Edgar Filing: CENTRAL EUROPE & RUSSIA FUND INC

(DEUTSCHE ASSET MANAGEMENT LOGO) (CEE LOGO)

The Central Europe and Russia Fund, Inc.

Rights Offering
Expires January 20, 2006*

(MAP OF CENTRAL EUROPE)

A Limited Opportunity for Stockholders

IMPORTANT DATES

Record Date December 22, 2005
Subscription Period December 22, 2005 to January 20, 2006*
Expiration Date January 20, 2006*
*unless extended

Contact your financial advisor for more information

(NOT PART OF THE PROSPECTUS)

(DEUTSCHE ASSET MANAGEMENT LOGO) (CEE LOGO)

Highlights of the Rights Offering

OVERVIEW OF THE RIGHTS OFFERING

THE CENTRAL EUROPE AND RUSSIA FUND, INC. (the "Fund") is conducting a Rights
Offering which expires on January 20, 2006, unless extended (the "Expiration
Date"). Pursuant to this offering, the Fund is issuing to its stockholders of
record ("Record Date Stockholders") as of the close of business on December 22,
2005 (the "Record Date") transferable rights ("Rights") entitling the holders of
those Rights to subscribe for up to an aggregate of 3,417,070 shares of the
Fund's common stock. Record Date Stockholders 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 (1-for-3),
at a discount to market price. Record Date Stockholders 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
("Over-Subscription Privilege"). The Fund's outstanding common stock is listed
on the New York Stock Exchange ("NYSE") and trades under the symbol "CEE," as
will the shares purchased in this Rights Offering. The rights are transferable
and will be listed for trading on the NYSE under the symbol "CEE.RT" during the
course of this Rights Offering.

WHY IS THE FUND CONDUCTING A RIGHTS OFFERING?

The Board of Directors of the Fund has determined that it would be in the Fund's
best interest and in its stockholders' best interest to increase the Fund's
assets available for investment. The Fund's investment manager, Deutsche
Investment Management Americas Inc. ("DIMA"), and its investment adviser,
Deutsche Asset Management International GmbH ("DeAMI"), believe that the outlook
for a number of industries and companies in Central Europe, Russia and Turkey is
promising and that the proceeds from this Rights Offering will allow the Fund to
capitalize on these attractive market opportunities. The Fund's Board of
Directors believes that increasing its assets available for investment may
result in a modest lowering of the Fund's expenses as a percentage of average
net assets because its fixed costs will be spread over a larger asset base.

WHY SHOULD I EXERCISE MY RIGHTS?

INVESTMENT OUTLOOK -- ATTRACTIVE MARKET OPPORTUNITIES

DIMA views Russia and Turkey as two particularly attractive investment markets.
In Russia, President Putin has renewed his commitment to reform with a focus on
issues important to investors, such as limiting the authority of tax officials
and clarifying property rights. In addition, Russia has enjoyed investment-grade
status with all three major ratings agencies since January 2005. Russia's
efforts toward continued fiscal responsibility made it compelling for rating
agencies to further upgrade Russia's sovereign debt rating in the second half of
2005. Russia has also experienced strong GDP growth partly due to rising prices
for exported oil and gas. DIMA believes that high energy prices could well
persist, and Russia should be a major beneficiary, as an improved infrastructure
(rail, road and pipelines) should facilitate the expected growth in oil output.
These positive trends and developments may translate into attractive investment
opportunities throughout various sectors of the Russian stock market. In Turkey,
the government has undertaken important structural reforms in its economy and
recently began formal membership discussions with the European Union ("EU").
Furthermore, the government's tightening of fiscal policy has led to a decline
in inflation and interest rates. Growth has been healthy as data for the second
quarter showed some moderation from 2004's pace, but with GNP still expanding at
better than 5% per annum. Industry continues to take the lead, but tourism is
also strong, with arrivals up 25% in the first eight months of the year,
providing an important boost to the economy and to currency reserves. DIMA
believes that the investment appeal of Turkey is improving as the country
continues to be a candidate for ratings upgrades, having most recently been
upgraded by Moody's in December 2005. Given Turkey's well developed financial
markets, DIMA believes that an increasing number of attractive investment
opportunities are emerging.

DIMA believes that the long-term outlook for the Czech Republic, Hungary and
Poland has improved considerably since their accession into the EU in May 2004
and their planned entry into the European Monetary Union. DIMA believes that
these countries may be able to realize higher GDP growth rates than the overall
EU (as currently constituted). DIMA also believes that EU admission has improved
transparency, corporate standards and liquidity of the regional capital markets,
thereby further attracting both foreign and domestic investor interest. Economic
growth in the Czech Republic in the second quarter of 2005 was more favorable
than many expected, driven mostly by strong exports. Hungarian GDP gained
momentum through infrastructure (highways) investments and an improving trade
balance in second quarter of 2005, leading to real GDP growth of 4.1% in the
quarter. Poland boasts the lowest current account deficit of the three
countries, with foreign direct investment coverage of the deficit exceeding that
of its neighbors.

Overall in the region, DIMA believes that attractive investment opportunities
may also take the form of initial public offerings and government planned
privatizations. The governments of Turkey and Russia are particularly active
with respect to plans for further privatizations. In addition, DIMA believes
that attractive investment opportunities may well arise in other Central
European countries currently not represented within the Fund's portfolio (e.g.,
Ukraine, Bulgaria and Romania) as these economies and capital markets develop
further. Despite forecasts that the economies of "Emerging Europe" will enjoy
faster growth than their Western European counterparts in 2006 and 2007, stock
markets through Emerging Europe trade at similar or in most cases lower
price-to-earnings and price-to-book ratios than those in Western Europe and the
U.S.

Due to the positive economic and market developments, as well as attractive
valuations, DIMA and DeAMI believe that now is an opportune time to further
invest in Central Europe, Russia and Turkey.

ALLOWS STOCKHOLDERS TO BUY SHARES AT A DISCOUNT TO THE MARKET PRICE

This Rights Offering provides Record Date Stockholders with the opportunity to
buy additional shares at a discount to market price. The subscription price per
share of the Fund's common stock will be 90% of the lower of 1) the average of
the last reported sale prices of a share of the Fund's common stock on the NYSE
on the Expiration Date and the preceding four business days and 2) the net asset
value per share as of close of business on the Expiration Date. Based on the
closing market price of $43.30 per share and net asset value of $44.52 per share
on December 16, 2005, the estimated subscription price is $38.97 per share
(90.0% of $43.30).

(continued on back flap)

For more information, call the Information Agent, Georgeson
Shareholder Communications Inc., at 1-800-221-4215

(NOT PART OF THE PROSPECTUS)

PROSPECTUS December 19, 2005
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(DETSCHE ASSET MANAGEMENT LOGO)(THE CENTRAL EUROPE AND RUSSIA FUND, INC. LOGO)

(CENTRAL EUROPE RUSSIA FUND)
Issuable Upon Exercise of Rights to Subscribe for Such Shares

3,417,070 Shares

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

We are issuing to our stockholders of record as of the close of business on
December 22, 2005 transferable rights entitling the holders of those rights to
subscribe for up to an aggregate of 3,417,070 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 will be traded on the NYSE under the symbol "CEE.RT" during the course of
this rights offering. See "Our Rights Offering" on page 12 in this prospectus
for a complete discussion of the terms of this rights offering. The subscription
price per share will be 90% 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 date on which the
rights offering expires, as such date may be extended (the "expiration date"),
and the four preceding business days and (ii) the net asset value per share of
our common stock as of the close of business on the expiration date. THE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 20, 2006, UNLESS
EXTENDED AS DESCRIBED IN THIS PROSPECTUS.

We announced our intention to conduct this rights offering on November 10, 2005.
The net asset values per share of our common stock at the close of business on
November 10, 2005 and December 16, 2005 (the last trading date prior to the date
of this prospectus on which we determined net asset value) were $43.45 and
$44.52, respectively, and the last reported sale prices of a share of common
stock on the NYSE were $44.45 and $43.30, respectively, representing 102.3% and
97.3% 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 will be less
than the then current net asset value per share, the completion of this rights
offering will 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, although nonexercising shareholders will experience
disproportionate dilution. See "Our Rights Offering--Investment Considerations"
on page 23 of this prospectus and "Risk Factors--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 Georgeson Shareholder Communications Inc., our information
agent for this rights offering, at 17 State Street, New York, New York 10004 or
1-800-221-4215.
(continued on inside front cover)
------------------------

BEFORE BUYING OUR COMMON STOCK, YOU SHOULD READ THE DISCUSSION OF THE MATERIAL
RISKS OF INVESTING IN US IN "RISK FACTORS" BEGINNING ON PAGE 27. CERTAIN OF
THESE RISKS ARE SUMMARIZED IN "PROSPECTUS SUMMARY--SPECIAL RISK CONSIDERATIONS"
BEGINNING ON PAGE 4.

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.

PER SHARE TOTAL(1)
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Estimated subscription price(2) $38.97 $133,163,218
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Estimated sales load(2)(3) $ 1.46 $ 4,993,621
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Proceeds, before expenses, to the Fund(2)(4) $37.51 $128,169,597
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(footnotes continued on inside front cover)
UBS INVESTMENT BANK

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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
1-202-551-8090. 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. Our investment manager is Deutsche Investment Management
Americas Inc. and our investment adviser is Deutsche Asset Management
International GmbH.

This prospectus sets forth concisely the information about us that a prospective
investor ought to know before investing. Investors are advised to read this
prospectus carefully and retain it for future reference. You may obtain
additional information about us from our reports filed with the SEC. Where
indicated, we have incorporated into this prospectus information from the
Statement of Additional Information ("SAI") dated December 19, 2005. You can
find the table of contents for the SAI on page B-1 of this prospectus. You may
obtain a copy of the SAI or our reports filed with the SEC upon written or oral
request free of charge by contacting the information agent at 17 State Street,
New York, New York 10004 or 1-800-221-4215. In addition, the SAI and other
reports filed with the SEC, including material incorporated by reference into
this prospectus or the SAI, are available on the SEC's website at
http://www.sec.gov.
------------------------

(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 90% of the last reported sale price of a share of
our common stock on the NYSE on December 16, 2005.

(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 advisory,
marketing and soliciting services equal to 3.75% of the subscription price
per share. 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 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 the Depository Trust
Company ("DTC") on the record date. We have agreed to reimburse the dealer
manager up to $100,000 for a portion of its reasonable expenses incurred in
connection with this rights offering. These fees and expenses 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 20 of this prospectus.

(4) Before deduction of offering expenses payable by us, estimated at $600,000.
Offering expenses include an aggregate of up to $100,000 to be paid to the
dealer manager as partial reimbursement for its out-of-pocket expenses. See
"Our Rights Offering -- Distribution Arrangements" on page 20 of this
prospectus.
------------------------

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

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ii

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, especially the information
set forth under "Risk Factors."

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. 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 12 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 12 of this prospectus.

Aggregate number of shares of our
common stock offered................. 3,417,070

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
90% 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 four preceding
business days and (ii) the net asset
value per share of our common stock as
of the close of business 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. The rights will be listed for trading on the NYSE under the symbol
"CEE.RT" during the course of this rights offering. Trading in the rights on the
NYSE will be conducted on a when-issued basis from December 19, 2005 until the
record date; thereafter, they will trade regular-way until the last business day
prior to the expiration date. 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 by 5:00 p.m., New York
City time, January 18, 2005 (or, if the subscription period is extended, by 5:00
p.m., New York City time, 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 15 of this
prospectus.

IMPORTANT DATES TO REMEMBER

Record date................................................. December 22, 2005
Subscription period......................................... December 22, 2005
to January 20, 2006*
Expiration date and pricing date............................ January 20, 2006*
Payment for shares or notices of guarantees of delivery
due....................................................... January 20, 2006*
Payment for guarantees of delivery due...................... January 25, 2006*
Confirmation mailed to participants......................... January 27, 2006*
Final payment for shares due................................ February 10, 2006*

* 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 14 of this prospectus.

METHOD FOR EXERCISING RIGHTS

Rights are evidenced by subscription certificates that will be mailed to
stockholders of record (except as described under "Our Rights Offering--Foreign
Restrictions") or, if a stockholder's shares are held by Cede & Co. or any other
depository or nominee, to Cede & Co. or such 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 17 of this prospectus and "Our Rights
Offering--Payment for Shares" on page 18 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
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 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. In addition, we have agreed to reimburse the dealer manager up to $100,000
for a portion of its reasonable expenses incurred in connection with this rights
offering. 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. 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. See "Our Rights
Offering--Distribution Arrangements" on page 20 of this prospectus.

INFORMATION AGENT

The information agent for this rights offering is Georgeson Shareholder
Communications Inc. If you have questions or need further information about this
rights offering, please write or call the information agent at 17 State Street,
New York, New York 10004 or 1-800-221-4215.

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 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 24 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 Investment Management Americas
Inc. ("DIMA"). Both DeAMI and DIMA are wholly-owned direct or indirect
subsidiaries of Deutsche Bank AG, a major German banking institution. See "Our
Management" on page 35 of this prospectus and "Investment Advisory and Other
Services" on page B-18 of the SAI.

MANAGEMENT FEES

We pay our investment manager a management fee, computed weekly and payable
monthly, at an annual rate of 0.65% of our average weekly net assets up to $100
million and 0.55% of our average weekly net 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 average weekly net assets in excess of $100 million. See "Our
Management" on page 35 of this prospectus and "Investment Advisory and Other
Services" on page B-18 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 73 of this
prospectus.

DIVIDEND-PAYING AGENT, TRANSFER AGENT AND REGISTRAR

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

SPECIAL RISK CONSIDERATIONS

RISKS 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 other things, 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 in emerging market
countries. Investment in these countries subjects us to a greater risk of loss
than investments in a country with more developed markets. 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 emerging
market 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 costs 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.

An established secondary markets might not 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, see "Risk Factors" on page 27 of this
prospectus.

RISKS RELATING TO INVESTMENT IN RUSSIA
Investing in Russia subjects us to many of the same risks associated with
investing in Central European countries, which are discussed below. There are
significant risks inherent in securities of Russian issuers 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, securities of Russian issuers are subject to a higher
degree of volatility than the securities of Western companies.

Russia has made transitional movements 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 this transition,
remains uncertain. There has been widespread speculation recently about the
future of Russia's presidency and political reforms. Russia's role and its
reintegration into the global political economy are also unclear, 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 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.

A centralized public market for trading Russian securities has not developed,
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. The events involving Yukos in 2004
led many investors to pull capital out of Russia over concerns regarding the
rule of law and shareholder rights.

Accounting, financial and auditing reporting by Russian companies is also
generally of lower 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.

RISKS RELATING TO INVESTMENT IN CENTRAL EUROPE
Central European countries are in varying stages of transition towards
developing 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 export 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 risk, and are subject to more
substantial volatility and price fluctuations than securities that are traded in
more developed markets.

RISKS RELATING TO INVESTMENT IN TURKEY
Investing in Turkey subjects us to many of the same risks associated with
investing in Central European countries that are described above; however,
investments in Turkey should be considered to have greater risks. There are
significant risks inherent in Turkish securities that are not typically
associated with securities of companies in more developed countries. The value
of Turkish securities may be affected by various uncertainties, such as
economic, political and social instability, and investment and regulatory

risk. The Turkish equity market is significantly less developed than securities
markets in the United States and Western Europe. The market in Turkey is
smaller, less liquid, and more volatile.

Over the past two decades, the Turkish economy has transitioned from a highly
regulated economy to a free market system. Despite a generally successful
transition, the Turkish economy has experienced significant macroeconomic
imbalances. High levels of government debt and the high current account deficit
continue to threaten Turkey's economic stability.

Uncertainties relating to Turkey's bid for European Union ("EU") membership are
an additional source of volatility in the Turkish financial markets. The
criteria for joining the EU include implementation of a number of political,
legislative and economic reforms, which Turkey may decide in the future that it
is either unable or unwilling to fulfill. In addition, there is significant
political pressure within the EU to move toward a "privileged partnership" with
Turkey rather than full membership. The negotiations are expected to last a
decade, and market sentiment may fluctuate dramatically as the negotiations
progress.

In addition to the domestic political uncertainty, terrorism and political
instability in neighboring countries, such as Iran and Iraq, is another source
of risk associated with investment in Turkey.

DILUTION OF NET ASSET VALUE
You 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 will 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, although nonexercising shareholders will experience disproportionate
dilution. 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 to receive 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 have generally
traded at a discount. See "Market and Net Asset Value Information" on page 11 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 a
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 relative to net
asset value as they currently do.

EXCHANGE RATE FLUCTUATIONS AND FOREIGN CURRENCY CONSIDERATIONS
Substantially all of our assets are invested in Russia and Central Europe, 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 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 are 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 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 limit 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 led to increased
short-term market volatility. U.S. military and related action in Iraq 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)........................ 0.83%
Other expenses(5)......................................... 0.21%
-----
Total annual expenses(4).................................. 1.04%

(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. 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. We have
also agreed to reimburse the dealer manager for out-of-pocket expenses up
to an aggregate of $100,000. These fees and expenses 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 20 of this prospectus.

(2) See "Voluntary Cash Purchase Program and Dividend Reinvestment Plan" on
page 66 of this prospectus.

(3) See "Our Management" on page 35 of this prospectus and "Investment Advisory
and Other Services" on page B-18 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 $127,569,597. It also assumes that net assets
attributable to our common stock will not increase or decrease due to price
or currency fluctuation.

(5) Amounts are based on our most recently completed fiscal year, except that
"Other expenses" are based on estimated amounts for our current fiscal year
and assume that all of the rights are exercised.

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

Total expenses incurred................................... $48 $69 $92 $157

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 35
of this prospectus, "Investment Advisory and Other Services" on page B-18 of the
SAI and "Brokerage Allocation and Other Practices" on page B-25 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
and on the next page for fiscal years 1996-2005 has been audited by
PricewaterhouseCoopers LLP ("PwC"), our independent registered public accounting
firm, 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, 2005 is included in the
SAI under "Financial Statements."

FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------

Per share operating performance
Net asset value:
Beginning of period......................................... $ 28.64 $ 23.08 $ 15.93 $ 13.83 $ 16.14
-------- -------- -------- -------- --------
Net investment income (loss)................................ .27 .20 .21 (.07) .10
Net realized and unrealized gain (loss) on investments and
foreign currency transactions.............................. 13.62 7.97 6.86 2.37 (2.70)
-------- -------- -------- -------- --------
Increase (decrease) from investment operations.............. 13.89 8.17 7.07 2.30 (2.60)
-------- -------- -------- -------- --------
Increase resulting from share repurchases................... -- .02 .08 .06 .29
-------- -------- -------- -------- --------
Distributions from net investment income.................... (.17) (.22) -- (.10) --
Distributions from net realized foreign currency gains...... -- -- -- (.13) --
Distributions from net realized short-term capital gains.... -- -- -- -- --
Distributions from net realized long-term capital gains..... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions(1)...................................... (.17) (.22) -- (.23) --
-------- -------- -------- -------- --------
Dilution from rights offering............................... -- (2.15) -- -- --
-------- -------- -------- -------- --------
Dealer manager fees and offering costs...................... -- (.25) -- -- --
-------- -------- -------- -------- --------
Dilution in NAV from dividend reinvestment.................. -- (.01) -- (.03) --
-------- -------- -------- -------- --------
Net asset value:
End of period.............................................. $ 42.36 $ 28.64 $ 23.08 $ 15.93 $ 13.83
======== ======== ======== ======== ========
Market value:
End of period.............................................. $ 44.89 $ 24.99 $ 21.25 $ 13.25 $ 10.95
Total investment return for the period:(2)
Based upon market value.................................... 80.71% 18.73% 60.38% 23.43% (7.79)%
Based upon net asset value................................. 48.74% 35.20%(3) 44.88% 17.05% (14.31)%
Ratio to average net assets:
Total expenses before custody credits(4)................... 1.20% 1.27% 1.51% 1.55% 1.66%
Net investment income (loss)............................... .78% .81% 1.00% (.44)% .63%
Portfolio turnover.......................................... 30.16% 45.29% 43.88% 57.77% 57.83%
Net assets at end of period (000's omitted)................. $431,975 $292,027 $177,766 $126,467 $111,213
(1) For U.S. tax purposes, total distributions consisted of:
Ordinary income......................................... $ (0.17) $ 0.22 -- $ 0.23 --
Long-term capital gains................................. -- -- -- -- --
-------- -------- -------- -------- --------
$ (0.17) $ 0.22 -- $ 0.23 --
-------- -------- -------- -------- --------
(2) Total investment return based on market value is calculated assuming that shares of the Fund's 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 the Fund's 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) Return excludes the effect of the $2.15 per share dilution associated with the Fund's rights offering.
(4) 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 1.19%, 1.26%, 1.50%, 1.54% and 1.62% for the periods ending 2005,
2004, 2003, 2002 and 2001, respectively.

--------------------------------------------------------------------------------
9

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

FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------

Per share operating performance
Net asset value:
Beginning of year........................................... $ 15.99 $ 15.74 $ 28.00 $ 24.56 $ 20.70
-------- -------- -------- -------- --------
Net investment income (loss)................................ (.09) (.08) .13 .09 .17
Net realized and unrealized gain (loss) on investments and
foreign currency transactions............................. (.38) .09 (6.18) 5.26 3.93
-------- -------- -------- -------- --------
Increase (decrease) from investment operations.............. (.47) 0.01 (6.05) 5.35 4.10
-------- -------- -------- -------- --------
Increase resulting from share repurchases................... .62 .40 .82 .28 .14
-------- -------- -------- -------- --------
Distributions from net investment income.................... -- (.13) (.01) (.11) (.13)
Distributions from net realized foreign currency gains(1)... -- (.01) -- -- (.03)
Distributions from net realized short-term capital
gains(1).................................................. -- -- (1.54) -- --
Distributions from net realized long-term capital gains..... -- -- (5.02) (1.81) (.22)
-------- -------- -------- -------- --------
Total distributions......................................... -- (.14) (6.57) (1.92) (.38)
-------- -------- -------- -------- --------
Dilution in NAV from dividend reinvestment.................. -- (.02) (.46) (.27) --
-------- -------- -------- -------- --------
Net asset value:
End of year............................................... $ 16.14 $ 15.99 $ 15.74 $ 28.00 $ 24.56
======== ======== ======== ======== ========
Market value:
End of year............................................... $ 11.875 $ 12.50 $13.0625 $ 23.125 $ 19.625
Total investment return for the year:(2)
Based upon market value................................... (5.00)% (3.29)% (22.89)% 28.93% 25.28%
Based upon net asset value................................ .94% 2.48% (26.09)% 22.41% 20.74%
Ratio to average net assets:
Total expenses before custody credits(3).................. 1.37% 1.44% 1.20% 1.10% 1.08%
Net investment income (loss).............................. (.44)% (.44)% .56% .32% .73%
Portfolio turnover.......................................... 59.17% 60.35% 97.48% 68.20% 52.30%
Net assets at end of year (000's omitted)................... $140,923 $157,265 $173,825 $325,972 $289,133

(1) Characterized as ordinary income for tax purposes.
(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 U.S. cash
balances. The ratios of total expenses after custody credits to average net
assets are 1.35%, 1.43% and 1.17% for 2000, 1999 and 1998, respectively.

--------------------------------------------------------------------------------
10

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

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 has traded in the market at both a premium and a discount to
net asset value, although 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 generally 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 our intention to register securities in connection with this rights
offering on November 10, 2005. The net asset values per share of our common
stock at the close of business on November 10, 2005 and December 16, 2005, (the
last trading day prior to the date of this prospectus on which we determined net
asset value) were $43.45 and $44.52, respectively, and the last reported sale
prices of a share of our common stock on the NYSE were $44.45 and $43.30,
respectively, representing 102.3% and 97.3% 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 or
premium price for each quarter, (ii) the per share high and low market price on
the NYSE, (iii) the discount or premium to net asset value of each high/low
market price and (iv) the total volume of trading on the NYSE during the period.

(DISCOUNT)/ PREMIUM
TO NET VOLUME OF
NET ASSET VALUE(1) MARKET PRICE(2) ASSET VALUE (%) TRADING(2)
HIGH LOW HIGH LOW HIGH LOW (SHARES)
--------------------------------------------------------------------------------------------------------------

Fiscal Year 2004
January 31, 2004.............. $26.30 $22.36 $25.82 $20.02 (1.83)% (10.47)% 1,444,035
April 30, 2004................ $28.02 $24.73 $25.15 $20.85 (10.24)% (15.61)% 4,203,900
July 31, 2004................. $25.15 $23.50 $22.00 $18.90 (12.52)% (19.57)% 1,667,700
October 31, 2004.............. $28.70 $23.59 $25.63 $20.14 (14.62)% (14.62)% 1,185,500
Fiscal Year 2005
January 31, 2005.............. $31.69 $27.97 $28.70 $23.98 (9.44)% (14.27)% 2,223,600
April 30, 2005................ $36.18 $31.07 $35.60 $27.58 (1.60)% (11.23)% 3,396,500
July 31, 2005................. $37.37 $30.55 $34.92 $26.80 (6.56)% (12.27)% 2,010,400
October 31, 2005.............. $47.97 $38.22 $51.91 $34.55 8.21% (9.60)% 6,987,600

(1) Based on our computations.

(2) As reported by the NYSE.

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

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

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 connection with our directors' consideration of this rights
offering, DIMA, our investment manager, and DeAMI, our investment adviser,
believe that the outlook for a number of industries and companies in Central
Europe, Russia and Turkey is promising.

In Turkey, the government has undertaken important structural reforms in its
economy and recently began formal membership discussions with the EU. Growth has
been healthy as data for the second quarter showed GNP still expanding at better
than 5% per annum. Industry continues to take the lead, but tourism is also
strong, with arrivals up 25% in the first eight months of the year, providing an
important boost to the economy and to currency reserves. A firming currency was
also boosted by success in the privatization program and across-the-board
investments. Lastly, Turkey continues to be a candidate for ratings upgrades,
having most recently been upgraded by Moody's in December 2005. Further, the
government's tightening of fiscal policy has led to a decline in inflation and
interest rates.

If the economies of Russia and Turkey improve and reform programs continue as
anticipated, both countries can expect upgrades in their credit ratings, which
in turn should result in lower interest rates and higher economic growth.
Overall in the region, but particularly in Russia and Turkey, privatization
plans are well under way, which DIMA expects to result in attractive investment
opportunities. In addition, DIMA believes that attractive investment
opportunities may well arise in other Central European countries currently not
represented within the Fund's portfolio (e.g., Ukraine, Bulgaria and Romania) as
these economies and capital markets develop further. Despite forecasts that the
economies of "Emerging Europe" will enjoy faster growth than their Western
European counterparts in 2006 and 2007, stock markets throughout emerging Europe
trade at similar or in most cases lower price-to-earnings and price-to-book
ratios than those in Western Europe and the United States.

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

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

Hungarian GDP gained momentum through infrastructure (highways) investments and
improving trade balance in second quarter of 2005, leading to real GDP growth of
4.1% in the quarter. Poland boasts the lowest current account deficit of the
three countries, with foreign direct investment coverage of the deficit
exceeding that of its neighbors.

Due to the positive economic and market developments, as well as attractive
valuations, DIMA and DeAMI believe that now is an opportune time to further
invest in Central Europe, Russia and Turkey.

This rights offering provides existing stockholders the opportunity to purchase
additional shares of our common stock at a price that is 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 costs can be spread over a larger asset
base. Our board of directors has 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" on page 27 of this prospectus and "--Investment Considerations" on page
23.

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" on page 22.

TERMS OF THE OFFER

We are issuing to stockholders on the record date transferable rights to
subscribe for an aggregate of 3,417,070 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
integer 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 December 22, 2005 and ends on the
expiration date, which is 5:00 p.m., New York City time, on January 20, 2006,
unless extended. See "--Expiration of This Rights Offering" on page 17. 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

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

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

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.

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 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 are listed for trading on the NYSE under the
symbol "CEE.RT" See "--Transferability and Sale of Rights" below.

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,
except as provided under "--Notice of Net Asset Value Decline" below on page 20.
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 $38.97 per share. For a
discussion of the method by which rights may be exercised and shares paid for,
see "--Exercise of Rights" on page 17 and "--Payment for Shares" on page 18.

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

A holder who receives shares upon exercise of rights will not be entitled to
receive with respect to those shares the Fund's year-end income dividend and
capital gains distribution being declared in December 2005, because those shares
will be issued after the record date for the dividend distribution.

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 to the number of
shares of our common stock owned by them on the record date. The allocation
process may involve a

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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. The rights will be listed for trading on the NYSE
under the symbol "CEE.RT" during the course of this rights offering. Trading in
the rights on the NYSE will be conducted on a when-issued basis from December
19, 2005 until the record date; thereafter, they will trade regular way until
the last business day prior to the expiration date. 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 THE SUBSCRIPTION AGENT AND THE 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 by 5:00 p.m., New York
City time, on January 18, 2006 (or, if the subscription period is extended, by
5:00 p.m., New York City time, 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 them or to use its best efforts to complete
their 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. The subscription agent will hold the proceeds
from those sales for the benefit of those nonclaiming stockholders until the
proceeds are either claimed or escheated. 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 sale
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
certificate in every particular, without alteration or enlargement, or any
change. A signature guarantee must be provided by an eligible

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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
are expected to be paid from the proceeds of the offering), 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. Stockholders who wish to purchase, sell, exercise or transfer
rights through a broker, bank or other party should first inquire about any fees
and expense that the stockholder will incur in connection with the transactions.

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 90% 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 $43.00 and the net asset value per share of our common stock on
the expiration date is $44.52, the subscription price would be $38.70 (90% of
$43.00). If, however, the five-day average of the last reported sale prices on
the NYSE on the expiration date is $42.50, and the net asset value per share of
our common stock on such date is $44.52, the subscription price would be $38.25
(90% of $42.50). Since the expiration date of the subscription period will be
January 20, 2006 (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 $38.97 per
share. See "--Payment for Shares" on page 18. 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, except as provided under "--Notice of Net Asset Value Decline" on page
20. We do not have the right to withdraw the rights or cancel this rights
offering after the rights have been distributed.

We announced our intention to register securities in connection with this rights
offering on November 10, 2005. The net asset values per share of our common
stock at the close of business on November 10, 2005 and on December 16, 2005
(the last trading day prior to the date of this prospectus on which we
determined our net asset value) were $43.45 and $44.52, respectively, and the
last reported sale prices of a share of our common stock on the NYSE on such
dates were $44.45 and $43.30, respectively, representing 102.3% and 97.3% of net
asset value, respectively. See "Market and Net Asset Value Information" on page
11 of this prospectus.

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EXPIRATION OF THIS RIGHTS OFFERING

The offer will expire at 5:00 p.m., New York City time, on January 20, 2006,
unless we extend the expiration date. Rights will expire on the expiration date
and may not be exercised after this date. If we extend the expiration date, we
will make an announcement as promptly as practicable. This announcement will be
issued no later than 5:00 p.m., New York City time, on the business day prior to
the previously scheduled expiration date. Without limiting the manner in which
we may choose to make this announcement, we will not, unless otherwise required
by law, have any obligation to publish, advertise or otherwise communicate this
announcement other than by making a release to the Dow Jones News Service or any
other means of public announcement as we may deem proper.

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
Georgeson Shareholder Communications Inc., our information agent, at
1-800-221-4215; 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,
Inc.
c/o Colbent Corporation
100 William Street Galleria
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 (except as described under "--Foreign Restrictions" on
page 21) 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 under "--Payment
For Shares" on page 18 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."

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STOCKHOLDERS WHO ARE RECORD OWNERS
Stockholders who are record owners can choose between either option set forth
below 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 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 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.

INFORMATION AGENT

The information agent for this rights offering is Georgeson Shareholder
Communications Inc.

If you have questions or need further information about this rights offering,
please write or call our information agent at 17 State Street, New York, New
York 10004 or 1-800-221-4215.

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 $5,000,
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 $38.97 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

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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 to be
accepted.

(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 third business day
after the expiration date.

On the confirmation date, which will be five 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 the rights holder 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 subscribed for are contingent upon actual payment
for such shares.

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, EXCEPT AS DESCRIBED
UNDER "--NOTICE OF NET ASSET VALUE DECLINE" ON PAGE 20.

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.

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

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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.

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 December
16, 2005, 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, which 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, 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 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

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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.

In addition, we have agreed to reimburse the dealer manager up to $100,000 for a
portion of its reasonable expenses incurred in connection with this rights
offering. 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. 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 January 17, 2006, 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, which 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.

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(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 on
the date when the right is exercised.

EMPLOYEE PLAN CONSIDERATIONS

Stockholders whose shares are in 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. 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
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 2006 is
$44.52 per share (the net asset value per share on December 16, 2005) and (iii)
the subscription price is $38.97 per share (90% of the last

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reported sale price of a share of our common stock on December 16, 2005), and
after giving effect to dealer manager fees and other offering expenses, our
investment manager and investment adviser would receive additional management
and advisory fees of approximately $1,251,494 and $568,524, respectively, for
2006. In addition, certain affiliates of our investment manager and investment
advisor may, in their capacity as broker-dealers, charge commissions or other
fees and expenses to stockholders who exercise, transfer or purchase rights
through them. 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
the investment manager, the investment adviser or the dealer manager. See "Our
Management" on page 35 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 will be less than the then net asset value per
share of our common stock, this rights offering will 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 the 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 $44.52 per share (the net asset value per
share on December 16, 2005), and that the subscription price is 90% of an
average market price of $43.30 per share (the last reported sale price of a
share of our common stock on December 16, 2005), our net asset value per share
on this date would be reduced by approximately $1.39 per share, after giving
affect to the dealer manager fees payable by us, estimated at $4,993,621, and
other expenses of this rights offering, estimated at $600,000, payable by us.
Stockholders on the record date 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.

IMPORTANT DATES TO REMEMBER

Record date................................................. December 22, 2005
Subscription period......................................... December 22, 2005
to January 20, 2006*
Expiration date and pricing date............................ January 20, 2006 *
Payment for shares or notices for guarantees of delivery
due....................................................... January 20, 2006*
Payment for guarantees of delivery due...................... January 25, 2006 *
Confirmation mailed to participants......................... January 27, 2006 *
Final payment for shares due................................ February 10, 2006*

* Unless this rights offering is extended

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23

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Use of proceeds

Assuming all shares in this rights offering are sold at an estimated
subscription price of $38.97 per share, the net proceeds of this rights offering
are estimated to be approximately $127,569,597 after payment of the dealer
manager 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

Under normal circumstances, at least 80% of our net assets are 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.

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

Kingdom of Belgium Republic of Ireland Kingdom of Spain
Republic of Cyprus Italian Republic Kingdom of Sweden
Kingdom of Denmark Grand Duchy of Luxembourg Republic of Turkey
Republic of Finland Republic of Malta United Kingdom of Great Britain and Northern Ireland
Republic of France Kingdom of the
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.

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24

INVESTMENT OBJECTIVE AND POLICIES
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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 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"
below and "Investment Objective and Policies--Futures and Options" on page B-2
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,
where our investments are and may in the future be significant. On October 31,
2005, the percentages of our total assets invested in these countries were:
Russia--50.5%, Poland--15.9%, Turkey--12.9%, Hungary--8.7% and the Czech
Republic--6.2%. Nonetheless, except as described in this prospectus, there are
no prescribed limits on geographic asset distribution within 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

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25

INVESTMENT OBJECTIVE AND POLICIES
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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%
Russia...................................................... 60%
Hungary..................................................... 50%
Czech Republic.............................................. 30%
Turkey...................................................... 20%
Any single other country.................................... 15%

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 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.

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26

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

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.

Risk factors

RISKS 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 other things:

+ 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.

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RISK FACTORS
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Some foreign markets in which we invest are considered to be in 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 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 emerging market 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.

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 those 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.

An established secondary market might not 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 for
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.

RISKS 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 below. 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 below,
investments in Russia should be considered to have greater risks.

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RISK FACTORS
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Since the break-up of the U.S.S.R. at the end of 1991, Russia has undergone
substantial and, at times, turbulent economic disruption and political and
social upheaval. Russia continues to make transitional movements 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. Russia's role and its reintegration into the global political
economy are also unclear. 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.

President Vladimir Putin's popularity within Russia has largely recovered from
losses sustained earlier in 2005 when he attempted to monetize social benefits.
Despite his strong domestic approval ratings, President Putin has repeatedly
stated that he will not implement constitutional changes to enable himself to
run for a third consecutive term as president. This has created widespread
speculation on possible presidential candidates for 2008 (including speculation
over whether President Putin will attempt to anoint a successor), particularly
due to the increased power that the Office of President has gained under Putin.
As a result, the parliamentary agenda over the next two years is likely to be
affected by political jockeying for position ahead of the presidential
elections. During his Presidential address to the Parliament in April, President
Putin placed a renewed emphasis on implementing key reforms, with a particular
focus on reforms aimed to reassure investors. However, even in the face of
renewed legislative activity, the government suffers from the perception that it
lacks a clear economic agenda.

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 United States military action in Iraq, it is even more
difficult to predict future oil price movements with any certainty, and
fluctuations in prices may increase substantially.

In 2004, the Russian equity market suffered from significant uncertainty in the
wake of the widely-publicized Yukos case, in which the Russian government
effectively seized control of the company's key production unit by forcing the
sale of subsidiary Yuganskneftegas in connection with billions of dollars in
back-tax claims. Because the move was widely considered to be a politically
motivated attack on Mikhail Khodorkovsky, the company's chief executive officer,
investors pulled their money out of Russia over concerns regarding the rule of
law and shareholder rights. The government has since taken steps to reassure
investors that Yukos was an isolated case, and, with Mr. Khodorkovsky now in
jail, investors have shifted their focus away from Yukos.

A centralized public market for trading Russian securities has not developed,
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
one another, resulting at times in contradictory regulations. 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

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RISK FACTORS
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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 levels of crime, including
extortion and fraud. Moreover, accounting, financial and audit 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" on page 34.

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

RISKS RELATING TO INVESTMENT IN CENTRAL EUROPE

European countries are in varying stages of transition towards becoming
pluralistic multi-party democracies with market-oriented economies based on
private and entrepreneurial initiatives. 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 export 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, securities traded in these markets may be
subject to greater volatility and price fluctuations than securities that are
traded in more developed markets.

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 other things:

+ 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;

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RISK FACTORS
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+ 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 to invest in, or in connection with our
investment in, the region, 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;

+ 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.

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RISK FACTORS
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RISK FACTORS RELATING TO INVESTMENT IN TURKEY

Investing in Turkey 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 Turkish securities that are not typically
associated with securities of companies in more developed countries. The value
of Turkish securities may be affected by various uncertainties, such as
economic, political and social instability and investment and regulatory risk.
As is the case with issuers in most emerging markets, Turkish 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 below, investments in Turkey should be considered to
have greater risks.

Over the past two decades, the Turkish economy has transitioned from a highly
regulated economy to a free market system. Despite a generally successful
transition, the Turkish economy has experienced significant macroeconomic
imbalances, including substantial budget and balance of payments deficits, high
rates of inflation, and high real rates of interest. High levels of government
debt and the high current account deficit continue to threaten Turkey's economic
stability. Turkey has entered into two stand-by agreements with the
International Monetary Fund (IMF) over the past 5 years to stabilize its
financial health. Nonetheless, in 2001 a liquidity crisis in the banking sector
triggered massive currency depreciation, soaring interest rates, and
hyperinflation. In 2002, the government renewed its commitment to improve the
Turkish economy with a reform program based on a flexible exchange rate regime,
tight fiscal policy, structural reform in the banking sector, and contained
inflation. The reform program has contributed to economic growth, but the
economy remains vulnerable to volatility due to external and internal shocks
such as high oil prices, terrorism, and political uncertainty, as well as
changes in investor sentiment. In May 2004, for example, the Turkish lira
depreciated significantly as share prices plummeted and interest rates rose.

Throughout its history, Turkey has been plagued by political instability, which
could have an adverse effect on the investment climate. Over the past 80 years,
58 different governments have ruled in Turkey, with military coups occurring
once every decade from 1960 to 1980. The current government is led by the
Justice and Development Party (AKP), which has been in power since November 2002
and is the first party in nearly two decades to have a majority in parliament.
Despite the recent political stability, the potential for future political
upheaval presents a very real risk to the implementation of important economic
reforms. The next national election will be held in 2007 and a change of
government could result in a change in economic policies. AKP has so far shown a
commitment to the current IMF program, but failure to continue to follow the IMF
program could have an adverse effect on the Turkish economy.

Uncertainties relating to Turkey's bid for EU membership are an additional
source of volatility in the Turkish financial markets. In October of this year,
formal negotiations on Turkey's accession into the EU were launched. The
criteria for joining the EU include implementation of a number of political,
legislative and economic reforms, which Turkey may decide in the future it is
either unable or unwilling to fulfill. In addition, there is significant
political pressure within the EU to move toward a "privileged partnership" with
Turkey rather than full membership. The negotiations are expected to last a
decade, and market sentiment may fluctuate dramatically as the negotiations
progress.

In addition to the domestic political uncertainty, terrorism and political
instability in neighboring countries, such as Iran and Iraq, is another source
of risk associated with investment in Turkey. Terrorism within Turkey and
conflicts in other countries in the region could create greater volatility in
the Turkish financial markets. Given the current situation in Iraq, political
instability in the Middle East is likely to remain a concern. In addition,
terrorist bombings have occurred in Turkey within the past two years, and the
threat of future terrorist acts could result in additional volatility. Turkey
has previously been in conflict with the

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Peoples' Congress of Kurdistan (PKK), which is recognized as a terrorist group
in the United States and some European nations; the Kurdish issue continues to
be a source of potential political instability.

The Turkish equity market is significantly less developed than securities
markets in the United States and Western Europe. The market in Turkey is
smaller, less liquid, and more volatile. Approximately half of the market
capitalization of the Istanbul Stock Exchange (ISE) is concentrated in ten
companies, and shares of five companies accounted for approximately one-third of
the average daily trading value of all stocks traded on the ISE in 2004.
Securities that trade on the Turkish market may be subject to significant
fluctuations in price that are not necessarily related to the financial
performance of the companies that issued the securities.

DILUTION OF NET ASSET VALUE

A dilution of the aggregate net asset value on a share of our common stock will
be experienced as a result of this rights offering because the subscription
price will be less than our then current net asset value per share. This
dilution will be experienced by all stockholders, irrespective of whether they
exercise all or a portion of their rights, although nonexercising shareholders
will experience disproportionate dilution. 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 $38.97 is approximately 12.5% below
our net asset value of $44.52 per share on December 16, 2005, our net asset
value per share (after payment of the dealer manager fees and other estimated
offering expenses) would be reduced by approximately $1.39 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 to 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 11
of this prospectus and "Description of Common Stock" on page 64 of this
prospectus.

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RISK FACTORS
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EXCHANGE RATE FLUCTUATIONS AND FOREIGN CURRENCY CONSIDERATIONS

Substantially all of our assets are invested in Russia and Central Europe, 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 rubles, 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 the 10:00 a.m. mid-point of 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 U.S. dollars, changes in foreign currency exchange rates will affect the
value of 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-4 of the SAI.

INTEREST EXPENSE

We may, subject to limitations described under "Investment Restrictions" on page
B-5 of 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 & 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.

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RISK FACTORS
--------------------------------------------------------------------------------

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 events in the Middle East could have significant adverse effects on U.S. and
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.

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 ten directors, three of whom are "interested persons" (as defined in the
Investment Company Act) and seven 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-11 under
"Management" in the SAI.

INVESTMENT MANAGER

Deutsche Investment Management Americas Inc., with principal offices located at
345 Park Avenue, 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, DIMA also determines which
securities are suitable for our investment. We pay DIMA an annual management fee
equal to 0.65% of our average weekly net assets up to $100 million, and 0.55% of
our average weekly net assets in excess of $100 million. A discussion regarding
the basis for the board of directors approving our contracts with DIMA and DeAMI
is available on page B-18 of the SAI under "Investment Advisory and Other
Services".

DIMA is an indirect wholly-owned subsidiary of Deutsche Bank AG. DIMA is engaged
in the investment advisory business. DIMA also serves as investment manager for
numerous other registered investment companies. As of September 30, 2005, DIMA
had total assets of approximately $172 billion under management.

With total assets of approximately $1.173 trillion as of September 30, 2005,
Deutsche Bank AG is the largest commercial and investment bank in Germany and a
leading European financial institution, and is

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35

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

ranked among the world's largest banks in terms of total assets. 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.

For additional information about our investment manager, see "Investment
Advisory and Other Services" on page B-18 of the SAI.

INVESTMENT ADVISER

Deutsche Asset Management International GmbH, 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% of our average weekly net assets in
excess of $100 million.

DeAMI is a subsidiary of Deutsche Bank AG. DeAMI provides international
portfolio management services to institutional investors worldwide. DeAMI also
serves as investment adviser for The European Equity 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-18 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. Additional information about the
compensation, other accounts managed and the ownership of our securities by
these persons is provided on page B-22 of the SAI under "Investment Advisory and
Other Services--Portfolio Managers."

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

Sandra M. Schaufler Chief Investment Officer Since 2004 Director, Deutsche Asset Management since 2004)
and Portfolio Manager for The Central Europe and
Russia Fund, Inc., The European Equity Fund, Inc.
and The New Germany Fund, Inc. Formerly, Director
of Equity Sales, HVB Capital Markets (2001-2003);
Portfolio Manager, Deutsche Asset Management
(1997-2001)
Robert Kalin Senior Fund Manager, Since 2002 Vice President, Deutsche Asset Management,
Equities Frankfurt; Senior Portfolio Manager Equities,
Emerging Markets Deutsche Asset Management (since
2002). Formerly, Fund Manager, Zurich Invest
(2001-2002), responsible for Emerging Europe;
Advisor to Zurich Invest Mittelosteuropa Fund
(1998-2001)
Steffen Gruschka Senior Fund Manager, Since 2001 Director, Deutsche Asset Management, Frankfurt
Equities (since 2001). Senior Fund Manager for Emerging
European Equities; Head of the Emerging Equities
team (since 2001)
Sylwia Szczepek Senior Fund Manager, Since 2001 Vice President, Deutsche Asset Management,
Equities Frankfurt; Funds Manager for Emerging European
Equities, Deutsche Asset Management (since 2001).
Formerly, Deutsche Bank, Corporate Development
(Afk)

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OUR MANAGEMENT
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AFFILIATED BROKERAGE

In fiscal year 2003, we paid 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 years ended October 31, 2004 and October 31,
2005, however, Deutsche Bank AG and its affiliates did not receive brokerage
commissions from us. For information about brokerage practices and commissions,
see "Brokerage Allocation and Other Practices" on page B-25 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;

+ 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

Four 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. In addition, it is not
certain that a foreign court would enforce, in original actions, liabilities
against such persons predicated solely upon the U.S. securities laws.

The Central European, Russian and Turkish economies and securities markets

Following more than 50 years of communist command or control economies, the
Central European countries, Russia and Turkey now have economies that
essentially are market-based but starved for

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investment capital. Progress in further developing 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, 2000-2004

GDP
ANNUAL PER CAPITA
GDP ANNUAL IN 2004
COUNTRY GROWTH RATE INFLATION (USD $)(1)
-

Czech Republic.............................................. 3.1% 2.6% 16,740
Hungary..................................................... 3.9 7.1 15,180
Poland...................................................... 3.1 2.7 11,965
Russia...................................................... 6.1 14.9 9,856
Turkey...................................................... 4.3 36.4 7,400

Source: The Economist Intelligence Unit; World Bank national accounts data

Foreign investment levels have increased rapidly between 1994 and 2004. 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.

In May 2004, ten countries including eight Central European nations were
admitted to the EU: Poland, Hungary, the Czech Republic, Slovenia, Slovakia,
Malta, Cyprus, Estonia, Latvia and Lithuania. In the past, countries with
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 EMU in 2001.

As the Central European countries have joined the EU, foreign investors have
increased investments in the region, as evidenced by continued strong capital
flows (representing direct investment and portfolio investments) that were seen
in Hungary, Poland and the Czech Republic in 2004. The equity market indices of
Spain, Portugal and Greece moved closely in line with each other as the timing
of their membership in the EMU approached in 1999 and 2001. It is possible, but
not a certainty that this pattern will be repeated in the Central European
nations that are now part of the EU.

In Russia, President Vladimir Putin has made the country's reformation into a
free market economy a key priority. It is generally believed by many political
analysts, though far from a certainty, that Putin's policies, as well as the
designation of Russia by both the United States and the EU as a market economy
in 2002, may help smooth the country's path to eventual membership in the World
Trade Organization ("WTO"). In 2004, largely in response to a change in Russia's
stance on energy pricing policies and the Russian government's expression of
support to ratify the Kyoto protocol on climate change, the EU reportedly
dropped its objections to the country joining the WTO.

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

(1) All GDP data used in this section is based on purchasing power parity (PPP).

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In Turkey, the government began membership talks with the EU in October 2005
after having undertaken important structural reforms in its economy. However,
the failure of certain EU member countries to approve a European constitution
during the summer of 2005 has negative consequences for all countries that seek
to join the EU, including Turkey. Considerable legal and political barriers
remain that could hinder Turkey's entry into the EU, and some observers believe
it may take a decade or more for the process to run its course.

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 thirteen years, the Czech economy has undergone a
process of rapid transformation. The country joined the EU on May 1, 2004.

ECONOMIC TRENDS IN THE CZECH REPUBLIC

2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------

GDP per capita (USD $)............................ 13,807 14,644 15,130 15,780 16,740
GDP (% real change, per annum).................... 3.25 3.09 1.96 2.90 4.44
Government consumption (% of GDP)................. 19.63 19.34 21.41 20.60 22.65
Budget balance (% of GDP)......................... (3.11) (2.40) (6.30) (6.90) (3.90)
Consumer prices (% change per annum; average)..... 3.91 4.68 1.82 0.10 2.80
Public debt (% of GDP)............................ 17.20 18.99 24.45 30.20 32.60
Labor costs per hour (USD $)...................... 1.99 2.19 2.73 3.39 3.98
Recorded unemployment (%)......................... 9.00 8.55 9.19 9.90 9.78
Current-account balance/GDP (%)................... (5.23) (5.72) (6.45) (6.90) (5.23)

Source: The Economist Intelligence Unit

There are a number of economic factors that contribute to the Czech Republic's
attractiveness as an investment market. The country has achieved positive rates
of growth in GDP over the past five years. Core inflation decreased
significantly between 2001 and 2003, and was estimated at 3.20% for 2004.(2) In
addition, rising wages and relatively low unemployment over the past few years
are likely to continue to spur growth in private consumption, which potentially
could provide support to stock prices of Czech companies.

The Czech economy continued to perform relatively well in 2004 and 2005, due to
strong exports that could potentially lead to a sharply lower current-account
deficit by the end of 2005. That being said, the Czech National Bank, the
country's central bank, has expressed concerns about the potential impact of
rising oil prices on consumer prices and some observers expect the bank will
raise interest rates in early 2006.

Privatization has attracted considerable foreign direct investment. The EU is by
far the country's largest trading partner, accounting for 86% of exports and 72%
of imports in 2004. Machinery and transport equipment and intermediate
manufactured goods are the Czech Republic's major exports as well as imports.
After growing steadily since 1997, the current-account deficit has begun to show
signs of falling, both in absolute terms and as a percentage of GDP.

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

2 Source: The World Factbook 2005 (published by the U.S. Central Intelligence
Agency).

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THE CZECH EQUITY MARKETS
Following World War II, the Czech exchange business, which traced 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. In May 2004,
the PSE became a member of the Federation of the European Securities Exchanges
("FESE") in connection with the admission of the Czech Republic into the EU. In
that same month the PSE was granted the status of a designated offshore
securities market by the U.S. Securities and Exchange Commission.

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 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 T+3 settlement dates in September 2002 for the trading of
equities and bonds.

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The following table illustrates a multi-year history of the number and type of
listed securities (both debt and equity) on the PSE.

THE CZECH SECURITIES MARKET

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

1995............................. 195,407 7,463 1,764 82 6 1,676
1996............................. 393,200 15,024 1,750 70 53 1,627
1997............................. 679,538 25,957 412 78 60 274
1998............................. 860,192 32,858 402 43 99 260
1999............................. 1,187,486 33,161 290 38 84 168
2000............................. 1,222,833 32,781 245 35 71 139
2001............................. 1,987,179 55,840 186 33 62 91
2002............................. 1,793,071 59,581 153 25 59 69
2003............................. 1,367,546 46,140 144 32 53 96
2004............................. 1,172,141 52,218 132 30 48 54

Source: Prague Stock Exchange

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

The following table provides an overview of the market capitalization of the
stocks comprised by the PSE, as of December 31, 2004:

NUMBER OF MARKET CAP. MARKET CAP.
STOCK ISSUES (MIL. CZK) (MIL. USD $)
------------------------------------------------------------------------------------------------------

Main Market................................................ 6 778,342 34,672
Secondary Market........................................... 29 137,635 6,131
Free Market................................................ 20 59,797 2,664
-- -- --
Total...................................................... 55 975,774 43,467
== == ==

Source: Prague Stock Exchange

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

INDUSTRY COMPOSITION OF STOCKS TRADED ON THE PRAGUE STOCK EXCHANGE, AS OF
DECEMBER 31, 2004

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

Finance and Banking......................................... 45.2%
Power Generation............................................ 28.0
Transport, Communications................................... 13.6
Beverages and Tobacco....................................... 3.4
Extraction of Minerals/Ores................................. 3.0
Chemicals, Pharmaceuticals, Rubber.......................... 5.1
Building, Building Materials................................ 0.8
All Others.................................................. 0.9
-----------
Total....................................................... 100.0%
===========

Source: Prague Stock Exchange

The following table lists the 30 largest stocks listed on the PSE based on
market capitalization as of December 31, 2004. These 30 stocks represented
98.04% of the total market capitalization of all listed stocks on the PSE:

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

Erste Bank der
oesterreichischen Sparkas... Finance and Banking BAAERBAG 286,593 12,767
CEZ, a.s. .................... Power Generation BAACEZ 201,766 8,988
Komercni banka, a.s. ......... Finance and Banking BAAKOMB 124,368 5,540
Cesky Telecom, a.s. .......... Transport, Communications BAATELEC 118,916 5,297
Philip Morris CR, a.s. ....... Beverages and Tobacco
Production BAATABAK 32,104 1,430
Ceska pojistovna, a.s. ....... Finance and Banking BAACSPOJ 30,348 1,352
Zentiva, a.s. ................ Chemicals,
Pharmaceuticals, Rubber BAAZEN 28,892 1,287
Unipetrol, a.s. .............. Production of Chemicals,
Pharmaceuticals, Rubber BAAUNIPE 17,807 793
Ceske Radiokomunikace,
a.s. ....................... Transport, Communications BAACRADI 13,720 611
OKD, a.s., clen koncernu
Karbon Invest............... Extraction and Processing
of Minerals and Ores BAAOKD 11,593 516
Severoceske doly, a.s. ....... Extraction and Processing
of Minerals and Ores BAASEVDO 11,124 496
Severomoravska
energetika, a.s. ........... Power Generation BAASMENG 8,414 375

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Prazska energetika, a.s. ..... Power Generation BAAPRENG 7,884 351
Jihomoravska energetika,
a.s. ....................... Power Generation BAAJMENG 6,572 293
Severoceska energetika,
a.s. ....................... Power Generation BAASEVEN 5,702 254
Stredoceska energeticka,
a.s. ....................... Power Generation BAASTREN 5,555 247
Zapadoceska energetika,
a.s. ....................... Power Generation BAAZCENNG 5,511 246
Sokolovska uhelna, a.s. ...... Extraction and Processing
of Minerals and Ores BAASOKUH 5,235 233
Vychodoceska energetika,
s.a. ....................... Power Generation BAAVCENG 5,004 223
Jihomoravska
plynarenska, s.a. .......... Power Generation BAAJMPLY 3,932 175
Severonmoravska
plynarenska, a.s. .......... Power Generation BAASMPLY 3,852 172
Stavby silnic a zeleznic, a.s.
(SSZ)....................... Building, Building
Materials BAASTSSZ 3,466 154
Jihoceska energetika, a.s. ... Power Generation BAAJIHEN 3,039 135
Metalimex, a.s. .............. Trade BAAMETLX 2,442 109
Lafarge cement, a.s. ......... Building, Building
Materials BAACIZKO 2,435 108
Prazska Plynarenska, a.s. .... Power Generation BAAPRLY 2,347 105
Vychodoceska
plynarenska, a.s. .......... Power Generation BAAVCPLY 2,293 102
Seversceska plynarenska,
a.s. ....................... Power Generation BAASEVPL 1,969 88
United Energy, a.s. .......... Power Generation BAAPSZTE 1,887 84
Stredoceska plynarenska,
a.s. ....................... Power Generation BAASTRPL 1,886 84

Source: Prague Stock Exchange

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

The Czech Traded Index (the "CTX"), one of the currently five indices 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 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 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 November 25, 2005, which represented approximately 16.7% of the total market
capitalization of stocks (including shares and units) listed on the PSE as of
the same date.

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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 2000 and 2004 and through November 30, 2005.

ANNUAL RETURNS OF THE CZECH STOCK MARKETS(1) AND CURRENCY (IN USD $)

2000 2001 2002 2003 2004 11/30/05(2)
-----------------------------------------------------------------------------------------------

Czech Traded Exchange ("CTX").............. 1.91% (21.06)% 36.88% 63.25% 81.51% 25.57%
Koruna ("CZK")............................. (3.86) 4.70 18.41 16.95 14.65 9.56%

Source: Bloomberg

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

(2) Non-annualized return for January 1, 2005 through November 30, 2005.

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
joined 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.

ECONOMIC TRENDS IN HUNGARY

2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------

GDP per capita (USD $)............................ 12,083 12,874 13,485 14,260 15,180
GDP (% real change per annum)..................... 5.21 3.85 3.46 2.86 4.23
Government consumption (% of GDP)................. 9.67 10.17 10.88 10.50 10.65
Budget balance (% of GDP)......................... (3.00) (4.65) (9.18) (5.80) (5.36)
Consumer prices (% change per annum, avg.)........ 9.77 9.19 5.27 4.66 6.80
Public debt (% of GDP)............................ 54.97 52.20 55.40 56.00 58.77
Labor costs per hour (USD $)...................... 1.91 2.27 2.95 3.80 4.85
Recorded unemployment (%)......................... 6.38 5.71 5.82 5.89 6.09
Current-account balance/GDP (%)................... (6.21) (3.38) (4.07) (6.50) (8.79)

Source: The Economist Intelligence Unit

There are a number of economic factors that contribute to Hungary's
attractiveness as an investment market. The country has achieved positive rates
of growth in GDP over the past five years. Core inflation has decreased from 14%
in 1998 to 7% in 2004.(3) In addition, rising wages are likely to continue to
spur consumer spending, which potentially could provide support to stock prices
of retail and service-oriented companies.

Since 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. 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

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

3 Source: The World Factbook 2005 (published by the U.S. Central Intelligence
Agency).

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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 2004 figures.

Hungary's current left-centrist government is pursuing the economic reforms
required to join the European economic and monetary union in 2010. The
structural reforms, in which the government to date has made little progress,
are notably in the financing of the health care sector, in sub-national finance
and in capacity building. Although the National Bank of Hungary, the country's
central bank, has been lowering interest rates since March 2004, its policy
committee decided to keep them steady at its October 2005 meeting. Although
interest rates remain high relative to the United States and the EU, it is
possible that the cycle of rate cuts may have ended due to Hungary's weak fiscal
health, a result of relatively high deficits.

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 2004, the BSE had 31 members. 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 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 2004, the total market capitalization of the Budapest Stock
Exchange was roughly USD $77 billion. The average daily trading volume in 2004
was approximately USD $50 million. Equities represented 37% of the market
capitalization of the Exchange and accounted for 89% of the turnover during the
year. Trading on the BSE is carried out in three ways: securities, government
securities, and futures. As of December 31, 2004, there were 160 securities
listed on the BSE (an increase of 21.2% over the December 2003 level), of which
47 were equities, 24 were government bonds, 13 were corporate and international
institutional bonds, 10 were Treasury bills, and 18 were investment notes.

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 competitive sector that is likely to see increased consolidation as the
government privatizes several remaining holdings. In addition, the country
amended its financial regulations to meet EU standards before it joined the EU
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.

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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........................................... 2,340 328 348 44
1996........................................... 5,583 853 1,606 245
1997........................................... 15,029 3,059 7,685 1,436
1998........................................... 14,021 3,020 16,104 3,460
1999........................................... 16,414 4,145 14,848 3,431
2000........................................... 11,920 3,394 12,248 3,417
2001........................................... 10,210 2,849 4,834 1,386
2002........................................... 13,089 2,947 5,894 1,514
2003........................................... 16,689 3,470 8,595 1,849
2004........................................... 28,557 5,189 16,025 2,912

Source: Budapest Stock Exchange, Annual Statistics 2004

(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.

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

INDUSTRY COMPOSITION OF THE BUDAPEST STOCK EXCHANGE, AS OF DECEMBER 31, 2004

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

Banks....................................................... 34.8%
Oil and Gas................................................. 28.4
Pharmaceuticals............................................. 16.5
Telecom..................................................... 16.3
Chemicals................................................... 1.8
Electricity................................................. 1.1
Hotels, Tourism............................................. 0.9
Others...................................................... 0.2
------
Total....................................................... 100%
======

Source: Budapest Stock Exchange, Annual Statistics 2004

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

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The following table sets forth the 25 largest Hungarian stocks based on their
market capitalization, as of December 31, 2004. These stocks represent roughly
12.3% of the total market capitalization of the stocks traded on the Budapest
Stock Index ("BUX").

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

OTP Bank.............................. Universal Banking Services OTP
8,583
MOL Group............................. Oil and Natural Gas
Industry MOL 7,597
Magyar Telecom........................ Telecommunications MATV
4,964
Richter Gedeon........................ Pharmaceuticals RICHTER
2,327
BorsodChem............................ Chemicals BCHEM
775
Budapesti Elektromos Muvek Rt. ....... Electricity Supply ELMU
703
Tiszai Vegyi Kombinat Company Ltd. ... Chemicals TVK
675
Egis Ltd. ............................ Pharmaceuticals EGIS
467
Land Credit and Mortgage Bank Ltd. ... Land Credit and Mortgage
Banking Services FHB 417
Hungarian Elektricity Supply Co. ..... Electricity Supply EMASZ
329
Antenna Hungaria...................... Broadcasting,
Telecommunications Services ANTENNA 252
Danubius Szalloda es Gyogyudulo
Rt. ................................ Hotels DANUBIUS
235
Zwack Unicom.......................... Beverages ZWACK
96
Graphisoft SE......................... Software Development and
Marketing GRAPHI 80
Zkeramia.............................. Building Industry ZKERAMIA
68
Fotex................................. Retail Trade FOTEX
55
Inter-Europa Bank..................... Commercial Banking Services IEB
54
RABA Automotive Group................. Machinery RABA
50
Linamar Hungary....................... Engineering and Machinery LINAMAR
50
Globus Konzervipari Rt. .............. Food Industry GLOBUS
28
Pannonplast Muanyagipari Rt. ......... Plastics PPLAST
27
Synergon Informatika Rt. ............. Information Technology SYNERGON
18
NABI Autobuszipari Rt. ............... Engineering and Machinery NABI
10
Globus Konzervipari Rt. .............. Food Industry GLOBUS03
7
Globus Konzervipari Rt. .............. Food Industry GLOBUS03/2
0
BorsodChem............................ Chemicals BCHEM04
0.00

The Hungarian Traded Index (the "HTX" index, an index of the CECE Index family)
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 eight stocks as of November 25, 2005.
This group represented approximately 42% of the total market capitalization of
stocks listed on the BSE as of the same date.

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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 forint ("HUF"), between 2000 and 2004 and through November 30, 2005.

ANNUAL RETURNS OF THE HUNGARIAN STOCK MARKETS (1) AND CURRENCY (IN USD $)

2000 2001 2002 2003 2004 11/30/05(2)
-------------------------------------------------------------------------------------------------

Hungarian Traded Exchange ("HTX")....... (22.44)% (7.44)% 33.32% 27.83% 72.89% 16.44%
Forint ("HUF").......................... (10.57)% 2.74% 22.42% 7.56% 15.29% 18.76%

Source: Bloomberg

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

(2) Non-annualized return for January 1, 2005 through November 30, 2005.

POLAND'S ECONOMY AND SECURITIES MARKETS

After sluggish economic growth and high levels of unemployment in 2001 and 2002,
Poland has shown signs of an economic recovery driven by rising levels of
consumption and exports. With a market size greater than that of the Czech
Republic, Slovakia and Hungary combined, Poland's 38 million consumers comprise
the largest economy in Central Europe. For the past decade, Poland's GDP has
grown at an annualized rate of 4.5%.(4) Poland joined the EU on May 1, 2004.

ECONOMIC TRENDS IN POLAND

2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------

GDP per capita (USD $)............................. 9,874 10,220 10,528 11,090 11,965
GDP (% real change, per annum)..................... 4.00 1.00 1.40 3.70 5.40
Government consumption (% of GDP).................. 18.96 18.98 19.03 18.52 17.29
Budget balance (% of GDP).......................... (2.12) (4.26) (5.05) (4.54) (4.69)
Consumer prices (% change per annum; average)...... 10.14 5.49 1.87 0.75 3.54
Public debt (% of GDP)............................. 37.43 38.33 43.38 47.4 46.75
Labor costs per hour (USD $)....................... 2.42 2.77 2.86 3.14 3.48
Recorded unemployment(%)........................... 14.01 18.00 19.70 20.00 19.60
Current-account balance/GDP........................ (6.00) (2.89) (2.62) (1.8) (4.28)

Source: The Economist Intelligence Unit

There are a number of economic factors that make Poland an attractive country
for investment. Following four years of positive growth between 2000 and 2003,
GDP expanded by 5.4% in 2004, supported by strong exports. Inflation has dropped
steadily over that same period, to a nominal level. In September 2005, Poland's
central bank reported that the annual growth in core inflation stood at 1.3%,
markedly below the bank's target of 2.5% and lower than the annual average rate
of 2.7% witnessed between 2000-2004.(5) At the same time, rising wages may
continue to spur private consumption, which potentially could have a positive
effect on the stock prices of Polish companies.

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 the county's currency (the zloty, or PLN)

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

4 Republic of Poland's Official Web site: http://www.poland.pl/info/invest1.htm.

5 National Bank of Poland, "Information from the Meeting of the Monetary Policy
Council, 25-26 October, 2005."

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convertible, fixed the exchange rate and lowered import barriers. Since 2000,
Poland has moved rapidly from a country that was heavily dependent on
agricultural production to a more diversified economy. Fully 38.2% of Poland's
exports in 2004 were related to machinery and transport equipment, while food
and live animals accounted for just 7.7% of exports. In 1999, by contrast,
agricultural production accounted for 25% of Poland's GDP.

The main impediment to Poland's growth is the public sector, especially the
public finance system, which is hampered by losses in Polish state enterprises,
entitlements, and a tax code in need of reform. In October 2005, the central
bank decided to keep its main interest rate unchanged at 4.5%. In 2001, the
bank's intervention rate stood at 19%. Furthermore, to stimulate economic
growth, the Polish Government lowered corporate income tax to 19% from 27% in
2004. Lower tax rates are generally considered attractive to foreign investors.

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.

As of December 31, 2004, the total market capitalization of companies listed on
the WSE was 29.2 billion zlotys (USD $9.69 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 THOUSANDS
YEAR LISTED COMPANIES OF SHARES* IN MILLIONS 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
2004.................................... 230 15,270 109,531 36,623,276

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

Source: Warsaw Stock Exchange

(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.

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+ 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.

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

INDUSTRY COMPOSITION OF THE WARSAW STOCK EXCHANGE, AS OF DECEMBER 31, 2004

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

Banking..................................................... 46.7%
Telecom..................................................... 14.2
Chemicals................................................... 10.8
Metals...................................................... 4.8
Food........................................................ 3.9
Media....................................................... 3.3
Construction................................................ 2.8
Information Technology...................................... 2.7
Wood & Paper................................................ 2.3
Wholesale & Retail.......................................... 2.2
Building Materials.......................................... 1.3
Insurance................................................... 0.9
Electroengineering.......................................... 0.6
Light Industry.............................................. 0.4
Other....................................................... 3.0
---------------------
Total....................................................... 100.0%
=====================

Source: Warsaw Stock Exchange

As of December 31, 2004, the following 20 largest companies traded on the WSE
accounted for 78.0% of the total market capitalization of all companies traded
on the exchange:

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

Bank Powszechna Kasa Oszczednosci
Polski Spolka Akcyjna SA............ Finance PKO 1,000 27,800 9,227
Telekomunikacja Polska SA............. Telecom TPSA 1,400 27,720 9,200
Bank Polska Kasa Opieki SA............ Finance PEO 166 22,974 7,625

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Polski Koncern Natowy Orlen SA........ Chemicals PKN 428 16,167 5,366
Bank Przemyslowo-Hanlowy PBK SA....... Finance PBH 29 14,645 4,861
Bank Handlowy W Warszawie SA.......... Finance BHW 131 8,375 2,780
Bank Zachodni WBK SA.................. Finance BZW 73 7,077 2,349
KGHM Polska Miedz SA.................. Metals KGH 200 6,260 2,078
Grupa Zywiec SA....................... Brewery ZWC 11 5,124 1,701
ING Bank Slaski SA.................... Finance BSK 13 5,061 1,680
BRE Bank SA........................... Finance BRE 29 3,273 1,086
Agora SA.............................. Media ABO 57 3,224 1,070
Frantschach Swiecie SA................ Wood and Paper SFC 50 2,900 963
Bank Millennium SA.................... Finance MIL 849 2,853 947
TVN Spolka Akcyjna SA................. Media TVN 66 2,579 856
Kredyt Bank SA........................ Finance KRB 272 2,567 852
Boryszew Spolka Akcyjna SA............ Chemicals BRS 119 2,396 795
Europejski Fundusz Leasingowy SA...... Finance EFL 43 2,329 773
Globe Trade Centre Spolka Akcyjna
SA.................................. Construction GTC 20 2,106 699
Prokom Software SA.................... Information PKM 14 2,042 678
Technology

Source: Warsaw Stock Exchange

(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" index, a member of the CECE Index family) 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, it included 11 stocks as of November 25, 2005, which
represented approximately 32.9% of the total market capitalization of stocks
listed on the WSE as of the same date.

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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, between 2000 and 2004 and through November 30, 2005:

ANNUAL RETURNS OF POLISH STOCK MARKETS (1) AND CURRENCY (IN USD $)

2000 2001 2002 2003 2004 11/30/05(2)
-------------------------------------------------------------------------------------------------

Polish Traded Exchange ("PTX")............. (3.59)% (29.99)% 3.38% 30.52% 64.74% 19.04%
Zloty...................................... 0.42% 4.24% 3.54% 2.57% 23.97% 10.18%

Source: Bloomberg

(1) Simple price appreciation only.

(2) Non-annualized return for January 1, 2005 through November 30, 2005.

RUSSIA'S ECONOMY AND SECURITIES MARKETS

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 proceeded at an irregular pace and risks for
investing in Russia remain significant. Financial resources are still
concentrated in a few hands. Political and economic reforms are clearly needed
in order for the economy to continue to grow.

In the years following the collapse of the Russian economy in 1998 and a
subsequent USD $22.5 billion bailout by the International Monetary Fund,
however, Russia has made significant progress in transitioning to a market-based
economy. Global high levels of demand for oil and constrained production
capacities prices have fostered a recovery in Russia's oil industry. Foreign
investment in the country has increased and public debt levels have fallen
between 2000 and 2004.

ECONOMIC TRENDS IN RUSSIA

2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------

GDP per capita (USD $)................................. 6,626 7,169 7,664 8,350 9,856
GDP (% real change per annum).......................... 10.05 5.09 4.66 7.33 7.18
Government consumption (% of GDP)...................... 15.09 16.44 17.69 16.89 16.46
Budget balance (% of GDP).............................. 2.37 3.08 1.65 1.63 4.16
Consumer prices (% change per annum, average).......... 20.81 21.60 15.96 13.63 10.91
Public debt (% of GDP)................................. 62.15 49.35 42.01 34.80 24.80
Labor costs per hour (USD $)........................... 0.44 0.63 0.78 1.00 1.32
Recorded unemployment(%)............................... 10.49 9.03 8.00 8.47 8.18
Current-account balance/GDP(%)......................... 18.04 10.95 8.65 9.02 10.43

Source: The Economist Intelligence Unit

There are a number of positive economic trends that support investment in
Russia. First, GDP growth, supported by strong oil exports, has been strong, at
7.33% in 2003 and 7.18% in 2004, though it has slowed somewhat more recently (to
an annualized rate of around 5.2% for the first quarter of 2005).(6) Second, in
November 2005 core inflation reportedly had been brought down much lower than
the hyperinflation that the country experienced in the 1990s. Third, Russia is
one of the few countries in the

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

6 Source: The Economist Intelligence Unit, "Business Outlook: Russia, June 20,
2005.

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region that has been able to run a current account surplus over the past several
years. Finally, Russia's improved fiscal position has attracted the attention of
the major international credit rating agencies. On October 26, 2005, Moody's
Investors Services upgraded Russia's rating in national and foreign currency
liabilities from Baa3, the first investment-grade rating, to Baa2, along with
the foreign-currency borrowing rating of the state owned companies Gazprom,
Rosneft, Transneft and Russian Railways. Lower borrowing costs for the Russian
government and companies are expected to attract increasing foreign investment
to the country.(7)

Leaving aside these generally positive trends, 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 the Russian federal government has been under
considerable pressure to contain certain rebellious regions within the Russian
Federation, including, most recently, violence in the North Caucasus, and
continued instability in Chechnya. Vladimir Putin, who became Russia's president
in 2000, made the focus of his first administration tax reform and deregulation.
However, in the face of opposition from within the Federation, Mr. Putin has
spent much political capital shoring up power in the executive branch of
government.

President Putin, who was re-elected to a second term in March 2004, has made the
country's reformation into a free market economy a key priority. His second term
has been focused on restructuring Russia's utilities industries and instituting
housing reforms. Bureaucratic inertia, amplified by widespread government
corruption, has been a significant impediment to Putin's agenda.

It is generally believed by many political analysts that, given time, Putin's
policies might help smooth the country's path to eventual membership in the
World Trade Organization. In May 2004, the EU removed its main obstacle to
Russia's admission to the WTO--that domestic gas prices be brought in line with
export prices. Notably, Russia agreed to raise domestic gas prices to be more in
line with export prices by 2010, albeit at levels considerably below the pricing
parity that the WTO initially sought. In other areas of market reforms, Russia
agreed to liberalize its telecom industry by 2007 (although it may take longer
for competitors to get licenses to open businesses that compete with the
state-owned company, Rostelecom), and assented to reforming its airline
regulations. However, negotiations of Russia's full 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.

The key factor in the overall performance of Russian GDP growth has been oil and
natural gas exports. Oil exports revenues have soared since 2000, not only
fueling domestic demand and consumption but also helping to strengthen the
ruble. Russia had a trade surplus of USD $87 billion in 2004 and a
current-account surplus of USD $60 billion in the same year.

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 the world's second largest oil exporter (after Saudi Arabia)
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 represents the biggest single direct
investment in Russia. Second, a political decision to build a private pipeline
and expand port facilities in Murmansk is aimed at increasing oil exports to the
United States. Third, to reduce Russia's dependence on oil beginning in 2004,
the Russian government took steps to narrow the permitted uses of the
stabilization fund, which is funded by oil revenues and is to be used to cushion
the economy from the negative impact of potentially lower oil

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

7 Source: Russian News and Information Agency (NOVOSTI), "Moody's Upgrades
Russia's Investment Rating," October 27, 2005

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revenues. The fund, which had contained USD $38 billion on November 1, 2005,
currently can be used only to reduce foreign debt or to add to the state pension
fund. With oil revenues adding USD $500 million per day to the Russian economy,
according to press reports, President Putin has urged restraint in domestic
spending and has suggested continued commitment to the Stabilization Fund and
making large external debt payments.

THE RUSSIAN SECURITIES MARKETS
As noted in the "Risk Factors" section above, Russia's securities market is
evolving from a 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 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 protections
available to stockholders of Western issuers. Accounting, financial and auditing
reporting by Russian companies is also generally of lower 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, the Moscow Interbank
Currency Exchange (the "MICEX") and the 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 in the
United States. In 2003, the RTS introduced an order-driven 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 December 31, 2004, more than 300 securities traded on the
RTS, including more than 40 bonds.

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TRADING VOLUME FOR RUSSIAN STOCKS, YEAR ENDED DECEMBER 31(1)

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

1995........................................................ 220 924,218
1996........................................................ 3,540 10,919,144
1997........................................................ 15,600 20,415,205
1998........................................................ 9,200 30,629,708
1999........................................................ 2,420 22,716,229
2000........................................................ 5,810 29,011,847
2001........................................................ 4,450 22,648,366
2002........................................................ 4,570 18,077,301
2003........................................................ 6,120 17,728,537
2004........................................................ 5,412 11,237,290

Source: Russian Trading System, Annual Report 2003; RTS Stock Exchange Classic

Market: Year 2004 Results

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

The following table shows the percentages of RTS-traded companies in each
industry, by market capitalization of common stock (public float) at the end of
2003 (the latest date for which aggregate data is available):

INDUSTRY COMPOSITION OF THE RUSSIAN TRADING SYSTEM, AS OF DECEMBER 31, 2003

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

Electric Energy Production.................................. 27%
Machine Building and Metal Processing....................... 14
Fuel Industry, including Oil................................ 12
Metallurgy.................................................. 9
Telecommunications.......................................... 7
Banking..................................................... 5
Chemical and Petrochemical Industries....................... 4
Food Processing Industry.................................... 3
Transportation.............................................. 3
Retail...................................................... 2
Other....................................................... 14
---------------------
Total..................................................... 100%
=====================

Source: RTS Annual Report 2003

The MICEX, the other primary stock exchange in Russia (but second to the RTS),
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.

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The following table sets forth the 30 largest Russian securities listed in
Russia based on market capitalization, as of November 30, 2005.

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

Gazprom (St. Petersburg stock
exchange)............................. GSPBEX Oil
Companies--Integrated 140,884,415
LUKOIL.................................. LKOH Oil
Companies--Integrated 48,482,106
Surgutneftegas.......................... SNGS Oil
Companies--Integrated 43,446,906
Sberbank................................ SBER Commercial Banks 21,877,201
Norilsk Nickel, GMK..................... GMKN Metal-Diversified 18,010,877
Siberian Oil Company (Sibneft).......... SIBN Oil
Companies--Integrated 17,542,811
RAO "UES of Russia"..................... EESR Electric--Integrated 17,097,691
Mobilniye TeleSistemy................... MTSI RM Telecom Services 14,026,816
Transneft............................... TRNFP Oil
Companies--Integrated 11,141,633
Sistema JSFC............................ AFKS Diversified 10,422,000
Novolipetsk Iron & Steel Corporation.... NLMK Steel--Producer 8,450,450
Tatneft................................. TATN Oil
Companies--Integrated 7,605,532
NOVATEK................................. NVTK Oil Companies--Natural
Gas 7,104,956
Severstal............................... CHMF Steel--Producers 5,071,545
Baltika, Pivovarennaya.................. PKBA Brewery 4,095,982
Mechel.................................. MTLR Metals--Diversified 3,733,949
Rosneft-Purneftegaz..................... PFGS Oil
Companies--Integrated 3,695,457
Mosenergo............................... MSNG Electric-Integrated 3,601,793
Nizhny Tagil Ferrous Metal Factory...... NTMK Metal--Iron 2,213,905
Rostelecom.............................. RTKMP Telecom Services 2,076,552
Mikhaylovsky GOK........................ MGOK Metal--Mining 1,909,687
Irkutskenergo........................... IRGZ Electric 1,811,387
Sedmoy Kontinent........................ SCON Retail Supermarket 1,709,764
Rostelecom.............................. RTKM Telecom Services 1,665,071
MGTS Moscow City Telephone Network...... MGTS Telecom Services 1,559,517
AEROFLOT................................ AFLT Airlines 1,410,482
Uralsvyazinform......................... URSI Telecom Services 1,367,847
Lebedyansky............................. LEKZ Beverage 1,281,830
VolgaTelecom............................ NNSI Telecom Services 1,139,401
AVTOVAZ................................. AVAZ Automotive 1,078,284

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

(1) Market Capitalization based on last closing prices and currency exchange
rate as of November 30, 2005.

Reflecting the composition of the Russian economy, the Russian securities
markets are concentrated in the oil and gas industry. As of November 30, 2005,
approximately 69% of the market capitalization of the above-listed 30 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 Eastern Europe, ownership structures in Russia are rarely diversified.
In addition, companies rely much more on debt than equity financing; a

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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 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. 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 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. 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 securities 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.

In 2002, the RTS opened a new market--RTS Bonds--to facilitate trading in
corporate, government and municipal bonds and Eurobonds. 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 Eastern European neighbors.
Unlike the Russian government, which received an infusion of capital from the
International Monetary Fund following its loan defaults in 1998, Russian
companies do not offer investors any protection if they fail to make interest
payments. Nevertheless, growing foreign interest in the asset class, fueled by
low yields in alternative fixed income securities around the world, has sparked
renewed investment in Russia's fledgling bond market. The value of outstanding
corporate ruble bonds reached about USD $12.5 billion by August 2005, up from
USD $5.4 billion in November 2003 and USD $649 million in 1997. Foreign banks
and funds currently hold about a third of Russian bonds outstanding, according
to press reports.

The Russian Traded Index (the "RTX" index, a member of the CECE Index family),
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 RTX 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 November 28, 2005,
which represented approximately 41.5% of the total market capitalization of the
RTS Classic Stock Market, the primary equity trading market of the Russian
Trading System, as of the same date.

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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 2000 and 2004 and through November 30, 2005.

ANNUAL RETURNS OF THE RUSSIAN STOCK MARKETS(1) AND CURRENCY (IN USD $)

2000 2001 2002 2003 2004 11/30/05(2)
-------------------------------------------------------------------------------------------------

Russian Traded Exchange ("RTX")....... (32.68)% 56.43% 26.21% 73.29% (2.18)% 55.54%
Ruble ("RUB")......................... (2.17)% (7.69)% (4.54)% 9.28% 5.49% 3.92%

Source: Bloomberg

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

(2) Non-annualized return for January 1, 2005 through November 30, 2005.

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.

TURKEY'S ECONOMY AND SECURITIES MARKETS

Located between Europe and Asia, Turkey is a dynamic emerging market economy of
72.3 million people. Over the past several decades, agriculture has steadily
declined as a contributor to GDP (representing just 3.8% of total exports in
2004), having been replaced by clothing and textiles (27.9% of total GDP), road
vehicles (13.1%) and iron and steel production (8.4%) as major contributors to
the economy.(8)

ECONOMIC TRENDS IN TURKEY

2000 2001 2002 2003 2004
-----------------------------------------------------------------------------------------------

GDP per capita (USD $).............................. 6,668 6,220 6,713 7,050 7,400
GDP (% real change per annum)....................... 7.36 (7.50) 7.78 5.00 8.93
Government consumption (% of GDP)................... 14.08 14.24 14.03 12.80 13.19
Budget balance (% of GDP)........................... (11.45) (19.60) (14.53) (10.40) (7.04)
Consumer prices (% change per annum, average)....... 54.92 54.4 44.96 25.30 8.60
Public debt (% of GDP).............................. 51.19 99.88 86.33 74.40 73.52
Labor costs per hour (USD $)........................ 1.55 1.22 1.44 1.81 2.08
Recorded unemployment (%)........................... 6.60 8.53 10.35 10.65 10.30
Current-account balance/GDP......................... (4.93) 2.33 (0.81) (2.40) (5.15)

Source: The Economist Intelligence Unit

A number of recent economic trends have made Turkey an attractive market for
investment. Facing severe economic difficulties beginning in 2000, Turkey
experienced negative GDP growth of (7.5%) in 2001. Since 2002, Turkey has
generated solid economic growth. According to The Economist Intelligence Unit,
real annual GDP growth was 7.78% in 2002, 5.00% in 2003 and 8.93% in 2004.
Inflation in these years has been reduced by more than half.

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 1996. Turkey became a pre-accession candidate for EU membership
at the Helsinki Summit in December 1999. It is not possible to know whether
Turkey's EU accession

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

8 Source: The Economist Intelligence Unit, Factsheet: Turkey, June 16, 2005.

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negotiations, which began in earnest in October 2005, will be successful, given
the collapse of the European constitution referendum that occurred during the
summer of 2005, unresolved political issues over Cyprus, and opposition from
several EU members to Turkey's bid to join the EU.

In addition, the Turkish government has taken major steps to reduce its reliance
on external debt, reduce its spending, and modernize its financial institutions.
Legislation to reform Turkey's pension and social security systems 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. Although an IMF-backed program of reforms helped
to lower spiraling prices and contributed to growth following this crisis, the
government has not yet fully implemented policies to reduce inflation and
unemployment levels and achieve greater income parity for its citizens.

The basic rate of corporation tax is 30%. Personal income tax rates were lowered
to a range of 15-40%, down from their previous levels of 25% to 50%. Lower taxes
likely will spur domestic consumption.

In June 2003, a law was passed to improve conditions for foreign investments,
particularly in the area of privatization of formerly state-held companies.
Notably, Turkey could complete more than USD $20 billion in privatization deals
by year-end 2005. Significant transactions included the September 2005 agreement
to sell 51% interest in Tupras, an oil refinery, to a consortium of Turkey's Koc
Holding and Royal Dutch/Shell, for USD $4.1 billion, and the privatization in
August 2005 of a 55% stake in state-run Turk Telekom to Saudi Oger and Telecom
Italia, for USD $6.55 billion.

In 2004, exports totaled USD $66.9 billion, while imports were USD $90.7
billion, leaving a trade deficit of USD $23.8 billion. Although the foreign
trade gap has widened, driven partly by strong economic growth and partly by
high international oil prices, significant steps have been taken to promote
foreign direct investment in Turkey, the proceed from which some analysts argue
could be used to reduce the trade deficit.

Despite its growth prospects, the recent economic climate in Turkey has been
challenging. In 2004, a petroleum workers' union successfully challenged an
agreement to sell a portion of Tupras, and more recently it has filed a similar
case to block the Royal Dutch/Shell transaction. Telecom workers have also gone
to court to reverse the Turk Telekom transaction. Increased privatization
activity has added tensions between secularists and Islamists in Turkey over the
sale of strategic national assets, and caused uneasiness about the effect that
an influx of Arab money to the country may have on Western relations.

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 following the Crimean
War, in 1866. This exchange, called 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 was formally established at the end of 1985. The ISE is the only
securities exchange in Turkey authorized to provide trading in equities, bonds

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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 of 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 do not
meet 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 or 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.

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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 --
2004.................. 208,422,945 147,755 69,614,651 47,459,638 280,266 --

Source: Istanbul Stock Exchange, 2004 Annual Factbook

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The following table shows the percentages of ISE-traded companies in each
industry, by market capitalization, as of December 31, 2004:

INDUSTRY COMPOSITION OF THE ISTANBUL STOCK EXCHANGE, AS OF DECEMBER 31, 2004

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

Banks....................................................... 33.6%
Holding and Investment...................................... 15.4
Metal Products, Machinery................................... 7.5
Chemical, Petroleum, Plastics............................... 6.6
Basic Metals................................................ 6.2
Telecommunications.......................................... 5.5
Food, Beverage.............................................. 5.2
Non-Metal Mineral Products.................................. 4.6
Wholesale and Retail Trade.................................. 4.4
Wood, Paper, Printing....................................... 2.4
Insurance................................................... 1.8
Real Estate Investment Trusts............................... 1.1
Textile, Leather............................................ 1.0
Electricity................................................. 0.8
Leasing..................................................... 0.7
Technology.................................................. 0.6
Transportation.............................................. 0.4
Tourism..................................................... 0.2
Sport....................................................... 0.2
Other....................................................... 2.0
---------------------
Total..................................................... 100.0%
=====================

Source: Istanbul Stock Exchange, 2004 Annual Factbook

The following table presents the 25 largest securities traded on the ISE in 2004
by market capitalization. These companies represented 47.1% of the total market
capitalization of all companies traded on the ISE, as of December 31, 2004:

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

Turkcell Iletisi............ TCELL Cellular Telecom 10,349
Akbank T.A. ................ AKBNK Commercial Banks 9,351
Is Bankasi.................. ISBTR Commercial Banks 9,169
KOC Holding................. KCHOL Diversified Operations 5,189
Sabanci Holding............. SAHOL Diversified Operations 4,704
Turkiye Garanti............. GARAN Commercial Banks 3,817
Enka Insaat................. ENKAI Divers. Operations/Comm Servs. 2,781
Tupras...................... TUPRS Oil Refining & Marketing 2,561
Arcelik..................... ARCLK Appliances 2,464

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

Yapi Credi Bank............. YKBNK Commercial Banks 2,382
Ford Otomotiv............... FROTO Auto-Cars/Light Trucks 2,336
Anadolu Efes Bir............ AEFES Brewery 2,296
Eregli Demir Celik.......... EREGL Steel Producers 2,222
Dogan Yayin................. DYOL Multimedia 1,570
Dogan Yayin Holding......... DOHOL Diversified Operations 1,367
Turk Sise Cam............... SISE Housewares 1,176
Petrol Ofisi................ PTOFS Retail Petroleum Production 1,154
Migros...................... MIGRS Food--Retail 1,151
Finansbank.................. FINBN Commercial Banks 1,066
Turk Hava Yollar............ THYAO Airlines 1,039
Petkim...................... PETKM Chemicals--Diversified 1,001
Hurriyet Gzt................ HURGZ Publishing-- Newspapers 989
Tofas-Turk Otomo............ TOASO Auto-Cars/Light Trucks 921
Akcansa CimentoUlker Gida... AKCNS Building
Products--Cement/Aggregates 918
BSH Profilo................. BSPRO Appliances 881

Source: Bloomberg, Istanbul Stock Exchange

(1) As of December 31, 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, comprises 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 TRA. The
ISE Executive Council determines which securities will be included in the TRA,
and evaluates each company based on their market capitalization, operating
history and liquidity, among other factors. The constituents of the TRA 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 2000 and 2004 and through November 30, 2005.

ANNUAL RETURNS OF THE TURKISH STOCK MARKETS(1) AND CURRENCY (IN USD $)(2)

2000 2001 2002 2003 2004 11/30/05(3)
-------------------------------------------------------------------------------------------------

ISE National 100 Index ("TRA")....... (50.02)% (32.31)% (34.47)% 112.84% 38.77% 52.67%
Lira ("TRL")......................... (18.58)% (53.90)% (12.39)% 17.68% 4.69% 0.91%

Source: Bloomberg

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

(2) Calculated in Turkish Lira. In 2005, the Turkish Lira was replaced by the
New Turkish Lira ("TRY"). The new currency dropped six decimal places.

(3) Non-annualized return for January 1, 2005 through November 30, 2005.

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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 are listed for trading on the NYSE
under the symbol "CEE.RT."

Set forth below is information with respect to our common stock as of October
31, 2005:

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 5,864,443 10,197,209

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" on
page 66 of 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

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DESCRIPTION OF COMMON STOCK
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+ 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 summarized in the previous two bullets.

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" on
page ii of 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.

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 (1) INCOME CAPITAL GAINS TOTAL
----------------------------------------------------------------------------------------------

12/22/2004.................................................. $0.17 $0.17
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

(1) On December 14, 2005 we announced a dividend of $3.05 payable to
stockholders of record as of December 20, 2005. The dividend comprises
approximately $0.33 per share payable from net investment income, $0.21 per
share payable from short-term capital gains and $2.51 per share payable in
long-term capital gains. The payable date for the dividend is December 30,
2005.

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Voluntary cash purchase program and dividend reinvestment plan

GENERAL

We offer stockholders a voluntary cash purchase program and dividend
reinvestment plan (the "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.

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VOLUNTARY CASH PURCHASE PROGRAM AND DIVIDEND REINVESTMENT PLAN
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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, premium or 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 INCOME 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 his or her
income the 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 their 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.

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Taxation

DISTRIBUTIONS AND TAX MATTERS

The following is a general summary of the material tax considerations generally
affecting us and our stockholders. This section is based on the Internal Revenue
Code of 1986, as amended, 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 asset diversification tests 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 (x) 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 or (y) in the securities of one or more "qualified
publicly traded partnerships" (as such term is defined in the Code).

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 the 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

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will be imposed if the regulated investment company fails to distribute in each
calendar year an amount at least 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 tax basis
of this stock at that time. We would be allowed a deduction for the excess, if
any, of the adjusted tax 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

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TAXATION
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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 legislation 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 non-corporate U.S.
stockholders 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% if 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.

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TAXATION
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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 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

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TAXATION
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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. Generally, interest-related dividends and short-term capital
gains dividends received from a regulated investment company are exempt from the
30-percent withholding tax. The amount of "interest-related dividends" that we
may pay each year is limited to the amount of "qualified interest income"
received by us during that year, less the amount of our expenses properly
allocable to such interest income. "Qualified interest income" includes, among
other items, interest paid on debt obligations of a U.S. issuer and interest
paid on deposits with U.S. banks, subject to certain exceptions. The amount of
"short-term capital gain dividends" that we may pay each year generally is
limited to the excess of our net short-term capital gains over our net long-term
capital losses, without any reduction for our expenses allocable to such gains
(with exceptions for certain gains). This exemption applies to both nonresident
alien individuals and foreign corporations for dividends paid after December 31,
2004 and will cease to apply to dividends paid with respect to our taxable years
beginning after December 31, 2007, and applies to income that would not be
subject to the 30-percent tax if earned by the foreign person directly. With
respect to interest-related dividends, this exemption does not apply if we do
not receive a statement on Internal Revenue Service Form W-8 stating that the
stockholder is not a U.S. person. No assurance can be given that Congress will
not repeal these provisions prior to their scheduled expiration. 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

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

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

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 paid in taxable years beginning before January 2, 2007 will be
treated as "passive" or "financial services" income and dividends paid in
taxable years beginning after December 31, 2006 will generally be treated as
"passive" or "general" 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.

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 & Trust Company, 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, 2005, incorporated by reference in this
prospectus and in the SAI have been so incorporated in reliance on the report of
PwC, independent registered public accounting firm, given on their authority as
experts in auditing and accounting. The principal business address of PwC is 300
Madison Avenue, New York, New York, 10017.

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.

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73

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Table of contents of the Statement of Additional Information

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

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-17
Investment advisory and other services...................... B-18
Brokerage allocation and other practices.................... B-25
Financial statements........................................ F-1

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74

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

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

Available information................. ii
Prospectus summary.................... 1
Fee table............................. 8
Financial highlights.................. 9
Market and net asset value
information......................... 11
Our rights offering................... 12
Use of proceeds....................... 24
Investment objective and policies..... 24
Risk factors.......................... 27
Our management........................ 35
The Central European, Russian and
Turkish economies and securities
markets............................. 37
Description of common stock........... 64
Dividends and distributions........... 65
Voluntary cash purchase program and
dividend reinvestment plan.......... 66
Taxation.............................. 68
Custodians, dividend-paying agent,
transfer agent and registrar........ 73
Experts............................... 73
Validity of shares.................... 73
Table of contents of the Statement of
Additional Information.............. 74

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

(THE CENTRAL EUROPE AND RUSSIA FUND, INC. LOGO)

The Central Europe and Russia Fund, Inc.

3,417,070 SHARES OF
COMMON STOCK ISSUABLE
UPON EXERCISE OF RIGHTS TO
SUBSCRIBE FOR SUCH SHARES
------------------------------

PROSPECTUS
------------------------------
UBS INVESTMENT BANK
December 19, 2005
------------------------------------------------------
------------------------------------------------------

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

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 December 19, 2005. 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 1-800-221-4215. 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
December 19, 2005.

TABLE OF CONTENTS

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

--------------------------------------------------------------------------------
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 24 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 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.

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

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

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

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 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.

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B- 3

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

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.

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

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

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

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 Russian
Roubles) 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 Russian Roubles) 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;

3. issue senior securities, borrow money or pledge our 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;

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B- 5

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

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" on page 25 of the prospectus
and under "Investment Objective and Policies--Currency Transactions" on page
B-4 of 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 25 of the
prospectus and under "Investment Objective and Policies--Futures and
Options" on page B-2 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 11:30 a.m. New York City time. The daily NAVs will be
publicly announced via website posting (www.germanyfund.com) 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 time. The NAVs will also
continue to be made available via toll-free telephone (1-800-GERMANY) following
the website posting. Net asset value per share is calculated by dividing the
value of our net assets (the value of our assets less our liabilities) by the
total number of shares of our common stock outstanding. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the 11:00 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

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

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

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.

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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) DURING OVERSEEN
NAME, ADDRESS(1) & AGE WITH FUND SERVED PAST FIVE YEARS BY DIRECTOR
----------------------------------------------------------------------------------------------------------

INTERESTED DIRECTORS(3)
Detlef Bierbaum, 63(3) Director Since 1990. Partner of Sal. Oppenheim Jr. 2
& Cie KGaA (investment
management) (over five years).
John Bult, 69(3) Director Since 1990. Chairman, PaineWebber 3
International (asset
management)(since 1985).
Christian H. Strenger, Since 1990. Non-executive Director (since 3
62(3) Non-executive 1999) and Managing Director
Director (1991-1999) of DWS Investment
and GmbH (investment management),
Chairman a subsidiary of Deutsche Bank
AG.

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

INTERESTED DIRECTORS(3)
Detlef Bierbaum, 63(3) Director, The European Equity
Fund, Inc. (since 1986).(4)
Member of the Supervisory
Board, Tertia
Handelsbeteiligungsgesellschaft
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 GmbH (investment
company). Chairman of
Supervisory Board, Oppenheim
Kapitalanlagegesellschaft mbH
(investment company).
Chairman of Administrative
Board, Oppenheim Prumerica
Asset Management S.a.r.l.
(investment company). Member
of Supervisory Board,
Altradius N.V. (insurance
company). Member of the
Supervisory Board of DWS
Investment GmbH. Member of
the Board of Duindee REIT,
Toronto. Chairman of the
Supervisory Board, Oppenheim
Real Estate Investment GmbH.
Member of the Supervisory
Board, Cologne Reinsurance
AG.
John Bult, 69(3) Director, The European Equity
Fund, Inc. (since 1986) and
The New Germany Fund, Inc.
(since 1990).(4) Director,
The Greater China Fund, Inc.
(closed-end fund).
Christian H. Strenger, Director, The European Equity
62(3) Fund, Inc. (since 1986) and
The New Germany Fund, Inc.
(since 1990).(4)
Non-executive director,
Fraport AG (international
airport business).
Non-executive Board member of
Hermes Focus Asset Management
Europe Ltd.

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

MANAGEMENT
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NON-INTERESTED DIRECTORS
Dr. Kurt W. Bock, 47(5) Director Since 2004. Member of the Board of 2.....
Executive Directors and CFO,
BASF Aktiengesellschaft
(chemicals) (since 2003);
President, Logistics and
Information Services, BASF
Aktiengesellschaft
(2000-2003); Chief Financial
Officer, BASF Corporation
(1998-2000). Managing
Director, Robert Bosch Ltda.
(automotive and industrial
products) (1996-1998); Senior
Vice President, Finance and
Accounting, Robert Bosch GmbH
(1994-1996); Senior Vice
President, Finance, Robert
Bosch GmbH (1992-1994); Head
of Technology, Planning and
Controlling, Engineering
Plastics division, BASF
Aktiengesellschaft
(1991-1992); Executive
Assistant to BASF's Chief
Financial Officer (1987-
1991).
Ambassador Director Since 2000. Chairman, Diligence LLC, 54....
Richard R. Burt, 58 (international information and
risk management firm) (since
2002). Chairman, IEP Advisors,
Inc. (information services
firm) (1998-2001). Chairman of
the Board, Weirton Steel Corp.
(1996-2004). Formerly,
Partner, McKinsey & Company
(consulting firm) (1991-1994).
U.S. Ambassador to the Federal
Republic of Germany
(1985-1989).
John H. Cannon, 63 Director Since 2004. Consultant (since 2002). Vice 3.....
President and Treasurer,
Venator Group/Footlocker Inc.
(footwear retailer) (until
2001).

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

NON-INTERESTED DIRECTORS
Dr. Kurt W. Bock, 47(5) Director of The European
Equity Fund, Inc. (since
2004).(4) Member of the
Supervisory Boards of
Wintershall AG (since 2003)
and Basell N.V., (since
2003). Member of the Advisory
Boards of WINGAS GmbH (since
2003), WIEH GmbH (since
2003), Landesbank Baden-
Wurttemberg (since 2003),
Initiative D21 (since 2003),
DBW ("Die
Betriebswirtschaft") (since
2003), and Gesellschaft fur
Unternehmensplanung (IUP)
(since 2004). Member of the
Boards of BASFIN Corporation
(since 2002), Deutsches
Rechnungslegungs Standards
Committee ("DRSC") (since
2003),
Schmalenbachgesellschaft
(since 2004), and Jacob Gould
Schurman Stiftung (since
2004). Member of the Trustees
of Arbeitskreis Evangelischer
Unternehmer ("AEU") (since
2003). Member of the Advisory
Council of Deutsche Bank AG
(since June 2004). Member of
the Advisory Board of Gebr.
Rochling KG (since May 2004).
Ambassador Director, The European Equity
Richard R. Burt, 58 Fund, 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.
John H. Cannon, 63 Director of The New Germany
Fund, Inc. (since 1990) and
The European Equity Fund,
Inc. (since 2004).(4)

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Fred H. Langhammer, 61(8) Director Since 2003. Chairman, Global Affairs, The 2.....
Estee Lauder Companies Inc.
(manufacturer and marketer of
cosmetics) (since July 2004),
Chief Executive Officer (2000-
2004), President (1995-2004),
Chief Operating Officer (1985-
1999), Managing Director,
operations in Germany (1982-
1985), President, operations
in Japan (1975-1982).
Dr. Frank Tromel, 69(9) Director Since 2005. Deputy Chairman of the 3.....
Supervisory Board of DELTON AG
(strategic management holding
company operation in the
pharmaceutical, household
products, logistics and power
supply sectors) (since 2000).
Member (since 2000) and Vice-
President (since 2002) of the
German Accounting Standards
Board; Chairman of the Board
of Managing Directors of
DELTON AG (1990-1999);
Chairman of the Board of
Managing Directors of ALTANA
AG (management holding company
for the pharmaceutical and
chemical operation)
(1987-1990) and Member of the
Board (1977-1987).
Robert H. Wadsworth, 65 Director Since 1990. President, Robert H. Wadsworth 69....
Associates, Inc. (consulting
firm) (since 1983). President
and Trustee, Trust for
Investment Managers
(1999-2002). President,
Investment Company
Administration, L.L.C. (1992-
2001). President, Treasurer
and Director, First Fund
Distributors, Inc. (mutual
fund distribution)
(1990-2002). Vice President,
Professionally Managed
Portfolios (1991-2002). Vice
President, Advisors Series
Trust (registered investment
companies) (1996-2002).
Werner Walbrol, 67 Director Since 1990. President and Chief Executive 3
Officer, The European American
Chamber of Commerce, Inc.
Senior Adviser, Baker &
McKenzie (law firm). Formerly,
President and Chief Executive
Officer, The German American
Chamber of Commerce, Inc.
(until 2003).

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

Fred H. Langhammer, 61(8) Director, The European Equity
Fund, Inc. (since 2003).(4)
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, The
Walt Disney Company
(entertainment). Director,
Sinsei Bank.
Dr. Frank Tromel, 69(9) Director, The European Equity
Fund, Inc. (since 2005) and
The New Germany Fund, Inc.
(since 1990).
Robert H. Wadsworth, 65 Director, The European Equity
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, 67 Director, The European Equity
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 Art
Insurance Corporation (fine
art and collectible insurer).

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

OFFICERS
Vincent J. Esposito, 49 President and Chief Executive Officer Since 2005.
Sandra M. Schaufler, 38 Chief Investment Officer Since 2004.
Carole Coleman, 36 Secretary Since 2005.
Paul Schubert, 42 Treasurer and Chief Financial Officer Since 2005.
Kathleen Sullivan D'Eramo, 48 Assistant Treasurer Since 2003.

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

OFFICERS
Vincent J. Esposito, 49 Managing Director, Deutsche Asset Management
(since 2003). 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).
Sandra M. Schaufler, 38 Director, Deutsche Asset Management (since
2004). Formerly, Director of Equity Sales,
HVB Capital Markets (2001-2003); Portfolio
Manager and Equity Analyst, Deutsche Asset
Management (1997-2001).
Carole Coleman, 36 Director Deutsche Asset Management (since
2005); Associate General Counsel, Fred Alger
& Company (2002-2005); Associate Attorney,
Charpie & Associates (1995-2002).
Paul Schubert, 42 Managing Director, Deutsche Asset Management
(since 2004). Formerly, Executive Director,
Head of Mutual Fund Services and Treasurer,
UBS Global Asset Management Family of Funds
(1994-2004); Senior Vice President and
Director of Mutual Fund Finance at UBS
Global Asset Management (1994-1998).
Kathleen Sullivan D'Eramo, 48 Director, Deutsche Asset Management (since
2002). Formerly, Senior Vice President,
Zurich Scudder Investments (2000-2002).

(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 European Equity Fund, Inc. and the New Germany Fund, Inc.,
which are the other closed-end registered investment companies for which
Deutsche Investment Management Americas Inc. acts as manager. It also
includes [186] 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; Mr. Bult is an "interested" director because of his
affiliation with DBS 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.

(4) The European Equity Fund, Inc. and The New Germany Fund, Inc. are the other
closed-end registered investment companies for which Deutsche Investment
Management Americas 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
Investments VIT Funds, Scudder MG Investments Trust, Scudder Investors
Funds, 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. Mr. Wadsworth also serves as
Director/Trustee of the following open-end investment companies: Scudder
Blue Chip Fund, Scudder Equity Trust, Scudder High Income Series, Scudder
State Tax-Free Income Series, Scudder Strategic Income Fund, Scudder Target
Fund, Scudder Technology Fund, Scudder Total Return Fund, Scudder U.S.
Government Securities Fund, Scudder Value Series, Inc., Scudder Variable
Series II, Cash Account Trust, Investors Cash Trust, Investors Municipal
Cash Fund, Tax-Exempt California Money Market Fund and Scudder Money Funds.
Mr. Wadsworth also serves as Director of Scudder High Income Trust, Scudder
Multi-Market Income Trust, Scudder Municipal Income Trust, Scudder
Strategic Income Trust, and Scudder Strategic Municipal Income Trust, which
are 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. 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.

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(5) Dr. Tessen von Heydebreck, a managing director of Deutsche Bank, is a
member of the supervisory board of BASF AG, Dr. Bock's employer.

(6) Each also serving as an officer of The European Equity 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. As of April 1, 2004, the loan was fully
repaid.

(9) Dr. Tromel's son has been employed since March 1, 2002 by an indirect
subsidiary of Deutsche Bank AG.

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 EQUITY AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
SECURITIES IN THE ALL FUNDS OVERSEEN BY DIRECTOR IN FAMILY OF
NAME OF DIRECTOR FUND(1) INVESTMENT COMPANIES(1)(2)
--------------------------------------------------------------------------------------------------------------

Detlef Bierbaum...................... None. None.
Kurt W. Bock......................... None. None.
John Bult............................ Over $100,000 Over $100,000
Ambassador Richard R. Burt........... $50,001-$100,000 Over $100,000
John H. Cannon....................... $10,001-$50,000 $50,000-$100,000
Fred H. Langhammer................... None. None.
Christian H. Strenger................ $10,001-$50,000 $10,001-$50,000
Frank Tromel......................... None. None.
Robert H. Wadsworth.................. Over $100,000 Over $100,000
Werner Walbrol....................... Over $100,000 Over $100,000

(1) Valuation date is November 30, 2005.

(2) The Family of Investment Companies consists of us, The European Equity Fund,
Inc. and The New Germany Fund, Inc., which are closed-end funds and share
the same investment adviser and investment manager and hold themselves out
as related companies.

Our Board of Directors presently has five standing committees including an audit
committee (the "Audit Committee"), an advisory committee (the "Advisory
Committee"), an executive committee (the "Executive Committee"), a nominating
committee (the "Nominating Committee") and a special committee on shareholder
initiatives (the "Special Shareholder Initiatives Committee").

The Audit Committee, comprising Messrs. Burt, Cannon, Tromel, Wadsworth and
Walbrol, operates pursuant to a written charter. The members of the Audit
Committee are "independent" as required by the independence standards of Rule
10A-3 under the Securities Exchange Act of 1934. The Board of Directors has
determined that each member of the Audit Committee is financially literate and
has determined that each of Messrs. Cannon and Wadsworth meets the requirements
for an audit committee financial expert under the rules of the Securities and
Exchange Commission ("SEC"). Although the Board has determined that these
individuals meet the requirements for an audit committee financial expert, their
responsibilities are the same as those of the other audit committee members.
They are not auditors or accountants, do not perform "field work" and are not
full-time employees. The SEC has determined that an audit committee member who
is designated as an audit committee financial expert will not be deemed to be an
"expert" for any purpose as a result of being identified as an audit committee
financial expert. The Audit Committee met eight times during the fiscal year
ended October 31, 2005.

The Advisory Committee, comprising Messrs. Bierbaum, Burt, Wadsworth and
Walbrol, makes recommendations to the full Board with respect to the Management
Agreement between us and DIMA,

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and the Investment Advisory Agreement between us and DeAMI. The Advisory
Committee met twice during the past fiscal year, in connection with the annual
continuance of those agreements.

The Executive Committee, comprising Messrs. Burt, Strenger, Wadsworth and
Walbrol, has the authority to act for the Board on all matters between meetings
of the Board subject to any limitations under applicable state law. During the
past fiscal year the Executive Committee did not meet.

The Special Shareholder Initiatives Committee, comprising Messrs. Bult, Burt,
Cannon, Wadsworth and Walbrol, has the authority to act for the Board on all
matters relating to stockholder initiatives. The Special Shareholder Initiatives
Committee met three times during the past fiscal year.

The Nominating Committee comprises Messrs. Burt, Wadsworth and Walbrol. The
Board has determined that each of the members is not an "interested person" as
the term is defined in Section 2(a)(19) of the Investment Company Act of 1940,
as amended. Generally, the Nominating Committee identifies, evaluates and
selects and nominates, or recommends to the Board of Directors, candidates for
the Board or any committee of the Board. To be eligible for nomination as a
director a person must, at the time of such person's nomination, have Relevant
Experience and Country Knowledge and must not have any Conflict of Interest, as
those terms are defined in the our Bylaws. The Nominating Committee may also
take into account additional factors listed in the Nominating Committee Charter,
which generally relate to the nominee's industry knowledge, business experience,
education, ethical reputation, special skills, ability to work well in group
settings and the ability to qualify as an "independent director."

The Nominating Committee will consider nominee candidates properly submitted by
stockholders in accordance with applicable law, our Charter or Bylaws,
resolutions of the Board and the qualifications and procedures set forth in the
Nominating Committee Charter. A stockholder or group of stockholders seeking to
submit a nominee candidate (i) must have beneficially owned at least 5% of our
common stock for at least two years, (ii) may submit only one nominee candidate
for any particular meeting of stockholders, and (iii) may submit a nominee
candidate for only an annual meeting or other meeting of stockholders at which
directors will be elected. The stockholder or group of stockholders must provide
notice of the proposed nominee pursuant to the requirements found in our Bylaws.
Generally, this notice must be received not less than 90 days nor more than 120
days prior to the first anniversary of the date of mailing of the notice for the
preceding year's annual meeting. Such notice shall include the specific
information required by our Bylaws. The Nominating Committee will evaluate
nominee candidates properly submitted by stockholders on the same basis as it
considers and evaluates candidates recommended by other sources. The Nominating
Committee met twice during the past fiscal year.

All members on each of the five committees of the Board are non-interested
persons (except that Mr. Strenger, an interested person, is a member of the
Executive Committee; Mr. Bierbaum, an interested person, is a member of the
Advisory Committee; and Mr. Bult, an interested person, is a member of the
Special Shareholder Initiatives Committee).

During the past fiscal year, the Board of Directors had five regular meetings,
and each incumbent director that served as a director during the past fiscal
year, with the exception of Mr. Langhammer and Mr. Bock, attended at least 75%
of the aggregate number of meetings of the Board and meetings of Board
Committees on which that director served. The Board has a policy that encourages
directors to attend the Annual Meeting of Stockholders, to the extent travel to
the Annual Meeting of Stockholders is reasonable for that director. Four
directors attended the 2005 Annual Meeting of Stockholders.

To communicate with the Board of Directors or an individual director, a
stockholder must send a written communication to our principal office at 345
Park Avenue, NYC20-2799, New York, New York 10154 (c/o The Central Europe and
Russia Fund, Inc.), addressed to (i) the Board of Directors or an individual
director, and (ii) our Secretary. Our Secretary will direct the correspondence
to the appropriate parties.

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We pay each of our directors who is not an interested person of us, of DeAMI or
of DIMA an annual fee of $7,500 plus $750 for each Board and Committee meeting
attended. Each such director who is also a director of The European Equity Fund,
Inc. or The New Germany Fund, Inc. also receives the same annual and per-meeting
fees for services as a director of each such fund. 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 no such director
receives more than the annual fee of two funds. Each of the three funds
reimburses the directors (except for those employed by the Deutsche Bank Group)
for travel expenses in connection with Board meetings. These three funds,
together with 162 other open- and closed-end funds advised by wholly-owned
entities of the Deutsche Bank Group in the United States, represent the entire
Fund Complex within the meaning of the applicable rules and regulations of the
SEC. The following table sets forth (a) the aggregate compensation from us for
the fiscal year ended October 31, 2005, and (b) the total compensation from each
fund in the Fund Complex for the most recently completed fiscal year of each
such fund, for (i) each director who is not an interested person of the Fund,
and (ii) all such directors as a group:

AGGREGATE COMPENSATION TOTAL COMPENSATION
NAME OF DIRECTOR FROM FUND FROM FUND COMPLEX(1)
----------------------------------------------------------------------------------------------------

Dr. Kurt W. Bock..................................... $9,000 $14,750
Ambassador Richard R. Burt........................... $14,750 $34,750
John H. Cannon....................................... $13,500 $34,500
Fred H. Langhammer................................... $10,500 $18,750
Frank Tromel......................................... --* $15,250
Robert H. Wadsworth.................................. $15,250 $36,250
Werner Walbrol....................................... $16,500 $37,500
--------- ----------
Total $83,500 $191,750
--------- ----------
--------- ----------

* Dr. Tromel became a director in July 2005.

No compensation is paid by us to directors or officers who are interested
persons of us or of any entity of the Deutsche Bank Group.

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

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MANAGEMENT
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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 1-202-551-8090. 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") 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 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 "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.

+ Outside Directorships--Our investment manager generally votes for proposals
to restrict a chief executive officer from serving on more than three outside
boards of directors. Our investment manager generally votes against proposals
that require a company to appoint a chairman who is an independent director.

+ Compensation Matters--Our investment manager generally votes for executive
cash compensation proposals, unless they are unreasonably excessive. Our
investment manager generally votes against stock option plans that do not
meet the investment manager's criteria.

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 stockholders (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.

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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.

Information on how we voted proxies relating to our portfolio securities in the
12 month period ended June 30, 2005 is available on our website,
www.germanyfund.com, and on the SEC's website, www.sec.gov.

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Control persons and principal holders of securities

As of December 14, 2005 no person, to the knowledge of management, owned of
record or beneficially more than 5% of our outstanding common stock.

As of December 14, 2005, all directors and executive officers as a group (15
persons) owned approximately 14,020 shares of our common stock, which
constitutes less than 1% of our outstanding common stock.

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B- 17

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

Investment advisory and other services

INVESTMENT ADVISER AND INVESTMENT MANAGER

We entered into a management agreement with DIMA's predecessor and an investment
advisory agreement with DeAMI (at the time of execution of the agreement, DB
Capital Management International GmbH) on March 6, 1990. Our board of directors
approved a transfer of the management agreement to DIMA on July 12, 2004, which
became effective September 1, 2004 and did not involve any change in control or
actual management of the investment manager. 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 July 17, 2005. 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 DIMA or DeAMI,
as the case may be, at any time upon not less than sixty days' written notice to
the other party. Since neither DIMA 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 DIMA and DeAMI are
wholly owned direct or indirect subsidiaries of Deutsche Bank AG, a major German
banking institution.

Pursuant to the management agreement, DIMA 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. DIMA (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. DIMA 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, DIMA (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 DIMA
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
our reports to the SEC.

We pay DIMA 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,
2005, October 31, 2004 and October 31, 2003, we paid DIMA a management fee of
$2,046,762, $1,383,100 and $911,794, respectively.

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

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B- 18

INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

$100 million. During the fiscal years ended October 31, 2005, October 31, 2004
and October 31, 2003, we paid DeAMI an investment advisory fee of $985,229,
$683,227 and $469,148, respectively.

Both the management agreement and the investment advisory agreement provide that
DIMA 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. DIMA 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 35 of the
prospectus.

FACTORS CONSIDERED IN CONTINUANCE

The directors unanimously approved the continuance of the management agreement
between us and DIMA and the investment advisory agreement between us and DeAMI
(together called the "agreements") at a meeting held on July 17, 2005.

In preparation for the meeting, the directors had requested and evaluated
extensive materials from DIMA and DeAMI, including performance and expense
information for other investment companies with similar investment objectives
derived from data compiled by Lipper Inc. ("Lipper"). Prior to voting, the
directors reviewed the proposed continuance of the agreements with management
and with experienced counsel who are independent of DIMA and DeAMI and received
a memorandum from such counsel discussing the legal standards for their
consideration of the proposed continuance. The directors also discussed the
proposed continuance in a private session with counsel at which no
representatives of DIMA or DeAMI were present. In reaching their determination
relating to continuance of the agreements, the directors considered all factors
they believed relevant, including the following:

1. information comparing our performance to other investment companies with
similar investment objectives and to an index;

2. the nature, extent and quality of investment and administrative services
rendered by DIMA and DeAMI;

3. payments received by DIMA and DeAMI from all sources in respect us and all
investment companies in the Deutsche/Scudder family of funds;

4. the costs borne by, and profitability of, DIMA and Investment Adviser and
their affiliates in providing services to us and to all investment companies
in the Deutsche/Scudder family of funds;

5. comparative fee and expense data for us and other investment companies with
similar investment objectives;

6. the extent to which economies of scale would be realized as we grow and
whether fee levels reflect these economies of scale for the benefit of
investors;

7. DIMA's and DeAMI's policies and practices regarding allocation of our
portfolio transactions, including the extent, if any, to which DIMA and
DeAMI benefit from soft dollar arrangements;

8. our portfolio turnover rates compared to those of other investment companies
with similar investment objectives;

9. fall-out benefits which DIMA, DeAMI and their affiliates receive from their
relationships with us;

10. the professional experience and qualifications of our portfolio management
team and other senior personnel of DIMA and DeAMI; and

11. the terms of the agreements.

The directors also considered their knowledge of the nature and quality of the
services provided by DIMA and DeAMI to us gained from their experience as
directors of the European Equity Fund and,

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B- 19

INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

where relevant, the New Germany Fund and other Deutsche/Scudder funds, their
confidence in DIMA's and DeAMI's integrity and competence gained from that
experience and DIMA's and DeAMI's responsiveness to concerns raised by them in
the past, including DIMA's and DeAMI's willingness to consider and implement
organizational and operational changes designed to improve investment results
and the services provided to us.

In their deliberations, the directors did not identify any particular
information that was all-important or controlling, and each director attributed
different weights to the various factors.

The directors determined that the overall arrangements between us and DIMA, as
provided in the management agreement, and between us and DeAMI, as provided in
the investment advisory agreement, were fair and reasonable in light of the
services performed, expenses incurred and such other matters as the directors
considered relevant in the exercise of their reasonable judgment.

The material factors and conclusions that formed the basis for the directors'
reaching their determination to approve the continuance of the agreements
(including their determinations that DIMA and DeAMI should continue in those
roles for us, and that the fees payable to DIMA and DeAMI pursuant to the
agreements are appropriate) were separately discussed by the directors.

NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY DIMA AND DEAMI
The directors noted that, under the management agreement, DIMA acts as our
corporate manager and administrator and, subject to the supervision of our board
of directors and pursuant to recommendations made by DeAMI, determines suitable
securities for investment by us. Under the investment advisory agreement, DeAMI,
in accordance with our investment objectives, policies and limitations, makes
recommendations with respect to our investments and, upon instructions given by
DIMA as to suitable securities for investment by us, transmits purchase and sale
orders and selects brokers and dealers to execute portfolio transactions on our
behalf. Under the management agreement, DIMA also handles our relationships with
shareholders, is responsible for compliance with regulatory and NYSE listing
requirements, negotiates arrangements with third party service providers,
provides our directors with relevant reports, prepares our tax returns and SEC
and shareholder reports, calculates dividends and net asset value, oversees
payment of our expenses and maintains books and records. DIMA also provides us
with such office facilities and executive and other personnel adequate to
perform its services. DIMA pays all of the compensation of our directors and
officers who are interested persons of DIMA.

The directors considered the scope and quality of services provided by DIMA and
DeAMI under the agreements and noted that the scope of services provided had
expanded over time as a result of regulatory and other developments. The
directors noted that, for example, DIMA is responsible for maintaining and
monitoring its own and our compliance programs, and these compliance programs
have recently been refined and enhanced in light of new regulatory requirements.
The directors considered the quality of the investment research capabilities of
DIMA and DeAMI and the other resources they have dedicated to performing
services for us. The quality of administrative and other services, including
DIMA's role in coordinating the activities of our other service providers, also
were considered. The directors concluded that, overall, they were satisfied with
the nature, extent and quality of services provided (and expected to be
provided) to us under the agreements.

COSTS OF SERVICES PROVIDED AND PROFITABILITY TO DIMA AND DEAMI
At the request of the directors, DIMA provided information concerning
profitability of DIMA's and DeAMI's respective investment advisory and
investment company activities and their financial condition based on historical
information for 2003 and 2004. The directors reviewed with DIMA assumptions and
methods of allocation used by DIMA and DeAMI in preparing fund specific
profitability data. DIMA stated its belief that the methods of allocation used
were reasonable, but it noted that there are limitations inherent in allocating
costs to multiple individual advisory clients served by an organization

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B- 20

INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

such as DIMA and DeAMI where each of the advisory clients draws on, and benefits
from, the research and other resources of the Deutsche Bank organization.

The directors recognized that it is difficult to make comparisons of
profitability from fund management contracts because comparative information is
not generally publicly available and is affected by numerous factors, including
the structure of the particular adviser, the types of funds it manages, its
business mix, numerous assumptions regarding allocations and the adviser's
capital structure and cost of capital. In considering profitability information,
the directors considered the effect of possible fall-out benefits, on DIMA's and
DeAMI's expenses, including any affiliated brokerage commissions.

The directors noted that during 2003 DIMA and DeAMI revised their soft dollar
practices to discontinue using soft dollars to receive third party research from
brokers that execute purchases and sales of securities for us, and formalized
this change in their policies in 2004. DIMA and DeAMI may continue to allocate
brokerage to receive research generated by executing brokers and to receive
other information services. The directors also noted that in 2004 DIMA and DeAMI
revised their policies to prohibit consideration of the sale of shares of
Deutsche/Scudder funds when selecting broker dealers to execute portfolio
transactions for us or other Deutsche/Scudder funds.

The directors recognized that DIMA and DeAMI should, in the abstract, each be
entitled to earn a reasonable level of profits for the services it provides to
us and, based on their review, concluded that DIMA's and DeAMI's levels of
profitability from its relationship with us were not excessive.

INVESTMENT RESULTS
In addition to the information received by the directors for the meeting, the
directors receive detailed performance information for us at each regular board
meeting during the year. The directors reviewed information showing our
performance compared to that of other European Closed End Funds compiled by
Lipper, plus three other equity oriented closed end country funds managed by
affiliates of DIMA and DeAMI (a total of 12 funds, including us). The directors
also reviewed information showing performance of our benchmark index, currently
a blend of 45% CECE index of 26 Central European stocks, 45% RTX index of 8
Russian stocks and 10% ISE 30 index of 30 Turkish stocks.

The comparative information showed that we ranked in the top half for the one-,
three-, five- and 10-year periods ended March 31, 2005. Our results were
significantly positive in absolute terms, and exceeded our benchmark in 2003 and
2004. We exceeded our benchmark in two of the five years 1998-2002. (Comparisons
prior to 1998 are not meaningful because until then we had a purely German
focus.) We also exceeded our benchmark in each of the first two quarters of
2005. Taking into account these comparisons and the other factors considered,
including the excellent performance since our increased emphasis on Russian
investments that began in mid-2003, the directors concluded that our investment
results over time were satisfactory.

MANAGEMENT AND INVESTMENT ADVISORY FEES AND OTHER EXPENSES
The directors considered the management and investment advisory fee rates paid
by us to DIMA and DeAMI. The directors recognized that it is difficult to make
comparisons of management and advisory fees because there are variations in the
services that are included in the fees paid by other funds. Our peer group
consisted of the 12 closed end country funds described above in "Investment
Results." The information showed that our current effective management fee rate
of 0.884% was the lowest in the peer group and significantly below the average
and the median for the peer group. The directors noted that our effective fee
rate reflects the effect of breakpoints.

The directors also considered our total expense ratio in comparison to the fees
and expenses of funds within its peer group. The directors recognized that the
expense ratio information for us potentially reflected on DIMA's provision of
services, as DIMA is responsible for coordinating services provided to us by
others.

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B- 21

INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

The directors also noted that our expense ratio was the third lowest of the peer
group. DIMA explained that this difference was principally the result of our
relatively low management and investment advisory fee and our relatively large
asset base. The directors concluded that our expense ratio was highly
satisfactory.

ECONOMIES OF SCALE
The directors noted that our management fee and investment advisory schedules do
contain breakpoints that reduce the fee rate on assets above specified levels.
The directors recognized that breakpoints may be an appropriate way for DIMA and
DeAMI to share their economies of scale with some funds that have substantial
assets or that may grow materially over the next year. However, they also
recognized that there is no direct relationship between the economies of scale
realized by funds and those realized by DIMA and DeAMI as assets increase,
largely because economies of scale are realized (if at all) by DIMA and DeAMI
across a variety of products and services, and not only in respect of a single
fund. Having taken these factors into account, the directors concluded that our
breakpoint arrangements were acceptable under our circumstances.

PORTFOLIO MANAGERS

The Fund has been advised that the investment manager seeks to offer its
investment professionals competitive short-term and long-term compensation.
Portfolio managers and research professionals are paid (i) base salaries, which
are linked to job function, responsibilities and financial services industry
peer comparison and (ii) variable compensation, which is linked to investment
performance, individual contributions to the team and Scudder Investments' and
Deutsche Bank's financial results. Variable compensation may include a cash
bonus incentive and participation in a variety of long-term equity programs
(usually in the form of Deutsche Bank equity).

Bonus and long-term incentives comprise a greater proportion of total
compensation as an investment professional's seniority and compensation levels
increase. Top performing investment professionals earn a total compensation
package that is highly competitive, including a bonus that is a multiple of
their base salary. The amount of equity awarded under the long-term equity
programs is generally based on the individual's total compensation package and
may comprise from 0%-40% of the total compensation award. As incentive
compensation increases, the percentage of compensation awarded in Deutsche Bank
equity also increases. Certain senior investment professionals may be subject to
a mandatory diverting of a portion of their equity compensation into proprietary
mutual funds that they manage.

To evaluate its investment professionals, the investment manager uses a
"Performance Management Process." Objectives evaluated by the process are
related to investment performance and generally take into account peer group and
benchmark related data. The ultimate goal of this process is to link the
performance of investment professionals with client investment objectives and to
deliver investment performance that meets or exceeds clients' risk and return
objectives. When determining total compensation, the investment manager
considers a number of quantitative and qualitative factors such as:

+ Scudder Investments' performance and the performance of Deutsche Asset
Management; quantitative measures which include 1-, 3- and 5-year pre-tax
returns versus benchmark (such as the benchmark used by the Fund as described
in the prospectus) and the appropriate peer group, taking into consideration
risk targets. Additionally, the portfolio manager's retail/institutional
asset mix is weighted, as appropriate for evaluation purposes.

+ Qualitative measures include adherence to the investment process and
individual contributions to the process, among other things. In addition, the
investment manager assesses compliance, risk management and teamwork skills.

+ Other factors, including contributions made to the investment team as well as
adherence to compliance, risk management, and "living the values" of the
investment manager, are part of a

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B- 22

INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

discretionary component which gives management the ability to reward these
behaviors on a subjective basis through bonus incentives.

In addition, the investment manager analyzes competitive compensation levels
through the use of extensive market data surveys. Portfolio manager compensation
is reviewed and may be modified each year as appropriate to reflect changes in
the market, as well as to adjust the factors used to determine overall
compensation to promote good sustained investment performance.

FUND OWNERSHIP OF PORTFOLIO MANAGERS
The following table shows the dollar range of shares owned beneficially and of
record by each member of the Fund's portfolio management team in the Fund as
well as in all Scudder Funds as a group (i.e., those funds advised by investment
manager or its affiliates), including investments by their immediate family
members sharing the same household and amounts invested through retirement and
deferred compensation plans. This information is provided as of the most recent
practicable date.

DOLLAR RANGE OF DOLLAR RANGE OF ALL INVESTMENT
FUND SHARES MANAGER OR AFFILIATE
NAME OF PORTFOLIO MANAGER OWNED FUND SHARES OWNED
-------------------------------------------------------------------------------------------------------

Sandra M. Schaufler................................ $0 $0
Steffen Gruschka................................... $0 $0
Robert Kalin....................................... $0 $0
Sylwia Szczepek.................................... $0 $0

CONFLICTS OF INTEREST
In addition to managing the assets of the Fund, the Fund's portfolio managers
may have responsibility for managing other client accounts of the investment
manager or its affiliates. The tables below show, for each portfolio manager,
the number and asset size of (1) SEC registered investment companies (or series
thereof) other than the Fund, (2) pooled investment vehicles that are not
registered investment companies and (3) other accounts (e.g., accounts managed
for individuals or organizations) managed by each portfolio manager. The tables
also show the number of performance based fee accounts, as well as the total
assets of the accounts for which the advisory fee is based on the performance of
the account. This information is provided as of the most recent practicable
date.

OTHER SEC REGISTERED INVESTMENT COMPANIES MANAGED

NUMBER OF
NUMBER OF TOTAL ASSETS OF INVESTMENT TOTAL ASSETS OF
REGISTERED REGISTERED COMPANY ACCOUNTS PERFORMANCE-
INVESTMENT INVESTMENT WITH PERFORMANCE BASED FEE
NAME OF PORTFOLIO MANAGER COMPANIES COMPANIES BASED FEE ACCOUNTS
---------------------------------------------------------------------------------------------------------

Sandra M. Schaufler................... 2 $ 414,148,622 0 $0
Steffen Gruschka...................... 0 $ 0 0 $0
Robert Kalin.......................... 0 $ 0 0 $0
Sylwia Szczepek....................... 0 $ 0 0 $0

OTHER POOLED INVESTMENT VEHICLES MANAGED:

NUMBER OF POOLED
NUMBER OF TOTAL ASSETS OF INVESTMENT VEHICLE TOTAL ASSETS OF
POOLED POOLED ACCOUNTS WITH PERFORMANCE-
INVESTMENT INVESTMENT PERFORMANCE- BASED FEE
NAME OF PORTFOLIO MANAGER VEHICLES VEHICLES BASED FEE ACCOUNTS
---------------------------------------------------------------------------------------------------------

Sandra M. Schaufler................. 0 $ 0 0 $ 0
Steffen Gruschka.................... 2 $ 930,305,040 1 $ 261,790,495
Robert Kalin........................ 1 $ 429,006,910 1 $ 429,006,810
Sylwia Szczepek..................... 3 $ 327,182,901 1 $ 19,084,459

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B- 23

INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

OTHER ACCOUNTS MANAGED:

NUMBER OF OTHER TOTAL ASSETS OF
ACCOUNTS WITH PERFORMANCE-
NUMBER OF TOTAL ASSETS OF PERFORMANCE- BASED FEE
NAME OF PORTFOLIO MANAGER OTHER ACCOUNTS OTHER ACCOUNTS BASED FEE ACCOUNTS
-----------------------------------------------------------------------------------------------------------

Sandra M. Schaufler.................. 0 $0 0 $0
Steffen Gruschka..................... 0 $0 0 $0
Robert Kalin......................... 0 $0 0 $0
Sylwia Szczepek...................... 0 $0 0 $0

In addition to the accounts above, an investment professional may manage
accounts in a personal capacity that may include holdings that are similar to,
or the same as, those of the funds. The investment manager has in place a Code
of Ethics that is designed to address conflicts of interest and that, among
other things, imposes restrictions on the ability of portfolio managers and
other "access persons" to invest in securities that may be recommended or traded
in the funds and other client accounts.

Real, potential or apparent conflicts of interest may arise when a portfolio
manager has day-to-day portfolio management responsibilities with respect to
more than one fund or account, including the following:

Certain investments may be appropriate for the Fund and also for other clients
advised by the investment manager, including other client accounts managed by
the Fund's portfolio management team. Investment decisions for the Fund and
other clients are made with a view to achieving their respective investment
objectives and after consideration of such factors as their current holdings,
availability of cash for investment and the size of their investments generally.
A particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, because clients of the investment manager may have differing
investment strategies, a particular security may be bought for one or more
clients when one or more other clients are selling the security. The investment
results achieved for the Fund may differ from the results achieved for other
clients of the investment manager. In addition, purchases or sales of the same
security may be made for two or more clients on the same day. In such event,
such transactions will be allocated among the clients in a manner believed by
the investment manager to be most equitable to each client, generally utilizing
a pro rata allocation methodology. In some cases, the allocation procedure could
potentially have an adverse effect or positive effect on the price or amount of
the securities purchased or sold by the Fund. Purchase and sale orders for the
Fund may be combined with those of other clients of the investment manager in
the interest of achieving the most favorable net results to the Fund and the
other clients.

To the extent that a portfolio manager has responsibilities for managing
multiple client accounts, a portfolio manager will need to divide time and
attention among relevant accounts. The investment manager attempts to minimize
these conflicts by aligning its portfolio management teams by investment
strategy and by employing similar investment models across multiple client
accounts.

In some cases, an apparent conflict may arise where the investment manager has
an incentive, such as a performance-based fee, in managing one account and not
with respect to other accounts it manages. The investment manager will not
determine allocations based on whether it receives a performance-based fee from
the client. Additionally, the investment manager has in place supervisory
oversight processes to periodically monitor performance deviations for accounts
with like strategies.

The investment manager is owned by Deutsche Bank AG, a multi-national financial
services company. Therefore, the investment manager is affiliated with a variety
of entities that provide, and/or engage in commercial banking, insurance,
brokerage, investment banking, financial advisory, broker-dealer activities
(including sales and trading), hedge funds, real estate and private equity
investing, in addition to the provision of investment management services to
institutional and individual investors. Since Deutsche Bank AG, its affiliates,
directors, officers and employees (the "Firm") are engaged in businesses and
have

--------------------------------------------------------------------------------
B- 24

INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------------------------------------------------

interests other than managing asset management accounts, such other activities
involve real, potential or apparent conflicts of interests. These interests and
activities include potential advisory, transactional and financial activities
and other interests in securities and companies that may be directly or
indirectly purchased or sold by the Firm for its clients' advisory accounts.
These are considerations of which advisory clients should be aware and which may
cause conflicts that could be to the disadvantage of the investment manager's
advisory clients. The has instituted business and compliance policies,
procedures and disclosures that are designed to identify, monitor and mitigate
conflicts of interest and, as appropriate, to report them to the Fund's Board.

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, 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 year ended October 31, 2003, we incurred brokerage commissions
amounting in the aggregate to $162,271. During such period, we paid brokerage
commissions to Deutsche Bank AG or its affiliates amounting to $5,665, which
constituted 3.49% of our aggregate brokerage commissions, respectively. We did
not pay Deutsche Bank AG or its affiliates any brokerage commissions during the
fiscal years ended October 31, 2004 and October 31, 2005.

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, 2005, October 31, 2004, and October 31, 2003,
transactions in our portfolio securities with associated brokerage commissions
of approximately $497,530, $406,166 and $162,271, respectively, were allocated
to persons or firms supplying research to us, our investment manager or our
investment adviser.

--------------------------------------------------------------------------------
B- 25

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

Financial statements

The required financial statements are included in our 2005 Annual Report, and
are incorporated by reference into this SAI. These statements in our 2005 Annual
Report include: Schedule of Investments as of October 31, 2005; Statement of
Assets and Liabilities as of October 31, 2005; Statement of Operations for the
fiscal year ended October 31, 2005; Statements of Changes in Net Assets for the
fiscal years ended October 31, 2005 and October 31, 2004; Notes to Financial
Statements; and Financial Highlights for a share of common stock outstanding
during each of the fiscal years ended October 31, 2005, 2004, 2003, 2002 and
2001. A copy of our 2005 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 Georgeson Shareholder Communications Inc., our information
agent, at 17 State Street, New York, New York 10004 or 1-800-221-4215.

--------------------------------------------------------------------------------
F- 1

(DEUTSCHE ASSET MANAGEMENT LOGO) (CEE LOGO)

Highlights of the Rights Offering

INCREMENTAL PROCEEDS MAY REDUCE THE FUND'S EXPENSE RATIO AND ENHANCE SHARE
LIQUIDITY

Proceeds from a well-subscribed Rights Offering may result in a modest reduction
of the Fund's expense ratio as a proportion of average net assets because the
Fund's fixed costs will be spread over a larger asset base and the Fund's
management and advisory fees on the proceeds will be assessed at a reduced rate
due to breakpoints in the fee schedules of DIMA and DeAMI.

EXPERIENCED INVESTMENT MANAGER AND INVESTMENT ADVISER

Deutsche Investment Management Americas Inc. is the Fund's investment manager.
Deutsche Asset Management International GmbH is the Fund's investment adviser
responsible for making recommendations to the investment manager. DIMA and DeAMI
are subsidiaries of Deutsche Bank AG, one of the world's largest banks in terms
of assets. Deutsche Asset Management is the marketing name in the U.S. for the
asset management activities of Deutsche Bank AG, Deutsche Investment Management
Americas, Inc., Deutsche Asset Management, Inc., Deutsche Asset Management
Investment Services Ltd., Deutsche Bank Trust Company Americas and Scudder Trust
Company. Deutsche Asset Management has approximately $724 billion of assets
under management on behalf of retail and institutional clients.

From offices in London, Frankfurt and Warsaw, the DeAMI team is responsible for
synthesizing regional and industry sector research based on its own analysis as
well as the global economic and equity research resources of Deutsche Bank AG
and Deutsche Asset Management. In selecting Central Europe and Russian equity
securities for the Fund's portfolio, DeAMI utilizes a bottom-up fundamental
approach to equity analysis combined with a top-down macroeconomic and sector
allocation approach.

CAN I SUBSCRIBE FOR MORE SHARES THAN MY RIGHTS ENTITLE ME TO PURCHASE?

Yes. Record Date Stockholders who fully exercise all of the Rights issued to
them may also request to purchase additional shares at the same discounted
price. The Over-Subscription Privilege makes shares not purchased by other
stockholders available to those who wish to acquire more shares than their
Rights entitle them to purchase. If sufficient remaining shares are not
available after completion of the primary subscription to honor all
over-subscription requests, the available shares will be allocated on a pro rata
basis among those Record Date Stockholders who take advantage of the
Over-Subscription Privilege based on the number of Rights originally issued to
such Record Date Stockholders by the Fund. If you are not a Record Date
Stockholder, you are not entitled to participate in the Over-Subscription
Privilege.

HOW CAN I EXERCISE MY RIGHTS?

To exercise your Rights, contact your broker, custodian or trust officer, who
can forward your instructions on your behalf. If you do not have a broker,
custodian or trust officer, you should complete the subscription certificate
mailed to you and deliver it to the subscription agent, together with your
payment, at one of the locations indicated on the subscription certificate or in
the attached prospectus. For more information, contact the Fund's Information
Agent, Georgeson Shareholder Communications Inc., at 1-800-221-4215.

MAY I SELL MY RIGHTS?

Yes. The Rights will be traded on the NYSE under the symbol "CEE.RT." Contact
your broker, custodian or trust officer, who can arrange for the sale of rights
on your behalf.* If you do not have a broker, custodian or trust officer,
indicate your instructions on the subscription certificate and deliver it to the
subscription agent. The Rights are expected to trade on the NYSE through January
19, 2006 (one business day prior to the expiration of the offer, unless
extended). The Fund cannot assure Record Date Stockholders that a market for the
Rights will develop or that any minimum sale price can be obtained.

THE CENTRAL EUROPE AND RUSSIA FUND, INC. -- OVERVIEW

The Central Europe and Russia Fund, Inc., incorporated in Maryland on February
6, 1990 and registered under the Investment Company Act of 1940, is a
non-diversified, closed-end management investment company with approximately
$432 million in net assets as of October 31, 2005. The Fund's 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 the Fund's net assets
will be invested in the securities of issuers domiciled in Central Europe or
Russia. In selecting industries and companies for investments, the Fund's
investment manager and the investment adviser 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.

ALLOCATION BY COUNTRY -- OCTOBER 31, 2005

(PIE CHART)

Cyprus 1%
Netherlands 2%
Austria 3%
Czech Republic 6%
Hungary 9%
Turkey 13%
Poland 16%
Russia 50%

Source: Company

TOTAL RETURNS AS OF NOVEMBER 30, 2005

(BAR CHART)

Annualized
----------
YTD 1-Year 3-Years 5-Years 10-Years
--- ------ ------- ------- --------

Market Price 54.6 64.6 43.9 31.9 15.5

NAV 47.7 57.0 44.0 28.6 14.3

Source: Company

* The sale of Rights through your broker, custodian or trust officer may
incur traditional commissions payable by the seller

For more information, call the Information Agent, Georgeson Shareholder
Communications Inc., at 1-800-221-4215

(NOT PART OF THE PROSPECTUS)

(DEUTSCHE ASSET MANAGEMENT LOGO) (CEE LOGO)

The Central Europe and Russia Fund, Inc.

PLEASE READ THE ATTACHED PROSPECTUS FOR MORE INFORMATION

Investors should consider the Fund's investment objective, risks, and charges
and expenses before investing. The attached prospectus contains this and other
information about the Fund, including risk factors of the Rights Offering. The
attached prospectus should be read carefully before investing. These Highlights
of the Rights Offering are qualified in their entirety by reference to the
information included in the attached prospectus.

The Fund's 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. Central European countries are in
varying stages of transition towards becoming pluralistic multi-party
democracies with market-oriented economies based on private and entrepreneurial
initiatives. These countries experienced extremely volatile market performance
in the past decade, and investing in securities of Central European and Russian
issuers entails all of the risks of investing in securities of foreign issuers
to a heightened degree. 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. See "Risk Factors" in the
attached prospectus for more information.

DILUTION

Record Date Stockholders who do not fully exercise their Rights should expect
that they will, at the completion of the Rights Offering, own a smaller
proportional interest in the Fund than owned prior to the Rights Offering. In
addition, because the subscription price per share will be less than the then
current net asset value per share, the completion of this Rights Offering will
result in an immediate dilution of the net asset value per share for all
existing stockholders. The Fund cannot state precisely the amount of this
dilution at this time because the Fund does not know what the net asset value
per share will be on the Expiration Date or what proportion of the shares will
be subscribed. 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.

DEALER MANAGER

(UBS LOGO)

INFORMATION AGENT
Georgeson Shareholder Communications Inc.
1-800-221-4215

For more information, call the Information Agent, Georgeson Shareholder
Communications Inc., at 1-800-221-4215

(NOT PART OF THE PROSPECTUS)