as of December 31, 2003

INDUSTRY DIVISION BY
ECONOMIC INDUSTRY SECTOR MARKET CAPITALIZATION
-----------------------------------------------------------------------------------

Finance and Banking......................................... 47.24%
Power Generation............................................ 23.28
Transport, Communications................................... 16.29
Beverages and Tobacco....................................... 4.78
Extraction of Minerals/Ores................................. 2.78
Chemicals, Pharmaceuticals, Rubber.......................... 2.37
Metallurgy, Metal Products.................................. 0.93
Building, Building Materials................................ 0.83
All Others.................................................. 1.51
------
Total....................................................... 100.00%
======

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

Source: Prague Stock Exchange, Fact Book 2003

The following table lists the 30 largest stocks listed on the Prague Stock
Exchange based on market capitalization as of December 31, 2003. These 30 stocks
represented 88.9% of the total market capitalization of all listed stocks on the
PSE:

MARKET CAPITALIZATION(1)
IN MIL. IN THOUSANDS
COMPANY INDUSTRY TICKER CZK USD $
-----------------------------------------------------------------------------------------------

Erste Bank der
oesterreichischen
Sparkas................. Finance and Banking BAAERBAG 190,961.8 7,443,366.3
Cesky Telecom, a.s. ...... Transport,
Communications BAATELEC 93,824.8 3,657,131.2
Komercni banka, a.s. ..... Finance and Banking BAAKOMB 91,907.8 3,582,409.8
CEZ, a.s. ................ Power Generation BAACEZ 86,285.1 3,363,246.5
Philip Morris CR, a.s. ... Beverages and Tobacco
Production BAATABAK 30,098.6 1,173,192.3
Ceska pojistovna, a.s. ... Finance and Banking BAACSPOJ 17,841.0 695,411.9
Unipetrol, a.s. .......... Production of Chemicals,
Pharmaceuticals, Rubber BAAUNIPE 12,047.9 469,606.7
Ceske Radiokomunikace,
a.s. ................... Transport,
Communications BAACRADI 10,660.5 415,528.2
Severomoravska energetika,
a.s..................... Power Generation BAASMENG 7,066.3 275,432.4
Severoceske doly, a.s. ... Extraction and
Processing of Minerals
and Ores BAASEVDO 7,027.9 273,935.6
Prazska energetika,
a.s. ................... Power Generation BAAPRENG 6,601.7 257,323.0

--------------------------------------------------------------------------------
49

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

MARKET CAPITALIZATION(1)
IN MIL. IN THOUSANDS
COMPANY INDUSTRY TICKER CZK USD $
-----------------------------------------------------------------------------------------------

Jihomoravska energetika,
a.s. ................... Power Generation BAAJMENG 6,572.3 256,177.1
OKD, a.s., clen koncernu
Karbon Invest........... Extraction and
Processing of Minerals
and Ores BAAOKD 6,376.3 248,537.3
Ispat Nova Hut a.s. ...... Metallurgy, Metal
Products BAANOVHU 6,025.4 234,859.8
Severoceska energetika,
a.s. ................... Power Generation BAASEVEN 4,950.9 192,977.7
Zapadoceska energetika,
a.s. ................... Power Generation BAAZCENNG 4,678.6 182,363.9
Stredoceska energeticka,
a.s. ................... Power Generation BAASTREN 4,538.1 176,887.4
Severonmoravska
plynarenska, a.s. ...... Power Generation BAASMPLY 4,196.0 163,552.9
Vychodoceska energetika,
s.a. ................... Power Generation BAAVCENG 4,006.2 156,154.9
Jihomoravska plynarenska,
s.a. ................... Power Generation BAAJMPLY 3,931.8 153,254.9
Finop Holding(2).......... N/A(2) BAAFINOP(2) 3,721.5 145,057.7
Sokolovska uhelna,
a.s. ................... Extraction and
Processing of Minerals
and Ores BAASOKUH 3,510.1 136,817.7
Jihoceska energetika,
a.s. ................... Power Generation BAAJIHEN 2,910.4 113,442.4
Lafarge cement, a.s. ..... Building, Building
Materials BAACIZKO 2,171.6 84,645.3
Prazska Plynarenska,
a.s. ................... Power Generation BAAPRLY 2,129.7 83,012.1
Vychodoceska plynarenska,
a.s. ................... Power Generation BAAVCPLY 2,079.5 81,055.4
Stavby silnic a zeleznic,
a.s. (SSZ).............. Building, Building
Materials BAASTSSZ 1,878.3 73,212.9
Metalimex, a.s. .......... Trade BAAMETLX 1,834.1 71,490.1
Zapadoceska plynarenska,
a.s. ................... Power Generation BAAZCPLY 1,781.6 69,443.7
Seversceska plynarenska,
a.s. ................... Power Generation BAASEVPL 1,701.4 66,317.7

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

Source: Prague Stock Exchange

(1)U.S. dollar equivalents calculated at year-end exchange rate.

(2)This security was withdrawn from the PSE's Free Market effective on January
20, 2004, as a result of the cancellation of the company without liquidation.

The Czech Traded Index (the "CTX," one of the CECE Index families) is a commonly
used measure of the Czech stock markets. The CTX is a capitalization-weighted
price index reflecting in real time the movement of the most liquid blue chip
stocks traded on the PSE. It is calculated in U.S. dollars as well

--------------------------------------------------------------------------------
50

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

as in euros and on a local currency basis. Published criteria for selecting
stocks for the CTX include market capitalization, liquidity, price availability,
sector representation and market interest, with the primary criteria being
market capitalization and liquidity. The CTX is not adjusted for dividend
payments. Although there is no prescribed number of stocks to be included in the
CTX, the Index included seven stocks as of February 5, 2004, which represented
approximately 24.4% of the total market capitalization of stocks (including
shares and units) listed on the PSE as of the same date.

The following table presents the annual performance in U.S.-dollar terms of the
CTX, along with the U.S. dollar-denominated returns of the Czech currency, the
koruna ("CZK"), between 1999 and 2003.

Annual Returns of the Czech Stock Markets(1) and Currency (in USD $)

1999 2000 2001 2002 2003
---------------------------------------------------------------------------------------------

Czech Traded Exchange ("CTX")...................... 12.06% 1.91% (21.06)% 36.88% 63.25%
Koruna ("CZK")..................................... (15.76) (3.86) 4.70 18.41 16.95

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

Source: Bloomberg

(1)Simple appreciation only. Does not include dividends reinvested.

HUNGARY'S ECONOMY AND SECURITIES MARKETS

Relative to other Central European countries, Hungary is an upper middle-income
country and one of the region's most successful transition economies. Hungary is
scheduled to join the EU in May 2004. The country has attracted significant
inflows of foreign direct investment, built up a robust private export sector,
and achieved solid economic growth with low unemployment.

After communism fell with the collapse of Janos Kadar's government in May 1988
following nearly four decades of socialist rule, the country has been directing
most of its trade policies to the West, with special emphasis on the EU. Hungary
became politically liberalized in 1990, when free elections were first held.
Since then, reform-minded, right-centrist and left-centrist parties alternately
have assumed power.

Hungary ran large current-account deficits in the mid-1990s, but this situation
improved with increased export activity, which to a large extent was aided by
significantly lower production and labor costs than Western European countries.
More recently, there has been some retrenchment in these trade ratios, as
increased wage pressures outpaced productivity growth and demand stagnated in
the EU. Roughly three-quarters of Hungary's exports, dominated by machinery and
equipment products and other manufactured goods, go to the EU, especially
Germany, based on 2002 figures.

--------------------------------------------------------------------------------
51

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

Economic Trends in Hungary

1999 2000 2001 2002
-------------------------------------------------------------------------------------------

GDP per capita (USD $)...................................... 8,230 8,890 9,470 9,930
GDP (% real change per annum)............................... 4.17 5.15 3.80 3.30
Government consumption (% of GDP)........................... 10.15 9.84 11.00 11.05
Budget balance (% of GDP)................................... (3.20) (3.48) (5.15) (9.65)
Consumer prices (% change per annum, avg.).................. 9.99 9.82 9.16 5.29
Public debt (% of GDP)...................................... 61.21 55.53 54.04 60.45
Labor costs per hour (USD $)................................ 1.81 1.73 1.95 2.48
Recorded unemployment (%)................................... 6.95 6.38 5.71 5.82
Current-account balance/GDP (%)............................. (5.11) (6.25) (3.39) (4.27)

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

Source: The Economist Intelligence Unit

Hungary's current government is pursuing the economic reforms required by EU
membership. The structural reforms, which remain pending, are notably in the
financing of the health care sector, in sub-national finance and in capacity
building. Although the deficit has grown over the past several years, the
government has stated it will seek some spending cuts in 2004. It is not
possible to know whether these cuts will occur. In June 2003, the National Bank
of Hungary, the country's central bank, increased the interest rates used for
its loans to banks from 7.50% to 9.50% in an effort to restrain high rates of
inflation. Core inflation has decreased from 9.5% in December 2001 to 5.6% in
December 2002 to 4.9% in December 2003.

The Hungarian Securities Markets

The Hungarian securities market began to develop in the mid-80s after a 40-year
hiatus. The institutional framework was established when the first Securities
Act was passed in February 1990, which led to the opening of the Budapest Stock
Exchange (the "BSE") in June 1990.

The 1996 Offering of Securities, Investment Services and the Securities Exchange
Act and the 1990 Securities and Stock Exchange Act govern the public issuance
and trading of bonds, shares and other securities in Hungary. In April 2000, the
responsibilities of the Bank Supervisory Board were merged with the state
insurance and pension supervisory agencies to form the Hungarian Financial
Supervisory Authority ("PSZAF"). This entity is a consolidated financial
supervisory body that regulates all financial and securities markets. Although
the PSZAF is independent and self-financing, it has no authority to issue new
regulations that carry legal force.

At the end of 2003, the BSE had 33 members, including 17 licensed-broker or
broker-dealer companies (including several U.S.-based firms) and 16 banks.
Foreign investors can buy local-currency denominated Hungarian government bonds
of any maturity, and foreign investment funds can establish offices in Hungary
in order to attract additional Hungarian investors. In addition, the BSE,
working in concert with the nation's larger banks, has improved its payment and
securities settlement systems, significantly reducing broker risk, which was a
significant factor in the securities markets for investors in the 1990s. For
example, prior to September 3, 1999, banks made the majority of their interbank
payments using a paper-based account management service of the Hungarian Central
Bank (the "NBH"). In July 2000, a real delivery versus payment ("DVP") interbank
settlement system was introduced.

At the end of 2003, the total market capitalization of the Budapest Stock
Exchange was USD $50.0 billion, an increase of nearly 25.5% over year-end 2002.
The average daily trading volume in 2003 was USD $40.9 million. Trading on the
BSE is carried out in three ways: securities,

--------------------------------------------------------------------------------
52

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

government securities, and futures. Equity and fixed income securities account
for more than 90% of the total trades on the BSE. Between 1995 and 2003, the
number of securities listed and traded on the Budapest Stock Exchange totaled
approximately 1,238. Of these, approximately 475 were equity shares, 265 were
government bonds, 68 were corporate bonds, 249 were T-bills, and 118 were
investment fund shares.

The country has a well-developed banking system with diverse ownership. At the
end of 2002, two-thirds of the Hungarian banking sector was foreign-owned. It is
a very competitive sector that is likely to see increased consolidation as the
government privatizes several remaining holdings. In addition, the country has
been amending its financial regulations to meet EU standards as it prepares for
admission in May 2004. For example, the 2003 Act on Credit Institutions makes it
more difficult to conceal losses. It also modified liquidation rules in
accordance with EU regulations on cross-border services.

Market Capitalization(1) and Trading Volume(2) of Equity Securities on the
Budapest Stock Exchange

MARKET CAPITALIZATION AS OF TRADING VOLUME FOR YEAR
DECEMBER 31(3) ENDED DECEMBER 31(3)
YEAR IN MIL. USD $ IN BIL. HUF IN MIL. USD $ IN BIL. HUF
--------------------------------------------------------------------------------------------------------

1995......................................... 2,340 327.8 348 43.6
1996......................................... 5,583 852.5 1,606 245.3
1997......................................... 15,029 3,058.5 7,685 1,436.4
1998......................................... 14,021 3,020.1 16,104 3,460.4
1999......................................... 16,414 4,144.9 14,848 3,431.3
2000......................................... 11,920 3,393.9 12,248 3,417.0
2001......................................... 10,210 2,848.8 4,834 1,385.7
2002......................................... 13,089 2,947.2 5,894 1,513.7
2003......................................... 16,689 3,469.9 8,595 1,849.4

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

Source: Budapest Stock Exchange, Annual Report 2003

(1)Excluding stocks of foreign-domiciled companies and investment companies.

(2)Cash turnover at market value of common stock only, excluding
foreign-domiciled companies and investment companies.

(3)U.S. dollar equivalents calculated at year-end exchange rates.

--------------------------------------------------------------------------------
53

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

Hungary's stock market is concentrated in four sectors--pharmaceuticals,
telecom, banks and oil processing--as illustrated in the table below.

Industry Composition of the Budapest Stock Exchange, as of December 31, 2003

INDUSTRY DIVISION BY
ECONOMIC INDUSTRY SECTOR MARKET CAPITALIZATION
-----------------------------------------------------------------------------------

Pharmaceuticals............................................. 25%
Telecom..................................................... 22
Banks....................................................... 19
Oil Processing.............................................. 16
Chemicals................................................... 7
Power Supply................................................ 7
Others...................................................... 4
---------------------
Total..................................................... 100%
=====================

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

Source: Budapest Stock Exchange, Annual Report 2003

Financings via issuance of corporate bonds is very limited in Hungary, as the
corporate bond market is in its infancy. Generally only blue-chip companies and
local subsidiaries of multinational corporations have issued corporate debt in
the country.

The Hungarian Traded Index (the "HTX" Index, one of the CECE Index families) is
a commonly used measure of the Hungarian stock markets. The HTX is a
capitalization-weighted price index reflecting in real time the movement of the
most liquid blue chip stocks traded on the BSE. It is calculated in U.S. dollars
as well as in euros and on a local currency basis. Published criteria for
selecting stocks for the HTX include market capitalization, liquidity, price
availability, sector representation and market interest, with the primary
criteria being market capitalization and liquidity. The HTX is not adjusted for
dividend payments. Although there is no prescribed number of stocks to be
included in the HTX, the Index included ten stocks as of February 5, 2004. This
group represented approximately 16.4% of the total market capitalization of
stocks listed on the BSE as of December 31, 2003.

The following table presents the annual performance in U.S. dollar terms of the
HTX, along with the U.S. dollar-denominated returns of the Hungarian currency,
the florint ("HUF"), between 1999 and 2003.

Annual Returns of the Hungarian Stock Markets (1) and Currency (in USD $)

1999 2000 2001 2002 2003
---------------------------------------------------------------------------------------------

Hungarian Traded Exchange ("HTX")................ 11.55% (22.49)% (7.40)% 33.32% 27.83%
Florint ("HUF").................................. (14.32) (10.57) 2.74 22.42 7.56

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

Source: Bloomberg

(1)Simple appreciation only. Does not include dividends reinvested.

RUSSIA'S ECONOMY AND SECURITIES MARKETS

Investing in Russia subjects investors to many of the same risks associated with
investing in Central European countries, as described in the "Risk Factors and
Special Considerations" section, above. As previously noted, there are
significant risks inherent in Russian securities that are not typically
associated with securities of companies in more developed countries. The value
of Russian securities

--------------------------------------------------------------------------------
54

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

may be affected by various uncertainties, such as economic, political and social
instability; investment and regulatory risk, including crime and corruption in
government and business; and inconsistency and underdevelopment of Russia's tax
and legal systems. As is the case with issuers in most emerging markets, Russian
securities are subject to a higher degree of volatility than the securities of
Western companies.

Since the breakup of the Soviet Union in August 1991, Russia, the largest of the
former Soviet republics with a population of 145 million, has undergone
substantial economic change and upheaval. The country is structured as a
federation and run as a presidential republic with considerable input from
governors and security services.

Russia continues to be in transition from a centrally controlled command system
to a market-oriented, democratic model of government. The transition has not
been painless, and risks for investing in Russia are not insignificant.
Financial resources are still concentrated in a few hands. Political and
economic reforms are clearly needed in order for the economy to maintain its
growth trajectory.

Since 1991, Russia has been affected at various times by declines in GDP,
hyperinflation, an unstable currency and high government indebtedness relative
to GDP. Under former president Boris Yeltsin, the Russian economy collapsed in
1998 when the government defaulted on its domestic debt. A USD $22.5 billion
bailout by the International Monetary Fund largely proved to be ineffective in
stabilizing the economy.

Still, the country has achieved remarkable progress in transitioning to a
market-based economy, as the following statistics demonstrate.

Economic Trends in Russia

1999 2000 2001 2002
-------------------------------------------------------------------------------------------

GDP per capita (USD $)...................................... 4,514 5,085 5,496 5,830
GDP (% real change per annum)............................... 6.35 10.05 5.00 4.30
Government consumption (% of GDP)........................... 14.58 15.09 16.33 16.91
Budget balance (% of GDP)................................... (1.17) 2.37 3.05 1.65
Consumer prices (% change per annum, average)............... 85.70 20.75 21.60 15.80
Public debt (% of GDP)...................................... 88.09 59.12 48.3 43.4
Labor costs per hour (USD).................................. 0.34 0.44 0.62 0.78
Recorded unemployment (%)................................... 12.27 9.69 8.73 8.48
Current-account balance/GDP (%)............................. 12.56 18.04 11.29 9.47

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

Source: The Economist Intelligence Unit

Vladimir Putin became Russia's president in 2000. Chief among Putin's agenda
items during his administration have been tax reform and deregulation. In March
2002, for example, President Putin replaced the head of Russia's central bank,
Viktor Gerashchenko, a Soviet-era bureaucrat whose tenure was marked by intense
inflation and generally ineffective regulation.

Russia has long been and is today a collection of diverse territories in various
stages of development. Progress on the structural reform front has been somewhat
slowed by intense internal political struggles, and Moscow has been under
considerable pressure to contain certain rebellious regions within the Russian
Federation. Mr. Putin is determined to bring these areas under Moscow's control,
but he needs the cooperation of the Federation members. Significantly, on
December 9, 2003, the Duma parliamentary election confirmed a power shift toward
parties loyal to Mr. Putin. Presidential elections are scheduled for March 2004,
and President Putin is believed to be the front-runner.

--------------------------------------------------------------------------------
55

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

President Putin has made the country's reformation into a free market economy a
key priority. It generally believed by many political analysts, though far from
a certainty, that Putin's policies may help smooth the country's path to
eventual membership in the World Trade Organization ("WTO"). Supporting this
thesis was the June 2002 designation by the United States of Russia as a market
economy, which followed closely on the heels of a similar step taken by the EU.
Russia has taken measures to pass laws that fit WTO standards, and has
participated in bilateral discussions on such sensitive issues as access for
manufactured imports and protection of intellectual property. However,
negotiations that would lead to serious consideration of Russia's admission to
the WTO are far from complete, and to some extent have been hampered by the
country's large bureaucracy, which is charged with enforcing the new legal
standards.

Although the structure of Russia's economy has changed dramatically over the
last decade, it continues to be highly concentrated in several respects, and
retains a number of features that differ from Central European economies in
transition. First, the percentage of new enterprises (i.e., enterprises founded
after the beginning of systemic reforms) and of small- and medium-sized
enterprises is relatively low by international comparison. Second, the economy
still features large production units, many of which are suffering losses.
Third, a significant portion of the population (10%) still lives in economic and
social isolation in the Far North and Far East.

Nevertheless, Russia's economic performance has been both relatively strong and
stable since Putin became president, at a time when most global economies
experienced a considerable slowdown in economic performance. The Russian economy
has benefited from rising oil prices and significant foreign capital inflows. In
2003, Moody's upgraded Russia's credit rating to investment grade status. In
addition, several global companies have increased or are planning to increase
their exposure to the Russian market.

According to a September 2003 report issued by the U.S. Energy Information
Administration, a statistical agency of the U.S. Department of Energy, Russia is
important to world energy markets because it holds the world's largest natural
gas reserves, the second largest coal reserves, and the eighth largest oil
reserves. Russia is presently the world's second largest oil exporter and third
largest energy consumer. Over time, it could become a more significant oil
exporter. In this respect, three developments are noteworthy. First, in 2003 the
Russian authorities approved British Petroleum's nearly USD $8 billion
investment in Tyumen Oil, a joint venture between the two companies, which is
now called TNK-BP. This major transaction would represent the biggest single
direct investment in Russia. Second, a political decision to build a private
pipeline and expand port facilities in Murmansk are aimed at increasing oil
exports to the United States. Third, to reduce Russia's dependence on oil, the
minister of finance has submitted a proposal to create a stabilization fund that
would be used to cushion the economy from the negative impact of potentially
lower oil revenues.

Led by gains in the construction and agriculture sectors, growth was strong in
Russia in 2003, with GDP advancing 7.0% over 2002, according to the Russian
Ministry for Economic Growth. However, many economists expect smaller net
exports to result in lower GDP growth in 2004. The key factor in the overall
performance of Russian GDP growth has been oil and natural gas exports. Oil
revenues have not only fueled domestic demand and consumption but also helped
the Russian financial situation. Russia is one of the few countries in the world
with surpluses in both the federal budget and its current account. As a result,
Russia was able to repay some of its foreign debts before maturity and raise its
foreign exchange reserves to $44 billion in 2003.

The Russian Securities Markets

As noted in the "Risk Factors and Special Considerations" section above,
Russia's securities market is evolving from an exotic frontier market into a
more cohesive emerging market. However, there still is no centralized public
market for trading Russian securities despite the number of stock exchanges in

--------------------------------------------------------------------------------
56

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

the country. Trading occurs mostly over-the-counter. Corporate governance
standards for Russian companies have also proven to be poor, and minority
stockholders in Russian companies have suffered losses due to abusive share
dilutions, asset transfers and transfer-pricing practices. Stockholders of
Russian companies also lack many of the protection available to stockholders of
Western issuers. Accounting, financial and auditing reporting by Russian
companies is also generally of less quality and less reliability compared with
Western companies.

Laws and regulations involving foreign investment in Russian enterprises, title
to securities and transfer of title are also relatively new and can change
quickly and unpredictably. Moreover, Russia's taxation system is frequently
subject to change and enforcement is inconsistent at federal, regional and local
levels.

The activity at the two major Russian stock exchanges (Moscow Interbank Currency
Exchange, (the "MICEX") and Russian Trading System (the "RTS") accounts for
substantially all of the domestic volume of trading. Both exchanges are
nationwide electronic markets based on a continuous auction model. The MICEX
employs an Internet trading facility, and the RTS uses a dealer market approach
and quote-driven system structurally modeled after the NASDAQ system. These two
exchanges support a developing securities market infrastructure, including
several hundred broker/dealers, and depositary, registration, clearing and
settlement facilities. Regulatory oversight is handled by the Federal Securities
Market Commission ("FSMC"). Russian markets encompass the entire range of
financial instruments used in the global capital markets, including derivatives.

The RTS was established in 1995 to consolidate separate regional securities
trading floors into a unified Russian securities market. The RTS lists Russian
equity and fixed income securities, as well as futures and options (with ruble
and foreign currency settlement) for both domestic and foreign portfolio
managers. RTS also provides real-time trading data to global information
services companies. At year-end 2003, more than 300 securities traded on the
RTS, including 50 bonds.

Trading Volume for Russian Stocks, Year Ended December 31(1)

YEAR IN MIL. USD $(2) IN SHARES (000S)
-------------------------------------------------------------------------------------------------

1995........................................................ 187.3 924,218
1996........................................................ 2,926.3 10,919,144
1997........................................................ 14,424.3 20,415,205
1998........................................................ 8,662.5 30,629,708
1999........................................................ 2,338.4 22,716,229
2000........................................................ 5,553.5 29,011,847
2001........................................................ 4,239.1 22,648,366
2002........................................................ 4,236.0 18,077,301
2003........................................................ 5,514.6 17,728,537

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

Source: Russian Trading System

(1)Aggregate transactions in the RTS Classic Stock Market, the primary equity
trading market of the Russian Trading System.

(2)U.S. dollar equivalents calculated using daily exchange rates, aggregated for
the year.

--------------------------------------------------------------------------------
57

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

The following table shows the percentages of RTS-traded companies in each
industry, by market capitalization at the end of 2002 (the latest date for which
aggregate data is available):

Industry Composition of the Russian Trading System, as of December 31, 2002

INDUSTRY DIVISION BY
ECONOMIC INDUSTRY SECTOR MARKET CAPITALIZATION
-----------------------------------------------------------------------------------

Electric Energy Production.................................. 28%
Machine Building and Metal Processing....................... 14
Fuel Industry, including Oil................................ 13
Metallurgy.................................................. 9
Telecommunications.......................................... 7
Banking..................................................... 5
Food Processing Industry.................................... 3
Transport................................................... 3
Chemical and Petrochemical Industries....................... 3
Retail...................................................... 1
Other....................................................... 14
---------------------
Total..................................................... 100%
=====================

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

Source: RTS Stock Exchange Annual Report 2002

The MICEX, the other leading exchange in Russia, has served as a base for the
nationwide system of trades in the currency, stock and derivatives sectors of
the financial market, operating both in Moscow and in Russia's largest financial
and industrial centers. Jointly with its partners (the MICEX Settlement House,
the National Depository Center, regional exchanges and others), the MICEX
provides settlement and clearing as well as depository services.

The following table sets forth the 30 largest Russian companies based on market
capitalization. These stocks represent roughly 12.3% of the total market
capitalization of the stocks traded on the RTS and MICEX.

MARKET
CAPITALIZATION
COMPANY TICKER INDUSTRY SUB GROUPING (THOUS. USD $)(1)
-------------------------------------------------------------------------------------------------

Gazprom................................. GAZP Oil Companies--Integrated 4,150,335
YUKOS Corp.............................. YUKO Oil Companies--Integrated 3,114,563
LUKoil Oil Company...................... LKOH Oil Companies--Integrated 2,133,213
Surgutneftegaz.......................... SNGS Oil Companies--Integrated 2,000,156
Norilisk NIC--MMC....................... GMKN Metal--Diversified 1,493,063
Siberian Oil Company (Sibneft).......... SIBN Oil Companies--Integrated 1,491,139
Unified Energy System of Russia......... EESR Electric--Integrated 1,225,917
Savings Bank of the Russian
Federation............................ SBER Commercial Banks 570,000
Severstal............................... CHMF Steel--Producers 400,647
Surgutneftegaz-Pfd...................... SNGSP Oil Companies--Integrated 290,750
Tatneft................................. TATN Oil Companies--Integrated 274,515
Mosenergo............................... MSNG Electric--Integrated 228,601

--------------------------------------------------------------------------------
58

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

MARKET
CAPITALIZATION
COMPANY TICKER INDUSTRY SUB GROUPING (THOUS. USD $)(1)
-------------------------------------------------------------------------------------------------

Slavneft-Megionneftegaz................. MFGS Oil Companies--Explor. &
Prod 159,160
Rostelecom.............................. RTKM Telephone--Integrated 158,856
Baltika Brewery......................... PKBA Brewery 156,410
Orenburgneft............................ ORNB Oil Companies--Integrated 155,243
UralSvyazInform......................... URSI Telecom Services 125,965
Moscow City Telephone Network........... MGTS Telecom Services 105,375
Transneft............................... TRNFP Pipelines 105,265
Nizhny Tagil Iron & Steel Plant......... NTMK Metal-Iron 95,958
Aeroflot--Russian International
Airlines.............................. AFLT Airlines 94,402
AvtoVAZ Incorporated.................... AVAZ Auto-Cars/Light Trucks 78,864
Volga Telecom........................... NNSI Telecom Services 73,791
Bashneft................................ BANE Oil Companies--Explor. &
Prod. 66,366
Open Joint Stock Company of Energetics &
Electrification....................... IRGZ Electric Energy 64,352
CenterTelecom........................... ESMO Telephone--Integrated 59,570
Unified Energy System of Russia-Pfd..... EESRP Electric--Integrated 57,689
SibirTelekom............................ ENCO Telecom Services 55,853
Lenenergo............................... LSNG Electric Energy 55,346
Verkhnaya Salda Metallurgical Production
Assn. ................................ VSMO Metallurgy 54,191
Central Teleco-P........................ CTELP Telephone--Integrated 52,599

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

Source: Bloomberg, Russian Trading System, Moscow Interbank Currency Exchange

(1) Market Capitalization based on last closing prices and currency exchange
rate as of February 6, 2004.

As of February 6, 2004, approximately 71.9% of the market capitalization of the
above-listed 30 largest companies represented companies in the oil and gas
industry.

As a general rule, shareholders with controlling stakes in a company dominate
Russian equity investing. Typical of most emerging markets countries, including
those of Central Europe, ownership structures in Russia are rarely diversified.
In addition, companies rely much more on debt than equity financing; a small
number of large stakeholders control most shareholder capital; and the
government, not the market, largely controls how financial resources are
allocated. This situation is markedly different from the more accessible and
popular retail American-style of stock ownership.

The Russian securities market continues to benefit from legislative reforms. In
January 2003, several amendments to the Law on the Securities Market (the "Law")
became effective (while others were scheduled to take effect in subsequent
stages in 2004). The changes contained in the amended Law introduced a
legislative basis for the concept of share options and clarifies the government
approvals needed for the issuance or trading of Russian securities in foreign
market through the mechanism of American Depositary Receipts (ADRs), Global
Depositary Receipts (GDRs), or similar instruments. Essentially, under Article
16 of the Law, the FSMC must approve the "placement by a Russian issuer of
securities abroad." In addition, the amended Law has abolished the former
requirement for Russian

--------------------------------------------------------------------------------
59

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

legal entities and individuals to notify the FSMC upon their acquisition of
foreign-issued securities. Further, Article 29 of the Law has also changed the
former requirement for foreign purchasers to notify the FSMC upon their
acquisition of any Russian-issued securities; notice is now required only for
the acquisition of shares in circumstances when Russian law has imposed limits
on foreign ownership. (Such limits remain in effect for certain major Russian
companies, including the national electric utility RAO UES and OAO Gazprom.)
Although the timing of their effects is uncertain, and while enforcement of the
Law remains very much an open question, these changes could be favorable for
foreign investment capital in the Russian securities markets as the system
evolves from one favoring domestic shares and investors to a more global market
model.

However, structural distortions in the Russian securities market have
constrained its development. The cost of regulation is high and tax incentives
are insufficient for most investors. The domestic market is concentrated in
Moscow, where more than 60% of the country's financial capital base is located.
A company's success in the stock market often depends on how closely aligned its
sponsoring broker or bank is with the government and whether there is a personal
relationship between the owners of the company's sponsoring broker or bank and
civil servants. While securities regulation exists on the books, enforcement of
rules is often poor; real sanctions for dishonest practices in client/broker
relationships are rarely enforced.

Russia's domestic bond market, which barely existed five years ago, has grown,
but from relatively low levels and not nearly to the same extent as its Central
and Eastern European neighbors. International bond issues by Russian companies
grew to $5.4 billion by November 2003, from $649 million in 1997. In 2002, the
RTS opened a new market--RTS Bonds--to facilitate trading in corporate,
government and municipal bonds and Eurobonds.

The Russian Traded Index (the "RTX" Index), calculated and maintained by the
Vienna Stock Exchange, is a commonly used measure of the Russian stock markets.
The RTX is a capitalization-weighted price index reflecting in real time the
movement of the most liquid blue chip stocks traded on the RTS. It is calculated
in U.S. dollars as well as in euros and on a local currency basis. Published
criteria for selecting stocks for the RTX include market capitalization,
liquidity, price availability, sector representation and market interest, with
the primary criteria being market capitalization and liquidity. The PTX is not
adjusted for dividend payments. Although there is no prescribed number of stocks
to be included in the RTX, the Index included eight stocks as of February 5,
2004, which represented approximately 32.3% of the total market capitalization
of stocks listed on the RTS as of the same date.

The following table presents the annual performance in U.S. dollar terms of the
RTX, along with the U.S. dollar-denominated returns of the Russian currency, the
ruble ("RUB"), between 1999 and 2003.

Annual Returns of the Russian Stock Markets(1) and Currency (in USD $)

1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------

Russian Traded Exchange ("RTX").................... 260.68% (32.76)% 56.05% 26.21% 73.29%
Ruble ("RUB")...................................... (25.15) (2.17) (7.69) (4.54) 9.28

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

Source: Bloomberg

(1) Simple appreciation only. Does not include dividends reinvested.

As the table above illustrates, the Russian securities markets are characterized
by high volatility, including extremely large swings in returns (either up or
down) from year to year.

--------------------------------------------------------------------------------
60

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

TURKEY'S ECONOMY AND SECURITIES MARKETS

Located between Europe and Asia, Turkey is a dynamic emerging market economy. At
the end of 2002, more than 73% of its 70.3 million people lived in urban areas.
At the end of 2002, according to The Economist Intelligence Unit, agriculture
accounted for 16% of its GDP, industry for 24%, and services for 60%.

Economic Trends in Turkey

1999 2000 2001 2002
---------------------------------------------------------------------------------------------

GDP per capita (USD $).................................... 6,154 6,668 6,219 6,686
GDP (% real change per annum)............................. (4.71) 7.36 (7.5) 7.78
Government consumption (% of GDP)......................... 15.18 14.08 14.24 14.03
Budget balance (% of GDP)................................. (13.02) (10.65) (16.34) (14.16)
Consumer prices (% change per annum, average)............. 64.87 54.92 54.4 44.96
Public debt (% of GDP).................................... 53.55 60.46 101.6 88.9
Labor costs per hour (USD $).............................. 1.51 1.55 1.22 1.44
Recorded unemployment (%)................................. 7.65 6.6 8.53 10.68
Current-account balance/GDP............................... (0.74) (4.93) 2.33 (0.98)

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

Source: The Economist Intelligence Unit

Turkey established an industrial base through state control and protectionist
policies following World War II. Policies have since shifted towards
liberalization, a trend that was reinforced when Turkey signed a customs union
with the EU in 1995 and became a pre-accession candidate for EU membership at
the Helsinki Summit in December 1999. In addition, legislation to reform
pensions and social security was passed in August 1999. In that same year, the
Turkish government launched an economic reform program to quell high inflation
and restore sustained growth, although these efforts were interrupted by the
impact of several earthquakes and the financial crisis of 2000-2001. As a
result, the economy registered GDP contraction of 7.5% in 2001.

Turkey has been a net importer over the past several years. In 2002, exports
totaled USD $39.8 billion, while imports were USD $48.1 billion, leaving a trade
deficit of USD $8.3 billion, compared with USD $4.5 billion in 2001. Significant
steps have been taken to promote foreign investments in Turkey. Constitutional
change to allow international arbitration has been approved. Foreign direct
investment legislation was revised and a new law was passed in June 2003 to
improve conditions for foreign investments. A Patent Institute has been
established and a new Patent Law submitted to Parliament to protect intellectual
property. In addition, an Investment Promotion Agency is being established, and
state monopolies in electricity and the telecommunication sector have been
opened to competition.

The tax reform law in July 1998 reduced the basic rate of corporation tax from
30% to 25%. Personal income tax rates were lowered to a range of 20% to 45%,
down from 25% to 50%. They were reduced again on January 1, 1999, to between 15%
and 40%. New taxes imposed in the aftermath of the August 1999 earthquake were
maintained as part of an IMF-backed stabilization program. The economy started
to recover in 2002, with GDP growth reaching almost 8%, and the positive
improvement continued into 2003. During the third quarter of 2003, the Turkish
Ministry for Foreign Trade reported annualized GDP growth in the industrial
sector of 7.6%; in the services sector, 3.9%.

--------------------------------------------------------------------------------
61

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

Nevertheless, the recent political and economic climate in Turkey has been
challenging. In November 2003, Turkey was shaken by four suicide bombings by
Islamic fundamentalists in Istanbul. Two targeted Jewish synagogues and the
others demolished the British consulate and the UK-based HSBC bank. In addition,
in the same month, the head of the Banking Regulation and Supervisory Authority
("BRSA") resigned under pressure from the government.

The Turkish Securities Markets

Turkey's securities market has its roots in the second half of the 19th century,
when the first organized securities market was established in 1866 following the
Crimean War. This exchange, entitled the Dersaaset Securities Exchange, created
a medium for European investors who were seeking higher returns in the
far-reaching Ottoman markets. Following the demise of the Ottoman Empire and
formation of the Turkish Republic, a new law was enacted in 1929 to reorganize
the capital markets under the new name, the Istanbul Securities and Foreign
Exchange Bourse. The rise of the modern stock market in Turkey can be traced to
this marketplace, which operated without interruption through the 1929
depression and World War II.

The laws governing the establishment, activities, operations and supervision of
securities exchanges were codified by the Council of Ministers in 1983. The
establishment of the securities exchanges is subject to the approval of the
Finance Ministry upon the recommendation of the Capital Markets Board based in
Ankara. The regulations concerning operational procedures were approved in the
subsequent extraordinary meetings of the General Assembly. The Istanbul Stock
Exchange (the "ISE") was formally established at the end of 1985. The ISE is the
only securities exchange in Turkey authorized to provide trading in equities,
bonds and bills, revenue-sharing certificates, private sector bonds, foreign
securities, real estate certificates and international securities. In June 1991,
the ISE's market for bills and bonds was established.

Listing requirements, which are published by the ISE, require any individual
company applying for listing to provide detailed, independently audited
financial statements and consolidated financial statements for group companies.
Companies must demonstrate three-year operating histories, must have had pre-tax
profits in the two years prior to the application year, and must meet other
detailed requirements, including, among other items, company size, debt levels
and amount of equity float.

There are three principal stock market segments in the ISE:

+ National--All companies listed in the National Market must meet certain
listing requirements described above. Generally, stocks listed on this market
are the ISE's largest and most liquid securities. Currently, 100 companies
listed on the National Market are included in the ISE National 100 Index,
which is the main index of the ISE stock market.

+ Regional--The Regional Markets segment of the ISE was established to promote
trading in stocks of small- and medium-sized companies incorporated in all
parts of Turkey. The Regional Markets include companies delisted temporarily
or permanently from the National Market, as well as companies that fail to
fulfill the National Market's listing requirements.

+ New Companies--The New Companies Market was established in 1996 to provide an
organized market for trading in stocks of companies that may be under
regulatory scrutiny. Companies listed in this market may be under
investigation for improper, inconsistent, untimely disclosure information to
the public; failure to comply with existing rules and regulations; and other
situations leading to delisting and/or dismissal from the relevant market
temporarily or permanently in order to protect investors' rights.

--------------------------------------------------------------------------------
62

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

The following table presents an overview of the historical growth of the ISE in
terms of value and number of issues traded in its three principal market
segments.

NUMBER OF ISSUES BY MARKET TYPE
TOTAL VALUE TOTAL VALUE NUMBER OF NEW
YEAR (MIL. LIRA) (USD $MIL.) ISSUES NATIONAL REGIONAL COMPANIES
-------------------------------------------------------------------------------------------------

1986................. 9 13 3 3 -- --
1987................. 105 118 15 15 -- --
1988................. 149 115 32 32 -- --
1989................. 1,736 773 238 238 -- --
1990................. 15,313 5,854 1,537 1,537 -- --
1991................. 35,487 8,502 4,531 4,531 -- --
1992................. 56,339 8,567 10,285 10,285 -- --
1993................. 255,222 21,770 35,249 35,249 -- --
1994................. 650,864 23,203 100,062 100,062 -- --
1995................. 2,374,055 52,357 306,254 306,254 -- --
1996................. 3,031,185 37,737 390,924 377,026 12,765 963
1997................. 9,048,721 58,104 919,784 897,383 11,889 6,670
1998................. 18,029,966 70,396 2,242,531 2,205,345 17,665 18,165
1999................. 36,877,335 84,034 5,823,858 5,747,700 52,554 9,136
2000................. 111,165,396 181,934 11,075,685 10,988,802 64,626 4,364
2001................. 93,118,834 80,400 23,938,149 23,706,279 140,757 --
2002................. 106,302,343 70,756 33,933,251 33,411,837 322,127 --
2003................. 146,644,967 100,165 59,099,780 58,297,164 682,824 --

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

Source: Istanbul Stock Exchange

The following table shows the percentages of ISE-traded companies in each
industry, by market capitalization at the end of 2002 (the latest date for which
aggregate information is available):

Industry Composition of the Istanbul Stock Exchange, as of December 31, 2002

INDUSTRY DIVISION BY
ECONOMIC INDUSTRY SECTOR MARKET CAPITALIZATION
-----------------------------------------------------------------------------------

Chemical, Petroleum, Plastic................................ 31.38%
Non-Metal Mineral Products.................................. 15.07
Metal Products, Machinery................................... 21.47
Food, Beverage.............................................. 11.16
Basic Metal................................................. 8.99
Wood, Paper, Printing....................................... 6.79
Textiles, Leather........................................... 4.18
Other....................................................... 0.96
---------------------
Total..................................................... 100.00%
=====================

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

Source: Istanbul Stock Exchange, Annual Factbook 2002

--------------------------------------------------------------------------------
63

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

The following table presents the 30 largest securities traded on the ISE in 2003
by market capitalization. These companies represent 77.2% of the total market
capitalization of all companies traded on the ISE, as of December 31, 2003:

MARKET CAPITALIZATION
COMPANY TICKER INDUSTRY SUBGROUP (MIL. USD $)(1)
------------------------------------------------------------------------------------------------

Akbank T.A. .............. AKBNK Commercial Banks 8,440
Is Bankasi................ ISBTR Commercial Banks 7,728
Turkcell Iletisi.......... TCELL Cellular Telecom 6,950
KOC Holding............... KCHOL Diversified Operations 6,239
Sabanci Holding........... SAHOL Diversified Operations 6,100
Turkiye Garanti........... GARAN Commercial Banks 3,720
Enka Insaat............... ENKAI Divers. Operations/Comm Servs...... 3,600
Tofas-Turk Otomo.......... TOASO Auto-Cars/Light Trucks 3,535
Tupras.................... TUPRS Oil Refining & Marketing 3,005
Ford Otomotiv............. FROTO Auto-Cars/Light Trucks 2,983
Arcelik................... ARCLK Appliances 2,860
Anadolu Efes Bir.......... AEFES Brewery 2,111
Yapi Credi Bank........... YKBNK Commercial Banks 2,107
Eregli Demir Celik........ EREGL Steel Producers 1,841
Dogan Yayin Holding....... DOHOL Diversified Operations 1,603
Petrol Ofisi.............. PTOFS Retail Petroleum Production 1,560
Dogan Yayin............... DYOL Multimedia 1,455
Turk Hava Yollar.......... THYAO Airlines 1,391
Petkim.................... PETKM Chemicals--Diversified 1,198
Hurriyet Gzt.............. HURGZ Publishing--Newspapers 1,097
Migros.................... MIGRS Food--Retail 1,067
Vestel Elek San........... VESTL Audio/Video Products 986
Turk Sise Cam............. SISE Housewares 933
Trakya Cam Sanay.......... TRKCM Miscellaneous Manufacturing 795
Aygaz AS.................. AYGAZ Distribution/Wholesale 792
BSH Profilo............... BSPRO Appliances 752
Aksigorta................. AKGRT Property/Casualty Insurance 669
Alarko Holding............ ALARK Diversified Operations 627
Akcansa Cimento........... AKCNS Building
Products--Cement/Aggregates 612
Finansbank................ FINBN Commercial Banks 608

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

Source: Bloomberg, Istanbul Stock Exchange

(1)As of January 26, 2004.

The ISE National 100 Index (the "TRA"), a commonly used measure of the Turkish
stock markets, has been calculated since the inception of the ISE. The TRA, a
capitalization-weighted price index, is comprised of National Market companies
except investment trusts. The constituents of the Index are selected on the
basis of pre-determined criteria established for companies to be included in the
Index. The ISE Executive Council determines which securities will be included in
the Index, and evaluate each company based on their market capitalization,
operating history and liquidity, among other factors.

--------------------------------------------------------------------------------
64

CENTRAL EUROPEAN, RUSSIAN AND TURKISH ECONOMIES AND MARKETS

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

The constituents of the Index are subject to quarterly review and adjustment.
The ISE National 100 Index contains the ISE National 50 and ISE National 30
companies. All Turkish lira-based ISE indices are also expressed and published
in U.S. dollar terms.

The following table presents the annual performance in U.S. dollar terms of the
TRA, along with the U.S. dollar-denominated returns of the Turkish currency, the
lira ("TRL"), between 1999 and 2003.

Annual Returns of the Turkish Stock Markets(1) and Currency (in USD $)

1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------

ISE National 100 Index ("TRA").............. 240.83% (50.12)% (32.17)% (34.47)% 112.84%
Lira ("TRL")................................ (42.04) (18.58) (53.90) (12.39) 17.68

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

Source: Bloomberg

(2)Simple appreciation only. Does not include dividends reinvested.

--------------------------------------------------------------------------------
65

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

Description of common stock

GENERAL

All shares of common stock are equal as to earnings, assets, dividends,
liquidation and voting privileges and, when issued, will be fully paid and
nonassessable. There are no conversion, pre-emptive or other subscription
rights. In the event of liquidation, each share of common stock is entitled to
its proportion of our assets after debts and expenses. Stockholders are entitled
to one vote per share and do not have cumulative voting rights. Our outstanding
common stock is listed on the NYSE under the symbol "CEE," as will be the shares
offered for subscription in this rights offering. Our common stock is also
listed on the Regulated Market Segment (Geregelter Markt) of the Frankfurt Stock
Exchange. The rights are transferable and application will be made to list them
on the NYSE under the symbol "CEE.RT."

Set forth below is information with respect to our common stock as of February
6, 2004:

AMOUNT OUTSTANDING
AMOUNT HELD BY US (EXCLUSIVE OF OUR
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR OUR ACCOUNT HOLDINGS)
-------------- ----------------- ------------------ ------------------

Common Stock $.001 par value............. 80,000,000 5,864,442 7,641,533

We have no present intention of offering additional shares, other than pursuant
to this rights offering, except that additional shares may be issued under our
dividend reinvestment plan. For information about our dividend reinvestment
plan, see "Voluntary Cash Purchase Program and Dividend Reinvestment Plan" in
this prospectus. Additional offerings of our common stock, if made, will require
approval of our board of directors and will be subject to the requirements of
the Investment Company Act that common stock may not be sold at a price below
the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing stockholders or
with the consent of a majority of our outstanding stockholders.

PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
AFFECTING CHANGE OF CONTROL AND EXTRAORDINARY TRANSACTIONS

We have provisions in our articles of incorporation and bylaws that could have
the effect of delaying, deferring, preventing or otherwise limiting the ability
of other entities or persons to acquire control of us, to cause us to engage in
certain transactions or to modify our structure. Our board of directors is
divided into three classes each having a term of three years. Each year, the
term of one class expires and the successor or successors elected to that class
will serve for a three-year term. This provision could delay for up to two years
the replacement of a majority of our board of directors by our stockholders. A
director may be removed from office only by the affirmative vote of at least
two-thirds of all the votes entitled to be cast by our stockholders generally in
the election of directors. Except as otherwise required by law, any vacancy
created on our board of directors can be filled only by the affirmative vote of
the remaining directors in office. Our bylaws generally require that advance
notice be given to us in the event a stockholder desires to nominate a person
for election to the board of directors or to transact any other business at a
meeting of stockholders.

In addition, the affirmative vote of the holders of two-thirds of our
outstanding shares is required to authorize our dissolution or any of the
following transactions:

+ the merger or consolidation of us with or into any open-end investment
company;

+ the sale of all or substantially all of our assets; or

--------------------------------------------------------------------------------
66

DESCRIPTION OF COMMON STOCK
--------------------------------------------------------------------------------

+ any amendment to our articles of incorporation which makes the common stock a
redeemable security or reduces the two-thirds vote required to authorize the
actions listed in clauses (1) through (3).

The full text of these provisions can be found in our articles of incorporation
and bylaws, on file with the SEC, as described under "Available Information" in
this prospectus. These provisions could have the effect of depriving
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of us
in a tender offer or similar transaction. Our board of directors believes that
the provisions of our articles of incorporation and bylaws described above
provide the advantage of greater assurance of continuity of board and management
composition and policies. The supermajority voting requirements are generally
greater than the minimum voting requirements imposed on us by the Investment
Company Act and Maryland law. Our board of directors has determined that the
foregoing provisions are in the best interests of stockholders generally.

--------------------------------------------------------------------------------
67

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

Dividends and distributions

We distribute to stockholders, at least annually, substantially all of our net
investment income and net realized capital gains. Distributions are made in cash
or in common stock with the option to receive cash. Stockholders entitled to a
distribution to be made in common stock with the option to receive cash may
elect to receive cash by timely returning a completed option card to Investors
Bank & Trust Company, our dividend-paying agent.

The following table shows the history of dividends and distributions we
distributed to stockholders:

ORDINARY LONG-TERM
RECORD DATE INCOME CAPITAL GAINS TOTAL
-----------------------------------------------------------------------------------------------

12/22/ 2003................................................. $0.22 $0.22
11/19/2001.................................................. $0.23 $0.23
11/16/1998.................................................. $0.14 $0.14
9/01/1998................................................... $0.01 $0.01 $0.02
11/17/1997.................................................. $1.54 $5.01 $6.55
9/03/1997................................................... $0.02 $0.02
12/19/1996.................................................. $0.11 $1.79 $1.90
12/27/1995.................................................. $0.16 $0.22 $0.38
12/29/1994.................................................. $0.20 $0.20
12/28/1993.................................................. $0.08 $0.08
12/28/1992.................................................. $0.17 $0.13 $0.30
9/05/1991................................................... $0.02 $0.02
12/04/1990.................................................. $0.22 $0.04 $0.26

--------------------------------------------------------------------------------
68

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

Voluntary cash purchase program and dividend reinvestment plan

GENERAL

We offer stockholders a Voluntary Cash Purchase Program and Dividend
Reinvestment Plan which provides for optional cash purchases and for the
automatic reinvestment of dividends and distributions payable by us in
additional shares of our common stock. A more complete description of the plan
is provided in the plan brochure available from Investors Bank & Trust Company,
the plan agent, Shareholder Services, P.O. Box 642, OPS 22, Boston,
Massachusetts 02117-0642 (telephone 1-800-437-6269).

Under the Plan, participating stockholders appoint the plan agent to receive or
invest our distributions. In addition, participating stockholders may make
optional cash purchases of our shares through the plan agent as often as once a
month. There is no charge to participating stockholders for participating in the
plan, although when shares are purchased under the plan by the plan agent on the
NYSE or otherwise on the open market, each participating stockholder will pay a
pro rata share of brokerage commissions incurred in connection with these
purchases.

REINVESTMENT OF FUND SHARES

Whenever we declare a capital gains distribution, an income dividend or a return
of capital distribution payable, at the election of stockholders, either in cash
or in our shares of common stock, the plan agent will automatically elect to
receive our shares for the account of each participating stockholder.

Whenever we declare a capital gains distribution, an income dividend or a return
of capital distribution payable only in cash and the net asset value per share
of our common stock equals or is less than the market price per share on the
valuation date (the market parity or premium), the plan agent will apply the
amount of that dividend or distribution payable to a participating stockholder
to the purchase from us of our shares for a participating stockholder's account,
except that if we do not offer shares for this purpose because we conclude
Securities Act registration would be required and such registration cannot be
timely effected or is not otherwise a cost-effective alternative for us, then
the plan agent will follow the procedure described in the next paragraph. The
number of additional shares to be credited to a participating stockholder's
account will be determined by dividing the dollar amount of the distribution
payable to a participating stockholder by the net asset value per share of our
common stock on the valuation date, or if the net asset value per share is less
than 95% of the market price per share on such date, then by 95% of the market
price per share. The valuation date will be the payable date for the dividend or
distribution.

--------------------------------------------------------------------------------
69

VOLUNTARY CASH PURCHASE PROGRAM AND DIVIDEND REINVESTMENT PLAN
--------------------------------------------------------------------------------

VOLUNTARY CASH PURCHASES

Participating stockholders have the option of making investments in our shares
through the plan agent as often as once a month. Participating stockholders may
invest as little as $100 in any month and may invest up to $36,000 annually
through the voluntary cash purchase feature of the plan. The plan agent will
apply these funds (less a participating stockholder's pro rata share of
brokerage commissions or other costs, if any) to the purchase on the NYSE (or,
if different, on the principal exchange for our shares) or otherwise on the open
market for the participating stockholder's account, regardless of whether there
is a market parity or premium or a market discount.

ENROLLMENT AND WITHDRAWAL

Both current stockholders and first-time investors are eligible to participate
in the plan. Current stockholders may join the plan by either enrolling their
shares with the plan agent or by making an initial cash deposit of at least $250
with the plan agent. First-time investors may join the plan by making an initial
cash deposit of at least $250 with the plan agent. Stockholders who hold our
shares in the name of a brokerage firm, bank or other nominee should contact
their nominee to arrange for it to participate in the plan on the stockholder's
behalf.

Participating stockholders may withdraw from the plan without charge by written
notice to the plan agent. Participating stockholders who choose to withdraw may
elect to receive stock certificates representing all of the full shares held by
the plan agent on their behalf, or to instruct the plan agent to sell these full
shares and distribute the proceeds, net of brokerage commissions, to the
withdrawing participating stockholders. Withdrawn participating stockholders
will receive a cash adjustment for the market value of any fractional shares
held on their behalf at the time of termination.

AMENDMENT AND TERMINATION OF PLAN

The plan may be amended or supplemented by us or by the plan agent only by
giving each participating stockholder written notice at least 90 days prior to
the effective date of the amendment or supplement, except that the notice period
may be shortened when necessary or appropriate in order to comply with
applicable law or the rules or policies of the SEC or any other regulatory body.
The plan may be terminated by us or by the plan agent by written notice mailed
to each participating stockholder. Termination will be effective with respect to
all distributions with a record date at least 90 days after the mailing of
written notice to the participating stockholders.

FEDERAL TAX IMPLICATIONS OF REINVESTMENT OF FUND SHARES

Reinvestment in our shares does not relieve participating stockholders from any
income tax which may be payable on dividends or distributions. For U.S. federal
income tax purposes, when we issue shares representing an income dividend or a
capital gains dividend, a participating stockholder will include in income fair
market value of the shares received as of the payment date, which will be taxed
in the same manner as if cash had been received. The shares will have a tax
basis equal to the fair market value, and the holding period for the shares will
begin on the day after the date of distribution. If shares are purchased on the
open market by the plan agent, a participating stockholder will include in
income the amount of the cash payment made. The basis of the shares will be the
purchase price of the shares, and the holding period for the shares will begin
on the day following the date of purchase. State, local and foreign taxes may
also be applicable. For more information about taxation, see "Taxation" below.

--------------------------------------------------------------------------------
70

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

Taxation

DISTRIBUTIONS AND TAX MATTERS

The following is a summary of certain tax considerations generally affecting us
and our stockholders. This section is based on the Internal Revenue Code of
1986, as amended (the "Code"), published rulings and court decisions, all as
currently in effect. These laws are subject to change, possibly on a retroactive
basis. Please consult your own tax advisor concerning the consequences of
investing in us in your particular circumstances under the Code and the laws of
any other taxing jurisdiction.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY

We have elected to be taxed as a regulated investment company under Subchapter M
of the Code and intend to meet all other requirements that are necessary for us
to be relieved of federal taxes on income and gains we distribute to
stockholders. As a regulated investment company, we are not subject to federal
income tax on the portion of our net investment income (i.e., our investment
company taxable income, as that term is defined in the Code, without regard to
the deduction for dividends paid) and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) that we distribute to
stockholders, provided that we distribute at least 90% of the sum of our net
investment income for the year (the "Distribution Requirement") and satisfy
certain other requirements of the Code that are described below.

In addition to satisfying the Distribution Requirement, we must derive at least
90% of our gross income from dividends, interest, certain payments with respect
to loans of stock and securities, gains from the sale or disposition of stock,
securities or foreign currencies and other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to our
business of investing in those stocks, securities or currencies.

We must also satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
our taxable year, (1) 50% or more of the value of our assets must be represented
by cash, United States government securities, securities of other regulated
investment companies, and other securities, with these other securities limited,
in respect of any one issuer, to an amount not greater than 5% of the value of
our total assets and not greater than 10% of the outstanding voting securities
of that issuer, and (2) not more than 25% of the value of our total assets may
be invested in securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies), or of two or
more issuers which we control and which are engaged in the same, similar or
related trades or businesses.

If for any year we do not qualify as a regulated investment company, all of our
taxable income (including our net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to stockholders.
These distributions will generally be taxable to individual stockholders as
qualified dividend income, as discussed below, and generally will be eligible
for the dividends received deduction in the case of corporate stockholders. In
addition, we could be required to recognize unrealized gains, pay taxes and make
distributions (which could be subject to interest charges) before requalifying
for taxation as a regulated investment company.

EXCISE TAX ON REGULATED INVESTMENT COMPANIES

A 4% non-deductible federal excise tax is imposed on a regulated investment
company to the extent that it distributes income in such a way that it is
taxable to stockholders in a calendar year other than the calendar year in which
the regulated investment company earned the income. Specifically, the excise tax
will be imposed if the regulated investment company fails to distribute in each
calendar year

--------------------------------------------------------------------------------
71

TAXATION
--------------------------------------------------------------------------------

at least an amount equal to the sum of (1) 98% of qualified dividend income and
ordinary taxable income for the calendar year and (2) 98% of capital gain net
income (adjusted for certain ordinary losses) for the one-year period ending on
October 31 of this calendar year (or, at the election of a regulated investment
company having a taxable year ending November 30 or December 31, for its taxable
year) and (3) any ordinary income and capital gains for previous years that were
not distributed during those years. The balance of this income must be
distributed during the next calendar year. For the foregoing purposes, a
regulated investment company is treated as having distributed otherwise retained
amounts if it is subject to income tax on those amounts for any taxable year
ending in such calendar year.

We intend to make sufficient distributions or deemed distributions of our
qualified dividend income, ordinary income and capital gain net income prior to
the end of each calendar year to avoid liability for this excise tax. However,
investors should note that we may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.

FUND INVESTMENTS

We may make investments or engage in transactions that affect the character,
amount and timing of gains or losses that we realized. We may make investments
that produce income that is not matched by a corresponding cash receipt by us.
Any of this income would be treated as income earned by us and therefore would
be subject to the distribution requirements of the Code. These investments may
require us to borrow money or dispose of other securities in order to comply
with those requirements. We may also make investments that prevent or defer the
recognition of losses or the deduction of expenses. These investments may
likewise require us to borrow money or dispose of other securities in order to
comply with the distribution requirements of the Code. Additionally, we may make
investments that result in the recognition of ordinary income rather than
capital gain or that prevent us from accruing a long-term holding period. These
investments may prevent us from making capital gain distributions as described
below. We intend to monitor our transactions, will make the appropriate tax
elections and will make the appropriate entries in our books and records when we
make any of these investments in order to mitigate the effect of these rules.

We invest in equity securities of foreign issuers. If we purchase shares in
certain foreign corporations (referred to as passive foreign investment
companies ("PFICs") under the Code), we may be subject to federal income tax on
a portion of any "excess distribution" from this foreign corporation, including
any gain from the disposition of these shares, even if the income is distributed
by us to our stockholders. In addition, certain interest charges may be imposed
on us as a result of these distributions. If we were to invest in an eligible
PFIC and elected to treat the PFIC as a qualified electing fund (a "QEF"), in
lieu of the foregoing requirements, we would be required to include each year in
our income and distribute to stockholders in accordance with the distribution
requirements of the Code a pro rata portion of the QEF's ordinary earnings and
net capital gain, whether or not distributed to us by the QEF. Alternatively, we
generally will be permitted to "mark to market" any shares we hold in a PFIC. If
we make such an election, we would be required to include in income each year
and distribute to stockholders in accordance with the distribution requirements
of the Code, an amount equal to the excess, if any, of the fair market value of
the PFIC stock as of the close of the taxable year over the adjusted basis of
this stock at that time. We would be allowed a deduction for the excess, if any,
of the adjusted basis of the PFIC stock over its fair market value as of the
close of the taxable year, but only to the extent of any net mark-to-market
gains with respect to the stock included by us for prior taxable years. We will
make appropriate basis adjustments in the PFIC stock to take into account the
mark-to-market amounts.

Notwithstanding any election that we make, dividends attributable to
distributions from a foreign corporation will not be eligible for the special
tax rates applicable to qualified dividend income if the

--------------------------------------------------------------------------------
72

TAXATION
--------------------------------------------------------------------------------

foreign corporation is a PFIC either in the taxable year of the distribution or
the preceding taxable year, but instead will be taxable at rates applicable to
ordinary income.

FUND DISTRIBUTIONS

We anticipate distributing substantially all of our net investment income for
each taxable year. Dividends of net investment income paid to a noncorporate
U.S. stockholder before January 1, 2009 that are designated as qualified
dividend income will generally be taxable to this stockholder at a maximum rate
of 15%. However, the amount of income that we may so designate will generally be
limited to the aggregate amount of qualified dividend income we receive. Higher
tax rates will be reimposed after 2008 unless further legislative action by
Congress is taken. We cannot assure you as to what percentage of the dividends
paid on the shares, if any, will consist of qualified dividend income or
long-term capital gains, both of which are taxed at lower rates for individuals
than are ordinary income and short-term capital gains. In addition, we must meet
certain holding period and other requirements with respect to the shares on
which we receive the eligible dividends, and the noncorporate U.S. stockholder
must meet certain holding period and other requirements with respect to our
shares. Dividends of net investment income that are not designated as qualified
dividend income and dividends of net short-term capital gains will be taxable to
stockholders at ordinary income rates. Dividends paid by us with respect to a
taxable year will qualify for the 70% dividends received deduction generally
available to corporations to the extent of the amount of dividends we receive
from certain domestic corporations for the taxable year. Stockholders will be
advised annually as to the U.S. federal income tax consequences of distributions
made (or deemed made) during the year, including the portion of dividends paid
that qualify for the reduced tax rate.

Ordinarily, stockholders are required to take taxable distributions by us into
account in the year in which the distributions are made. However, for federal
income tax purposes, dividends that are declared by us in October, November or
December as of a record date in such month and actually paid in January of the
following year will be treated as if they were paid on December 31 of the year
declared. Therefore, these dividends will generally be taxable to a stockholder
in the year declared rather than the year paid.

We may either retain or distribute to stockholders our net capital gain for each
taxable year. We currently intend to distribute any of these amounts. If net
capital gain is distributed and designated as a "capital gain dividend", it will
be taxable to stockholders as long-term capital gain, regardless of the length
of time the stockholder has held his shares or whether this gain was recognized
by us prior to the date on which the stockholder acquired its shares. Capital
gain of a noncorporate U.S. stockholder that is recognized before January 1,
2009 is generally taxed at a maximum rate of 15% where the property is held by
us for more than one year. Capital gain of a corporate stockholder is taxed at
the same rate as ordinary income.

Conversely, if we elect to retain our net capital gain, we will be taxed thereon
(except to the extent of any available capital loss carryovers) at the 35%
corporate tax rate. In such a case, it is expected that we also will elect to
have stockholders of record on the last day of our taxable year treated as if
each received a distribution of its pro rata share of this gain, with the result
that each stockholder will be required to report its pro rata share of this gain
on its tax return as long-term capital gain, will receive a refundable tax
credit for its pro rata share of tax paid by us on the gain and will increase
the tax basis for its shares by an amount equal to the deemed distribution less
the tax credit.

Distributions by us that do not constitute qualified dividend income, ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the stockholder's tax basis in
its shares; any excess will be treated as gain from the sale of its shares, as
discussed below.

--------------------------------------------------------------------------------
73

TAXATION
--------------------------------------------------------------------------------

Distributions by us will be treated in the manner described above regardless of
whether these distributions are paid in cash or reinvested in additional shares
of our common stock (or of shares of another fund). Stockholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, prospective investors
should be aware that distributions from us will, all other things being equal,
have the effect of reducing the net asset value of our shares by the amount of
the distribution. If the net asset value is reduced below a stockholder's cost,
the distribution will nonetheless be taxable as described above, even if the
distribution effectively represents a return of invested capital. Investors
should consider the tax implications of buying shares just prior to a
distribution, when the price of shares may reflect the amount of the forthcoming
distribution.

SALE OR REDEMPTION OF SHARES

A stockholder will recognize gain or loss on the sale or redemption of our
shares in an amount equal to the difference between the proceeds of the sale or
redemption and the stockholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the stockholder acquires
other shares of us within a period of 61 days beginning 30 days before and
ending 30 days after that disposition, such as pursuant to reinvestment of a
dividend in our shares. Additionally, if a stockholder disposes of our shares
within 90 days following their acquisition, and the stockholder subsequently
re-acquires our shares pursuant to a reinvestment right received upon the
purchase of the original shares, any load charge (i.e., sales or additional
charge) incurred upon the acquisition of the original shares will not be taken
into account as part of the stockholder's basis for computing profit or loss
upon the sale of the shares.

In general, any gain or loss arising from (or treated as arising from) the sale
or redemption of our shares will be considered capital gain or loss and will be
long-term capital gain or loss if the shares were held for more than one year.
However, any capital loss arising from the sale or redemption of shares held for
six months or less will be treated as a long-term capital loss to the extent of
the amount of capital gain dividends received on (or undistributed capital gains
credited with respect to) those shares. Capital gain of a noncorporate U.S.
stockholder that is recognized before January 1, 2009 is generally taxed at a
maximum rate of 15% where the property is held by the stockholder for more than
one year. Capital gain of a corporate stockholder is taxed at the same rate as
ordinary income.

BACKUP WITHHOLDING

We will be required in certain cases to backup withhold and remit to the U.S.
Treasury a portion of qualified dividend income, ordinary income dividends and
capital gain dividends, and the proceeds of redemption of shares, paid to any
stockholder (1) who has provided either an incorrect tax identification number
or no number at all, (2) who is subject to backup withholding by the IRS for
failure to report the receipt of interest or dividend income properly or (3) who
has failed to certify to us that it is not subject to backup withholding or that
it is a corporation or other "exempt recipient". Backup withholding is not an
additional tax and any amounts withheld may be refunded or credited against a
stockholder's federal income tax liability, provided the appropriate information
is furnished to the IRS.

FOREIGN STOCKHOLDERS

Taxation of a stockholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership
("foreign stockholder") depends on whether the income from us is "effectively
connected" with a U.S. trade or business carried on by this stockholder. If the
income from us is not effectively connected with a U.S. trade or business
carried on by a foreign

--------------------------------------------------------------------------------
74

TAXATION
--------------------------------------------------------------------------------

stockholder, dividends paid to this foreign stockholder from net investment
income will be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) on the gross amount of the dividend. This foreign stockholder would
generally be exempt from U.S. federal income tax, including withholding tax, on
gains realized on the sale of our shares, capital gain dividends and amounts
retained by us that are designated as undistributed capital gains. However, a
foreign stockholder who is a nonresident alien individual and is physically
present in the United States for more than 182 days during the taxable year and
meets certain other requirements will nevertheless be subject to a U.S. tax of
30% on such gains realized on the sale of our shares, capital gain dividends and
amounts retained by us that are designated as undistributed capital gains. If
the income from us is effectively connected with a U.S. trade or business
carried on by a foreign stockholder, then ordinary income dividends, capital
gain dividends, undistributed capital gains credited to this stockholder and any
gains realized upon the sale of our shares will be subject to U.S. federal
income tax at the graduated rates applicable to U.S. citizens or domestic
corporations. Foreign corporate stockholders may also be subject to the branch
profits tax imposed by the Code.

In the case of foreign noncorporate stockholders, we may be required to backup
withhold U.S. federal income tax on distributions that are otherwise exempt from
withholding tax (or taxable at a reduced treaty rate) unless those stockholders
furnish us with proper notification of their foreign status.

The tax consequences to a foreign stockholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
stockholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in us, the procedure for
claiming the benefit of a lower treaty rate and the applicability of foreign
taxes. Transfers by gift of our shares by an individual foreign stockholder will
not be subject to U.S. federal gift tax, but the value of our shares held by
this stockholder at his death will generally be includible in his gross estate
for U.S. federal estate tax purposes, subject to any applicable estate tax
treaty.

FOREIGN TAXES

We may be subject to foreign withholding taxes or other foreign taxes with
respect to income (possibly including, in some cases, capital gain) received
from sources within foreign countries. So long as more than 50% of the value of
our total assets at the close of the taxable year consists of stock or
securities of foreign issuers, we may elect to treat any foreign income taxes
paid by us as paid directly by our stockholders.

If we make the election, each stockholder will be required to (i) include in
gross income, even though not actually received, its pro rata share of our
foreign income taxes, and (ii) either deduct (in calculating U.S. taxable
income) or credit (in calculating U.S. federal income tax) its pro rata share of
our income taxes. A foreign tax credit may not exceed the U.S. federal income
tax otherwise payable with respect to the foreign source income. For this
purpose, each stockholder must treat as foreign source gross income (i) its
proportionate share of foreign taxes paid by us and (ii) the portion of any
actual dividend paid by us which represents income derived from foreign sources;
the gain from the sale of securities will generally be treated as U.S. source
income and certain foreign currency gains and losses likewise will be treated as
derived from U.S. sources. This foreign tax credit limitation is, with certain
exceptions, applied separately to separate categories of income; dividends from
us will be treated as "passive" or "financial services" income for this purpose.
The effect of this limitation may be to prevent stockholders from claiming as a
credit the full amount of their pro rata share of our foreign income taxes. In
addition, the foreign tax credit is allowed to offset only 90% of the
alternative minimum tax imposed on corporations and individuals, and
stockholders will not be eligible to claim a foreign tax credit with respect to
foreign income taxes paid by us unless certain holding period requirements are
met.

--------------------------------------------------------------------------------
75

TAXATION
--------------------------------------------------------------------------------

We will make such an election only if we deem it to be in the best interest of
our stockholders. A stockholder not subject to U.S. tax may prefer that this
election not be made. We will notify stockholders in writing each year if we
make the election and of the amount of foreign income taxes, if any, to be
passed through to the stockholders and the amount of foreign taxes, if any, for
which our stockholders will not be eligible to claim a foreign tax credit
because the holding period requirements (described above) have not been
satisfied.

STATE AND LOCAL TAX MATTERS

Depending on the residence of the stockholders for tax purposes, distributions
may also be subject to state and local taxes. Rules of state and local taxation
regarding qualified dividend income, ordinary income dividends and capital gain
dividends from regulated investment companies may differ from the U.S. federal
income tax rules in other respects. Stockholders are urged to consult their tax
advisers as to the consequences of these and other state and local tax rules
affecting investment in us.

Custodians, dividend-paying agent, transfer agent and registrar

Investors Bank and Trust Company ("IBT"), with principal offices at 200
Clarendon Street, Boston, Massachusetts 02116, acts as our custodian,
dividend-paying agent, transfer agent and registrar. IBT has agreements with a
global network of sub-custodians, which, together with IBT, maintain custody of
our portfolio securities and cash.

Experts

The financial statements, at October 31, 2003, incorporated by reference in this
prospectus and in the SAI have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent auditors, given on their authority as
experts in auditing and accounting. The principal business address of PwC is
1177 Avenue of the Americas, New York, New York, 10036.

Validity of shares

The validity of the shares offered in this rights offering will be passed on for
us by Sullivan & Cromwell LLP, New York, New York and for the dealer manager by
Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, Illinois.

--------------------------------------------------------------------------------
76

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

Table of contents of statement of additional information

PAGE
------------------------------------------------------------------

General information......................................... B-2
Investment objective and policies........................... B-2
Investment restrictions..................................... B-5
Net asset value............................................. B-6
Management.................................................. B-8
Control persons and principal holders of securities......... B-16
Investment advisory and other services...................... B-17
Brokerage allocation and other practices.................... B-18
Financial statements........................................ F-1

--------------------------------------------------------------------------------
77

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF US SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. IN THE EVENT THAT A MATERIAL CHANGE IN OUR AFFAIRS
OCCURS SUBSEQUENT TO THE DATE HEREOF, A SUPPLEMENTAL PROSPECTUS WILL BE
DISTRIBUTED IN ACCORDANCE WITH APPLICABLE LAW. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.

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

TABLE OF CONTENTS

PAGE
----

Available Information................. 3
Prospectus Summary.................... 4
Fee Table............................. 10
Financial Highlights.................. 11
Market and Net Asset Value
Information......................... 13
Our Rights Offering................... 14
Use of Proceeds....................... 25
Investment Objective and Policies..... 25
Risk Factors and Special
Considerations...................... 29
Our Management........................ 37
Central European, Russian and Turkish
Economies and Markets............... 40
Description of Common Stock........... 66
Dividends and Distributions........... 68
Voluntary Cash Purchase Program and
Dividend Reinvestment Plan.......... 69
Taxation.............................. 71
Custodians, Dividend-Paying Agent,
Transfer Agent and Registrar........ 76
Experts............................... 76
Validity of Shares.................... 76
Table of Contents of Statement of
Additional Information.............. 77

[LOGO]

THE CENTRAL EUROPE AND RUSSIA FUND, INC.

[ ] SHARES OF
COMMON STOCK ISSUABLE
UPON EXERCISE OF RIGHTS TO
SUBSCRIBE FOR SUCH SHARES

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

PROSPECTUS
------------------------

UBS INVESTMENT BANK

, 2004

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

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

Subject to Completion, dated February 10, 2004

THE CENTRAL EUROPE AND RUSSIA FUND, INC.

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information (the "SAI") is not a prospectus, but
should be read in conjunction with our prospectus dated , 2004. This
SAI does not include all information that a prospective investor should consider
before purchasing our shares, and investors should obtain and read the
prospectus prior to purchasing shares. A copy of the prospectus may be obtained
without charge, by calling our information agent at. This SAI incorporates by
reference the entire prospectus. Defined terms used in this SAI have the same
meaning as provided in the prospectus. The date of this SAI is , 2004.

TABLE OF CONTENTS

PAGE
------------------------------------------------------------------

THE INFORMATION CONTAINED IN THIS SAI IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.

--------------------------------------------------------------------------------
B- 1

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

General information

We were incorporated in Maryland on February 6, 1990 as The United Germany Fund,
Inc. On February 15, 1990, we changed our name to The Future Germany Fund, Inc.,
and thereafter commenced investment operations under that name. On June 29,
1995, we changed our name to The Central European Equity Fund, Inc. On June 25,
2003, we changed our name to the current one, The Central Europe and Russia
Fund, Inc.

Investment objective and policies

Our investment objective is to seek long-term capital appreciation through
investment primarily in equity and equity-linked securities of issuers domiciled
in Central Europe and Russia. We may not be able to achieve our objective. For a
more detailed discussion of our investment objective and policies, see
"Investment Objective and Policies" on page 25 of the prospectus.

The following is a discussion of other investment policies and practices with
respect to warrants, participation certificates, futures and options, fixed
income securities, securities lending and currency transactions and the special
considerations relevant to these practices that supplements the material
contained in the prospectus. For purposes of policies and practices discussed
below, all percentage limitations apply only immediately after a transaction,
and any subsequent change in any applicable percentage resulting from changing
values will not require elimination of any security from our portfolio.

WARRANTS

We may also invest in warrants if consistent with our investment objective. The
warrants in which we may invest are a type of security, usually issued together
with another security of an issuer, that entitles the holder to buy a fixed
amount of common or preferred stock of that issuer at a specified price for a
fixed period of time (which may be in perpetuity). Warrants are commonly issued
attached to other securities of the issuer as a method of making these
securities more attractive and are usually detachable and thus may be bought or
sold separately from the issued security. Warrants can be a speculative
instrument. The value of a warrant may decline because of a decrease in the
value of the underlying stock, the passage of time or a change in perception as
to the potential of the underlying stock, or any combination thereof. If the
market price of the underlying stock is below the exercise price set forth in
the warrant on the expiration date, the warrant will expire worthless. Publicly
traded warrants currently exist with respect to the stock of a significant
number of European companies.

PARTICIPATION CERTIFICATES

Certain German, Swiss and Austrian companies have issued participation
certificates ("Participation Certificates" or "Genuss-Scheine"), which entitle
the holder to participate only in dividend distributions, generally at rates
above those declared on the issuers' common stock, but not to vote, nor usually
to any claim for assets in liquidation. Participation Certificates trade like
common stock, either in the over-the-counter market or through the relevant
stock exchanges.

These securities may have higher yields; however, they may be less liquid than
common stock. We may invest in Participation Certificates of issuers in any
European country or Russia.

--------------------------------------------------------------------------------
B- 2

INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------

FUTURES AND OPTIONS

For hedging purposes, we may also purchase put and call options on stock of
European or Russian issuers and, to the extent permitted by applicable United
States law, invest in the index and bond futures and any other derivative
securities listed on any organized exchange. Options are contracts which give
the buyer the right, but not the obligation, to buy or sell a fixed amount of
securities at a fixed price for a fixed period of time. A futures contract is a
binding obligation to purchase or deliver the specific type of financial
instrument, or the cash equivalent of this instrument in certain circumstances,
called for in the contract at a specific price at a future date. We will only
invest in options or futures in an attempt to hedge against changes or
anticipated changes in the value of particular securities in our portfolio or
all or a portion of our portfolio. We will not invest in options or futures if,
immediately thereafter, more than the amount of our total assets would be
hedged. For hedging purposes, we may also purchase put and call options on bonds
and other securities, as well as securities indices, if and when such
investments become available. We may invest in other options, futures and
options on futures with respect to any securities or securities indices
compatible with our investment objective that may from time to time become
available on any organized exchange, if permitted by applicable law.

We may also write (also referred to as "selling") covered call options on our
portfolio securities and appropriate securities indices for purposes of
generating income. We may write covered call options on portfolio securities and
appropriate securities indices up to the amount of our entire portfolio. A call
option gives the holder the right to purchase the underlying securities from us
at a special price (the "exercise price") for a stated period of time (usually
three, six or nine months). Prior to the expiration of the option, the writer
(also referred to as the "seller") of the option has an obligation to sell the
underlying security to the holder of the option at the exercise price regardless
of the market price of the security at the time the option is exercised. The
initial purchaser of an option pays the writer a premium, which is paid at time
of purchase and is retained by the writer whether or not the option is
exercised. A "covered" call option means that so long as we are obligated as the
writer of the option, we will own:

+ the underlying securities subject to the option;

+ securities convertible or exchangeable without the payment of any
consideration into the securities subject to the option; or

+ warrants on the securities subject to the option exercisable at a price not
greater than the option exercise price and, at the time the option is
exercisable, the securities subject to the option.

In the case of covered call options on securities indices, references to
securities in the bullet points above will include such securities as the
investment adviser believes approximate the index (but not necessarily all those
comprising the index), as well as, in the case of the second two bullets,
securities convertible, exchangeable or exercisable into the value of the index.
The writing of a call option may involve the pledge of the underlying security
which the call option covers, or other portfolio securities. In order to make
use of our authority to write covered call options, we may pledge our assets.

In the event the option is exercised, the writer may either deliver the
underlying securities at the exercise price or if it does not wish to deliver
its own securities, purchase new securities at a cost to the writer, which may
be more than the exercise price premium received, and deliver the new securities
for the exercise option. In the event the option is exercised, our potential for
gain is limited to the difference between the exercise price plus the premium
less the cost of the security. Alternatively, the option's position could be
extinguished or closed out by purchasing a like option. It is possible, although
considered unlikely, that we might be unable to execute such a closing purchase
transaction. If the price of a security declines below the amount to be received
from the exercise price less the

--------------------------------------------------------------------------------
B- 3

INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------

amount of the call premium received and if the option could not be closed out,
we would hold a security which might otherwise have been sold to protect against
depreciation. In addition, our portfolio turnover may increase to the extent
that the market price of underlying securities covered by call options written
by us increases and we have not entered into closing purchase transactions.
Brokerage commissions associated with writing options transactions are normally
higher than those associated with other securities transactions.

FIXED INCOME SECURITIES

We may also invest up to 20% of our total assets in fixed income securities of
European or Russian issuers. Such investments may include debt instruments
issued by private and public entities, including multinational lending
institutions and supranational institutions if denominated in a European or
Russian currency or composite currency, which have been determined by our
investment manager and investment adviser to be of comparable credit quality to
securities rated in the three highest categories by Moody's Investors Service,
Inc. or Standard & Poor's Corporation. When selecting a debt instrument from
among several investment opportunities, our investment manager and investment
adviser will consider the potential for capital appreciation, taking into
account maturity and yield considerations. For temporary defensive purposes, we
also may invest in money market instruments denominated in U.S. dollars or in a
European or the Russian currency or composite currency, including bank time
deposits and certificates of deposit.

LOANED SECURITIES

We may also lend our portfolio securities to banks, securities dealers and other
institutions meeting the creditworthiness standards established by our board of
directors. We may lend our portfolio securities so long as the terms and the
structure of such loans are not inconsistent with the Investment Company Act,
which currently requires that:

+ the borrower pledge and maintain with us collateral consisting of cash, a
letter of credit issued by a domestic United States bank or securities issued
or guaranteed by the United States Government having a value at all times of
not less than 100% of the value of the securities loaned;

+ the borrower add to such collateral whenever the price of the loaned
securities rises (e.g., the value of the loan is "marked to market" on a
daily basis);

+ the loan be made subject to termination by us at any time; and

+ we receive reasonable interest on the loan (which may include a portion of
the interest from our investing any cash collateral in interest bearing
short-term investments).

Any such collateral may be invested by us in repurchase agreements
collateralized by securities issued or guaranteed by the United States
Government. Any distributions on the loaned securities and any increase in their
market value accrue to us. Loan arrangements made by us will comply with all
other applicable regulatory requirements. All relevant facts and circumstances,
including the creditworthiness of the borrowing institution, will be monitored
by our investment manager and adviser, and will be considered in making
decisions with respect to lending of securities, subject to review by our board
of directors. We may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by our board of directors. In addition, any voting rights may pass with
the loaned securities, but if a material event were to occur affecting an
investment on loan, the loan may be called and the securities voted. Any gain or
loss in the market price of the loaned securities that may occur during the term
of the loan will be for our account.

--------------------------------------------------------------------------------
B- 4

INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------

CURRENCY TRANSACTIONS

We may attempt to hedge our foreign currency exposure by entering into forward
currency contracts. We do not currently engage in foreign exchange transactions
as an investment strategy. However, at such future time as our investment
manager and investment adviser believe that one or more currencies in which our
securities are denominated might suffer a substantial decline against the United
States dollar, we may, in order to hedge the value of our portfolio, enter into
forward contracts, e.g., to sell fixed amounts of such currencies for fixed
amounts of United States dollars in the interbank market. A forward currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract.

Our dealings in forward exchange transactions will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to our specific
receivables or payables, which will generally arise in connection with the
purchase or sale of our portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions denominated or
generally quoted in that currency.

We may engage in "conventional hedging," which involves entering into forward
currency contracts to sell fixed amounts of a foreign currency (such as Polish
zlotys) for fixed amounts of United States dollars in order to hedge the United
States dollar value of our portfolio. We may also engage in "cross-hedging",
which involves entering into forward currency contracts to sell fixed amounts of
such foreign currency (such as Polish zlotys) for fixed amounts of another
foreign currency to which we may seek exposure (such as euros).

We may not position a hedge with respect to any currency to an extent greater
than the aggregate market value (at the time of making such sale) of the
securities held in our portfolio denominated or generally quoted in or currently
convertible into such currency. If we enter into a hedging transaction, our
custodian or subcustodian will place cash or United States Government or other
liquid securities in a segregated account of ours in an amount equal to the
value of our total assets committed to the consummation of the forward contract,
which value will be adjusted on a daily basis. If the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account so that the value of the account will equal the amount of
our commitment with respect to the contract.

Investment restrictions

In addition to its investment objective and the other investment policies
described under "Investment Objective and Policies" above and in the prospectus,
we have adopted certain investment restrictions, which are fundamental policies
and may be changed only by the approval of a majority of our outstanding voting
securities. Under the Investment Company Act, a "majority" means 67% of our
shares present at a meeting of our stockholders if the owners of more than 50%
of our shares then outstanding are present in person or by proxy or, if lower,
more than 50% of our outstanding shares. We refer to this approval voting level
as a "majority vote." For purposes of the restrictions listed below, all
percentage limitations apply only immediately after a transaction, and any
subsequent change in any applicable percentage resulting from changing values
will not require elimination of any security from our portfolio.

We may not:

1. purchase more than 10% of the voting securities of any single issuer;

2. invest 25% or more of our total assets in the securities of issuers in any
one industry;

--------------------------------------------------------------------------------
B- 5

INVESTMENT RESTRICTIONS
--------------------------------------------------------------------------------

3. issue senior securities, borrow money or pledge its assets, except that we
may borrow for temporary or emergency purposes or for the clearance of
transactions in amounts not exceeding 10% of the value of our total assets
(not including the amount borrowed) and will not purchase securities while
any of these borrowings are outstanding, and except that we may pledge our
assets in connection with writing covered call options;

4. make real estate mortgage loans or other loans, except through the purchase
of debt obligations consistent with our investment policies;

5. buy or sell commodities, commodity contracts, futures contracts, real estate
or interests in real estate (other than as described under "Investment
Objective and Policies--Portfolio Structure" in the prospectus and under
"Investment Objective and Policies--Currency Transactions" in this SAI);

6. make short sales of securities or maintain a short position in any security;

7. buy, sell or write put or call options (other than as described under
"Investment Objective and Policies--Portfolio Structure" on page 26 of the
prospectus and under "Investment Objective and Policies--Futures and
Options" on page B-3 in this SAI);

8. purchase securities on margin, except such short-term credits as may be
necessary or routine for the clearance or settlement of transactions;

9. act as an underwriter, except to the extent we may be deemed to be an
underwriter in connection with the sale of securities in our portfolio; or

10. purchase securities, the sale of which by us could not be effected without
prior registration under the Securities Act, except that this restriction
shall not preclude us from acquiring non-U.S. securities.

We are classified as a "non-diversified" investment company under the Investment
Company Act, which means we are not limited by the Investment Company Act in the
proportion of our assets that may be invested in the securities of a single
issuer. However, we conduct our operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code, which relieves us
of any liability for Federal income tax to the extent that our earnings are
distributed to stockholders. To so qualify, among other requirements, we must
limit our investments so that, at the close of each quarter of the taxable year,
(i) not more than 25% of the market value of our total assets may be invested in
the securities of a single issuer or a group of related issuers and (ii) at
least 50% of the market value of our total assets must be represented by cash,
United States Government securities and other securities, with such other
securities limited, in respect of any one issuer, to not more than 5% of the
market value of our total assets and not more than 10% of the issuer's
outstanding voting securities.

For purposes of our policy not to invest 25% or more of the total value of our
assets in a particular industry, our investment manager generally classifies the
issuers of our portfolio securities according to the broad industry
classification used by Standard & Poor's Corporation.

Net asset value

Net asset value per share is determined on each business day that the NYSE is
open for trading as of 5:00 p.m. New York City time and made available to
stockholders. Effective February 17, 2004, we will change the time of
calculating our net asset value per share to 11:30 a.m. New York City time and
make it available to stockholders as soon as reasonably possible after the 11:30
a.m. calculation time, currently expected to be in the range of 1:00 p.m. to
2:00 p.m. New York City time. Net asset value per share is calculated by
dividing the value of our net assets (the value of our assets less our

--------------------------------------------------------------------------------
B- 6

NET ASSET VALUE
--------------------------------------------------------------------------------

liabilities) by the total number of shares of our common stock outstanding. Any
assets or liabilities initially expressed in terms of non-US dollar currencies
are translated into U.S. dollars at the 10:00 a.m. mid-point of the buying and
selling spot rates quoted by the Federal Reserve Bank of New York.

All securities for which market quotations are readily available are valued at
the last quoted sale price on the primary exchange on which they are traded
prior to the time of determination. If no sale occurs on that business day or
there is otherwise no last quoted sale price available at that time, and both
bid and asked prices are available, the securities are valued at the mean
between the last current bid and asked prices (but if no quoted asked prices are
available, they are valued at the last quoted bid price). Unlisted securities
and listed securities whose primary market is over-the-counter will be valued,
if both bid and asked prices are available, at the mean between the last current
bid and asked prices prior to the time of determination (but if no quoted asked
prices are available, they are valued at the last quoted bid price). If bid and
asked quotations are not available, then these securities are valued at their
fair value as determined in good faith by or under the direction of our board of
directors.

Warrants issued separately from any other security will be valued upon their
issuance and prior to commencement of trading at the stated value ascribed by
the issuing entity. Warrants attached to other securities (also known as a unit)
are given no separate value. Warrants that become detached from a unit are
initially valued at the difference between the value of the unit prior to
detachment and the value of the other security after detachment. Warrants are
then valued at the quoted last sales price. Rights that are trading will be
valued as any other equity security. If the rights are not trading and the
shares resulting from exercising the rights are trading, then the rights will be
valued at the market value of the new shares minus the cost to subscribe to the
new shares multiplied by the subscription ratio. If the rights are not trading
and the shares resulting from exercising the rights are not trading, then the
rights are valued at their fair value as determined in good faith by or under
the direction of our board of directors. Upon commencement of trading, both
warrants and rights are valued as any other security.

New shares initially issued resulting from the exercise of rights will be valued
as any other security if the new shares are trading. If the new shares are not
trading and the rights are still trading, then the shares will be valued at the
market value of the number of rights needed to exercise to receive the new
shares less the cost to subscribe to the new shares. If the rights are not
trading and the new shares are not trading, then the shares are valued at their
fair value as determined in good faith by or under the direction of our board of
directors.

Initial public offering securities will be initially valued at the offer price,
and, upon commencement of trading, will be valued as any other security. Any
securities tendered by us will continue to be valued at the closing market price
until the tender is completed. Debt securities with a remaining maturity of 60
days or less at the time of purchase will be valued at amortized cost unless the
circumstances indicate that amortized cost does not approximate fair value.
Overnight repurchase agreements and other repurchase agreements maturing in
seven days or less will be valued at par. Longer-term repurchase agreements will
be valued at the bid quotations. All other securities and assets are valued at
their fair value as determined in good faith by or under the direction of our
board of directors.

--------------------------------------------------------------------------------
B- 7

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

Management

DIRECTORS AND OFFICERS

The names and addresses of our directors and officers are set forth below,
together with their positions and their principal occupations during the past
five years and, in the case of directors, their positions with certain other
organizations and companies.

NUMBER OF
PORTFOLIOS
IN FUND
TERM OF OFFICE AND COMPLEX(2)
POSITION(S) LENGTH OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN
NAME, ADDRESS(1) & AGE WITH FUND SERVED DURING PAST FIVE YEARS BY DIRECTOR
-------------------------------------------------------------------------------------------------------

INTERESTED DIRECTORS(3)
Detlef Bierbaum, 61(3) Director Since 1990. Partner of Sal. Oppenheim 2
Jr. & Cie KGaA (investment
management).
John Bult, 67(3) Director Since 1990. Chairman, PaineWebber 3
International (since 1985).
Christian H. Strenger, Director Since 1990. Director (since 1999) and 3
60(3) Managing Director (1991-
1999) of DWS Investment
GmbH (investment
management).

OTHER DIRECTORSHIPS HELD BY
NAME, ADDRESS(1) & AGE DIRECTOR
------------------------- ---------------------------

INTERESTED DIRECTORS(3)
Detlef Bierbaum, 61(3) Director, The Germany Fund,
Inc. (since 1986).(4)
Member of the Supervisory
Board, Tertia
Handelsbeteiligungsgesel
lschaft mbH (electronic
retailer). Member of
Supervisory Board, Douglas
AG (retailer). Member of
Supervisory Board, LVM
Landwirtschaftlicher
Versicherungsverein
(insurance). Member of
Supervisory Board, Monega
KAG. Member of Supervisory
Board, AXA Investment
Managers.
John Bult, 67(3) Director, The Germany Fund,
Inc. (since 1986) and The
New Germany Fund, Inc.
(since 1990).(4) Director,
The France Growth Fund,
Inc. (closed-end fund).
Director, The Greater China
Fund, Inc. (closed end
fund).
Christian H. Strenger, Director, The Germany Fund,
60(3) Inc. (since 1986) and The
New Germany Fund, Inc.
(since 1990).(4) Member,
Supervisory Board, Fraport
AG (international airport
business). Board member,
Incepta PLC (media and
advertising).

--------------------------------------------------------------------------------
B- 8

MANAGEMENT
--------------------------------------------------------------------------------

NON-INTERESTED DIRECTORS
Ambassador Director Since 2000. Chairman, Diligence LLC, 68
Richard R. Burt, 56 formerly IEP Advisors, Inc.
(information collection,
analysis, consulting and
intelligence) (since 1998).
Chairman of the Board,
Weirton Steel Corp. (since
1996). Partner, McKinsey &
Company (1991-1994). U.S.
Ambassador to the Federal
Republic of Germany
(1985-1989). Chairman, IEP
Advisor, LLP (international
consulting).
Fred H. Langhammer, 59(8) Director Since 2003. Chief Executive Officer, 2
The Estee Lauder Companies
Inc. (manufacturer and
marketer of cosmetics)
(since 2000), President
(since 1995), Chief
Operating Officer (1985-
1999), Managing Director,
operations in Germany
(1982-1985), President,
operations in Japan (1975-
1982).
Eggert Voscherau, 60(5) Director Since 2003. Vice Chairman, BASF 2
Aktiengesellschaft
(chemicals) (since 2002).
Deputy Chairman, Ressort II
(Europe Region)
(Industrials) (1998-2002).
Chairman and Chief
Executive Officer and
Executive Director, BASF
Corporation (chemicals)
(United States)
(1997-1998). Executive
Director, BASF
Aktiengesellschaft (1996-
1997), Executive Vice
President, BASF Corporation
(United States) and
President, North American
Consumer Products division
(1991-1994). President,
BASF Aktiengesellschaft
(Germany) (1986-1991).

OTHER DIRECTORSHIPS HELD BY
NAME, ADDRESS(1) & AGE DIRECTOR
------------------------- ---------------------------

NON-INTERESTED DIRECTORS
Ambassador Director, The Germany Fund,
Richard R. Burt, 56 Inc., as well as other
funds in the Fund Complex
as indicated.(4) Board
Member, IGT, Inc. (gaming
technology) (since 1995).
Board Member, Hollinger
International (printing and
publishing) (since 1995).
Board Member, HCL
Technologies, Inc.
(information technology and
product engineering) (since
1999). Member, Textron
Corporation International
Advisory Council (aviation,
automotive, industrial
operations and finance)
(since 1996). Director,
UBS-Paine Webber family of
Mutual Funds.
Fred H. Langhammer, 59(8) Director, The Germany Fund,
Inc. (since 2003).(4)
Director, Gillette Company.
Director, Inditex, S.A
(fashion manufacturer and
retailer). Director,
Cosmetics, Toiletries and
Fragrance Association.
Director, German-American
Chamber of Commerce, Inc.
Co-Chairman, American
Institute for Contemporary
German Studies at Johns
Hopkins University. Senior
Fellow, Foreign Policy
Association. Director,
Japan Society.
Eggert Voscherau, 60(5) Director The Germany Fund
Inc. (since 2003).(4)
Member, Supervisory Boards
of: Dresdner Bank
Lateinamerika AG,
Haftpflichtverband der
Deutschen Industrie V.a.G.,
Basell N.V., BASF Espanola
S.A., BASF Schwarzheide
GmbH. President, Cefic
(European Chemical Industry
Council). President,
International Council of
Chemical Associations.
Board Member, BASF
Aktiengesellschaft.

--------------------------------------------------------------------------------
B- 9

MANAGEMENT
--------------------------------------------------------------------------------

Robert H. Wadsworth, 64 Director Since 1990. President, Robert H. 69
Wadsworth Associates, Inc.
(consulting firm) (May
1983-present). President
and Trustee, Trust for
Investment Managers
(registered investment
companies) (April 1999-June
2002). President,
Investment Company
Administration, L.L.C.
(January 1992-July 2001).
President, Treasurer and
Director, First Fund
Distributors, Inc. (mutual
fund distribution) (June
1990-January 2002). Vice
President, Professionally
Managed Portfolios (May
1991-January 2002) and
Advisors Series Trust
(registered investment
companies) (October 1996-
January 2003).
Werner Walbrol, 66 Director Since 1990. President and Chief 2
Executive Officer, The
European American Chamber
of Commerce, Inc. Formerly,
President and Chief
Executive Officer, The
German American Chamber of
Commerce, Inc.

OTHER DIRECTORSHIPS HELD BY
NAME, ADDRESS(1) & AGE DIRECTOR
------------------------- ---------------------------

Robert H. Wadsworth, 64 Director, The Germany Fund,
Inc. (since 1986) and The
New Germany Fund, Inc.
(since 1992) as well as
other funds in the Fund
Complex as indicated.(4)
Werner Walbrol, 66 Director, The Germany Fund,
Inc. (since 1986).(4)
Director, TUV Rheinland of
North America, Inc.
(independent testing and
assessment services).
President and Director,
German-American Partnership
Program (student exchange
programs). Director, AXA
Nordstern Art Insurance
Corporation (fine art and
collectible insurer).
Member, Advisory Board,
Abels & Grey.

--------------------------------------------------------------------------------
B- 10

MANAGEMENT
--------------------------------------------------------------------------------

TERM OF OFFICE AND
NAME, ADDRESS(1) & AGE POSITION(S) WITH FUND(6) LENGTH OF TIME SERVED
---------------------- ------------------------------------- ------------------------

OFFICERS
Richard T. Hale, 58 President and Chief Executive Officer Year to year since 2001.
Vincent J. Esposito, Vice President Year to year since 2004.
Hanspeter Ackermann, 46(7) Chief Investment Officer Year to year since 1996.
Bruce A Rosenblum, 43 Secretary Year to year since 2003.
Charles A. Rizzo, 46 Treasurer and Chief Financial Officer Year to year since 2003.
Kathleen Sullivan D'Eramo, 46 Assistant Treasurer Year to year since 2003.

PRINCIPAL OCCUPATION(S)
NAME, ADDRESS(1) & AGE DURING PAST FIVE YEARS
---------------------- -----------------------------------------

OFFICERS
Richard T. Hale, 58 Managing Director, Deutsche Investment
Management Americas Inc. (2003-present);
Managing Director, Deutsche Bank
Securities Inc. (formerly Deutsche Banc
Alex. Brown Inc.) and Deutsche Asset
Management (1999 to present); Director
and President, Investment Company Capital
Corp. (registered investment advisor)
(1996 to present); Director Deutsche
Global Funds, Ltd. (2000 to present).
CABEI Fund (2000 to present), North
American Income Fund (2000 to present)
(registered investment companies);
Director Scudder Global Opportunities
Fund (since 2003); Director/ Officer,
Deutsche/Scudder Mutual Funds (various
dates); President, Montgomery Street
Income Securities, Inc. (2002 to present)
(registered investment companies); Vice
President, Deutsche Asset Management,
Inc. (2000 to present); Formerly,
Director, ISI Family of Funds (registered
investment companies; 4 funds overseen)
(1992-1999).
Vincent J. Esposito, Managing Director, Deutsche Asset
Management (2003 to present) Formerly,
Managing Director and Head of
Relationship Management, Putnam
Investments (March 1999 - 2003) and
Managing Director and National Sales
Manager, Putnam Investments (March 1997 -
March 1999)
Hanspeter Ackermann, 46(7) President of Deutsche Bank Investment
Management Inc. Managing Director,
Deutsche Bank Securities Inc. Managing
Director and Senior International Equity
Portfolio Manager, Bankers Trust Co.
President and Managing Partner, Eiger
Asset Management (1993-1996), Managing
Director and CIO, SBC Brinson, formerly
SBC Portfolio Management International
Inc. (institutional investment
management) (1983--1993).
Bruce A Rosenblum, 43 Director of Deutsche Asset Management
(2000 to present); prior thereto, Vice
President of Deutsche Asset Management
(2000-2002); and partner with the law
firm of Freedman, Levy, Kroll & Simonds
(1997-2000).
Charles A. Rizzo, 46 Director, Deutsche Asset Management
(April 2000 to present). Formerly, Vice
President and Department Head, BT Alex,
Brown Incorporated (now Deutsche Bank
Securities Inc.) (1998-1999); Senior
Manager, Coopers and Lybrand L.L.P. (now
PricewaterhouseCoopers LLP) (1993-1998).
Kathleen Sullivan D'Eramo, 46 Director, Deutsche Asset Management (2003
to present).

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

(1) Unless otherwise indicated, the address of all directors and officers is c/o
Deutsche Asset Management., 345 Park Avenue, New York, New York 10154.

(2) Includes The Germany Fund, Inc. and the New Germany Fund, Inc., which are
the other closed-end registered investment companies for which Deutsche Bank
Securities Inc. acts as manager. It also includes 204 other open-and
closed-end funds advised by wholly-owned entities of the Deutsche Bank Group
in the United States.

(3) Indicates "Interested Person", as defined in the Investment Company Act. Mr.
Bierbaum is an "interested" Director because of his affiliation with Sal.
Oppenheim Jr. & Cie KGaA, which is the parent company of a registered
broker-dealer; and Mr. Bult is an "interested" Director because of his
affiliation with UBS Securities LLC, a registered broker-dealer, and the
dealer manager in this rights offering; and Mr. Strenger is an "interested"
Director because of his affiliation with DWS-

--------------------------------------------------------------------------------
B- 11

MANAGEMENT
--------------------------------------------------------------------------------

Deutsche Gesellschaft fur Wertpapiersparen mbH ("DWS"), a majority-owned
subsidiary of Deutsche Bank and because of his ownership of Deutsche Bank
shares.

(4) The Germany Fund, Inc. and the New Germany Fund, Inc. are the other
closed-end registered investment companies for which Deutsche Bank
Securities, Inc. acts as manager. Messrs. Burt and Wadsworth also serve as
Directors/Trustees of the following open-end investment companies: Scudder
Advisor Funds, Scudder Advisor Funds II, Scudder Advisor Funds III, Scudder
Institutional Funds, Scudder Investment Portfolios, Scudder Cash Management
Portfolio, Scudder Treasury Money Portfolio, Scudder International Equity
Portfolio, Scudder Equity 500 Index Portfolio, Scudder Asset Management
Portfolio, Scudder Investments VIT Funds, Scudder MG Investments Trust,
Scudder Investors Portfolios Trust, Scudder Investors Funds, Inc., Scudder
Flag Investors Value Builder Fund, Inc., Scudder Flag Investors Equity
Partners Fund, Inc., Scudder Flag Investors Communications Fund, Inc., Cash
Reserves Fund, Inc. and Scudder RREEF Securities Trust. They also serve as
Directors of Scudder RREEF Real Estate Fund, Inc. and Scudder RREEF Real
Estate Fund II, Inc., closed-end investment companies. These Funds are
advised by either Deutsche Asset Management, Inc., Deutsche Asset Management
Investment Services Limited, or Investment Company Capital Corp, each an
indirect, wholly-owned subsidiary of Deutsche Bank AG.

(5) Dr. Tessen von Heydebreck, a managing director of Deutsche Bank, is a member
of the supervisory board of BASF AG, Mr. Voscherau's employer.

(6) Each also serving as an officer of The Germany Fund, Inc. and The New
Germany Fund, Inc. Our officers are elected annually by our board of
directors at their meeting following the Annual Meeting of Stockholders.

(7) Indicates ownership of securities of Deutsche Bank AG either directly or
through Deutsche Bank's deferred compensation plan.

(8) In December 2001, Mr. Langhammer's two adult children borrowed $1 million
from a Deutsche Bank Group company. The loan, which is secured by collateral
furnished by Mr. Langhammer, bears interest at 3-month LIBOR and is of
indefinite duration. As of May 9, 2003, the full principal remained
outstanding.

The following table contains additional information with respect to the
beneficial ownership of equity securities by each of our directors and, on an
aggregated basis, in any registered investment companies overseen by the
director within our same Family of Investment Companies:

DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
EQUITY SECURITIES IN THE ALL FUNDS OVERSEEN BY DIRECTOR IN FAMILY OF
NAME OF DIRECTOR FUND(1) INVESTMENT COMPANIES(1)(2)
--------------------------------------------------------------------------------------------------------------

Detlef Bierbaum.................... None None
John Bult.......................... $10,001-$50,000 $50,001-$100,000
Ambassador Richard R Burt.......... $10,001-$50,000 $10,001-$50,000
Fred H. Langhammer................. None None
Christian H. Strenger.............. $10,001-$50,000 $10,001-$50,000
Eggert Voscherau................... None None
Robert H. Wadsworth................ $50,001-$100,000 Over $100,000
Werner Walbrol..................... $10,001-$50,000 $50,001-$100,000

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

(1) Valuation date is February 3, 2004.

(2) The Family of Investment Companies consists of us, The Germany Fund, Inc.
and The New Germany Fund, Inc., which are closed-end funds and share the
same investment adviser and manager and hold themselves out as related
companies.

Our board of directors presently has an audit committee (composed of Messrs.
Burt, Wadsworth and Walbrol). The audit committee makes recommendations to the
full board with respect to the engagement of independent accountants and reviews
with the independent accountants the plan and results of the audit engagement
and matters having a material effect upon our financial operations. The audit
committee met three times during the fiscal year ended October 31, 2003. In
addition, our board of directors has an advisory committee composed of Messrs.
Burt, Wadsworth and Walbrol. The advisory committee makes recommendations to the
full board with respect to our management agreement with Deutsche Bank
Securities Inc. ("DBSI") and our investment advisory agreement with Deutsche
Asset Management International GmbH ("DeAMI"). The advisory committee met once
during the past fiscal year. The board of directors also has an executive
committee and a nominating committee. During the past fiscal year, the
nominating committee met twice and the executive committee did not meet. The
members of the executive committee are Messrs. Burt, Strenger, Wadsworth and
Walbrol. The executive committee has the authority to act for the board on all
matters between meetings of the board, subject to any limitations under
applicable state law. The members of

--------------------------------------------------------------------------------
B- 12

MANAGEMENT
--------------------------------------------------------------------------------

the nominating committee are Messrs. Burt, Wadsworth and Walbrol. The nominating
committee makes recommendations to the full board with respect to the selection
of candidates to fill vacancies on the board of directors intended to be filled
by persons not affiliated with DBSI or DeAMI, and the nominating committee
evaluates the qualifications of all nominees for directorship pursuant to the
director qualification provisions in our bylaws. The nominating committee will
consider suggestions from stockholders submitted in writing to our secretary
that comply with the requirements for such proposals contained in our bylaws.
All members on each of the four committees of the board are non-interested
persons (except that Mr. Strenger, an interested person, is a member of the
executive committee).

During the past fiscal year, our board of directors had four regular meetings,
and each director (except Messrs. Voscherau and Langhammer) attended at least
75% of the aggregate number of meetings of the board and meetings of board
committees on which that director served.

We pay each of our directors who are not interested persons of us, our
investment adviser or our investment manager an annual fee of $7,500 plus $750
for each meeting attended. Each director who is also a director of The Germany
Fund, Inc. or The New Germany Fund, Inc. also receives the same annual and
per-meeting fees for services as a director of each fund. Effective as of April
24, 2002, no director of all three funds is paid for attending more than two
funds' board and committee meetings when meetings of the three funds are held
concurrently, and, effective as of January 1, 2002, no director receives more
than the annual fee of two funds. We reimburse directors (except for those
employed by the Deutsche Bank group) for travel expenses in connection with
board meetings. The following table sets forth (a) the aggregate compensation
from us for the fiscal year ended October 31, 2003, and (b) the total
compensation from the fund complex that includes us for our fiscal year ended
October 31, 2003, and such other funds in the fund complex for the fiscal year
ended December 31, 2003, for each director, and for all directors as a group:

AGGREGATE COMPENSATION TOTAL COMPENSATION
NAME OF DIRECTOR FROM FUND FROM FUND COMPLEX(1)
-------------------------------------------------------------------------------------------------

Detlef Bierbaum(2)................................ N/A N/A
John Bult(2)...................................... N/A N/A
Richard R. Burt................................... $16,500 $168,640
Fred H. Langhammer................................ $6,500 $13,000
Edward C. Schmults(3)............................. $15,750 $30,750
Christian Strenger(2)............................. N/A N/A
Eggert Voscherau.................................. $5,000 $10,000
Robert H. Wadsworth............................... $12,000 $170,000
Werner Walbrol.................................... $18,000 $34,500
--------- ----------
Total $73,750 $426,890
--------- ----------
--------- ----------

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

(1) Includes us, The Germany Fund, Inc. and the New Germany Fund, Inc., which
are the other closed-end registered investment companies for which Deutsche
Bank Securities Inc. acts as manager. It also includes 204 other open- and
closed-end funds advised by wholly-owned entities of the Deutsche Bank AG in
the United States.

(2) Indicates "Interested Person", as defined in the Investment Company Act. Mr.
Bierbaum is an "interested" Director because of his affiliation with Sal.
Oppenheim Jr. & Cie KGaA, which is the parent company of a registered
broker-dealer; and Mr. Bult is an "interested" Director because of his
affiliation with UBS Securities LLC, a registered broker-dealer, and the
dealer manager in this rights offering; and Mr. Strenger is an "interested"
Director because of his affiliation with DWS-Deutsche Gesellschaft fur
Wertpapiersparen mbH ("DWS"), a majority-owned subsidiary of Deutsche Bank
and because of his ownership of Deutsche Bank shares.

(3) Mr. Schmults resigned as director on January 16, 2004.

No compensation is paid us to directors or officers who are interested persons
of us or of any entity affiliated with Deutsche Bank AG.

--------------------------------------------------------------------------------
B- 13

MANAGEMENT
--------------------------------------------------------------------------------

CODE OF ETHICS

Our board of directors has adopted a code of ethics pursuant to Rule 17j-1 under
the Investment Company Act. This code of ethics permits access persons to trade
in securities that may be purchased or held by us for their own accounts,
subject to compliance with the code of ethic's preclearance requirements. In
addition, the code of ethics provides for trading "blackout periods" that
prohibit trading by personnel within periods of trading by us in the same
security. The code of ethics prohibits short-term trading profits and personal
investment in initial public offerings and requires prior approval with respect
to purchases of securities in private placements.

Our investment manager (in its capacity as our investment manager) has adopted a
code of ethics pursuant to Rule 17j-1 under Investment Company Act. This code of
ethics permits access persons to trade in securities that may be purchased or
held by us for their own accounts, subject to compliance with the code of ethics
preclearance requirements. In addition, the code of ethics provides for trading
"blackout periods" that prohibit trading by personnel within periods of trading
by us in the same security. The code of ethics prohibits short-term trading
profits and personal investment in initial public offerings and requires prior
approval with respect to purchases of securities in private placements.

Our investment adviser has adopted a code of ethics pursuant to Rule 17j-1 under
the Investment Company Act. This code of ethics permits access persons to trade
in securities that may be purchased or held by us for their own accounts,
subject to compliance with the code of ethic's requirements. The code of ethics
requires prior approval for personal investment in initial public offerings and
prohibits short-term trading profits, "front running" trades placed by us, naked
short sales, and personal investment in private placements.

These code of ethics are on file with and available from the SEC at
http://www.sec.gov or by calling 1-202-942-8090. Copies may also be obtained,
after paying a duplication fee, by electronic request at the following email
address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section,
Washington, D.C. 20549-0102.

PROXY VOTING POLICIES AND PROCEDURES

We have delegated proxy voting responsibilities to our investment manager,
subject to our board of directors' general oversight. We have delegated proxy
voting to our investment manager with the direction that proxies should be voted
consistent with our best economic interests. Our investment manager has adopted
its own Proxy Voting Policies and Procedures ("Policies"), a Proxy Voting
Desktop Manual ("Manual") and Proxy Voting Guidelines ("Guidelines") for this
purpose. The Policies address, among other things, conflicts of interest that
may arise between our interests, and the interests of our investment manager and
its affiliates. The Manual sets forth the procedures that the investment manager
has implemented to vote proxies, including monitoring for corporate events,
communicating with our custodian regarding proxies, considering the merits of
each proposal, and executing and recording the proxy vote. The Guidelines set
forth our investment manager's general position on various proposals, such as:

+ Stockholder Rights--Our investment manager generally votes against proposals
that restrict stockholder rights.

+ Corporate Governance--Our investment manager generally votes for confidential
and cumulative voting and against supermajority voting requirements for
charter and bylaw amendments.

+ Anti-Takeover Matters--Our investment manager generally votes for proposals
that require stockholder ratification of poison pills or that request boards
to redeem poison pills, and votes

--------------------------------------------------------------------------------
B- 14

MANAGEMENT
--------------------------------------------------------------------------------

"against" the adoption of poison pills if they are submitted for stockholder
ratification. Our investment manager generally votes for fair price
proposals.

+ Routine Matters--Our investment manager generally votes for the ratification
of auditors, procedural matters related to the annual meeting, and changes in
company name, and against bundled proposals and adjournment.

The general provisions described above do not apply to investment companies. Our
investment manager generally votes proxies solicited by investment companies in
accordance with the recommendations of an independent third-party, except for
proxies solicited by or with respect to investment companies for which our
investment manager or any of its affiliates serve as investment adviser or
principal underwriter ("affiliated investment companies"). Our investment
manager votes affiliated investment company proxies in the same proportion as
the vote of the investment company's other stockholder (sometimes called
"mirror" or "echo" voting). Master fund proxies solicited from feeder funds are
voted in accordance with applicable requirements of the Investment Company Act.

Although the Guidelines set forth our investment manager's general voting
positions on various proposals, our investment manager may, consistent with our
best interest, determine under some circumstances to vote contrary to those
positions.

The Guidelines on a particular issue may or may not reflect the view of
individual members of our board of directors, or of a majority of our board of
directors. In addition, the Guidelines may reflect a voting position that
differs from the actual practices of the public companies within the Deutsche
Bank organization or of the investment companies for which our investment
manager or any of its affiliates serve as investment adviser or sponsor.

Our investment manager may consider the views of a portfolio company's
management in deciding how to vote a proxy or in establishing general voting
positions for the Guidelines, but management's views are not determinative.

As mentioned above, the Policies describe the way in which our investment
manager resolves conflicts of interest. To resolve conflicts, our investment
manager, under normal circumstances, votes proxies in accordance with its
Guidelines. If our investment manager departs from the Guidelines with respect
to a particular proxy or if the Guidelines do not specifically address a certain
proxy proposal, a proxy voting committee established by our investment manager
will vote the proxy. Before voting any such proxy, however, the committee will
exclude from the voting discussions and determinations any member who is
involved in or aware of a material conflict of interest. If, after excluding any
and all such members, there are fewer than three voting members remaining, the
investment manager will engage an independent third party to vote the proxy or
follow the proxy voting recommendations of an independent third party.

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

--------------------------------------------------------------------------------
B- 15

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------

Control persons and principal holders of securities

As of February 3, 2004 no person, to the knowledge of management, owned of
record or beneficially more than 5% of our outstanding common stock, other than
as set forth below:

AMOUNT AND NATURE PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OUTSTANDING COMMON STOCK
---------------------------------------------------------------------------------------------------

MeAG Munich Ergo Kapitalanlage-
gesellschaft mbH(1) (Munich, Germany).......... 507,076 6.42%

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

(1) This information is based exclusively on information provided by such person
on Schedules 13G filed with respect to us on February 14, 2003. To the
knowledge of management, no other Schedules 13D or 13G had been filed with
respect to us as of December 10, 2003.

As of February 3, 2004, all directors and executive officers as a group (14
persons) owned approximately 12,470 shares of our common stock, which
constitutes less than 1% of our outstanding common stock.

--------------------------------------------------------------------------------
B- 16

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

Investment advisory and other services

INVESTMENT ADVISER AND INVESTMENT MANAGER

We entered into a management agreement with DBSI (at the time of execution of
the agreement, Deutsche Bank Capital Corporation) and an investment advisory
agreement with DeAMI (at the time of execution of the agreement, DB Capital
Management International GmbH) on March 6, 1990. Both agreements continue in
effect for successive twelve-month periods from their initial term, but only if
the agreements are approved for continuance annually by our board of directors
in accordance with the requirements of the Investment Company Act. Our board of
directors last voted to continue both the management agreement and the
investment advisory agreement on May 9, 2003. Both agreements are terminable
without penalty by vote of a majority of our board of directors or by a vote of
the holders of a majority of our outstanding common stock, or by DBSI or DeAMI,
as the case may be, at any time upon not less than sixty days' written notice to
the other party. Since neither DBSI nor DeAMI is willing to provide services
separately, each agreement provides that it shall automatically terminate upon
assignment or upon termination of the other agreement. Both DBSI and DeAMI are
wholly owned direct or indirect subsidiaries of Deutsche Bank AG, a major German
banking institution.

Pursuant to the management agreement, DBSI is our corporate manager and
administrator and, subject to the supervision of our board of directors and
pursuant to recommendations made by the investment adviser, determines which
securities are suitable securities for our investment. DBSI (i) handles our
relationships with our stockholders, including stockholder inquiries, (ii) is
responsible for, arranges and monitors compliance with regulatory requirements
and New York Stock Exchange listing requirements and (iii) negotiates
contractual arrangements with third-party service providers, including, but not
limited to, custodians, transfer agents, auditors and printers. DBSI also
provides office facilities and personnel to carry out these services, together
with clerical and bookkeeping services which are not being furnished by our
custodian or transfer and dividend-paying agent. In addition, DBSI (i)
determines and publishes our net asset value in accordance with our policy as
adopted from time to time by our board of directors, (ii) establishes our
operating expense budgets and authorizes the payment of actual operating
expenses incurred, (iii) calculates the amounts of dividends and distributions
to be declared and paid by us to our stockholders, (iv) provides our board of
directors with financial analyses and reports necessary for our board to fulfill
its fiduciary responsibilities, (v) maintains our books and records required
under the Investment Company Act (other than those being maintained by our
custodian and transfer and dividend-paying agent and registrar, as to which DBSI
oversees such maintenance), (vi) prepares our United States federal, state and
local income tax returns, (vii) prepares financial information for our proxy
statements and quarterly and annual reports to stockholders and (viii) prepares
the our reports to the SEC.

We pay DBSI a management fee, computed weekly and payable monthly, at an annual
rate of 0.65% of our average weekly net assets up to $100,000,000 and 0.55% of
such assets in excess of $100,000,000. During the fiscal years ended October 31,
2003, October 31, 2002 and October 31, 2001, we paid DBSI a management fee of
$911,794, $786,424 and $775,596, respectively. Besides its role as our
investment manager, DBSI also acts as the investment manager for The Germany
Fund, Inc. and The New Germany Fund, Inc. The Germany Fund, Inc. pays DBSI an
annual management fee of 0.65% of its average weekly net assets up to
$50,000,000 and 0.55% of such assets over $50,000,000. The New Germany Fund,
Inc. pays DBSI an annual management fee of 0.65% of its average weekly net
assets up to $100,000,000 and 0.55% of such assets over $100,000,000 and up to
$500,000,000 and 0.50% of such amounts in excess of $500,000,000. We, together
with The

--------------------------------------------------------------------------------
B- 17

INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

Germany Fund, Inc. and The New Germany Fund, Inc., represent the entire fund
complex managed by DBSI.

Pursuant to our investment advisory agreement, DeAMI, in accordance with our
investment objective, policies and restrictions, makes recommendations to our
investment manager with respect to our investments and, upon instructions given
by our investment manager as to which securities are suitable for investment,
transmits purchase and sale orders and selects brokers and dealers to execute
portfolio transactions on our behalf.

We pay DeAMI an investment advisory fee, computed weekly and payable monthly, at
an annual rate of 0.35% of our average weekly net assets up to $100 million and
0.25% of such assets in excess of $100 million. During the fiscal years ended
October 31, 2003, October 31, 2002 and October 31, 2001, we paid DeAMI an
investment advisory fee of $469,148, $412,158 and $407,237, respectively.
Besides its role as our investment manager, DBSI also acts as the investment
manager of The Germany Fund, Inc. and The New Germany Fund, Inc. The Germany
Fund, Inc. and The New Germany Fund, Inc. each pay DeAMI an investment advisory
fee, computed weekly and payable monthly, at an annual rate of 0.35% of their
average weekly net assets up to $100 million and 0.25% of such assets in excess
of $100 million. We, together with The Germany Fund, Inc. and The New Germany
Fund, Inc., represent the entire fund complex advised by DeAMI.

Both the management agreement and the investment advisory agreement provide that
DBSI and DeAMI, respectively, are responsible for all expenses of all employees
and overhead incurred by them in connection with their duties under their
respective agreements. DBSI pays all salaries and fees of our directors and
officers who are "interested persons" under the Investment Company Act. An
"interested person" is a director who is not independent under the specific
requirements of the Investment Company Act. We bear all of our own expenses,
including those expenses described in "Our Management" on page 37 of the
prospectus.

In reaching their decision on May 9, 2003 to continue the management agreement
and the investment advisory agreement for another twelve-month period, our board
of directors reviewed information derived from a number of sources covering a
range of issues. Our board of directors considered, among other things, the
experience, expertise and availability of the executive and professional
personnel of DBSI and DeAMI, as well as the management and investment advisory
services that DBSI and DeAMI, respectively, provided to us. With respect to
DBSI, this entailed a review of the portfolio services performed by DBSI, a
review of the general nature of the corporate services performed by DBSI in
addition to those provided by others (such as the registrar and transfer agent),
and a review of any current changes to DBSI's asset management operations that
could be relevant to the services DBSI provides to us. With respect to DeAMI,
this entailed a review of the investment advisory services performed by DeAMI.
Our board of directors also reviewed the performance of DBSI's and DeAMI's other
advisory clients as well as comparative information with respect to the
performance of certain securities indices for the equity markets relevant to us.
In addition, our board of directors also compared the management and investment
advisory fees charged by DBSI and DeAMI, respectively, with information on fees
charged by other investment managers and investment advisers for comparative
services. Taking into account this review, our board of directors determined
that it was satisfied with the nature and quality of services provided by DBSI
and DeAMI, and that fees charged for these services were reasonable.

Brokerage allocation and other practices

The primary objective in placing orders for the purchase and sale of securities
for the our portfolio is to obtain best price together with efficient execution,
taking into account such factors as commission,

--------------------------------------------------------------------------------
B- 18

BROKERAGE ALLOCATION AND OTHER PRACTICES
--------------------------------------------------------------------------------

size of order, difficulty of execution and skill required of the broker.
Brokerage commission rates in Central Europe and Russia for transactions
executed on the exchanges may be discounted for certain large domestic and
foreign investors such as us. Off-board transactions outside of the exchanges'
regular business hours are executed on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Subject to best price
together with efficient execution, orders for brokerage transactions may be
placed with Deutsche Bank AG or any of its affiliates. Our policy requires that
commissions paid to Deutsche Bank AG or any of its affiliates be reasonable and
fair compared with commissions received by other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time.

During our fiscal years ended October 31, 2003, October 31, 2002, and October
31, 2001, we incurred brokerage commissions amounting in the aggregate to
$162,271, $288,097 and $282,266, respectively. During such periods, we paid
brokerage commissions to Deutsche Bank AG or its affiliates amounting to $5,665,
which constituted 3.49% of our aggregate brokerage commissions, $20,790, which
constituted 7.22% of our aggregate brokerage commissions, and $25,202, which
constituted 8.93% of our aggregate brokerage commissions, respectively.

At each board meeting, our board of directors reviews the commissions paid by us
to determine if the commissions paid over representative periods of time were
reasonable in relation to the benefits we receive. They have determined that the
aforementioned commissions were at the best rate available for institutions such
as ours.

Subject to best price together with efficient execution, orders are placed with
brokers and dealers who supply research, market and statistical information
("research" as defined in Section 28(e) of the Exchange Act) to us, our
investment manager and investment adviser. Our commissions to such brokers may
not represent the lowest obtainable commission rates, although they must be
reasonable in relation to the benefits received. The research may be used by our
investment manager and investment adviser in advising other clients. Conversely,
the information provided to our investment manager and investment adviser by
brokers and dealers through whom their other clients effect securities
transactions may be useful to them in providing services to us. Although
research from brokers and dealers may be useful to our investment manager and
investment adviser, it is only supplementary to their own efforts. For our
fiscal years ended October 31, 2003, October 31, 2002, and October 31, 2001,
transactions in our portfolio securities with associated brokerage commissions
of approximately $162,271, $288,097 and $282,266, respectively, were allocated
to persons or firms supplying research to us, our investment manager or our
investment adviser.

--------------------------------------------------------------------------------
B- 19

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

Financial statements

The required financials statements are included in our 2003 Annual Report, and
are incorporated by reference into this SAI. These statements include: Schedule
of Investments as of October 31, 2003; the Statement of Assets and Liabilities
as of October 31, 2003; Statement of Operations for the fiscal year ended
October 31, 2003; Statements of Changes in Net Assets for the fiscal years ended
October 31, 2003 and October 31, 2002; Notes to Financial Statements; and
Financial Highlights for a share of common stock outstanding during each of the
fiscal years ended October 31, 2003, 2002, 2001, 2000 and 1999. A copy of our
2003 Annual Report is available on the SEC's website at http://www.sec.gov. A
copy may also be obtained without charge upon written or oral request from our
information agent at or 1-800- .

--------------------------------------------------------------------------------
F- 1

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

Part C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(1) Financial Statements

Part B--The Central Europe and Russia Fund, Inc. Financial Statements are
included in the Fund's 2003 Annual Report and are incorporated by reference into
the Statement of Incorporation. These statements include: Schedule of
Investments as of October 31, 2003; the Statement of Assets and Liabilities as
of October 31, 2003; Statement of Operations for the fiscal year ended October
31, 2003; Statements of Changes in Net Assets for the fiscal years ended October
31, 2003 and October 31, 2002; Notes to Financial Statements; and Financial
Highlights for a share of common stock outstanding during each of the fiscal
years ended October 31, 2003, 2002, 2001, 2000 and 1999.

(2) Exhibits

--------------------------------------------------------------------------------
C- 1

PART C
--------------------------------------------------------------------------------

(k) -- Transfer Agency and Service Agreement between the Fund and
Investors Bank & Trust Company
*(l)(1) -- Opinion and Consent of Sullivan & Cromwell LLP
***(m) -- Consent of Deutsche Asset Management International GmbH to
service of process in the United States
(n) -- Consent of PricewaterhouseCoopers LLP
(o) -- Not applicable
(p) -- Not applicable
(q) -- Not applicable
(r)(1) -- Code of Ethics of the Fund adopted pursuant to Rule 17j-1 of
the Investment Company Act
(r)(2) -- Code of Ethics of Deutsche Bank Securities Inc. adopted
pursuant to Rule 17j-1 of the Investment Company Act
(r)(3) -- Code of Ethics of Deutsche Asset Management International
GmbH adopted pursuant to Rule 17j-1 of the Investment
Company Act
**Other -- Power of Attorney
Exhibits

------------
* To be filed by amendment

** Previously filed.

*** Incorporated by reference to Form ADV filed on January 30, 2004 (Commission
File No. 801-20289)

ITEM 25. MARKETING ARRANGEMENTS.

(1) See Section 4(a) of the Dealer Manager Agreement, to be filed as Exhibit
(2)(h)(1).

(2) See Section 4(b) of Exhibit (2)(h)(1).

(3) Not Applicable

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the estimated expenses to be incurred in
connection with this rights offering described in this Registration Statement:

Registration Fee............................................
New York Stock Exchange listing fee.........................
Printing (other than stock certificates)....................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Dealer Manager expense allowance............................
NASD filing fee.............................................
Miscellaneous expenses......................................
-------
TOTAL.......................................................
=======

--------------------------------------------------------------------------------
C- 2

PART C
--------------------------------------------------------------------------------

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.

None.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES.

As of February 3, 2004, the Fund had approximately 8,500 holders of record of
its common stock, par value $0.001 per shares.

ITEM 29. INDEMNIFICATION.

Under Article Eleventh of our Amended and Restated Articles of Incorporation and
Article XII of our Amended and Restated By-Laws, our directors and officers will
be indemnified to the fullest extent allowed and in the manner provided by
Maryland law and provisions of the 1940 Act, including advancing of expenses
incurred in connection therewith. Indemnification shall not be provided however
to any officer or director against any liability to us or our security-holders
to which he or she would otherwise be subject by reasons of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.

We maintain insurance on behalf of any person who is or was a director of
officer of the Fund, against certain liability asserted against him or her and
incurred by him or her or arising out of his or her position. In no event,
however, will we pay that portion of the premium, if any, for insurance to
indemnify any such person or any act for which we ourselves are not permitted to
indemnify.

Insofar as indemnification for liabilities under the Securities Act of 1933 may
be permitted to the directors and officers, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
such Act and is therefore unenforceable. If a claim for indemnification against
such liabilities under the Securities Act of 1933 (other than for expenses
incurred in a successful defense) is asserted against us by the directors or
officers in connection with this rights offering, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by us is against public policy as expressed in such Act and will be governed by
the final adjudication of such issue.

Our Management Agreement and Investment Advisory Agreement, filed as exhibits
(g)(1) and (g)(2), respectively, limit the liability of our investment advisor
and our investment manager.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

We are fulfilling the requirement of this Item 30 to provide a list of the
officers and directors of our investment adviser and investment manager,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by those entities or those of its
officers and directors during the past two years, by incorporating herein by
reference the information contained in the current Form ADV filed on January 30,
2004 and July 24, 2003, respectively, with the Securities and Exchange
Commission by each of Deutsche Asset management International GmbH (Commission
File No. 801-20289) and Deutsche Bank Securities Inc. (Commission File No.
801-9638) pursuant to the Investment Advisers Act of 1940, as amended.

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act and the rules thereunder will be maintained
at the offices of Investors Bank & Trust Company, 200 Clarendon Street, Boston
Massachusetts 02116, and at our offices, 345 Park Avenue, New York, New York
10154.

--------------------------------------------------------------------------------
C- 3

PART C
--------------------------------------------------------------------------------

ITEM 32. MANAGEMENT SERVICES.

Not Applicable.

ITEM 33. UNDERTAKINGS.

(a) Registrant undertakes to suspend offering of the shares covered under this
registration statement until it amends its prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share declines more than ten percent from its net asset value as of
the effective date of this Registration Statement, or (2) its net asset value
increases to an amount greater than its net proceeds as stated in the prospectus
contained herein.

(b) Registrant undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) in the registration statement; and (iii)
to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.

(4) For the purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.

(c) Registrant undertakes to send by first class mail or other means designed
to ensure equally prompt delivery, within two business days of receipt of a
written or oral request, the Statement of Additional Information.

--------------------------------------------------------------------------------
C- 4

PART C
--------------------------------------------------------------------------------

Signatures

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
city of New York, and the state of New York, on the 10th day of February, 2004.

THE CENTRAL EUROPE AND RUSSIA FUND, INC.
------------------------------------------
(Registrant)

By: /s/ RICHARD T. HALE
---------------------------------------
Richard T. Hale
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons and on the date
indicated.

NAME TITLE
---------------------------------------------------------------------------------------

* Chairman of the Board and Director
---------------------------------------------------
Christian H. Strenger

Director
---------------------------------------------------
Detlef Bierbaum

* Director
---------------------------------------------------
John Bult

Director
---------------------------------------------------
Richard R. Burt

* Director
---------------------------------------------------
Fred H. Langhammer

* Director
---------------------------------------------------
Robert H. Wadsworth

* Director
---------------------------------------------------
Werner Walbrol

Director
---------------------------------------------------
Eggert Voscherau

/s/ RICHARD T. HALE President and Chief Executive
--------------------------------------------------- Officer
Richard T. Hale

--------------------------------------------------------------------------------
C- 5

PART C
--------------------------------------------------------------------------------

NAME TITLE
---------------------------------------------------------------------------------------

* Treasurer and Chief Financial
--------------------------------------------------- Officer (Principal Financial
Charles A. Rizzo Accounting Officer)

------------
* Richard T. Hale, by signing his name hereto, does sign this document in behalf
of the persons indicated above pursuant to a power of attorney duly executed
by such person and filed as an exhibit to this Registration Statement.

/s/ RICHARD T. HALE February 10, 2004
---------------------------------------- ----------------------------------------
Richard T. Hale Date
Attorney-in Fact

--------------------------------------------------------------------------------
C- 6

PART C
--------------------------------------------------------------------------------

INDEX TO EXHIBITS

EXHIBIT
NUMBER EXHIBIT
----------------------------------------------------------------------------

(a)(1) -- Articles of Incorporation of the Fund, dated February 6,
1990
(a)(2) -- Articles of Amendment to Articles of Incorporation, dated
February 14, 1990
(a)(3) -- Articles of Amendment of Articles of Incorporation, dated
June 29, 1995
(a)(4) -- Articles Supplementary, dated December 14, 1999
(a)(5) -- Articles of Amendment of Articles of Incorporation, dated
June 24, 2003
(b) -- By-Laws of the Fund
(c) -- Not applicable
*(d)(1) -- Form of Subscription Certificate
*(d)(2) -- Form of Notice of Guaranteed Delivery
*(d)(3) -- Form of Nominee Holder Over-Subscription Exercise Form
*(d)(4) -- Form of Beneficial Owner Certification Form
*(d)(5) -- Form of Subscription Agent Agreement
*(d)(6) -- Form of Information Agent Agreement
**(e) -- Voluntary Cash Purchase Program and Dividend Reinvestment
Plan
(f) -- Not applicable
(g)(1) -- Management Agreement, dated as of March 6, 1990, between the
Fund and Deutsche Bank Securities Inc. (formerly Deutsche
Bank Capital Corporation)
(g)(2) -- Investment Advisory Agreement, dated as of March 6, 1990,
between the Fund and Deutsche Asset Management International
GmbH (formerly DB Capital Management International GmbH)
(h)(1) -- Form of Dealer Manager Agreement (including the exhibits
containing the form of Selling Group Agreement and the form
of Soliciting Dealer Agreement)
(h)(2) -- Form of Letter Agreement
(i) -- Not applicable
(j)(1) -- Amended and Restated Custody Agreement between the Fund and
Investors Bank & Trust Company
(j)(2) -- Delegation Agreement between the Fund and Investors Bank &
Trust Company
(k) -- Transfer Agency and Service Agreement between the Fund and
Investors Bank & Trust Company
*(l)(1) -- Opinion and Consent of Sullivan & Cromwell LLP
***(m) -- Consent of Deutsche Asset Management International GmbH to
service of process in the United States
(n) -- Consent of PricewaterhouseCoopers LLP
(o) -- Not applicable
(p) -- Not applicable
(q) -- Not applicable
(r)(1) -- Code of Ethics of the Fund adopted pursuant to Rule 17j-1 of
the Investment Company Act
(r)(2) -- Code of Ethics of Deutsche Bank Securities Inc. adopted
pursuant to Rule 17j-1 of the Investment Company Act
(r)(3) -- Code of Ethics of Deutsche Asset Management International
GmbH adopted pursuant to Rule 17j-1 of the Investment
Company Act

--------------------------------------------------------------------------------
C- 7

PART C
--------------------------------------------------------------------------------

EXHIBIT
NUMBER EXHIBIT
----------------------------------------------------------------------------

**Other -- Power of Attorney
Exhibits

------------
* To be filed by amendment

** Previously filed.

*** Incorporated by reference to Form ADV filed on January 30, 2004 (Commission
File No. 801-20289)

--------------------------------------------------------------------------------
C- 8